Tag: Systemically Important

Asset Management and Financial Stability

Asset management report cover

The US Office of Financial Research recently released a report raising concerns that the largest asset managers could pose a threat to financial stability. That puts firms like BlackRock, Deutsche Asset & Wealth Management, Prudential Financial, AXA Investment Managers, MetLife, Invesco and UBS Global Asset Management in the cross-hairs of being considered “systemically important.”

The Financial Stability Oversight Council decided to study the activities of asset management firms to better inform its analysis of whether to consider such firms for enhanced prudential standards and supervision under Section 113 of the Dodd-Frank Act. Section 113 gives the FSOC the power to designate a non-bank firm as a “systemically important financial institution”. Being considered “systemically important” means heightened supervision by the US Federal Reserve and also makes the firm subject to risk-based capital requirements and leverage rules.

The FSOC asked the Office of Financial Research to step in and collect data. The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Office of Financial Research within the Treasury Department to improve the quality of financial data available to policymakers and to facilitate more robust and sophisticated analysis of the financial system.

This report is the first step to seeing greater regulatory control of large asset managers. According to the Report, the U.S. asset management industry oversees the allocation of approximately $53 trillion in financial assets.

The Report asserts that separate accounts managed by large asset managers are less transparent than those of mutual funds, banks, and private funds because the activities are not publicly reported.

The Report identifies four key factors that make the industry vulnerable to shocks:

(1) “reaching for yield” and herding behaviors;
(2) redemption risk in collective investment vehicles;
(3) leverage, which can amplify asset price movements and increase the potential for fire sales; and
(4) firms as sources of risk;

To me, (1) and (3) seem to miss the point of separate accounts. Pension plans and institutional investors usually choose a separate accounts strategy to have greater control over their investments. The active involvement of the separate account holder acts as a control against the asset manager reaching for yield or using excessive leverage.

Of course, the findings in the Report do not mean that the big asset managers are imminently subject to additional regulatory oversight. There is a lengthy process for designated a firm as “systemically important.” However, this report could lead to adverse regulation that might adversely impact the separate account business of large asset managers, including those with real estate investment management platforms.

References:

The SEC Wants to Know if You Are Systemically Important

The Securities and Exchange Commission proposed a new rule that would require advisers to private funds to report information for use by the Financial Stability Oversight Council in monitoring risk to the U.S. financial system. Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to gather this information.

The SEC is proposing a new Rule 204(b)-1 under the Investment Advisers Act that would require SEC-registered investment advisers to report systemic risk information on Form PF if they advise one or more private funds.

Each private fund adviser would report basic information about the operations of its private funds on Form PF once each year. Large Private Fund Advisers would be required to submit this basic information each quarter along with additional systemic risk related information required by Form PF concerning certain of their private funds.

“Large Private Fund Advisers” would be

  • Advisers managing hedge funds that collectively have at least $1 billion in assets as of the close of business on any day during the reporting period for the required report;
  • Advisers managing a liquidity fund and having combined liquidity fund and registered money market fund assets of at least $1 billion as of the close of business on any day during the reporting period for the required report; and
  • Advisers managing private equity funds that collectively have at least $1 billion in assets as of the close of business on the last day of the quarterly reporting period for the required report.

The SEC estimates that approximately 4,450 advisers would be required to file Form PF. Of those, approximately 3,920 would be smaller private fund advisers not meeting the thresholds for reporting as Large Private Fund Advisers.

It looks like the definition of private equity fund for purposes of the Large Private Fund Adviser reporting requirements will exclude real estate funds.

Private equity fund:

Any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course.

Under the proposed rule, real estate private equity funds will be subject to the annual reporting, but not subject to the more detailed quarterly reporting. This is just a proposed rule, so the final requirements and definitions may change in the final rule when it is issued. In the meantime, you can make comments.

Sources: