08-08-14

Asset Managers Avoid Extra Oversight

Two of the industry's largest asset managers can breathe a little easier this week. After a long lobbying campaign BlackRock and Fidelity have finally convinced the Financial Stability Oversight Council (FSOC) that they should not be designated "systemically important." That designation would have carried with it additional regulatory oversight from the Federal Reserve, a burden which the two companies have successfully avoided for now. 

The FSOC was created under Title I of the Dodd-Frank Act and is charged with "identifying risks and responding to emerging threats to financial stability". It is a collaborative group that includes the Secretary of Treasury, Chairman of the Federal Reserve, and the heads of the SEC, FDIC, CFTC and many other regulatory bodies. The intent of the structure is to prevent buildups of systemic risk caused by lapses in oversight of financial companies that can or do report to multiple regulators. By bringing all of the major regulatory bodies together and holding them all responsible, the law creates an incentive for a cross-functional and comprehensive regulatory environment. 

Rather than designating certain firms as systemically important, the FSOC was encouraged by BlackRock and Fidelity to shift their focus to labeling certain asset management activities (or products) as such.  According to meeting notes released by the Treasury Department, "The Council directed staff to undertake a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management industry." They did not detail which products or services would be specifically investigated. 

The decision to label BlackRock and Fidelity as systemically important would have brought the two non-bank entities under the umbrella of the Federal Reserve where they would have been subject to stricter capital, leverage and liquidity requirements. The FSOC has previously designated General Electric, AIG and Prudential as systemically important. The choice not to label BlackRock and Fidelity will leave both companies under the domain of the SEC. 

At the same meeting, the FSOC discussed the SEC's changes to money market fund rules (which we blogged about here), the effects of which they will monitor for a trial period going forward before considering the systemic issues those funds can create as resolved. 

Just this week, MetLife launched a final attempt to avoid the systemically important label as well. New York's superintendent of financial services (MetLife's current regulator) and various members of Congress are calling into question the FSOC's decision to apply the designation to MetLife. While no final decision has been made, industry insiders do not expect MetLife to prevail as BlackRock and Fidelity have given that Prudential and AIG have already been tagged with the designation and both (especially Prudential) have highly similar business models to MetLife. 

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