SEC Commissioner Piwowar Criticizes Prudential Regulators' Attempt to Regulate Non-Bank Participants in Capital Markets (with Lofchie Comment)
SEC Commissioner Michael Piwowar delivered remarks at the 2015 Mutual Funds and Investment Management Conference. He spoke about the "continuing efforts" of prudential banking regulators and quoted Daniel Tarullo in characterizing their goal: "to 'broaden the perimeter of prudential regulation' to regulate the activities of non-bank participants in the capital markets."
According to Commissioner Piwowar, it is "ironic" that prudential banking regulators are pushing for more oversight of capital markets and non-bank participants, since they themselves are "responsible for creating the dominant position of investment funds in providing liquidity in the fixed income market."
Commissioner Piwowar explained that prudential regulators, who caused capital market activities to exit the banking sector and move into the non-banking sector through their own regulatory decisions, now believe that it is necessary to regulate the non-banking sector. He stated that recent actions taken by the Financial Stability Oversight Council ("FSOC") and the Financial Stability Board ("FSB") "confirm" the targeting of investment companies and their advisers as non-banking entities that are subject to prudential regulation.
According to Commissioner Piwowar, prudential banking regulators, such as FSOC and the FSB, have been "jumping to a conclusion without engaging in a deliberate analysis of available data" – particularly regarding the risks of non-bank, non-insurer global systemically important financial institutions and leveraged inverse exchange traded funds. In Commissioner Piwowar's words, the risks are "likely exaggerated."
Commissioner Piwowar stated that three areas of the regulatory regime "might warrant a closer look":
- Fund Data Reporting. He stated that he supports Chair White's initiative to enhance data reporting for both funds and advisers, and noted that the SEC should make the existing quarterly fund portfolio holding information available in an interactive data format that can be analyzed readily;
- In-Kind Redemptions. According to Commissioner Piwowar, the SEC should revisit and consider eliminating in-kind redemptions, particularly "if that will further clarify the fact that a mutual fund is not a bank, and therefore, a mutual fund shareholder is simply not the equivalent of a bank depositor"; and
- Temporary Suspension of Redemptions. He explained that if the SEC concluded that the redemption requirements in Section 22(e) could create broader market concerns, then it would be advisable for the SEC to consider which regulatory solutions could be constructed to address such concerns "[r]ather than for prudential regulators to designate funds and/or their advisers and/or their activities as systemically risky."
Lofchie Comment: "Prudential regulation" of private investment decisions is a step toward an economy in which the prudential (banking) regulators could prohibit or direct the investment decisions of private parties. Such a state-directed economy rests on the rationale that private investment decisions, if left uncontrolled, could create risk that the regulators find unacceptable. It is not surprising that some SEC Commissioners resist such assertions of authority. It is not apparent that Dodd-Frank contemplates such an exercise of power. If Congress intends that the prudential regulators exercise that power, then sufficient public debate and an express legislative grant of authority should be required – assuming that any such grant could be obtained.