View from Washington Five topics to watch
“There’s no consensus on which approach is better.” Theresa Hamacher President, NICSA
Lehman still in the picture ► The American market is seeing debates over systemic, retail alternative fund, and cybersecurity risks.
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Text Theresa Hamacher ― Illustration Stina Fisch
ix years after the event, the collapse of Lehman Brothers is still driving change in the US fund industry. While the economic growth is back on track driving fund assets to new highs, regulators, the industry and the public are still debating what caused the Lehman bankruptcy – and the broader financial crisis of which it was a part – and what needs to be done to prevent a recurrence of the turmoil. The passage of the Dodd-Frank Act in 2010 should have brought closure, but instead opened up a new conversation about what constitutes risk in the asset management industry. Here are the five topics dominating the risk discussion in the United States today: Money market funds. Yes, this is still on the list – as it has been every year since the credit crisis. The Securities and Exchange Commis-
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sion has made two proposals for changes in money market regulation. The first proposal calls for a floating net asset value for funds sold to institutions, using market prices for securities, rather than a constant $1 per share. The second proposal would impose exit fees and redemption gates limiting withdrawals during periods of market stress. There’s no consensus on which approach is better, with banking regulators favouring the first proposal and the industry favouring the second – while continuing to advocate for no change at all. The debate has become so heated that even members of the US congress have been drawn into this technical conversation, and the arguing is likely to continue even after the SEC issues its decision. Systemically important financial institution (SIFI) designation. While the money market debate is longstanding, the SIFI con-
― Supplement ― ALFI Global Distribution Conference 2014
versation has risen to the top of the agenda only within the past year. Asset managers never imagined that they’d be on the list of candidates for designation as systemically important financial institutions by the Financial Stability Oversight Council – but now they are. So far, the focus has been on the very largest fund managers, though there are voices suggesting that involvement in certain activities, and not sheer size, should be the basis for SIFI status. Needless to say, the industry is strongly opposing a designation that would add significantly to its regulatory burden – though some suggest that the entire issue may be moot if money market reform is adopted. Liquid alternatives. But it’s not just money market funds that raise risk concerns. Regulators are also taking a close look at what have become known as liquid, or retail, alternatives funds; these are registered funds sold to the general public which use more aggressive investment strategies, such as short selling and leverage. US regulation imposes no clearcut limits on the use of the derivatives used to implement these strategies, which worries some observers. The SEC has recently conducted a sweep exam of these funds, so it wouldn’t be surprising to see additional regulatory guidance soon. Suitable distribution. The SEC – like many other regulators around the world – has realised that imposing tighter controls on investment products by itself can’t provide complete investor protection, since many of the problems arise at the point of sale. As a result, distribution of fund shares has become an area that the SEC is paying closer attention to. While proposals to establish a fiduciary standard for brokers and retirement plan advisers have been hotly contested – and may never be adopted – increasing scrutiny of the sales process and tighter standards regarding suitability seem likely. Cybersecurity. And then there’s the risk that could well dwarf all the others. While perhaps not technically in its purview, the SEC is taking a leadership position here, emphasising that firms need to understand their data security risks and be prepared to protect their customers’ information. Expect to hear more on all these topics. ◄