ICI Calls on FSOC to Reconsider Position on Financial Stability Risk and Mutual Funds

The Investment Company Institute (“ICI”), a global association of regulated funds, urged the Financial Stability Oversight Committee (“FSOC”) to reconsider the conclusion that liquidity and redemptions in mutual funds carry significant financial stability risks. The ICI was responding to an FSOC public update of a two-year review of asset management products and activities.

The ICI contended that although it recognizes the need for enhanced liquidity management for mutual funds, the FSOC provided “no basis . . . for its conclusion that there are financial stability concerns that may arise from liquidity and redemption risks in mutual funds, particularly funds investing in less liquid asset classes.” The ICI made the following assertions:

  • the FSOC’s concern that a “first mover” advantage in pooled investment vehicles may be attributed to either the mutualization of trading costs or funds selling their most liquid assets first to meet redemptions is unfounded and ignores data gathered in response to this very question by the ICI in December 2014;
  • the FSOC failed to substantiate concerns about destabilizing redemptions from mutual funds, which ignore the “modest net outflows from mutual funds in the aggregate, even during times of severe market stress”; and
  • the FSOC misconstrued the lessons to be learned from funds investing in less liquid assets (i.e., the Third Avenue Focused Credit Fund) despite the New York Federal Reserve’s economic modeling that suggests that “even extremely large outflows from high-yield bond funds – which assumed outflows far greater than ever seen in history – are simply too small to pose systemic risks.”

Lofchie Comment: The FSOC has shown a continuing interest in risks that relate to mutual funds and investment advisers, two areas that are not under the control of the banking regulators who dominate the FSOC. Meanwhile, the FSOC largely has ignored risks that seem far greater than, for example, the risks associated with government pension plans. Would it not be more prudent for the FSOC to address the unrealistically high levels of projected returns that these plans promise, along with the billions of dollars of long-term obligations they add, particularly given that governmental pension plans typically underestimate the life span of plan recipients? The FSOC should focus on risks that, despite being politically more difficult to confront, are greater in significance and certainty.