Asset Managers May Dodge ‘Systemically Important’ Label

Asset management firms could avoid the “too big to fail” label, as US financial regulators announced they would focus their scrutiny on potentially risky products and activities rather than the individual firms.

The Financial Stability Oversight Council (FSOC)—established under the Dodd-Frank Act—said the shift in attention indicated asset managers were less likely to be labeled “systemically important.” Such designation would draw greater regulatory scrutiny by the US Federal Reserve.

“The council directed staff to undertake a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management industry,” the US Treasury Department said in a statement.

Prior to the change, the FSOC reviewed firms’ size, “interconnectedness,” leverage, off-balance sheet exposures, relationships with other financial institutions, and “any other factors the [council] deems appropriate” to make the “systemically important” designation.

Asset management firms have since argued that the label would discourage specialization and lead institutional investors to pull assets to manage internally.  

“The council directed staff to undertake a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management industry,” the US Treasury Department said.

 “I don’t see systemic risk in our asset managers,” Ken Griffin, CEO of Citadel, said in May. “I see systemic risk in the megabanks around the world.”

BlackRock also urged FSOC to better characterize the risk profile of the designation and focus on general industry practices that might pose threat to financial stability. 

“We also believe that many risks are not specific to one investment fund or one asset manager, but rather result from common practices undertaken across all market participants,” the firm said.

Under the new direction, the FSOC said it “intends to monitor” the Securities and Exchange Commission’s reform of the money-market mutual fund sector that was passed last month.

It also announced it would maintain the “systemically important” labels for AIG and GE Capital, which were first designated July 2013 and will review Prudential’s designation in September. 

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