Ever since the Treasury Department’s Office of Financial Research (“OFR”) released its report on Asset Management and Financial Stability in September 2013 (“OFR Report” or “Report”), the industry has vigorously opposed its central conclusion that the activities of the asset management industry as a whole make it systemically important and may pose a risk to US financial stability.
Several members of Congress have also voiced concern with the OFR Report’s findings, particularly during recent Congressional hearings, as have commissioners of the Securities and Exchange Commission. Further complicating matters, a senior official of the Office of the Comptroller of the Currency recently expressed alarm about banks working with alternative asset managers or shadow banks on “weak” leveraged lending deals.
Amidst this domestic controversy, the Financial Stability Board and the International Organization of Securities Commissions issued a Consultative Document in January proposing methodologies for identifying globally active systemically important investment funds. Like the OFR Report, the Consultative Document explains why designation may be necessary without addressing which firms may be designated or what additional regulations would apply. However, unlike the OFR Report, the Consultative Document proposes assessing systemic importance at the fund-level, as opposed to at the asset manager-level with all funds combined (although the proposed designation criteria are similar).
The key takeaway in our view is that the Consultative Document’s publication, in and of itself, furthers the likelihood that a few, large US asset managers will ultimately be designated by the US’s Financial Stability Oversight Council (“Council”) as systemically important financial institutions (“SIFIs”). The Consultative Document affirms the US’s position that the industry as a whole is systemically important, even after the Council revealed last summer its inclination to designate particular asset managers as SIFIs. The Council will not need to “prove” that a particular firm is systemically important – rather the Council will assert broad discretion based on the flexible standard of what “could” happen under a worst-case-scenario, as we saw with the rationale for designating insurance companies last year.
This Regulatory Brief analyzes the OFR report and the Consultative Document, and concludes with our continued view that the Council will propose a few large asset managers for designation.