Regulators propose stress testing for mutual funds
In February, we highlighted an announcement from SEC Chair Mary Jo White that the SEC would be taking a closer look at the regulation of mutual funds and the asset management industry to ensure that appropriate risk controls are in place.
Improved stress testing among firms will require them to have a more detailed plan in place for the transition of their clients' assets under certain circumstances, like economic depression.
A few months have passed, and tightening of regulations around mutual funds is topping the priority list of several other regulators—including the International Monetary Fund (IMF).
"Supervision of funds and asset managers is generally weak across jurisdictions," said the IMF. It's because of this weak supervision that financial soundness indicators haven't been developed and why there hasn't been much stress testing of funds and asset management firms.
Some of the largest asset managers, like BlackRock Inc., are also jumping aboard this train—endorsing stress testing of mutual funds in a letter to the Financial Stability Oversight Council (FSOC).
Under pressure from Congress, the FSOC had asked the industry if asset managers’ activities could threaten the financial system. It even considered labeling some U.S. fund managers “systematically important non-banks,” which would've subjected them to oversight by the Federal Reserve, but that has yet to come to fruition. Many firms believe that this decision should be handled by the SEC and not the FSOC.
Core to this argument is that many fund managers don't believe they post a systematic risk to the financial system and that their business model is fundamentally different than that of banks. Many others argue that their systematic risk is similar.
Regardless of the classification of fund managers and asset firms, it doesn’t appear that stress testing is going by the wayside anytime soon. Stress testing measures have been applied to other sectors of the financial industry, and mutual funds may be the next step.
To read the full report from the IMF, click here.