It's Premature to Label Asset Managers as 'Systemic': Treasury Official

WASHINGTON — A top Treasury official on Monday sought to dispel the idea that regulators were moving quickly to label asset management firms as systemically important.

Mary Miller, the Treasury Department's undersecretary for domestic finance, instead signaled that members of the Financial Stability Oversight Council were still in the early stages of collecting data and understanding the industry, and determining what, if any, steps regulators should take.

"There aren't any easy answers here in the first place," said Miller, speaking to reporters ahead of the council's first public conference on the asset management industry. "There's no judgment that has been made. There's no outcome that's been predetermined. So we're not driving to any particular conclusion. We're trying to understand what risks there are to the market."

Miller said there was a "broad menu" of options that the council could employ, including making recommendations in its annual report to Congress, using its authority to urge action by the industry's primary regulator, the Securities and Exchange Commission, or designating the industry as systemically important.

But she also left open the possibility that regulators could opt to do nothing, if the potential risks posed by such firms did not warrant heightened scrutiny.

"No decisions or no predetermined outcomes of what the remedy is [have been made]," said Miller. "We're still in that what-are-the-risks stage, and if there are risks that need further action, then what are the remedies?"

The council's conference on Monday was set up in the hopes of drawing academics, experts and industry professionals to have an "open conversation about risk," according to Miller.

The conference hosted by the council, a 10-member regulatory panel headed by Treasury Secretary Jack Lew, is intended to discuss internal risk management practices at private firms such as how they manage liquidity and redemption risk as well as questions tied to operational risks, such how to safely unwind a firm or a fund safely.

Among those participating in the conference are William De Leon, global head of portfolio risk management for PIMCO, Barbara Novick, vice chairman of BlackRock and Peter Stahl, associate general counsel of Fidelity Investments.

Since last year, all three firms have been battling efforts by regulators to label asset management firms as systemically important.

Miller, who once worked in the asset management industry, said she had been "a little bit surprised" by the industry "overreaction" to public statements made thus far. She's hopeful that the council's conference will serve as an "opportunity to clear up that misunderstanding," but also made clear the effort to examine the industry was Congress' intent in creating the FSOC.

"It's natural to bristle a little if people are challenging the safety and soundness of your industry, but that's exactly what we have to do," said Miller. "This is the FSOC's job. They would be remiss if they didn't examine every corner of the financial market."

The FSOC had asked the Office of Financial Research, which acts as a data arm of the regulatory council, to examine the risks posed by large asset managers. In its report, the OFR said such companies are susceptible to various vulnerabilities like "reaching for yield" and "herding."

Regulators are concerned that firms in a low-interest rate environment may try to seek higher returns by buying up riskier assets or that asset managers would crowd into similar or even the same assets simultaneously.

Both the industry and lawmakers on Capitol Hill have repeatedly sought to discount the credibility of the OFR's report, arguing that the findings provide an incomplete and inaccurate view of the industry.

Under the Dodd-Frank Act, the FSOC has the authority to identify companies it believes pose a risk to the system. Those firms face a host of tougher regulatory requirements and automatically fall under the Federal Reserve Board's supervision.

The council has already designated three non-bank firms — American International Group, GE Capital and Prudential Inc. — and that list is likely to grow.

At the conference, panelists like Kent Daniel, a finance professor at Columbia University, listed the potential for run-like behaviors to occur as a result of the first-mover advantage as well as the importance of keeping in mind external events that could cause fragility in the market.

But PIMCO's De Leon and Michael Mendelson, a portfolio manager at Risk Parity Strategies, AQR disagreed, suggesting that there is a significant distinction to be made between run-risk versus liquidity risk.

"The run risk is a very overreaching statement and very misleading," said De Leon. "Daily liquidity and fund liquidity is a natural thing and the question is when people liquidate assets do they sell them? The question is the fund structure similar to the market, in which case you are acting as an agent for a client, which is very different than leveraged vehicles or banks."

Both De Leon and Mendelson also tried to appeal to regulators by detailing their risk management practices, which they claimed were often prompted by their own internal controls, while also putting part of the burden on investors, whose needs often call for managing greater risk.

"Our job is not to prevent people from taking risk, but to quantify the risk and make sure we are consistent with the amount of risk we are taking and meeting our fiduciary responsibility to our clients," said De Leon.

His message was echoed by Mendelson, who noted that first and foremost his firm manages "the portfolio to the desires of the risk investor."

"A lot of investments are targeted to certain risk levels that are needed by the investors," said Mendelson. "Our job in managing risk is not always just to reduce risk, but to take the amount of risk the investor needs. That's what we're hired for."