We appreciate the opportunity to comment on the Asset Management and Financial Stability report released by the Office of Financial Research (OFR) in September.1 We particularly commend the Securities and Exchange Commission (SEC) for soliciting public comment on this important topic given the OFR’s failure to solicit public input. The Mercatus Center at George Mason University is dedicated to bridging the gap between academic ideas and real-world problems and advancing knowledge about the effects of regulation on society. Thus, this comment does not represent the views of any particular affected party or special interest group but is designed to assist the SEC and other regulators as they review the OFR report.
The report was prepared in order to assist the Financial Stability Oversight Council (FSOC) in “its analysis of whether—and how—to consider [asset management firms] for enhanced prudential standards and supervision.” 2 A full response to the FSOC’s request would have included an analysis of whether subjecting asset management firms to enhanced prudential standards and supervision would undermine financial stability—an issue that was not addressed in the OFR report. With respect to the matters the OFR did discuss, the analysis was incomplete and, in some areas, flawed. In many places, the OFR underscores the tentative or conditional nature of its conclusions.3 The OFR also acknowledges “significant data gaps” 4 with respect to asset management firms and activities. Because of the report’s inadequacies, the FSOC cannot reasonably rely on it as support for embarking on a process of designating asset managers as systemically important financial institutions.
The report suffers from several shortcomings. Most fundamentally, it fails to appreciate the heterogeneity of the asset management industry. Consequently, the report’s identification and analysis of vulnerabilities in the asset management industry is flawed. The OFR’s implicitly suggested remedy for these vulnerabilities—macroprudential oversight—could homogenize the industry and increase risk, an effect precisely the opposite of the one intended.
Shortcomings of the OFR's Asset
As an initial matter, attempting to look at the more than $50 trillion asset management industry as a cohesive whole in a thirty-page report is a difficult undertaking, at best. At worst, it fatally confuses the analysis by creating the impression that the entire asset management industry moves in lockstep. Even though the report acknowledges that there are differences among asset management firms and clients, it seems to fail to grasp the industry’s heterogeneity.
Understanding how the diverse parts of the industry interact with one another and the rest of the financial industry during normal times and in times of crisis requires more detail than would have been possible in such a short report. Of greater concern is the possibility that a similar one-size-fits-all approach will be employed by the Federal Reserve Board of Governors in developing enhanced prudential standards for, and supervision of, designated asset managers.