The SEC, Office of Financial Research (OFR), Financial Stability Oversight Commission (FSOC), and the European Financial Stability Board (FSB) have all issued reports or proposals focused on the supposed risks of the asset management industry. The gist of these reports and consultations is the supposition that the asset management industry—particularly because of its size—poses systemic risk implications that require additional regulating.
In 2013, the OFR published a report highlighting the risks of asset management (on which the SEC sought public comment). In 2014, the FSOC issued for public comment a notice on what it considered to be asset management risks, particularly focusing on systemic risk implications of the transfer of a significant number of accounts from one asset manager to another.
In 2016, the SEC proposed (and adopted) requirements that investment management funds have liquidity management programs, and the optional use of swing pricing.
The European FSB also has raised numerous issues in consultations about the potential systemic risk implications of the asset management industry. In 2017, the FSB issued recommendations to address those risks.
CFA Institute Viewpoint
CFA Institute believes the systemic risk concerns specific to the asset management industry are misplaced and may reflect a lack of understanding regarding the ways that this industry differs from other financial services industries, such as the banking industry. The asset management business is fundamentally different from bank and insurance institutions in that asset managers typically do not own the assets they manage and assets managed are typically marketable and highly liquid securities.
CFA Institute supports meaningful measures to reduce systemic risk in the financial industry. We believe, however, that it is important to balance the actual need for additional regulation with the industry. This industry is already highly regulated, and it showed little systemic implications stemming from the 2007–2008 financial crisis. In fact, it has shown resiliency during tumultuous times.
We are unsure that a systemic risk issue exists in regard to the vast majority of open-end funds. The regulatory requirements already in place under the Investment Company Act of 1940 provide a robust barrier against that kind of contagion. It is important that policymakers base their regulatory framework on a thorough understanding of the industry they seek to regulate.
We question the utility and appropriateness of regulatory actions to mandate “risk contagion” efforts across the fund industry, particularly where there are substantial questions about their effectiveness. Instead, we recognize that some degree of risk is inherent in, and vital to, our capital markets.