By Sarah N. Lynch
WASHINGTON, Sept 30 Some activities of asset
managers could pose risks to the broader marketplace, according
to a study released by the Treasury Department on Monday that
boosted the likelihood the largest such firms would face tougher
The report does not draw any conclusions about particular
asset managers or whether any firms should be designated as
potentially risky to the broader market.
While it does not call for new designations, the report does
lay out potential factors that could be used to determine if an
asset manager is risky. Those factors include the use of
leverage aimed at boosting returns, such as through the use of
derivatives, or a reliance on borrowing.
The report also discusses how "herding," or the tendency of
managers to crowd into similar or the same assets at the same
time, can also pose risks if the investments are illiquid.
"A certain combination of fund and firm level activities
within a large, complex firm or engagement by a significant
number of asset managers in riskier activities could pose,
amplify or transmit a threat to the financial system," according
to the report by the Office of Financial Research, the
Treasury's financial research arm.
"These threats may be particularly acute when a small number
of firms dominate a particular activity or fund offering."
The findings make it appear more likely that tougher
scrutiny is on the horizon for large firms such BlackRock
, Vanguard Group Inc. and Fidelity Investments.
That is because the Financial Stability Oversight Council
(FSOC), which called for the study, has been contemplating
whether or not certain large, complex asset management firms
should be designated as "systemically important financial
Any firm given this tag will face new capital requirements
and oversight by the Federal Reserve, in addition to any current
BlackRock has staunchly opposed the idea of being
designated, saying its activities do not pose a risk to the
The FSOC is a council of regulators chaired by Treasury
Secretary Jack Lew and comprised of the country's top financial
regulators, including the heads of the Securities and Exchange
Commission and Commodity Futures Trading Commission, which both
regulate asset managers.
The Office of Financial Research helps conduct financial
research for the council, and its head is a non-voting member of
The FSOC has already designated other kinds of financial
institutions, including banks, clearing agencies and insurance
firms like American International Group and Prudential
Financial, the second-largest U.S. life insurer.
In a statement, a spokesman for the Investment Company
Institute, a funds trade association, said the group was glad
the report recognizes key differences between asset management
companies and banks.
But the ICI reiterated that investment companies registered
with the SEC are already highly regulated and should not be
designated by FSOC.
"We continue to believe that designation as systemically
important financial institutions or 'SIFIs' is not an
appropriate regulatory tool for addressing risks, if any, that
registered funds or their advisers might raise regarding
financial stability," said ICI spokesman Mike McNamee.
The OFR report did not focus on risks posed specifically by
money market funds, which have already been studied by the
The SEC is currently weighing new rules designed to reduce
potential risks posed by money funds, including a switch from a
stable $1 per share net asset value to a floating net asset
The report also did not consider risks posed by certain
private funds, such as hedge funds or private equity funds.