The Asset Management Group of SIFMA (“SIFMA AMG”) and the Investment Adviser Association (“IAA”) provided comments to the SEC regarding a study, published in September 2013 by the Office of Financial Research of the U.S. Department of Treasury (“OFR”), titled Asset Management and Financial Stability (the “OFR Study”). By way of background, the introduction to the OFR Study announces that it was issued for the purpose of determining whether asset management firms should be subject to enhanced prudential standards and supervision under Section 113 of Dodd-Frank (“Authority to require supervision and regulation of certain nonbank financial companies”). Section 113 authorizes the Financial Stability Oversight Committee to impose additional regulation on financial entities that may, because of various factors, such as the “extent of the leverage of the company,” create financial risk to the economy. The OFR Study provides a very general description of the financial advisory industry and various lists of the major firms and products. Beyond that general description of the financial industry, the gist of the OFR Report is effectively: if asset management firms make bad investment decisions, that might be bad for the economy, so maybe they should be more heavily supervised and regulated.
In response, SIFMA AMG and IAA issued the attached comment, asserting that the study lacks evidence of rigorous analysis, and does not reflect an accurate or effective understanding of the role of asset managers, the relationship between asset managers and the investment products they offer, and the factors that link asset managers and investment products to potential financial market distress. The groups went on to state that the study should not be relied on to inform policy discussions about the asset management industry, and the letter strongly urges OFR to withdraw the report.
Lofchie Comment: A number of aspects of the OFR Report and the related comment letter appear notable. First, OFR asserts that it is issuing the report in connection with its obligations under Section 113 of Dodd-Frank. That Section of Dodd-Frank very clearly deals with risks that may be created by an entity that acts as principal; e.g., creates risk to the economy through its use of leverage. Second, the OFR Report seems more like a college paper than an analysis by a government agency with massive resources and access to data from across every U.S. financial regulator. (The footnotes are largely to various published economic studies. The statement at footnote 56 that “an asset manager noted that it was able to use separate accounts to replicate a hedge fund strategy” – seems to demonstrate a rather low level of sophistication; i.e., that an account manager can manage the assets of one large investor in essentially the same way as the assets of a fund.) Third, the OFR Report seems like a report that is looking to justify a conclusion that there should be more regulation.
The simple argument for more regulation represented by the Report seems to outpace necessity given the government’s current reach under existing authority. For example, the OFR Report cites the government’s use of Form PF as a valuable source of data as to the financial industry; yet, as we have noted numerous times, the Form is so poorly designed that the key financial information (as to leverage) is next to useless. In the same vein, the OFR Report expresses concern as to the degree of concentration in the financial services industry, and notes that larger asset management firms are able to provide services at lower cost; i.e., they have economies of scale. Unfortunately, the report says nothing about whether these economies of scale are driven in good part by the increasing fixed costs of compliance with government regulation.
The government should review the manner in which it regulates: too many different regulators with overlapping authorities issuing rules at too fast a pace for anyone to keep up with, many of them poorly drafted with unworkable timeframes. Government would do better considering how best to use the authority it has (which is quite a lot) before asserting that it needs more.