MFA Criticizes FSOC Proposed Guidance for Designating Nonbank Financial Institutions

The Managed Funds Association ("MFA") criticized an Financial Stability Oversight Council ("FSOC") proposal that would eliminate "key aspects" of current interpretive guidance on the process for designating nonbank financial institutions for heightened Federal Reserve Board ("FRB") supervision.

In its letter, the MFA responded to FSOC's request for comments on (i) proposed new interpretative guidance on designating nonbank financial institutions for heightened FRB supervision and (ii) a proposed analytic framework for "identifying, assessing and addressing" financial stability risks. (See, previous coverage.) The proposed amendments to the "Interpretive Guidance on Nonbank Financial Company Determinations" would require "significant engagement and communication" between FSOC and any nonbank financial institution under review for designation (see prior coverage). FSOC said that that the proposal would update the interpretive guidance to:

• eliminate the requirement that FSOC must first rely on federal and state regulators to address financial stability risks before FSOC considers designating the financial institution;
• implement a "broader approach" to assess potential risks to U.S. financial stability which FSOC detailed in a separate "analytic framework" document for public comment (see below); and
• eliminate language requiring FSOC to conduct a cost-benefit analysis of a financial institution’s material financial distress (FSOC found the assessment to be "not useful or appropriate").

FSOC also requested comments on a proposed analytic framework on financial stability risks. The proposed framework addresses (i) how to evaluate risks to U.S. financial stability stemming from material financial stress or failure from nonbank financial institutions, (ii) how to encourage market discipline and (iii) emerging threats to the stability of the U.S. financial system.

Comment Letter

In its comment letter, MFA argued that the FSOC’s proposal to eliminate prioritization of an activities-based approach and to conduct a cost-benefit analysis before designating an entity would "undermine the credibility, predictability and prudence of the use of the [FSOC’s] authorities." MFA recommended that the FSOC revise its proposed amendments to provide transparency about its approach to examining financial stability risks by (i) making more information publicly available on which risks the FSOC considers to be systemically important and (ii) implementing a "greater mandatory dialogue" before and during the pre-designation stages. By implementing additional dialogue and greater transparency, MFA stated that this may encourage self-corrective behavior among firms and help the FSOC to achieve its financial stability goals more efficiently.

MFA also warned against imposing "bank-centric" prudential regulatory standards on the asset management industry, stating that it would result in increased standards and supervision by the FRB. MFA emphasized that the FRB has "no track record of successfully apply these types of standards to asset management firms or funds." MFA also argued that applying another regulatory regime would increase fees, outweighing any benefit to financial stability.