WSJ Letter to the Editor: Don’t Regulate Asset Managers as If They Were Banks

It’s a mistake for the government to regulate asset managers as if they were banks.

Regarding your editorial ” Barney Frank vs. Dodd-Frank” (Dec. 9): As former financial-market regulators, we firmly believe vibrant securities markets are indispensable to economic growth and job creation. They require investor confidence, transparency and liquidity. Unfortunately, the recent report on “Asset Management and Financial Stability” by the newly created Office of Financial Research (OFR) could undermine market vibrancy by its thinly veiled suggestion that the Financial Stability Oversight Council (FSOC) may restrict asset managers’ pursuit of investment strategies on behalf of their investors by subjecting these managers to bank regulation. Investors will bear the extra costs and potentially diminished returns from these restrictions on managers’ activities.

At its heart, OFR’s report reflects, first, a flawed analysis of asset managers, and second, fundamental misconceptions about how securities markets function. The report lacks meaningful analysis, and its conclusions rest on inaccurate data and unsupported assumptions. Remarkably, the report expresses concern about asset managers’ “reaching for yield.” Investors of all kinds, including asset managers who invest their customers’ money, necessarily seek to “buy low and sell high.” The federal government cannot—and should not—attempt to influence investors’ inclinations whether, when and why to buy or sell securities.

Unsurprisingly, OFR’s report doesn’t articulate solutions tailored to the concerns it expresses, but the report seems intended to lead, ineluctably, to the imposition of the double-barreled blunderbuss of capital controls and liquidity restraints. If OFR had identified these as its (or FSOC’s) ultimate objectives, it would have had to rationalize them with the fact that countries that have pursued that course have suffered unacceptable loss of investor confidence and consequent stultification of economic growth. Given our current economic condition, our economy can ill afford such measures.

To its credit, the SEC has requested public comments on OFR’s report. Putting out for comment another agency’s report certainly is unusual, but it was necessary because the OFR did not seek public comment, and the SEC reportedly viewed the report as exaggerating risks and reflecting a limited understanding of both our securities markets and the important role asset managers play in them. OFR’s report is consistent with other FSOC initiatives reflecting a desire to impose bank regulatory standards on nonbanks. For example, FSOC recently designated a major insurance company complex as “systemically important,” requiring it to be regulated as if it were a bank. FSOC member and insurance expert, Roy Woodall, objected, calling FSOC’s analysis “antithetical to a fundamental and seasoned understanding of the business of insurance.”

These FSOC efforts effectively empower bank regulators to override subject-matter regulators for nonbanking entities. Since FSOC members are technically appointed as individuals, rather than as formal representatives of the agencies they head, if an FSOC member must recuse himself for any reason from a significant FSOC issue, that member’s agency cannot substitute another participant. This recusal effectively forecloses the member’s entire agency from having any input, thereby shortchanging FSOC of needed expertise.

Bank regulation should not automatically be prescribed for nonbank financial services firms. OFR’s report attempts to support FSOC’s mistaken assumption that bank-regulatory concepts should be applied, indiscriminately, to nonbank companies; but nonbanks have different business models, serve very different purposes, and are already heavily regulated by nonbank regulators. FSOC’s approach effectively would subject financial services firms to multiple and conflicting regulatory regimes, impose significant but often unnecessary regulatory burdens, and saddle investors and taxpayers with the bill.

Difficult regulatory questions cannot effectively be answered by rote responses. They require thoughtful discussion and consideration of multiple alternatives. Unfortunately, it is difficult to achieve an intelligent dialogue, given FSOC’s opaque processes. Indeed, the Government Accountability Office (GAO) has noted FSOC’s lack of accountability and transparency, as well as its failure to collaborate with other financial regulators—concerns echoed by congressional sources. FSOC thus far has not been responsive to these concerns.

If FSOC has specific concerns about asset managers it believes warrant a regulatory response, these should be addressed on an industrywide basis, with the public participating in an open debate about whether the concerns are valid, and if so, what solutions should obtain. Of course, to have that debate, FSOC must engage with subject-matter regulators and the public, not merely push them aside or decline to solicit the views of the public, its constituent regulators, and the industries it seeks to regulate.

Roderick M. HillsSEC Chairman 1975-77William M. IsaacFDIC Chairman 1981-85Richard C. BreedenSEC Chairman 1989-93Harvey L. PittSEC Chairman 2001-03Donald PowellFDIC Chairman 2001-05James E. Newsome, CFTC Chairman 2001-04Randal K. QuarlesUndersecretary of Treasury for Domestic Finance 2005-06Christopher Cox,SEC Chairman 2005-09Charles C. CoxSEC Commissioner 1983-89Richard Y. RobertsSEC Commissioner 1990-95Laura S. UngerSEC Commissioner 1997-2002Sharon Brown-Hruska, CFTC Commissioner 2002-06Paul S. Atkins, SEC Commissioner 2002-08Roel C. CamposSEC Commissioner 2002-07Frederick W. HatfieldCFTC Commissioner 2004-06Jill E. SommersCFTC Commissioner 2007-13

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