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Regulators Should Not Use Dodd-Frank to Hammer Fund Investors

Mutual funds did not cause the financial crisis--and they should be regulated accordingly.

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Abraham Maslow said that for the person with a hammer, every problem looks like a nail. For the Financial Stability Oversight Council, the hammer is the Dodd-Frank Act, and I fear that mutual fund investors will become the nail.

Late last year, the FSOC--the group of regulators that Dodd-Frank essentially charges with preventing another financial crisis--asked a series of questions that may be intended to determine, in part, whether asset managers or funds should be regulated as systemically important financial institutions (SIFI). US regulators are also participating in an international effort to determine which nonbank firms should be considered SIFIs. For banks and insurance companies, the SIFI designation has led to rigorous, expensive regulation and higher capital requirements for affected institutions. It is unclear what the SIFI designation would mean in the fund world, though it is possible that some funds or fund managers would face costly regulation and/or the need to invest some portion of assets in highly liquid securities. Whatever the exact regulatory regime, it is highly likely that the SIFI designation would impose costs on fund investors.

Scott Cooley does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.