The ICI and unions are going toe-to-toe over whether mutual funds pose any major systemic risks to the U.S. financial system -- and if the mutual fund industry needs extra oversight
Mutual funds pose little threat to the U.S. financial system and should remain beyond the reach of Federal Reserve oversight, the industry's lobbying group said.
“Many characteristics of funds -- including their simple capital structure, limited used of leverage and comprehensive regulatory scheme -- put funds at the ‘less risky' end of the spectrum when considering the potential for systemic risk,” the Washington-based Investment Company Institute said in a letter sent to the Financial Stability Oversight Council.
The oversight council, created by the Dodd-Frank financial overhaul law, has the authority to recommend that the Fed and other agencies toughen rules to reduce risk at banks as well as non-bank financial firms.
U.S. bank holding companies with more than $50 billion in assets -- about 35 in all, including JPMorgan Chase & Co. and Goldman Sachs Group Inc. -- are automatically included. The council, led by Treasury Secretary Timothy F. Geithner, will rule next year on which, if any, mutual funds, hedge funds, private-equity firms, life insurers and other companies need extra oversight because they pose a potential risk to financial stability.
The designation should be “reserved for those circumstances, presumably quite limited,” when a company's risk isn't addressed by current rules or regulations granted by Dodd- Frank, ICI said in its Nov. 5 letter posted on a federal government website on regulations.
‘No Single Factor'
“No single factor in isolation -- such as how ‘big' a firm is -- is sufficient,” the letter said. ICI's members -- including mutual, closed-end and exchange-traded funds -- manage assets of $12 trillion.
Vanguard Group Inc., Capital Group Cos., Franklin Resources Inc., Fidelity Investments and Pacific Investment Management Co. are among the largest U.S. mutual fund companies.
Because money-market funds are a type of mutual fund, the firms shouldn't have a “blanket exemption,” said Heather Slavkin, senior legal and policy adviser at the AFL-CIO labor federation's investment office.
Money-market funds have been under scrutiny since the September 2008 failure of the $62.5 billion Reserve Primary Fund, whose value fell below the standard $1 a share. The fund's failure to meet redemptions sparked a run that helped freeze global credit markets and prompted the Federal Reserve to provide liquidity to money-market funds.
“If a class of financial institutions received government support during the financial crisis, there should be a strong presumption that they can pose a systemic threat,” Slavkin said.
Increased Supervision
Geithner said Sept. 30 that bailed-out insurer American International Group Inc. and GE Capital, General Electric Co.'s finance arm, could be considered for increased supervision because Dodd-Frank imposes stricter oversight on entities “that are banks in all but name, whether you call them investment banks, or AIG, or GE Capital.” Such firms may be forced to “run with a much more conservative, prudent leverage and funding mix,” Geithner said.
The council also includes Federal Reserve Chairman Ben S. Bernanke, Securities and Exchange Commission Chairman Mary Schapiro, Federal Deposit Insurance Corp. Chairman Sheila Bair and Commodity Futures Trading Commission Chairman Gary Gensler.
The group, for the past month, has been accepting public comment on what criteria should be used to determine which companies should be the target of increased oversight. It is scheduled to meet again Nov. 23.
The council supplants the smaller President's Working Group on Financial Markets, formed in response to the October 1987 stock-market crash. It is has begun work on implementing the so-called Volcker rule that bars bank holding companies from trading for their own accounts.
