WASHINGTON, April 7 Memos and emails between U.S. securities regulators and a Treasury research office show major disagreements leading up to the release of a controversial report on the asset management industry, according to documents seen by Reuters on Monday.
The Sept. 30, 2013 final report sent shockwaves through the industry because it declared that activities by asset managers could pose risks to the broader marketplace.
The documents, which were obtained by a U.S. House of Representatives investigative panel, demonstrate that the U.S. Securities and Exchange Commission pushed Treasury officials to make sweeping changes to the report before it was published.
In one memo sent to the Office of Financial Research, SEC staff members said they had flagged major problems with how a draft of the report, which looked at risks to financial stability posed by asset managers, described the current regulatory structure.
"The description of registered investment companies' structural and regulatory framework contains multiple and fundamental inaccuracies," SEC staff wrote on Feb. 27, 2013. "If it would be helpful to you, we can re-write that section. But it will take some time."
In response, OFR officials replied, "We would appreciate any language SEC can provide."
Despite the SEC's concerns, industry critics later accused the OFR of fundamentally misunderstanding the regulatory structure of asset managers after the final report was published, among other things.
Critics now fear that regulators who make up the Financial Stability Oversight Council, or FSOC, will use the report to justify subjecting asset managers to tougher capital requirements and oversight by the Federal Reserve.
Reuters reported in October that the SEC had warned the research office of major flaws in drafts of its report. The documents obtained by the House Oversight Committee confirm the Reuters report.
Lawmakers who obtained the communications said the memos showed that the SEC tried to point out flaws, but that many were never corrected in the end. They said the research office ignored the SEC's suggestions.
"Amazingly, while OFR paid lip service to the SEC staff's suggestions, OFR failed to meaningfully address the important issues flagged in the SEC memorandum," wrote House Oversight Committee Chairman Darrell Issa and Republican Congressman Jim Jordan of Ohio, in a letter to Treasury Secretary Jack Lew.
Lew chairs the FSOC, which is weighing whether to designate asset managers as systemic.
"Documents produced to the committee show that OFR ultimately ignored or dismissed core criticisms from the career, non-partisan regulatory experts at the SEC," the lawmakers added.
Although some of the SEC's comments appear to have been addressed in the final report, industry critics later raised many of the same concerns as the SEC, including claims that the report misunderstood how the industry worked and viewed it through a "bank" lens.
"The study identifies ways in which asset management differs from banking," SEC staff wrote. "Nevertheless, some industry participants and observers are likely to object to the study on the grounds that it examines the industry through a banking industry lens."
As an example of viewing asset managers through a bank lens, the SEC pointed to the prominence the OFR gave in its draft to risks associated with securities lending and long-term funds' cash balances.
"These activities are not core areas of focus in terms of risk-management in the asset management industry," the SEC wrote.
A Treasury spokeswoman said the department had received the letter and would respond to the lawmakers in due course.
She noted that the OFR had conducted the study at the FSOC's request, and that the research office engaged with other regulators and the industry before publishing it.
"The (FSOC) is in the early stages of analyzing the asset management industry and its various activities," the spokeswoman said.
"As that analysis moves forward, the council will continue to be informed by the work of the OFR and welcomes continued engagement with asset managers and other stakeholders."
An SEC spokesman declined to comment on Monday.
After the asset management report was published, the SEC last year released it for public comment, an unusual move that provided a venue for industry complaints.
According to the memos, SEC staff also raised concerns with the research office that the draft initially placed an "overemphasis on money market funds" to inform discussions on the industry more broadly, according to the documents.
Staff also encouraged the OFR to seek out additional sources of data to back up its conclusions. (Editing by Eric Walsh)