Mutual funds pose little threat to the U.S. financial system and should remain beyond the reach of Federal Reserve oversight, the industry's lobbying group said.
"Many characteristics of funds — including their simple capital structure, limited used of leverage and comprehensive regulatory scheme — put funds at the 'less risky' end of the spectrum when considering the potential for systemic risk," the Washington-based Investment Company Institute said in a letter sent to the Financial Stability Oversight Council.
The oversight council, created by the Dodd-Frank financial reform law, has the authority to recommend that the Fed and other agencies toughen rules to reduce risk at banks as well as nonbank financial companies.
U.S. bank holding companies with more than $50 billion in assets — about 35 in all, including JPMorgan Chase & Co. and Goldman Sachs Group Inc. — are automatically included.
The council, led by Treasury Secretary Timothy F. Geithner, is to rule next year on which, if any, mutual funds, hedge funds, private-equity firms, life insurers and other financial entities should get extra oversight because they pose a systemic risk to financial stability.
The designation should be "reserved for those circumstances, presumably quite limited," when a company's risk is not addressed by current rules or regulations under Dodd-Frank, the institute said in its Nov. 5 letter, which was posted on a federal government website.
"No single factor in isolation — such as how 'big' a firm is — is sufficient," the letter said. ICI's members, including mutual, closed-end and exchange-traded funds, manage assets totaling $12 trillion.
Geithner said Sept. 30 that the bailed-out insurer American International Group Inc. and GE Capital, General Electric Co.'s finance arm, could be considered for increased supervision because Dodd-Frank imposes stricter oversight on entities "that are banks in all but name, whether you call them investment banks, or AIG, or GE Capital."
Such companies may be forced to "run with a much more conservative, prudent leverage and funding mix," Geithner said at the time.
The financial stability council also includes Federal Reserve Chairman Ben S. Bernanke, Securities and Exchange Commission Chairman Mary Schapiro, Federal Deposit Insurance Corp. Chairman Sheila Bair and Commodity Futures Trading Commission Chairman Gary Gensler.
The group, for the past month, has been accepting public comment on what criteria should be used to determine which companies should get increased oversight. It is scheduled to meet again Nov. 23.
The council supplants the smaller President's Working Group on Financial Markets that was formed in response to the October 1987 stock market crash. It has begun work on carrying out the so-called Volcker Rule that bars bank holding companies from trading for their own accounts.