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U.S. senators slam study on systemic risks posed by asset managers

By Emily Stephenson and Sarah N. Lynch

WASHINGTON (Reuters) - Five U.S. senators slammed a government report that raised red flags about risks posed by asset management firms in a letter to Treasury Secretary Jack Lew that was dated Thursday.

The bipartisan group said the September study mischaracterized the asset management industry and in some places relied on faulty information, and that the report could threaten the credibility of the Treasury Department unit that published it.

The Office of Financial Research (OFR), which was established by the 2010 Dodd-Frank law, said in the report that asset managers such as BlackRock and Fidelity could pose a systemic threat to markets by borrowing to boost returns or all crowding into the same assets at once.

The study was requested by the Financial Stability Oversight Council (FSOC), which could subject asset managers to much tougher regulation if it decides their failure could destabilize the U.S. financial system.

But the report is hugely controversial.

"We strongly urge the FSOC and other governing bodies not to base any policy or regulation actions grounded on the information in the OFR study," the bipartisan group of senators wrote in the letter, which was reviewed by Reuters.

"Furthermore, we are concerned that the OFR study could potentially compromise the credibility of the OFR and, by extension, the FSOC," they said.

The Thursday letter comes roughly one week before Richard Berner, the research office's director, plans to testify before a Senate Banking subcommittee.

At that hearing, he is likely he field questions from lawmakers about the report's conclusions.

The group behind Thursday's letter included Democrats Claire McCaskill of Missouri and Thomas Carper of Delaware, and Republicans Mark Kirk of Illinois, Patrick Toomey of Pennsylvania and Jerry Moran of Kansas.

A Treasury spokesman said the department had not officially received a copy of the letter. But he defended the report and how the study was handled.

"The OFR consulted with FSOC member agencies and market participants and throughout the report was transparent about its data sources," the spokesman said.

The OFR and the stability council were established as part of sweeping reforms in response to the worst financial crisis in decades. Lawmakers believed that during the 2007-2009 crisis, regulators did not have sufficient data or authority over nonbank financial firms to prevent the meltdown.

The research office was charged with improving data collection and analysis about the financial system. The stability council, which uses the OFR's research, identifies firms it believes are "too big to fail" and designates them for tougher regulation similar to the way big banks are overseen.

The FSOC has already designated insurers American International Group and Prudential Financial, as well as General Electric's financial services unit, for higher capital and liquidity requirements.

Asset managers have maintained that they are not too big to fail and should not be regulated like banks. Some have even called for the OFR to withdraw its report.

The U.S. Securities and Exchange Commission, which oversees asset managers, asked for public feedback on the study, a sign that it disagreed with the OFR's findings.

The OFR did the research with little input from the SEC and, as a new agency, has struggled to obtain data it needs in some cases, Reuters has reported.

The senators said they support the effort to determine which financial firms pose threats to markets, but they said the OFR study was flawed.

"The OFR study mischaracterizes the asset management industry and the risks asset managers pose, makes speculative assertions with little or no empirical evidence, and, in some places, predicates claims on misused or faulty information," they wrote.

(Reporting by Emily Stephenson; Editing by Meredith Mazzilli)

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