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“Impact of Dodd-Frank on Customers, Credit, and Job Creators”
Testimony of Thomas Lemke
General Counsel and Executive Vice President
Legg Mason & Co. LLC
On Behalf of the Investment Company Institute
Subcommittee on Capital Markets and Government-Sponsored Enterprises
Committee on Financial Services
United States House of Representatives
July 10, 2012
As prepared for delivery.
Good morning, Chairman Garrett, Ranking Member Waters, and members of the Subcommittee. I am Thomas Lemke, General Counsel of Legg Mason & Co. We’re a Baltimore-based global asset management firm that manages more than $630 billion in mutual funds and other assets for our clients. I very much appreciate the opportunity today to testify on behalf of the Investment Company Institute on the impact of the Dodd-Frank Act.
ICI is the national association of mutual funds and other SEC-registered investment companies. The members of ICI help more than 90 million investors seeking to achieve their financial goals.
It is important to note that Dodd-Frank is not directed at SEC-registered mutual funds. These funds were not a cause of the financial crisis. However, Dodd-Frank is very broad and very technical in its scope and, in a number of areas, it raises important implications for mutual funds.
Our written statement addresses these matters in detail. In some cases, we believe the impact of certain provisions on mutual funds and their investors was not intended by Congress. In other cases, we believe that new regulations designed to achieve Dodd-Frank’s protections should be implemented in a manner that minimizes market disruptions and strikes the right balance between costs and benefits. I would briefly like to highlight four issues of particular concern to ICI and its members.
First is the Volcker Rule. Congress’ clear purpose in this area was to limit “proprietary trading” by banks and to prohibit banks from sponsoring or investing in unregistered hedge funds and private equity funds. Mutual funds and other SEC-registered funds were not the Rule’s target.
Under the Proposed Rule to implement Volcker, however, some SEC-registered funds could be treated the same as hedge funds or private equity funds, thus barring banks from owning or sponsoring those funds. Virtually all non-US retail funds would get similar treatment. That’s not what Congress intended, and we believe the Proposed Rule should be amended to explicitly exclude all of these funds from treatment as “covered funds” or “banking entities.”
We are also concerned that the Volcker Proposal could sharply reduce market liquidity, by preventing banks from exercising their historic role as market makers. For mutual funds and their investors, less liquidity means wider spreads, higher trading costs, and diminished returns.
In comments to regulators, ICI has offered recommendations designed to avoid an adverse effect on market liquidity and address other problems with the Volcker Proposal. We and many other commenters believe that significant changes are needed. As a result, we have called upon regulators to issue a new proposal for public comment before adopting any final rule.
Our second concern is the Financial Stability Oversight Council and its authority to designate systemically important non-bank financial institutions, or “SIFIs.”
These provisions in Dodd-Frank did not target SEC-registered funds. Indeed, Dodd-Frank includes criteria and other language suggesting that these funds are not what Congress had in mind. FSOC and its Office of Financial Research are conducting an analysis of asset managers to see if these companies pose any threats to financial stability. This study should be subject to formal public comment. ICI believes the FSOC will conclude, at the very least, that SIFI designation would not be the proper tool to address any such risks.
Third is the regulation of derivatives and asset-backed securities. These instruments play an important role for many institutional investors, including registered funds. Funds use swaps, futures, and other derivatives to manage risks, improve returns, and gain liquidity. ICI has supported reforms that would increase transparency and reduce counterparty risks in these markets, though we still have a number of specific concerns with these regulatory proposals. Broadly speaking, we urge the Securities and Exchange Commission and the Commodity Futures Trading Commission to work together, and with their global counterparts, to ensure that new regulations achieve the protections sought by Dodd-Frank in a coordinated and cost effective manner while minimizing market disruptions.
Fourth and finally, we could not discuss the impact of Dodd-Frank without raising what we believe is a troubling example of a regulator using Dodd-Frank as a pretext to expand its authority through unjustified regulation.
In February, the CFTC vastly extended its reach over SEC-registered funds—and only SEC-registered funds—by sharply curtailing their ability to rely on a rule that has long exempted otherwise-regulated entities from CFTC registration.
The CFTC claims to have acted on these amendments under the “more robust mandate” it received under Dodd-Frank. But its actions were neither required nor even contemplated by Dodd-Frank. The result of the CFTC’s action is that SEC-registered funds will be subject to unnecessary and redundant regulation, the costs of which will be borne by funds and their shareholders.
ICI and the U.S. Chamber of Commerce have challenged the CFTC’s Rule 4.5 amendments in federal court. If our case does not succeed, not only will SEC-registered funds and their shareholders suffer the consequences of this ill-advised rule, but the CFTC will face a host of new registrants and further demands on its limited resources—at a time when the agency itself says that its workload under Dodd-Frank “creates risks in its critical oversight roles.” We believe this prospect should be of serious concern to Congress.
Mr. Chairman and members of the subcommittee, our written statement contains additional detail on these and other matters, and I will be happy to take your questions. Thank you.