Money Market Funds
Operations and Technology
Designation’s Vast Reach into Investor Portfolios
By Paul Schott Stevens
March 24, 2015
On Wednesday, March 25, I’ll testify before the Senate Committee on Banking, Housing, and Urban Affairs about the Financial Stability Oversight Council’s process for designating nonbank firms as “systemically important financial institutions,” or SIFIs.
As ICI has said repeatedly in public commentary, SIFI designation would be inappropriate and harmful for regulated funds and their investors. Regulated funds or asset managers designated as SIFIs would be subject to bank-level capital requirements, the risk of assessments to pay into a resolution fund for any failed SIFI bank, and Federal Reserve supervision—including “prudential oversight.”
What does “prudential oversight” mean? In a recent speech, Fed Governor Daniel K. Tarullo called for “prudential market regulation” to provide a “system-wide perspective” that would trump traditional investor protections and market regulation, and respond to “system-wide demands.” Presumably, any fund or manager designated a SIFI henceforward would be put to the service of two masters—with the Fed’s focus on protecting banks and other institutions trumping the interests of fund shareholders saving for retirement, education, homeownership, or other financial goals. We don’t think investors would fare well in that plan.
That Fed oversight could reach far into investors’ portfolios. In fact, more than half of the assets in mutual funds, exchange-traded funds (ETFs), and other registered investment companies—as well as more than half of the retirement savings in 401(k) and other defined contribution (DC) plans—could fall directly or indirectly under the Fed’s prudential oversight, with all the added costs and potential controls over investing that such oversight would bring.
Under FSB Proposal, Federal Reserve Would Be “Prudential Market Regulator” for More Than Half of the U.S. Regulated Fund and Defined Contribution (DC) Plan Markets
Billions of dollars
1Represents registered investment company (RIC) assets managed by asset managers with more than $1 trillion in assets under management (AUM) globally, or RIC assets managed by asset managers with at least one regulated fund with net assets exceeding $100 billion.
2Represents defined contribution (DC) assets managed by asset managers with more than $1 trillion in AUM globally, or DC assets managed by asset managers with at least one regulated fund with net assets exceeding $100 billion.
3Represents RIC assets managed by asset managers with more than $750 billion in AUM globally.
4Represents DC assets managed by asset managers with more than $750 billion in AUM globally.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute and Pensions and Investments
How do we reach this conclusion?
The Fed is one of the U.S. representatives to the Financial Stability Board (FSB)—an international body of central bankers and other financial regulators. An FSB project, led by Governor Tarullo, is working to figure out which funds and asset managers should be reviewed for potential designation as global SIFIs (G-SIFIs). In its latest proposal, the FSB sets out size-based thresholds for identifying the asset managers and individual funds that automatically would be evaluated for potential designation as G-SIFIs. Under one scenario, any asset manager with more than $1 trillion of assets under management worldwide or any individual fund with more than $100 billion in assets would be considered for designation.
As the charts above show, if these thresholds were applied to the U.S. regulated fund industry, and the funds and managers meeting the thresholds were designated as SIFIs, a staggering share of the assets managed by funds and included in DC retirement plans could be swept under Federal Reserve oversight. Of the $18.1 trillion that U.S. households have invested in U.S. regulated funds, more than $9.7 trillion could come under Fed supervision. Of the $6.3 trillion in DC plans—savings that millions of workers have set aside for retirement—more than $3.4 billion could come under such supervision.
Did Congress intend for the Dodd-Frank Act to give the Federal Reserve such broad prudential oversight of U.S. regulated funds? Did Congress even imagine that this was possible? We highly doubt it—but we hope Congress will now take note.
Paul Schott Stevens is president and CEO of ICI.
Living Wills and an Orderly Resolution Mechanism? A Poor Fit for Mutual Funds and Their Managers
By Frances Stadler and Rachel Graham
August 12, 2014
During the global financial crisis, the distress or disorderly failure of some large, complex, highly leveraged financial institutions (banks, insurance companies, and investment banks) required direct intervention by governments—including a number of bailouts—to stem the damage and prevent it from spreading. One focus of postcrisis reform efforts has been to ensure that regulators are better equipped to “resolve” a failing institution in a way that minimizes risks to the broader financial system, as well as costs to taxpayers. The new tools provided under the Dodd-Frank Act include requirements for the largest bank holding companies and nonbank systemically important financial institutions (SIFIs) to prepare comprehensive resolution plans in advance (known as “living wills”), and creation of a new “orderly resolution” mechanism for financial institutions whose default could threaten financial stability.
Across the Universe: Seeing the Whole Picture in the Systemic Risk Debate
By Paul Schott Stevens
July 30, 2014
Astrophysicists have discovered that they can’t account for the composition and behavior of the universe without including “dark matter”—matter that can’t be observed directly.
Industry Leaders Address Evolving Industry Challenges and Opportunities
By Miriam Bridges
June 9, 2014
In conversations exploring outcome-oriented investing, the globalization of the fund industry, and the next generation of retirement plans, industry leaders offered their perspectives on serving investors in an evolving world during several insightful sessions at ICI’s annual General Membership Meeting, held in Washington May 20–22.
Now Off the Hill, Senator Snowe Still Brimming with Ideas, Advice
By Rob Elson
June 5, 2014
U.S. policy is ripe for reform in a number of key areas, but changes to ease the polarized political environment must come first, former U.S. senator Olympia Snowe (R-ME) told the crowd during the final session of ICI’s 56th annual General Membership Meeting (GMM), held May 20–22 in Washington, DC.
Industry Leaders Reflect on Serving Investors in an Evolving World
By Tina Kilroy
June 4, 2014
Speaking on the Leadership Panel held Wednesday, May 21, at ICI’s General Membership Meeting (GMM), fund industry leaders agreed that challenges as well as opportunities abound for their businesses in today’s complex world.
SEC Chair White Stresses Need for FSOC to Consult Sources for Necessary Expertise
By Rachel McTague
May 22, 2014
Securities and Exchange Commission (SEC) Chair Mary Jo White today called for the U.S. Financial Stability Oversight Council (FSOC) to use outside expertise to the degree necessary in its process of designating systemically important financial institutions (SIFIs). She asserted that it is “enormously important for FSOC, before it makes any decision of any kind, to make sure it has the necessary expertise on any of those issues.”
GMM Policy Forum: BlackRock’s Larry Fink Speaks with ICI’s Paul Stevens
By Todd Bernhardt
May 21, 2014
The fund industry needs to stop focusing on the moment and start focusing on outcomes when advising investors on their resources, said Laurence D. Fink, chairman and CEO of BlackRock, at ICI’s Annual Policy Forum, part of the Institute’s 56th General Membership Meeting (GMM).
America’s Retirement System Is Strong
By Sarah Holden
December 18, 2013
One year ago, ICI released its landmark study, The Success of the U.S. Retirement System, a compilation of research from a wide range of sources, which found that the country’s retirement system is fostering economic security in retirement for Americans across all income levels.
ICI’s Guide to Avoiding a Common 401(k) Tax Trap
By Mike McNamee
December 9, 2013
A tax trap for retirement savings is catching many smart people unaware. If allowed to go unchecked, it could harm the retirement savings of millions of Americans. A columnist for the Washington Post was just the latest in a long list of victims.
Revenue Estimates of Restricting Tax Deferral: It Ain’t Necessarily So
By Peter Brady
September 20, 2013
Fifth in a series of posts about retirement plans and the policy proposals surrounding them.
In previous Viewpoints posts, I explained that retirement contributions are neither tax deductions nor tax exclusions, but rather are tax deferrals. I also explained why, in my opinion, the two most prominent proposals to restrict qualified deferred compensation are flawed (post three and post four).
Tax Reforms Should Not Favor DB Plans over DC Plans
By Peter Brady
September 19, 2013
Fourth in a series of posts about retirement plans and the policy proposals surrounding them.
In The Tax Benefits and Revenue Costs of Tax Deferral and in two previous Viewpoints posts (post one and post two), I explained the benefits that workers get from deferring tax on compensation set aside for retirement.
A ‘Modest’ Proposal That Isn’t: Limiting the Up-Front Benefits of Retirement Contributions
By Peter Brady
September 18, 2013
Third in a series of posts about retirement plans and the policy proposals surrounding them.
Marginal Tax Rates and the Benefits of Tax Deferral
By Peter Brady
September 17, 2013
Second in a series of posts about retirement plans and the policy proposals surrounding them.
In a previous Viewpoints post, I discussed the difference between tax deferral—the tax treatment applied to retirement savings—and tax deductions and exclusions, such as the mortgage interest deduction or the exclusion of employer-paid health insurance premiums from income. The difference is often overlooked or misunderstood, leading to inaccurate analysis and harmful policy proposals.
Retirement Plan Contributions Are Tax-Deferred—Not Tax-Free
By Peter Brady
September 16, 2013
First in a series of posts about retirement plans and the policy proposals surrounding them.
In today’s fiscal and political climate, taxes are never far from politicians’ minds. Whether to achieve comprehensive tax reform or to raise revenue to meet budget deficits, members of Congress are now considering changes to a range of tax code provisions—including those governing retirement policy. Any comprehensive effort to address fiscal policy or tax reform should examine every option, but some discussions of retirement policy have been misguided. The tax treatment of retirement savings—tax deferral— too often has been lumped together with tax deductions (such as the deduction from income of mortgage interest expense) and tax exclusions (such as the exclusion from income of employer-provided health insurance premiums).