December 11, 2014 / 3:01 PM / in 4 years

Asset managers could face tighter supervision under new plan: SEC

WASHINGTON/NEW YORK (Reuters) - The top U.S. securities regulator laid out a plan on Thursday to tighten supervision of large asset managers, saying more must be done to identify the risks the firms could pose and to protect markets in the event of a major crisis.

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

Securities and Exchange Commission Chair Mary Jo White announced a three-pronged plan in a major policy speech at The New York Times Dealbook conference in New York.

The SEC’s push on asset managers is part of a larger attempt by regulators to clamp down on potentially risky financial activities that were not fully addressed by the 2010 Dodd-Frank Wall Street reform law.

White said current regulations for advisers and funds are not sufficient in overseeing how fund managers deal with risk.

“It is not enough ... to simply identify, monitor and evaluate,” White said. “A broader set of proactive initiatives is required to help ensure that our regulatory program is fully addressing the increasingly complex portfolio composition and operations of today’s asset management industry.”

It was not clear what the timetable would be for the new rules for large asset managers, such as BlackRock Inc and Fidelity Investments, or how much support there was among fellow SEC commissioners.

SEC Democratic Commissioner Luis Aguilar told Reuters in a statement he is “generally supportive” of White’s initiatives, but didn’t want to “pre-judge any particular steps” until he had more details.

White told reporters she expects 2015 to be an “active” year for the reforms.

In her speech, she laid out a three-part approach. The first calls for enhancing the data the SEC collects from funds and advisers so the agency has a better window into industry trends.

A second piece would require mutual funds and exchange-traded funds to beef up internal risk controls, particularly risks for liquidity and the use of derivatives.

It would also call for firms to come up with a plan in the event they must unwind and transfer client assets to another fund company.

The SEC’s plans for overseeing risks posed by large asset managers comes as the Financial Stability Oversight Council (FSOC) conducts its own review of asset management activities.

White is a member of the FSOC, a panel created by the 2010 Dodd-Frank law that is chaired by the Treasury Secretary and watches for systemic risks.

The FSOC has been aggressively trying to beef up oversight of the asset management sector.

The industry has been fearful that the FSOC would use its ultimate power to dub large asset management firms as “systemic.” That tag imposes capital requirements and oversight by the U.S. Federal Reserve.

The FSOC has so far only given the tag to insurers and a commercial lender.

But in 2013, the FSOC’s research arm, the Office of Financial Research (OFR), released a report saying asset managers may pose systemic risks, including concerns funds might all crowd into the same assets.

It also said regulators lacked adequate visibility into “separate accounts,” or accounts that companies manage for individual clients, as opposed to pooled investment vehicles.

The OFR has said it is concerned risks could be lurking in those less transparent accounts, and that significant securities sales or the use of leverage might amplify the impact to the markets during a crisis.

The report was torn to shreds by the industry, many members of Congress, and some SEC officials, who said it was riddled with flaws and demonstrated a lack of understanding about the sector.

The industry feared the report was a precursor to being designated systemic, and launched a massive lobbying campaign to get out ahead of any potential actions by the FSOC.

In July, the FSOC shifted gears in its review of the industry, focusing more on asset management activities and products, instead of the big firms themselves. A person familiar with the matter said at the time the panel was unlikely to designate any firms as systemic.

White, in her speech, said she sees the FSOC’s ongoing review as a “complement” to the SEC’s work.

Some of the details of her plan also appeared to address concerns previously raised by the FSOC and the OFR.

The data collection initiative would include information about separately managed accounts, as well as securities lending activities, derivatives use, valuation and liquidity.

The asset management industry’s reaction to White’s speech was generally positive.

“I have products at BlackRock and so do other people that probably require more transparency,” Larry Fink, BlackRock’s chief executive, said at the same conference when asked about White’s plan by Reuters.

Paul Schott Stevens, the head of the Investment Company Institute, said the SEC as the industry’s primary regulator “has the experience and the authority” to protect investors and help support the markets.

Reporting by Sarah N. Lynch in Washington and John McCrank in New York; additional reporting by Jessica Toonkel; Editing by Meredith Mazzilli

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