The SEC observed flaws in a U.S. Treasury draft report that could invite costly regulations on large asset managers.

SEC whistleblower

Sarah N. Lynch of Reuters feels this could send shockwaves through the asset management industry as Treasury’s findings could wrongly encourage regulators to tag big asset managers as ‘systemic’.

The Financial Stability Oversight Council, which comprises the heads of the top financial regulators including the SEC, asked the Office of Financial Research to study the asset management industry to help inform it about the selection of “systemic” firms.

U.S. Treasury’s report

Last week, the Office of Financial Research (OFR) released Asset Management and Financial Stability, September 2013, report analyzing the industry’s activities, the key factors within it that could generate systemic risk, and the identification of the channels through which such risks could transmit to the broader financial markets.

The report ranked the top 20 asset managers by Worldwide Asset Under Management with BlackRock, Inc. (NYSE:BLK), Vanguard Group Inc., State Street Global Advisors and Fidelity Investments topping the list.

The report highlighted with increased concentration in the sector, the U.S.-based managers could lead to increase in market impact of firm-level risks, such as operational risk and investment risk or increase the risk of fire sales.

Treasury’s report further highlighted systemic shock could emanate from redemption, particularly in vehicles that give the ‘early-bird’ redeemer an economic advantage. Besides asset managers using leverage through derivatives, securities lending could significantly boost the risk carried by asset managers and could be a source of systemic risk in times of heightened volatility.

SEC’s concerns

Citing known sources, Sarah N. Lynch of Reuters points out the SEC’s chief concerns stems from an earlier draft of the report that SEC felt exaggerated the riskiness of the business. Besides the SEC feels Treasury’s research arm failed to consider a number of critical feedback provided by the SEC.

Citing the above concerns, the SEC decided last week to issue the report for public comment. Several firms are gearing up to file critical comment letters with the SEC about the OFR’s asset management report.

Asset managers oppose designation

Some of the largest asset managers, including BlackRock, Inc. (NYSE:BLK), Fidelity and Vanguard, have opposed the ‘systemic’ tag, as such a tag would bring tough capital requirements and supervision by the U.S. Federal Reserve.

Most of the asset management companies contend they are already heavily regulated by the SEC and feel the FSOC should back off and let the SEC do its job.