SIFMA AMG Submits Comments to Multiple U.S. Regulators Critical of FSB-IOSCO's Second Consultative Document (with Lofchie Comment)

The Asset Management Group of SIFMA ("SIFMA AMG") submitted comments to the U.S. Treasury Department, the SEC, the Board of Governors of the Federal Reserve System ("FRB") and the CFTC regarding the publication of the second consultative document by the Financial Stability Board ("FSB") and the International Organization of Securities Commissions ("IOSCO"). The document is titled "Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions" (see also IOSCO press release).

In the letter, SIFMA AMG criticized the Second Consultative Document's lack of attention to comments by SIFMA AMG on FSB-IOSCO's First Consultative Document. The Second Consultative Document proposes methodologies for designating investment funds and their managers as global systemically important financial institutions ("G-SIFIs"). SIFMA AMG stated that the designation of asset managers and investment funds as G-SIFIs would be unjustified and the consequence of the designation would be the imposition of an ineffective structure for their regulation.

Dismissing the Second Consultative Document as "irredeemably flawed" and noting that the Financial Stability Oversight Council shifted its attention from individual firms, or funds identified on the basis of size, to "a more constructive review of products and activities in the sector," SIFMA urged U.S. regulators to reject the proposals in the Second Consultative Document. Further, SIFMA urged U.S. regulators to oppose any further FSB-IOSCO attempt to create a methodology for designating asset managers and investment funds as G-SIFIs. Emphasizing the significance of the industry's criticism of the document, SIFMA noted that the "approval by U.S. members of the FSB and IOSCO of a new global SIFI proposal before the end of the comment period on the FSOC Notice conflicts with statements that Secretary Lew and others have made." SIFMA AMG also argued that the proposed actions would be particularly damaging to U.S. firms and could effectively surrender regulatory control over U.S. firms to non-U.S. regulators.

Lofchie Comment: The argument that investment advisers might be regarded as systemically significant is weak. (See, Cabinet Commentary on a Speech by FRB Governor Fischer). Such an argument leads to an uncomfortable conclusion: that the real power sought by the prudential regulators is not over the capital structure of investment advisers, but over the investment decisions made by investment funds. Such an assumption of power cannot be supported by advancing the argument that individual decisions made by individual funds are bad collectively for global financial stability. Most of the focus of the IOSCO document is on investment holdings and not investment advisers. For example, the report states that "[r]egulation also aims to promote and ensure a high level of compliance by entities involved in managing a fund's operations not only from an investor protection perspective, but also, in recent years following the crisis, from a systemic perspective" (at 31). The report then goes on to state that "private funds, which generally are not subject to regulatory leverage limits, have the potential to become highly leveraged or concentrated, and could give rise to such systemic risk." The notion that government(s) should decide whether a private investment fund is too highly concentrated seems a remarkable expansion of governmental power. How is the government to decide what's "too" concentrated (let alone whether government(s) should have that power)? Might the government(s) decide that activist investing is improper because it results in too high a percentage of the ownership of a single company? Might the government(s) decide that specialization in a particular industry (whether it be solar, tech or defense) is impermissible because it is too exposed to the volatility of that industry? These would seem to be extraordinary powers to grant to government(s). Also noteworthy is the document's exclusion of public funds and sovereign wealth funds from the control imposed on private sector entities (at 5). In other words, governmental entities can invest as they like, and can also control the investments of private sector entities.

See: SIFMA AMG Comment Letter.Related news: FRB Vice Chair Fischer Discusses the Non-Bank Financial Sector (with Lofchie Comment) (March 27, 2015). (This was the news story that we referenced with the Newsletter headline "Radical or Regular Way? You Decide." However, a speech that is far more explicit in its assertion that the government should regulate private investment decisions is discussed in another Cabinet news article: "Mercatus Scholar Hester Peirce Cautions against Macroprudential Regulation (with Lofchie Comment)" (February 25, 2015).)