FSOC Requests Information on the Asset Management Industry (with Lofchie Comment)

FSOC seeks comment as to whether asset management products and activities may pose potential risks to the U.S. financial system in the areas of liquidity and redemptions, leverage, operational functions, and resolution.

The body of the release is divided into four parts: one dealing with redemption rights, one dealing with leverage, a third with operational risk, and a fourth and final part on insolvency risk. The last part concerns not only the insolvency of the underlying investment funds, but also of the investment manager, suggesting that FSOC may still be considering whether investment managers could be deemed to be systemically significant.

Lofchie Comment: The combination of (i) the failure of the release to develop questions that are reasonably tailored to different market participants, (ii) the absence of transparency as to the "success" of Form PF and (iii) the implicit assumption that the government could dictate permissible investments even by private funds (or by private citizens who hire investment advisers) is discomforting.First, many of the questions are so simplistic that they seem to indicate that the government has a starting knowledge level of close to zero. Beyond that, the questions cover too much ground both in terms of their scope and in terms of the types of funds that they cover. FSOC should develop different forms of questions that would be relevant to different types of funds. Does it really make sense to send the same questions to SEC-registered investment companies, to private equity funds and to commodity pools that trade futures? Further, as to SEC-registered investment companies, shouldn't most of the information already be available from the SEC? Second, Form PF, was "intended" to collect information of the type requested by this Notice. Several times the government has commented on the high value of the information collected by Form PF. If that information is so valuable, why is the government requesting in this Notice the same very basic information. Perhaps, it is because Form PF is an incredibly expensive, yet totally worthless, information gathering effort; most of the questions with respect to financing make no sense. Until the government provides real information as to the results (or lack thereof) provided by Form PF, it is not appropriate for the government to embark on another massive information-gathering exercise. Third, the language in the Notice suggests that the government could impose rules that dictate permissible investments or investment strategies of private funds. For example, the government could require private funds to hold assets in cash or in U.S. government securities. The Notice states that investment advisers "may not always manage investment vehicles in a way that prevents or fully mitigates the risks to . . . the broader financial system." (at page 9). Is FSOC suggesting that private investors are going to be subject to regulations dictating how much of their assets are to be held in cash, or that their investment advisers manage assets for the purpose of protecting the financial system (perhaps by prohibiting asset sales in a down market)? The government already has many ways to control leverage of private funds; for example, through government regulation of the banking system, of broker-dealers, of FCMs, and so on.

See: FSOC Requests Comment on Asset Management Products and Activities.

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