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Tuesday, June 16, 2015

Are Regulators Chasing Imaginary Mutual Fund Waterfalls?

News summary by MFWire's editors

The fight over designating mutual fund shops as systemically important financial institutions (SIFIs) continues, with Morningstar taking up fundsters' cause.

Daniel M. Gallagher
U.S. Securities and Exchange Commission
Scott Cooley, director of policy research at M*, outlines the fight via a two-page column. He warns both mutual fund investors and fundsters themselves that they all "should be very worried" about U.S. and global regulators' efforts to change the asset management business.

The Financial Stability Board (FSB) in Basel and the Financial Stability Oversight Council (FSOC) here in the U.S. are both digging into whether or not the largest mutual funds and the largest asset managers should be considered "systemically important", like big banks, and thus face extra (the details are fuzzy) regulation. M* reminds fundster and investors that, unlike big banks, mutual funds largely made it through 2008 without big collapses (even the fallen Reserve Primary money fund returned more than 99 cents on the dollar). And M* brings up mutual funds' leverage limits, which further distinguish them from banks. So-called "waterfall scenarios" (where high fund redemptions lead to funds selling their highly liquid assets, and investors get freaked over liquidity and withdraw even more), Cooley writes, largely didn't plague the industry even during the financial crisis.

"If the downturn in 2008 was not large enough to trigger the so-called waterfall scenario, is this really the right area for regulators to be focusing so much of their attention?" Cooley wonders.

The piece cites asset management defenses from SEC commissioner Daniel Gallagher and Fund Democracy founder Mercer Bullard. Another SEC commissioner, Michael Piwowar, made a similar case in March in his remarks at the 2015 Mutual Funds and Investment Management Conference. Even SEC chair Mary Jo White says the regulatory agency doesn't need any extra tools (like, say, SIFI designation) in its efforts regulating the asset management industry. 

Edited by: Neil Anderson, Managing Editor

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