On April 18, 2016, US Treasury Secretary and chairman of the Financial Stability Oversight Council, Jacob Lew, provided remarks at a meeting of the FSOC regarding the release of the FSOC’s review of the asset management industry. The statement released by the FSOC is not a rulemaking but rather, reflects the assessment of the FSOC on key areas of focus and risk in the asset management industry. Lew highlighted two key findings that are the focus of the statement—liquidity and leverage risk. With respect to liquidity, the FSOC found that financial stability concerns may arise from liquidity and redemption risks in pooled investment vehicles, including mutual funds in particular. The statement includes a number of policy recommendations for mitigating such risks, including the implementation of robust liquidity management practices and disclosures for mutual funds, and clearer guidelines that would limit a fund’s ability to hold assets having limited liquidity. With respect to leverage, Lew’s statement notes that while leverage does not generally appear high in all hedge funds, risk may still be present in these funds. He stated that regulators need to better understand the risks being taken by such funds and to engage in further analysis and information sharing in order to reach conclusions as to whether the use of leverage by private funds presents significant financial stability risk.
Deputy Assistant Secretary Patrick Pinschmidt also delivered remarks, adding that the FSOC is creating an interagency working group that will share and analyze relevant regulatory information in order to better understand hedge fund activities and potential risks to financial stability. He also highlighted other key areas addressed in the FSOC’s statement, including operational risks, securities lending and resolution and transition planning.
Treasury Secretary Lew’s statement is available at: https://www.treasury.gov/press-center/press-releases/Pages/jl0430.aspx, Deputy Assistant Secretary Pinschmidt’s statement is available at: https://www.treasury.gov/press-center/pressreleases/Pages/jl0439.aspx and the FSOC’s Update on Review of Asset Management Products and Activities is available at: https://www.treasury.gov/initiatives/fsoc/councilmeetings/Documents/Financial%20Stability%20Oversight%20Council%20Releases%20Statement041816.pdf.
Shearman & Sterling’s client publication regarding the FSOC report is available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/04/US-Financial-Stability-Oversight-Council-Focuseson-Asset-Management-Products-and-Activities-AM-042616.pdf.