Treasury Report on Asset Management Criticized in Early Feedback Sent to SEC

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By Chris Bruce

Nov. 1 --A Sept. 30 report by the Treasury Department's Office of Financial Research (OFR) on possible systemic risk posed by asset managers is being criticized in an early crop of comments sought by the Securities and Exchange Commission.

The OFR, the data analysis arm of the Financial Stability Oversight Council, said more information is needed on whether mutual funds and other investment vehicles should be designated as systemic risks by the FSOC.

The report, which was a subject of discussion at an Oct. 31 FSOC meeting, is now the focus of comment letters to the SEC, which Sept. 30 set up a website to collect feedback on it.

Letters are still flowing into the SEC, but so far, the early reviews are less than glowing. In an Oct. 31 letter, David Oestreicher, general counsel of T. Rowe Price Associates Inc., a unit of T. Rowe Price Group Inc.(TROW), a major mutual fund firm, said the report “lacks the necessary rigor” to give the FSOC the information it needs.

“The OFR Report is generally inconclusive due to its emphasis on anecdotal claims and a scarcity of supporting data,” Oestreicher said.

Three representatives of the Committee on Capital Markets Regulation, which describes itself as an independent research organization with leaders drawn from the finance, investment, business, law, accounting, and academic communities, said the OFR report “presents an inaccurate and incomplete picture of the asset management market and the risks it poses to the financial system.”

“Although the OFR Report suggests that funds managed by large asset managers are susceptible to runs and fire sales, it does not provide any empirical evidence that such runs or fire sales pose systemic risk or that such runs would occur on asset managers as distinct from funds,” said a Nov. 1 letter by Columbia Business School Dean R. Glenn Hubbard, Brookings Institution Chairman John L. Thornton, and Hal S. Scott, Nomura Professor and director of the program on international financial systems at Harvard Law School.

SIFI Designation Possible

The report, and any action that could follow from it, could result in asset managers being designated as nonbank systemically important financial institutions (SIFIs) under Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Firms that receive nonbank SIFI designation are subject to bank-like supervision by the Federal Reserve Board, although the shape of that compliance is the focus of intense debate.

The FSOC asked the OFR to report on the $53 trillion asset management industry. The OFR, though citing gaps in data, said it sees implications for financial stability.

“The failure of a large asset management firm could be a source of risk, depending on its size, complexity, and the interaction among its various investment management strategies and activities,” the OFR report said.

In general, the report focused on mutual funds, hedge funds and private equity funds, funds run by the asset management divisions of banks, and separate accounts for large institutional investors or high net-worth individuals.

Thomas P. Vartanian, a partner with Dechert LLP in Washington, D.C., who represents clients that could be affected by the report, said the report fails to draw vital distinctions between the different structures and strategies used by different asset management firms.

“Reliance on the Report by the FSOC will taint the administrative record and provide a basis for challenging any designation actions by the FSOC that rely upon it, Vartanian said in an Oct. 31 letter.

To contact the reporter on this story: Chris Bruce in Washington at

To contact the editor responsible for this story: Joe Tinkelman at

The SEC is posting comment letters on its website at The T. Rowe Price letter is at The Capital Markets Committee letter is at The Dechert letter is at The OFR's Sept. 30 report is at

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