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Feb. 5 — The Securities and Exchange Commission is struggling with a Dodd-Frank-mandated rule that would require asset managers with more than $10 billion in assets to be stress tested, a top agency official said today.
The Dodd-Frank Act requires stress tests for large banks, but there is a “false parallel” for stress testing asset managers because funds vary more than banks do, SEC Chief Economist Mark Flannery said at a conference in Washington put on by the Office of Financial Research and Financial Stability Oversight Council.
Under Dodd-Frank, the definition and methodologies for the nonbank stress tests are left up to the SEC.
“There’s a problem that’s really got us stuck, which is what does it mean to stress test a mutual fund, ” Flannery said. Stress testing is difficult for a mutual fund, “where all the asset value fluctuation, by design, gets passed through the owners.”
The agency is working to determine what kind of external shocks it can specify within the tests to elicit the best data, Flannery, who leads the agency's Division of Economic and Risk Analysis, said.
About 300 firms would be subject to the stress tests.
Flannery told Bloomberg BNA he would prefer those individual firms to have flexibility in how the stress tests are applied and reported.
“The parallel to bank stress tests is really extremely misleading,” Flannery added. It's as if Dodd-Frank said “stress test the big banks, and, oh, you might as well go ahead and do the asset management companies.”
Dodd-Frank says the stress tests must include at least “baseline, adverse, and severely adverse” conditions but adds little detail.
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