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Monday, March 13, 2017

Blass Highlights an Emerging Threat to Fund Firms

Reported by Neil Anderson, Managing Editor

Fundsters might have a new enemy to defend against soon. So says David Blass, general counsel of the Investment Company Institute (ICI).

David Blass
General Counsel
This morning at the 2017 ICI Mutual Funds and Investment Management (MFIM) conference at the JW Marriott Desert Springs in Palm Desert, California, Blass warns mutual fund industry lawyers and other fundsters about some new academic research related to mutual funds' ownership of stakes in concentrated industries like the airlines.

"Some academic papers allege that fund complex ownership of companies that compete in a concentrated industry ... causes the management teams not to compete on price," Blass tells ICI MFIM attendees.

Some of the researchers are calling for limiting funds' ownership stakes in companies in concentrated industries to just one percent, an idea that would hit both big passive asset managers and active managers, Blass notes. And implementing such a rule, he adds, could trigger a big sell off by managers with big holdings in concentrated industries.

Some academic papers are now rebutting those findings, Blass says, and he wants fundsters to join the fight, too.

"We're in the early days of this emerging academic research," Blass says.

Blass offers four critiques of this "really troubling" research. One, "it seriously overstates the influence of minority stakeholders." Two, fund complexes hold lots of stakes, across different strategies, that are not necessarily aligned with each. Three, correlation is not causation. And four, using the example of the airline industry, there are other causes for rising prices that the research overlooks, notably the bounce back in demand for air travel after a big drop after the financial crisis of 2007-2009.

"More demand equals pricing power," Blass notes.

Blass summed up his critique with an analogy he credits to fellow ICI staffer Matthew Thornton. Since Nick Saban was hired as the football coach for the University of Alabama in 2007, Alabama has won four national championships. This new anti-fund-firm research, Blass says, is like crediting Alabama's four recent championships to the new ball boy Saban hired in 2007.

In his remarks, Blass also urges fundsters to take advantage of The Swap in Washington this year, given the Trump administration's new regulatory perspective and priorities. And he's calling on regulators to give the industry some space to implement all the new rules from multiple regulators, such as the DoL rule and the SEC's new reporting and liquidity rules.

"We collectively should put our creative hats on" and give regulators ideas for the coming year, Blass says.

After his opening remarks, Blass interviewed Dave Grim, head of the SEC's 200-person division of investment management, about the SEC's priorities under the new administration. Grim mentioned the DoL rule, roboadvisors, disclosure requirements, concerns and ideas regarding ETFs, the federal government hiring freeze (which does effect the SEC), and "the power of technology."  

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