Washington, D.C., July 27, 2023 – SIFMA’s Asset Management Group (SIFMA AMG) today submitted comments regarding changes to guidance on nonbank financial company designations as proposed by the Financial Stability Oversight Council (FSOC) expressing strong concern with the move away from the current activities-based approach.
“We strongly urge FSOC to retain its current prioritization of an activities-based approach to identifying and addressing systemic risk and to consider entity-based designation only as a last resort, as articulated in its current guidance,” SIFMA AMG stated in the letter signed by SIFMA AMG Head Lindsey Keljo and SIFMA AMG Managing Director and Associate General Counsel William Thum. “We believe that FSOC’s existing guidance continues to be the most effective and efficient mechanism to identify and address potential risks to U.S. financial stability, including with respect to nonbank financial companies (NBFCs) and the products and services they offer.”
In particular, SIFMA AMG identified the following areas of concern:
I. FSOC should not finalize the Proposals, as the “activities-based approach” continues to serve as the most effective means of addressing financial stability risk for NBFCs.
- As FSOC stated when it proposed the 2019 Guidance, adherence to an activities-based approach reduces the potential for competitive distortions among companies and in markets that could arise from entity-specific regulation and supervision.
- An activities-based approach also best leverages the expertise, skills and experience of the individual financial regulators that are experts in a given domain, as previously recognized by FSOC.
II. Further analysis of the Proposals is necessary, as they raise important procedural concerns, and the Proposed Guidance has failed to articulate a compelling or satisfactory need for changing FSOC’s approach.
- If FSOC believes changes are necessary, especially changes that eliminate important procedural safeguards and protections, then FSOC should conduct a study or engage in a rigorous analysis concerning why any such changes are necessary—and ultimately develop a report, similar to the general process that the Treasury Department followed in 2017 when it engaged in a holistic assessment of FSOC’s approach and developed recommendations for improvement.
III. Additional safeguards and elements are necessary if, counter to our central recommendation, FSOC ultimately decides to proceed with the Proposals, Consistent with 2019 Guidance.
- Any finalized guidance should include a cost-benefit analysis. FSOC’s current requirement to conduct a cost-benefit analysis prior to making a nonbank SIFI designation is necessary and appropriate because it imposes a disciplined, rigorous analytical process that will ultimately lead FSOC to better, more reasoned decisions and better public policy outcomes. Not only is the proposed elimination of the cost-benefit analysis requirement problematic from a policy and optics perspective, but it is inconsistent with legal requirements and judicial precedent.
- Any finalized guidance should include a requirement to determine the likelihood of a company’s material financial distress if and when FSOC considers a designation. FSOC should specify in the Proposed Guidance that it will consider not just the impact of an identifiable risk, but also the likelihood that the risk will be realized. Any amended guidance should furthermore state that FSOC will assess the likelihood of a company’s material financial distress, based on its vulnerability to a range of factors, when evaluating the overall impact of a potential FSOC designation for a company under review in Stage 1.
- The Proposed Analytic Framework should require FSOC to consider the extent to which assets are managed rather than owned by the company and the extent to which ownership of assets under management is diffuse. As stated in the 2019 Guidance, this approach is “required by statute” and recognizes the distinct nature of exposure risks when the company is acting as an agent rather than as principal.
- The Proposed Guidance should explicitly acknowledge the availability and importance of a pre-designation “off-ramp” mechanism—e., that FSOC’s communication to a company under review during Stage 1 regarding the focus of FSOC’s analysis may enable the company to act to mitigate any purported risks to financial stability and thereby potentially avoid becoming subject to an FSOC designation.
- The Proposed Analytic Framework’s definition of “financial stability” is overly broad and could result in FSOC having the power to review all aspects of the economy, including the real economy, which would exceed FSOC’s mission. We recommend that FSOC retain the interpretation of “threat to financial stability” as provided in the 2019 Guidance.
- Certain of the Proposed Analytic Framework’s sample quantitative metrics should be revised to more appropriately measure the vulnerabilities associated with NBFCs. Otherwise, as currently proposed, certain metrics are more applicable to banks than NBFCs, such as the metrics proposed to assess inadequate risk management and leverage. In addition, more specific articulation of the metrics in the Proposed Analytic Framework would help to positively inform NBFC behavior and guide expectations as well as facilitate engagement among NBFCs with FSOC, should they become subject to an initial review (and during regular risk monitoring activities).
The letter also urged for the 60-day advance notice requirement to be lengthened to no less than 90 days to allow companies adequate time to engage with FSOC and provide relevant information to FSOC to assist in its evaluation.
The full comment letter can be found here.
SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.
SIFMA’s Asset Management Group (SIFMA AMG) brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms – both independent and broker-dealer affiliated – whose combined assets under management exceed $62 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.
