Jack Lew Explains Why He's Watching You
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Thursday, April 21, 2016

Jack Lew Explains Why He's Watching You

The Secretary of the Treasury for the United States of America took time out of his busy schedule to explain why he's watching fundsters and other asset managers. Fundsters from big shops might take heart, but boutiques may not be happy.

Jack Lew
The United States Senate
U.S Secretary of Treasury
Yesterday's Wall Street Journal posted an op-ed from U.S. Treasury Secretary Jack Lew, in which the Obama appointee explains why the Financial Stability Oversight Council (FSOC) is "reviewing asset management." The good news is that Lew uses the column to explain FSOC's big hammer, labeling big firms as SIFIs (systemically important financial institutions), is not their only tool.

That could be comforting to the largest fund firms and asset managers, who have been fighting for years the notion that large asset managers might be labeled as SIFIs. Indeed, in another article, Sarah Krouse and Ryan Tracy of the WSJ portray FSOC's backing away from SIFI labeling as one of many lobbying wins for the world's largest asset manager, BlackRock [profile].

Yet the vast majority of smaller shops that would almost certainly have escaped SIFI status and the extra regulatory scrutiny that comes with it ... meaning that SIFI labeling might actually helped them out a bit by giving them a bit of an edge over the industry behemoths. The WSJ notes that FSOC has focused more on "products and activities" instead of specific, large asset managers. And that might mean that all asset managers, large and small, could face new regulations and thus new costs and constraints. And when new costs or constraints hit all firms, it is the largest that tend to be the best-equipped to be able to take that hit while the smallest firms suffer disproportionately.

Lew's op-ed seems to fall on this latter side. He mentions FSOC's interest in "robust risk management practices to ensure that funds are able to meet redemption requests from investors" and "clearer guidelines about the extent to which funds can hold assets with very limited liquidity." FSOC, Lew says, wants "enhanced reporting and disclosure by mutual funds" on liquidity issues, and more asset manager data in general.

One positive point for mutual fund shops large and small: another one of Lew's highlighted FSOC points of interest is specifically focuses on a different kind of asset manager, hedge funds. FSOC is worried about hedge funds' leverage, and given that mutual funds' use of leverage is already pretty constrained, this shouldn't worry too many fundsters.

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