On Monday, the Financial Stability Oversight Council will hold an asset management conference with industry, academics, regulators, and a handpicked audience. The FSOC, which is made up primarily of the heads of the federal financial regulatory agencies, has the power to designate non-bank financial companies for regulation by the Federal Reserve. Monday's event will be the latest step in the FSOC's consideration of whether to designate one or more asset managers as systemically important. A report by the FSOC's sidekick--the Office of Financial Research--on the asset management industry looked as if it had been written without much consideration of the actual nature, purposes, or risks of the industry.
Monday's event is intended to make up for the faux pas of issuing the report without first soliciting comment.
The Securities and Exchange Commission, which heavily regulates asset managers, put the report out for comment after it was published. The SEC did so without the blessing of the FSOC. The FSOC now assures us that it "welcomes the opportunity to hear directly from the industry and other stakeholders on topics related to investment risk management, potential risks across the broader financial system, and operational issues and resolvability."
One SEC commissioner is not so sure that the FSOC is all ears. On Thursday, Commissioner Daniel Gallagher placed a comment letter in the SEC's file on the OFR asset management report. His letter, which makes for better reading than the typical regulatory comment letter, points out flaws in the FSOC's structure, powers, and process. Commissioner Gallagher concludes by registering his vote against designating asset managers. That vote will not count towards the official tally because only the SEC's chairman is a member of the FSOC.
Why does any of this matter? As Commissioner Gallagher points out, if bank regulators get their way, they will crush the capital markets--which are meant for risk-taking--under bank-like regulations. An analysis by the American Action Forum, also released last Thursday, suggests that investors will pay a hefty price--in the form of lower returns--for designation. Bank regulators are understandably skittish after the crisis, but they cannot allow their fear to turn every financial institution into a bank, protected with deposit insurance and guarded by bank regulators. Doing so would not prevent failures, but it would deprive investors of the ability to put their money to work and entrepreneurs of a vitally important source of financing their dreams and our future economic growth.