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Piwowar: Prudential Regulators Bootstrapping Asset Management Oversight

In a recent speech, SEC Commissioner Michael Piwowar identified the irony that prudential regulators are calling for more oversight of the capital markets and participants, while they are at the same time responsible “for creating the dominant position of investment funds in providing liquidity in the fixed income market.” He noted that bank inventories of bonds have fallen and that bond mutual funds and ETFs now hold a larger swath of these markets. The root cause of this move, he argued, is “regulatory decisions discouraging banks from intermediating risk and the resulting concomitant decline in bank inventories of fixed income securities.” He added that the Fed’s Quantitative Easing program has pushed investors to reach for yield, seeking out riskier and less liquid investments, further exacerbating the problem. In sum, “the prudential regulators believe that since they have caused capital market activities to exit the banking sector and move into the non-banking sector, where asset managers play a significant role, it is now necessary for the prudential regulators to regulate the non-banking sector.”

Turning to specific sources of risk cited by prudential regulators, Piwowar noted recent research from Fed economists showing that volatility concerns related to leveraged ETFs are overblown, and suggested that the ability for a fund to redeem in-kind redemptions mitigates the concerns of a run. In the speech, Piwowar supported initiatives to mitigate risks in financial markets including considering expanding the ability of all funds to suspend redemptions, and Chair Mary Jo White’s plan to improve data reporting in the mutual fund space. He also suggested that the SEC publish quarterly fund holding information in interactive format for public analysis. The Commission, he argued, could use some assistance scrutinizing the data, given that the number registered investment companies exceeds 16,000.

Piwowar also leveled criticism at the Financial Stability Board, an organization that “promotes international financial stability . . . by coordinating national financial authorities and international standard-setting bodies.” He charged that the FSB’s recently released consultative paper on global systemically important financial institutions was “devoid of economic analysis” and had reached a foregone conclusion that at least some asset managers would be subject to prudential oversight.