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ICI President Warns of Consequences of SIFI Designation and Encourages Action

In his remarks at the Mutual Fund and Investment Management Conference, ICI President and CEO Paul Schott Stevens outlined the reasons why asset managers and funds should not be designated as systemically important financial institutions (SIFI); the consequences of such a designation to the fund industry and its investors; and encouraged members of the industry to speak out against the additional regulation.

Mr. Stevens outlined the ICI’s commitment to gathering data to refute the recent reports by the OFR and international regulators that outline risks in the asset management industry.  He provided four reasons that funds and their advisers do not need the additional layer of regulation:

  • Funds make only limited use of leverage, preventing losses from one fund from being magnified and multiplied
  • Funds don’t fail in the same way as banks or insurance companies
  • The herding behavior highlighted in the OFR report does not exist
  • The structure and regulation of funds and managers protect investors and limit system risk.

Mr. Stevens acknowledged that the consequences of SIFI designation are not known because the Federal Reserve Board (the agency that will supervise any non-bank SIFI) has not commented on what those “remedies” may be.  He did outline likely consequences based on the Dodd-Frank Act, including higher fees, assessments and capital costs that would make funds less competitive and less attractive to shareholders.   Further, he expressed concern that the new regulation would spread beyond the largest funds and asset managers.  He cautioned that the consequences to the fund industry could in turn harm the broader economy by reducing a key source of funding to the economy as a whole and harm fund investors who rely on funds to fund retirement and other savings goals.

Rather than seeking to identify entities that pose risk to the financial system, Mr. Stevens encouraged regulation of specific activities that pose risk.  The benefits of such regulation outlined by Mr. Stevens include that it allows regulators with expertise in industries and markets to take the lead in rulemakings as well as following “regular” rulemaking procedures that provide with an opportunity to comment on proposed rules and require agencies to conduct cost-benefit analyses.  He ended his speech by encouraging the industry to speak up and express concern about the consequences of SIFI designation for funds, to provide information that supports the ICI’s arguments, or to help regulators better understand how the asset management industry works.