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SEC to explore ripple effects of asset management industry's M&A craze

Wall Street's top regulator plans to explore the ripple effects of the deal craze that has hit asset managers in recent years.

Across the industry, asset management behemoths such as BlackRock Inc. and Invesco Ltd. have been snatching up their smaller competitors as a way of bolstering their assets under management while introducing potential cost savings into their models. But that consolidation has piqued the interest of the SEC, where officials including its Division of Investment Management director, Dalia Blass, are worried about the potential impacts that the M&A frenzy could have on investor choice.

"I am concerned about what it will mean for investors, particularly Main Street investors, if the variety and choice offered by small and midsize asset managers becomes lost in a wave of consolidation and fee compression," Blass said March 18 during a speech in San Diego.

Now, Blass has directed her staff to begin reaching out to small and midsize fund sponsors to gain a better understanding of how the SEC can address any potential regulatory burdens that smaller asset managers face. The agency is also hoping to gain insights into other steps it could take to allow smaller companies to better compete, Blass said.

To address some of these lingering worries in the industry, the SEC is considering forming an asset management advisory committee as well, Blass said.

Asset managers have undergone a massive wave of consolidation in recent years, as investors continue to seek out low-cost investment products and strategies that also have highly technical systems that their clients can easily use. A large portion of the M&A activity in the asset management industry has focused on active managers, which have largely struggled to outperform their benchmark indexes in recent years, leading investors to pour even more money into index-tracking vehicles such as exchange-traded and index funds.

Smaller asset managers also tend to make for easy targets, as executing and integrating large-scale mergers in the asset management industry can be very difficult, Franklin Resources Inc. Chairman and CEO Gregory Johnson said in January.

Atlanta-based Invesco's chief executive, Martin Flanagan, whose company struck a $5.7 billion agreement in 2018 to acquire OppenheimerFunds Inc., recently estimated in an interview with the Financial Times that as many as one in three asset managers could no longer exist within the next five years.

"The strong are getting stronger and the big are going to get bigger," Flanagan said, according to the report.