WASHINGTON A U.S. Treasury research report that could pave the way for tougher regulation of asset managers lacks empirical evidence to back up its claims and should be scrapped, the head of the largest U.S. mutual fund trade group said.
"I'd like to see them take the report off the table," Investment Company Institute Chief Executive Paul Schott Stevens told Reuters in an interview on Friday.
Stevens was responding to a September 30 report released by the Treasury Department's Office of Financial Research, which determined that the activities of certain large asset managers could pose risks to the broader marketplace.
The study concluded that risks are posed by the activities of large firms, including the use of leverage to help boost returns and "herding" behavior in which managers crowd into similar or the same assets. Any financial shocks could then trigger investors to rush for the exits, the report found.
Its findings are expected to be used by regulators on the Financial Stability Oversight Council (FSOC) to determine whether they should designate certain large asset managers as "systemically important financial institutions" or SIFIs - a tag that brings tough capital requirements and heavy supervision by the Federal Reserve.
Certain large banks were automatically designated as systemically important, and the council has since also designated large clearinghouses and insurance companies.
Many people expect asset managers will be the next sector to be considered for possible designation.
The Securities and Exchange Commission, whose Chairwoman Mary Jo White is a voting member of the FSOC, put the report out for public comment after its release.
The comments were due on Friday, and asset managers from Fidelity to Vanguard as well as the ICI are expected to submit letters highly critical of the report.
As of the close of business on Friday, more letters criticizing the report started to pour in, including comments from BlackRock, T. Rowe Price, two leading trade groups for fund managers, and AllianceBernstein among others.
"Our view is that the OFR study creates confusion," BlackRock's Vice Chairman Barbara Novick told Reuters. "It mixes the risks that are associated with, let's say an investment product or investment practice versus what might be the risks associated with an asset management firm."
BlackRock, the world's largest money manager, is among the largest asset management firms opposed to a SIFI designation. Novick said the report's focus on larger asset management firms as a bigger risk than smaller firms is wrong.
"A smaller, more concentrated firm is actually a bigger risk," Novick said, citing a larger firm's ability to diversify portfolios and strategies.
People familiar with matter previously told Reuters that the SEC decided to seek comments on the study in part because it, too, had concerns about the report's portrayal of the industry.
"Our bottom line is that the report does not provide any predicate whatsoever for the FSOC to be acting to designate firms in the asset management business as SIFIS," Stevens said.
The Office of Financial Research is an arm of the Treasury Department that was created by the 2010 Dodd-Frank Wall Street reform law to help conduct research that will lay the groundwork for the council's regulatory policy decision-making.
The asset management report is the first study to be released since OFR's creation.
Stevens said history fails to support the study's findings.
"It doesn't produce any empirical evidence to support that scenario," he said. "In fact, all of our research...suggests that that kind of phenomenon has never happened."
He also said the report is flawed because it fails to include research on private funds such as hedge funds, even though the leading historical example of an asset manager sending shockwaves through the market was the 1998 collapse of the highly leveraged hedge fund Long-Term Capital Management.
"Long-Term Capital Management is mentioned nowhere in this report," he said.
Stevens said he thinks the process for how the council designates firms as systemically important is shrouded in secrecy and should be more transparent.
His request for the report to be withdrawn is part of a growing chorus of voices that emerged this week, as firms, trade groups and lawyers all wrote letters to the SEC making similar requests.
Among others who asked for the report to be withdrawn were the head of the U.S. Chamber of Commerce's Center for Capital Market Competitiveness, Dechert LLP Partner Thomas P. Vartanian and two other asset manager trade groups.
"The study should not be relied on to inform policy discussions about the asset management industry," wrote the Investment Adviser Association and the asset management group of the Securities Industry and Financial Markets Association.
"The flaws and inaccuracies in the study reflect an incomplete research process and a failure by OFR to engage subject matter experts in its research and analysis."
(Reporting by Sarah N. Lynch in Washington; Additional reporting by Ashley Lau in New York; Editing by Karey Van Hall, Kenneth Barry, Ken Wills and Leslie Gevirtz)