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Monday, February 2, 2015

The Latest "Systemic Risk" Attack On Asset Managers

News summary by MFWire's editors

The U.S. Treasury, the Financial Stability Oversight Council, the SEC, and now a Fed governor have all asked a question that's keeping fundsters up at night: do the world's biggest asset managers pose systemic risks to the economy, and are they thus too big to fail, with all the regulatory oversight that entails?

The latest salvo was fired Friday by Daniel Tarullo, a member of the board of governors of the U.S. Federal Reserve who also is vice chairman of the Federal Financial Institutions Examination Council and a professor at Georgetown Law. Ryan Tracy of the Wall Street Journal reported on Tarullo's speech at the Office of Financial Research and FSOC's 4th Annual Conference on Evaluating Macroprudential Tools in Arlington, Virgina, just outside Washington, D.C. The full text of Tarullo's prepared remarks, which touch on many other topics in addition to asset managers, is available on the Fed's website.

Before compliance- and legal-minded fundsters hyperventilate too much, note that the phrase "mutual fund" (or even just the word "mutual") does not appear in Tarullo's speech at all. So his beef isn't with mutual funds specifically.

As for his specific concerns, they should be familiar to fundsters who have been following the "are any asset managers Systemically Important Financial Institutions?" debate. Tarullo worries about asset managers' ability (or lack thereof) to quickly liquidate products full of illiquid assets. He's also worried about assets under management figures and asset managers' use of leverage. He even points to a roadmap SEC Chair Mary Jo White laid out last month in what he calls "her important speech."

MFWire remains unconvinced that these concerns merit any further regulation, at least on the mutual fund side of the asset management industry, thanks to the power of the Investment Company Act of 1940. Mutual funds already need to fairly value their assets daily, and they're already required to be able to liquidate in an orderly fashion. Mutual fund shops already regularly disclose oodles of data, to the SEC and the public at large, and mutual funds' use of leverage is already severely limited.

The upshot of any new regulations along these lines would seem to be repetition of the '40 Act's rules, and perhaps more pressure and constraints on the non-mutual side of the business.

Tarullo himself is a Boston native and a Georgetown, Duke, and University of Michigan alumnus. He was appointed to the Fed's board in 2009 by U.S. President Barack Obama, after having worked in the Clinton administration, on the Council on Foreign Relations, on the staff of the late Senator Ted Kennedy, and in the U.S. Departments of Justice and Commerce.

In 2012 Tarullo spoke out in favor of then-SEC chair Mary Schapiro's proposed money market fund regulations, and his name was once tossed about as a possible contender for succeeding then-Treasury Secretary Tim Geithner for Obama's then-theoretical second term in office. 

Edited by: Neil Anderson, Managing Editor

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