U.S. mutual fund industry warns regulators not to embrace global risk standards

By Sarah N. Lynch

WASHINGTON (Reuters) – A leading mutual fund trade group is asking U.S. regulators to pressure their international counterparts to abandon efforts to draft criteria that could be used by countries to designate large funds as systemically risky.

In a May 28 letter made public on Monday, Investment Company Institute President Paul Schott Stevens told the heads of the U.S. Treasury, Federal Reserve and Securities and Exchange Commission they need to “redirect” efforts by an international body of regulators to impose tougher rules on large funds.

At the heart of the ICI’s concerns are efforts by the Financial Stability Board (FSB), the Group of 20 economies’ regulatory task force, to reduce systemic risk by asset managers.

A working group within the FSB led by Federal Reserve Governor Daniel Tarullo is drawing up a list of criteria to determine which large funds should come under stricter supervision.

A deadline for public comments on its latest proposal ended Friday.

The insurance and asset management industries have been critical of the FSB and fear that the U.S. Financial Stability Oversight Council may be too influenced by the FSB’s work.

The FSOC is a U.S. body led by Treasury Secretary Jack Lew. Its members include Fed Chair Janet Yellen and SEC Chair Mary Jo White.

The FSOC has the power to designate large non-banks as systemic, a tag that imposes greater regulation.

The FSOC previously designated several large insurers such as Prudential and American International Group, after the FSB named them in a list of systemically important insurance companies.

The FSOC currently is reviewing products and activities by asset managers, and many fear large funds could be next in line for designation.

The ICI complained in its letter that the FSB is wrongfully focused on fund size, which results in singling out mostly U.S. funds.

It also says it is “troubled” that the Fed’s Tarullo is leading the FSB’s efforts, noting it could be used to “exert multilateral influence” on the FSOC.

“I don’t think this is simply a drill. I think it is a live fire exercise that is intended to result in designation,” the ICI’s Stevens said in an interview on Monday.

The ICI also warned that U.S. regulators are not permitted to adopt any rules that are deemed “arbitrary and capricious” – a legal requirement for U.S. rule-making that industry groups have often used successfully to beat back financial regulations in court.

(Reporting by Sarah N. Lynch; Editing by Dan Grebler)