November 1, 2013
The Office of Financial Research of the Department of the Treasury prepared a study entitled, “Asset Management and Financial Stability” at the request of the FSOC. The Council commissioned the Study in order to “inform its analysis of whether—and how—to consider [asset management] firms for enhanced prudential standards and supervision” within the meaning of section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. FSR has several substantive concerns with the Study. First, the failure to adopt a sound methodology for conducting the Study has resulted in a report that lacks rigor, balance and perspective. Second, the Study appears to be flawed in its analyses of (i) asset management firms as sources of systemic risk, (ii) redemption risk, (iii) asset management firms’ connections with the financial industry, (iv) the principal-agent relationship between asset managers and their clients as a source of systemic risk, and (v) the use of leverage. Third, the Study reflects a fundamental misunderstanding of the asset management industry, how asset management firms operate, and the expectations of investors in the capital markets. In particular, the Study fails to appreciate the fact that investors will take on greater risk in order to receive the potential for greater return. Fourth, the Study gives insufficient weight to the comprehensive regulatory régime imposed on asset managers and the industry by several U.S. regulatory agencies, including the Securities and Exchange Commission, and non-U.S. regulatory agencies, particularly with respect to the new regulatory requirements imposed since the Dodd-Frank Act. Finally, the Study fails to appreciate the important role that asset managers play as agents acting on behalf of millions of individual and institutional investors who participate in U.S. capital markets and the contributions that asset managers make to the financial stability of the United States.