Occupy the SEC Urges Global Regulators to Address Systemic Risks Posed by Asset Management Industry

Occupy the SEC (“OSEC”) has submitted a letter to the Financial Stability Board (“FSB”) and the International Organization of Securities Commissions (“IOSCO”) recommending that these international regulators address the systemic risks posed by global asset managers. In its letter, OSEC points to weaknesses in the measures that these regulators have proposed to designate asset managers or funds as Globally Systemically Important Financial Institutions (G-SIFIs). OSEC also urges the FSB/IOSCO to pursue industry-wide regulatory measures to address systemic risks that asset managers pose.

The FSB and IOSCO set the global framework for policy that national regulators, including the SEC, are expected to follow. The FSB requested comment on a second draft of a proposed methodology to be used to designate asset management companies, among others, as systemically important financial institutions. Asset managers have contributed to systemic crises in the past and regulation is needed to reduce these risks. OSEC has commended the FSB/IOSCO for broadening the methodology relative to the first draft but argues that their focus is still too narrow. In particular, the methodology only considers risks related to the failure of a fund or asset management company even though asset managers often contribute to systemic risk without themselves failing.

OSEC also exhorts the FSB and the IOSCO to pursue more comprehensive measures to mitigate or systemic risks created, propagated or amplified by, asset managers. The IMF devoted a chapter of its most recent Global Financial Stability Report to these risks and concluded that “assessments of individual institutions are not sufficient for assessing systemic risk.” OSEC notes with dismay that the IOSCO has not followed up on its 2011 study of tools for securities regulators to use to mitigate these risks. These concerns are particularly timely considering the contemplated withdrawal of quantitative easing by central banks and the “taper tantrum” that occurred last fall. In addition, OSEC’s letter points out that there are numerous global trends involving asset managers that exacerbate these risks. For instance, funds have increased their use of leverage and derivatives. In addition, asset managers are assuming roles traditionally performed by banks as part of the precarious “shadow banking system.”

OSEC notes the FSB’s acknowledgement that global regulators lack the information needed to understand the risks posed by asset managers, particularly separately managed accounts. OSEC urges the IOSCO, and national regulatory agencies, to address this weakness and to implement stress testing to better understand existing risks, including the complex interactions among asset managers, the markets and other financial institutions.

In its comment letter, OSEC asserts that the risks that asset managers have presented in the past still remain, and that the FSB’s and IOSCO’s collective failure to tackle these problems at this juncture would worsen financial crises and cause greater economic hardship in the future.

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