In a comment letter, the SIFMA Asset Management Group (“SIFMA AMG”) expressed support for a proposal by the Financial Stability Oversight Council (“FSOC”) to change existing interpretive guidance to include adopting an “activities-based approach” to address systemic risk issues. Under the approach, FSOC would identify, evaluate and address potential risks to U.S. financial stability that arose from particular activities and would seek to adopt regulations applicable to those activities, rather than impose requirements on a single entity.
SIFMA AMG agreed that the proposed guidance would improve FSOC’s ability to identify and mitigate risks to U.S. financial stability. In order to better “enhance, clarify and refine the strong foundation” outlined in the proposed guidance, SIFMA AMG advised FSOC to:
– provide more details on how FSOC will conduct the “activities-based approach” process;
– confirm that any action by FSOC is triggered by a “reasonably foreseeable and likely set of facts and circumstances,” not simply by possible or potential situations or conditions;
– identify the level of scope and scale that indicates financial risks or threats to financial stability;
– strengthen the role of the primary financial regulator;
– explicitly state that it will solicit input from the industry;
– outline the “shortcomings” of the prior guidance and how the new approach will be better;
– clarify that the cost-benefit analysis requirement applies to recommendations for increased regulation and entity-based designations;
– state that it is responsible for the burden of proof in adopting any requirement;
reference existing rules or policies concerning “transmission channels” that relate to threats to U.S. financial stability;
– set more formalized procedures for the two-stage designation process and specify how it will treat confidential information;
separate functions of investigative and prosecutorial staffs and adjudicative bodies to ensure impartiality; and
– work with non-U.S. and international policymakers to harmonize rules and policies affecting the asset management industry.
The FSOC move towards imposing restraints on a particular type of activity, rather on an individual entity, is extremely significant in preventing potential abuses of power. It will limit the ability of FSOC to single out a company that may be in the disfavor of the ruling political party. While this move is to the good, it would be better still if Congress would actually adopt legislation that would confine FSOC’s discretionary power rather than rely upon FSOC to police itself.