The Zacks Analyst Blog Highlights: BlackRock, Legg Mason, Franklin Resources and Invesco

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Dec 15, 2014, 09:30 ET

CHICAGO, Dec. 15, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the BlackRock, Inc. (NYSE:BLK-Free Report), Legg Mason Inc. (NYSE:LM-Free Report), Franklin Resources Inc. (NYSE:BEN-Free Report) and Invesco Ltd. (NYSE:IVZ-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Friday's Analyst Blog:

Will SEC Initiatives Curb Asset Managers' Growth?

Amid heightened regulations and scrutiny in the broader financial system post crisis, the regulatory bodies continue to focus on the asset management industry similar to what they are doing for the banking sector. The Securities and Exchange Commission ('SEC') has come up with three major initiatives with the aim to better monitor associated risks in the $63 trillion asset management industry and to protect investors from any further crisis.

On Dec 11, 2014, SEC Chair Mary Jo White revealed these initiatives in a speech on "Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry" at The New York Times Dealbook conference held in New York.

Highlighting the rapid growth in the asset management industry, White mentioned that growing number of retail investors are seeking advice from investment advisers and investing in mutual funds for supporting various financial requirements. These include making a down payment while buying a home, savings for education, and obtaining income for retirement.

With the growth of the asset management industry, several risks and challenges have cropped up and the regulatory body continues to work on the issues and have taken measures. However, White mentioned that more needs to be done. She said "A broader set of proactive initiatives is required to help ensure that our regulatory program is fully addressing the increasingly complex portfolio composition and operations of today's asset management industry."

The Three Initiatives

• Improving data and related information used to infer risks of the asset management industry and undertake proper regulatory measures. In this context White stated that though funds and advisers disclose substantial information to the SEC, it is not adequate given the growing number of new products and strategies being introduced in the industry.

Citing examples, she stated that current rules do not mandate proper reporting by several types of derivatives (financial instrument used to manage risk). Also, the SEC does not receive full information about securities lending by funds.

• Ensuring registered funds improve their fund-level controls in order to make them aware of the risks and address such risks pertaining to the "modern composition" of the portfolios stemming from the overall profile of the fund or certain type of instruments, such as derivatives. In this respect, the SEC is focused on liquidity management and the use of derivatives in mutual funds and Exchange Traded Funds (ETF). Lack of adequate controls threaten the funds as well as their investors and may impact the overall financial system.

• Taking necessary actions to ensure that firms are well equipped for transitioning their clients' assets in case of sudden unforeseen satiations. The situations include closure of advising service or exit of an important official. The SEC is working on recommendations that will involve laying of transition plans by investment advisers in such situations.

Also, it is weighing its options for implementing annual stress testing for the bigger investment advisers and large funds, as per the Dodd-Frank Act. It believes that this tool, which is primarily used in the banking space, will enable the SEC to gauge the effect of a stress scenario in a better way. White stated "If we have learned nothing else from the financial crisis, it is that we must test and plan for the worst."

The overall initiatives are expected to lower the systematic risks in the asset-management industry. White said, "This is the right set of initiatives for this stage of the development of the modern asset management industry." White also stated that the ongoing work of The Financial Stability Oversight Council (FSOC) on the probable risks of asset managers to the stability of the nation's financial system comes as a "complement" to the SEC's work.

In her conclusion White stated that the regulator's objective is not total risk elimination. She said, "Investment risk is inherent in our capital markets – it is the engine that gives life to new companies and provides opportunities for investors. Just as our regulatory program evolves, so too must our understanding of the balance that program strikes between reducing undue risks and preserving the principle of 'reward for risk' that is at the center of our capital markets."

Industry Response

Per a Reuters release, the asset management industry took White's speech on a positive note.

BlackRock, Inc.'s (NYSE:BLK-Free Report) chief executive Larry Fink said "I have products at BlackRock and so do other people that probably require more transparency."

Paul Schott Stevens, the head of the Investment Company Institute, said, "As the primary regulator for funds and asset managers, the SEC has the expertise and the authority to strike the right balance between protecting investors and the financial system and preserving the important role of the capital markets."

With respect to the stress test requirement for asset managers, a Wall Street Journal release highlighted the fact that though the stress test result will have to be publicly disclosed by law, the SEC doesn't possess the authority to restrict funds from paying shareholders with dividends or stock buybacks in the event of failure of a stress test, unlike the banking sector.

Bottom-Line

The rules that are yet to be finalized are coming at a time when the asset managers – including BlackRock, Legg Mason Inc. (NYSE:LM-Free Report), Franklin Resources Inc. (NYSE:BEN-Free Report) and Invesco Ltd. (NYSE:IVZ-Free Report) – are striving hard to launch technologically advanced products, alternative AUM products, hedge funds, increasing the size of private equity funds and expanding business. The rules might impact several products of the industry including mutual fund and ETFs that use derivatives as these "result in leveraged investment exposures and potential future obligations that can create risks for the funds."

Precisely, we believe that though the new rules, if implemented, can impact the revenue growth of the companies in this industry to some extent, the broader system should remain safeguarded from any potential downturn.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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