SIFMA AMG Urges Regulators to Stop Efforts to Create Systemic Risk Methodology for Asset Managers and Funds (with Lofchie Comment)

SIFMA Asset Management Group ("SIFMA AMG") submitted a comment letter expressing concerns with the second public consultation document on Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions. The document was published by the Financial Stability Board ("FSB") and the International Organization of Securities Commissions ("IOSCO") (collectively, the "Organizations").

In the letter, SIFMA AMG "strongly" encouraged the Organizations to stop their efforts to create a methodology to designate asset managers and funds as systemically important. Instead, SIFMA AMG suggested the Organizations focus on asset management products and activities such as those contained in FSB's recently announced workstream. SIFMA AMG explained that this approach would better reflect the nature of asset management business, and would enable the Organizations to better align and leverage efforts that are currently being undertaken by regulators.

The SIFMA AMG comment letter highlights key concerns with the second consultation document, including:

• jurisdictional issues. SIFMA AMG argued that the G-20 did not give the Organizations a specific mandate to designate investment funds or asset managers as systemically important;
• process issues. SIFMA AMG recommended that the Organizations should review lessons to be learned from the FSOC Notice on Products and Activities, as well as the SEC's current initiatives to collect data on the asset management industry. Additionally, SIMFA AMG explained that systemic risk regulatory efforts under way in other jurisdictions, such as Canada and the EU, should also be completed before any international body proceeds in determining whether further steps are warranted; and
• methodological questions. SIMFA AMG noted that there does not seem to be any real analysis of the comments generated by over 50 commenters on the First Consultative Document. Furthermore, SIFMA AMG stressed that the Organizations seem to be "putting the cart before the horse" – a full review and analysis of data collected on products and activities would provide for more information on any potential risks in the industry, rather than a "needless and harmful" entity designation methodology.

Lofchie Comment: The notion that the U.S. or global bank regulators, in the name of reducing systemic risk, may determine which investors will be entitled to buy which assets and in which amounts should be a non-starter. This is not power exercised at the fringe; this goes to the very heart of personal freedom. Philosophically speaking, if the bank regulators can decide what an investor is permitted to buy, how very far is that from deciding what field of study a student may pursue (too many liberal arts majors perhaps) or where a person can live in the country. (For a more detailed discussion of the power that may be exerted by economic planners, see Friedrich von Hayek, The Road to Serfdom, particularly, but not limited to, the chapter titled "Economic Control and Totalitarianism.")Obviously, the government has numerous ways of significantly influencing what investors buy or sell (as well as what students study and where people live). For example, by taking actions with respect to the money supply that affect interest rates, the government influences the attractiveness of investments in assets such as real estate or the decisions to purchase stocks vs. bonds. Similarly, by granting tax preferences to certain industries (such as solar power), the government may attract investments to that industry. However, it is quite different for the government to adopt policies, applicable to all, that influence investments or other decisions, than it is to designate certain parties as systemically important and determine that this group of parties, or even an individual party, is prohibited from making investments that are otherwise available to all other members of the society.

See: SIFMA Comment Letter Announcement; SIFMA Press Release.Related news: FSB and IOSCO Propose Assessment Methodologies for Identifying Non-Bank Non-Insurer G-SIFIs (March 5, 2015).