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Former ICI President Matt Fink Decries FSOC’s “Revisionist History”

By Mike McNamee

May 30, 2014

Arguments that large stock and bond mutual funds are prone to “runs” that can destabilize markets go back many decades, and are as misguided now as they were then, argues Matt Fink, ICI president from 1991 to 2004, and author of The Rise of Mutual Funds: An Insider's View.

In an opinion piece written for Ignites (subscription required), Fink cites claims by bank regulators and others that large mutual funds pose risks to the overall financial system, and thus require designation by the Financial Stability Oversight Council (FSOC) as systemically important financial institutions, or SIFIs. As ICI has pointed out previously, such designation—and the resulting “prudential supervision” by the Federal Reserve—would raise costs for investors, harm a fund’s ability to serve its investors, and distort the marketplace.

Fink points out that claims of mutual fund “runs” were first brought up in the aftermath of the stock market crash of 1929, leading to calls to limit the size of mutual funds. But the unique structure of the funds and their managers, as well as the tough controls incorporated in the Investment Company Act of 1940, have meant that “no stock or bond fund has ever faced a run, failed, or otherwise posed a risk to the financial system,” Fink writes.

He adds that two examples of risk most cited by modern critics—Reserve Primary Fund’s “breaking the dollar” in 2008 and the failure of Long-Term Capital Management (LTCM) in 1998—are “red herrings.” Though some regulators currently allege that risks arise from stock and bond mutual funds, neither Reserve Primary (a money market fund) nor LTCM (a hedge fund) supports their case. “If anything,” he concludes, “these two cases highlight the remarkably successful history of stock and bond mutual funds, which have successfully weathered many crises without placing the financial system in peril.”

For more information on ICI’s views and research on financial stability, please visit our Financial Stability Resource Center or read the previous entries in our recent Viewpoints series on the subject:

Mike McNamee is Chief Public Communications Officer at ICI.

TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsMutual FundTreasury

Errors of the Times: Getting the FSOC Debate All Wrong

By Mike McNamee

May 23, 2014

New York Times columnist Floyd Norris makes a number of fundamental errors in his Friday column about the House Financial Services Committee hearing and the broader debate about the Financial Stability Oversight Council (FSOC) and its review of asset management.

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TOPICS: Federal ReserveFinancial MarketsFinancial StabilityFund RegulationGovernment AffairsICI GlobalInternationalMutual FundTreasury

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.”

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TOPICS: EventsFederal ReserveFinancial MarketsFinancial StabilityFund GovernanceFund RegulationGMMGovernment AffairsMoney Market FundsMutual FundOperations and TechnologyShareholderTradingTreasury

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