United States:
FSOC Interprets Its Own Authority To Regulate Nonbank Financial Companies
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The Financial Stability Oversight Council
(“FSOC”) finalized interpretive guidance on its
authority to require the supervision and regulation of certain
nonbank financial companies.
In the final guidance, FSOC referred to Dodd-Frank Section 113, which permits FSOC to
place a nonbank financial company under the supervision of the
Federal Reserve Board (“FRB”) and prudential standards if
it determines that (i) “material financial distress”
could pose a systemic threat or (ii) the “nature, scope, size,
scale, concentration, interconnectedness, or mix of the
[company’s] activities” could pose a systemic threat.
FSOC said it will use a two-step activities-based approach to
identify companies that pose a threat to U.S. financial stability.
FINRA said it will (i) monitor a broad swath of different
“financial products, activities, and practices” to
identify potential risks, and (ii) consider characteristics like
the “extension of credit, maturity and liquidity
transformation, market making and trading” to determine the
extent of the threat. Once threats are identified, FSOC said it
will work with financial regulators to address the potential
risks.
FSOC stated that a nonbank financial company determined to be a
threat to the financial stability of the United States will be (i)
supervised by the FRB and (ii) subject to prudential standards. If
the activity-based approach fails to properly address a potential
risk, FSOC can transition to an entity-specific approach to
“evaluate a nonbank financial company for a potential
determination.”
In a statement at an FSOC meeting, SEC Chair Gary
Gensler supported the FSOC action and provided
updates on SEC regulatory actions concerning money market funds,
open-end bond funds, and hedge funds. Mr. Gensler stated that money
market funds and open-end bond funds have a potential
“liquidity mismatch” between investors’ ability to
redeem daily and the possible lower liquidity of funds’
securities, which he said raises systemic issues during
“stress times.” He also emphasized the financial
resiliency risks hedge funds present through “leverage or
derivatives positions.”
Commentary / Steven Lofchie
FSOC’s authority to regulate nonbank financial institutions
is overly discretionary and ought to be done away
with (see previous commentary).
Primary Sources
- Gary Gensler Statement before the Financial
Stability Oversight Council on Money Market Funds, Open-End Bond
Funds, and Hedge Funds - FSOC: Authority to Require Supervision and
Regulation of Certain Nonbank Financial
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