ICI Submits Comment Letters to Regulators and FSB Critical of Potential for G-SIFI Designation (with Lofchie Comment)

In a letter to top regulators, the Investment Company Institute ("ICI") expressed concern about the proposed framework and specific methodologies contained in the second consultation document issued by the Financial Stability Board ("FSB") and IOSCO, dated March 4, 2015. That document focused on assessment methodologies for identifying non-bank, non-insurer, global systemically important financial institutions. The ICI letters were sent to U.S. Treasury Department Secretary Lew, SEC Chair White, Board of Governors of the Federal Reserve System Chair Yellen and the FSB.

According to the ICI, the letter was written to express "significant concern about the basis for the consultation," and to urge the regulators to redirect efforts away from entity designation of funds and asset managers. Rather, the ICI stated, the regulators should encourage the FSB and IOSCO to "inform themselves more closely about, and assess risks to financial stability that may arise from, activities and practices in the asset management sector."

Specifically, the ICI expressed its concerns that the second consultation:

• "continues to place undue emphasis on the size of a fund, thus singling out many large, highly regulated U.S. stock and bond funds as candidates for potential designation." The ICI observed that the second consultation also adds criteria that would result in identification of candidates for potential designation that are almost solely U.S. asset managers. According to the ICI, it is not apparent why the standards emerging from this "multilateral process" should target almost exclusively U.S. firms and capital markets;
• focuses on the U.S. funds that in fact "demonstrated a remarkable degree of stability during the financial crisis";
• would designate funds and their managers in a way that "defies logic, because it does not take leverage into account";
• proposes to exclude pension funds and sovereign wealth funds from any assessment for systemic risk using justification that is "hollow"; and
• advances proposed methodologies for designation "without giving sufficient weight to empirical data, historical experience, industry structure and practice, existing regulation, or other factors that might bear on the existence or severity of the risks that the methodologies posit."

Overall, the ICI stated that the second consultation "fails as a predicate for any regulatory action in the United States," and "fails to meet basic standards for regulatory policymaking elsewhere embraced by multilateral organizations."

In its letter to the FSB, the ICI went into further detail, offering views on the proposed assessment process. ICI concluded by urging the FSB to address any concerns identified in asset management through a market-wide or activity-based approach.

Lofchie Comment: ICI is concerned that U.S. banking regulators seem to be contributing to a process by which U.S. asset managers and U.S. funds – entities that are not banks – would become subject to the control of a consortium of global banking regulators. Surely, the fact that U.S. regulators are engaged in discussions where the only "consensus" that can emerge would be contrary to the interests of the United States should be enough to give anyone pause. To be clear, the only consensus that can emerge will be contrary to U.S. interests not because non-U.S. regulators are inherently hostile, but because there is no reason why these non-U.S. regulators should reject the opportunity, if offered, to establish regulations governing U.S. asset managers and funds. On the other hand, there is no reason why U.S. regulators ought to be offering this opportunity. Put another way, how can it possibly benefit the United States?(This issue does not even touch upon the profound concern that the application of the SIFI and G-SIFI process to private investors is a wholly inappropriate exercise of governmental power.)

See: ICI Letter to the Regulators; ICI Letter to FSB.Related news: SIFMA AMG Submits Comments to Multiple U.S. Regulators Critical of FSB-IOSCO's Second Consultative Document (with Lofchie Comment) (April 2, 2015); FRB Vice Chair Fischer Discusses the Non-Bank Financial Sector (with Lofchie Comment) (March 27, 2015); FSB and IOSCO Propose Assessment Methodologies for Identifying Non-Bank Non-Insurer G-SIFIs (March 5, 2015); Mercatus Scholar Hester Peirce Cautions against Macroprudential Regulation (with Lofchie Comment) (February 25, 2015).