For those of us embroiled in the “Title VII” voice and data recording regulatory burdens placed by the Dodd-Frank Act, it is easy to forget it is just one piece of the puzzle.
An interesting piece in today’s FT (http://www.ft.com/cms/s/0/08f8d538-5ddb-11e3-8fca-00144feabdc0.htm) takes a look at the wider regulatory impact as it affects US asset managers. It focuses specifically on how one of the chief architects of the Dodd-Frank Act, former Massachusetts Congressman Barney Frank, feels that the “super regulator” (the Financial Stability Oversight Council or FSOC) set up because of the Act has gone too far in its implementation.
Specifically he refers to so called “Systemically Important Financial Institutions” (SIFIs). SIFIs are the “too big to fail” institutions that could, if something catastrophic happens, cause a collapse of the entire banking system. As a SIFI you face increased oversight, but also, both in the US and Europe (under Basel III), increased capital requirements, and this is what the asset management community objects to.
The FSOC has determined that large fund managers such as Blackrock, Fidelity and State Street amongst others fall into the SIFI category, and Barney Frank makes it clear that this was not in his mind when framing the legislation. He makes it clear that the issue is not so much about people losing money, it’s about not being able to stand behind those losses, eg making highly leveraged trades or engaging in derivatives trading where the loss can far outweigh the initial investment.
In particular the FSOC suggests that the “reach for yield” means that managers are tempted to make riskier trades and to follow the herd potentially into dangerous new areas. Barney Frank says that there are a lot of “potential horror stories” outlined in the report, but very little real evidence of this type of behaviour.
Of course, just because this type of risk was not in the mind of the original author of the legislation does not mean that such a risk does not exist, and FSOC has significantly more resources to explore the questions posed by the Dodd-Frank Act, and to look at the potential failure areas in the global economy.
Like all genies, though, once uncorked they are difficult to put back in the bottle. And it is always very important to be extremely careful what you wish for…