SEC Weighs New Asset Management Rules


The Securities and Exchange Commission (SEC) is considering new rules for oversight and stress testing of the asset management industry. In response to concerns that hedge funds, mutual funds and other alternative types of investments lack the regulatory control that banks now operate under, regulators are studying whether they need more data about such matters as mutual-fund portfolio holdings and the ability of the asset-management industry to withstand episodes of economic shock. But do such funds have the same potential as banks to inflict systemic risk should there be a sudden seismic event? The sheer value of the sector would seem to suggest that the answer is “yes.”

A $50 Trillion Industry

As investors stand ready to pump more money into the alternative investment market — an industry that has already eclipsed the $50 trillion mark — it is clear that if such a market were to collapse, the ramifications for the economy would be every bit as severe as were the big bank crises of 2008. Yet as of now, such funds are not subject to anywhere near the reporting, capitalization or stress testing requirements as are the larger financial institutions. A sudden change in interest rates and the specter of widespread investor redemptions are just two of the scenarios that experts believe could destabilize the financial system.

Derivatives Once Again the Demon

Just as derivatives played a key role in the last financial crisis, the SEC fears that the increasing use of derivatives by alternative mutual funds should also be viewed as a matter of concern. One suggested rule would see a forced limit on the use of derivatives by mutual funds sold to small investors. Also, firms would be required to have in place internal policies designed to manage the risk associated with such products and would have to curb use of derivatives if it were determined that a particular fund was not sufficiently liquid to readily meet redemption demand.

Reporting and Exit Requirements

New reporting requirements would provide the SEC with across-the-portfolio risk data as opposed to gathering such information on a fund-by-fund basis for examination. Advance winding down plans, the so-called “living wills” of large financial institutions, would apprise the SEC of a fund’s orderly transition scheme — without use of taxpayer dollars — in the event of insolvency.

Federal Reserve Oversight

Financial regulators had considered enacting rules that would have placed the largest mutual funds under Federal Reserve oversight but retreated from that position because of objections from both industry leaders and some lawmakers. In any event, new alternative fund rules proposed by the SEC would need to go through at least a months’-long if not years’-long process before implementation.