Friday, August 12, 2011

FSOC to Propose Additional Guidance on Designating Hedge Funds and Other Non-Bank Financial Institutions for Heightened Regulation

In a letter to House Financial Services Oversight and Investigations Subcommittee Chairman Randy Neugebauer (R-TX), the Financial Stability Oversight Council (FSOC) said that it intends to seek public comment on additional guidance on the regulation and supervision of hedge funds and other non-bank financial institutions under Title I of Dodd-Frank. The proposed rule will specify the procedures pursuant to which hedge funds and other non-bank financial companies will be considered for designation and the accompanying guidance will provide the public with additional clarity regarding the Council’s proposed approach to evaluating non-bank financial companies for designation. The guidance will describe how the Council intends to apply the ten statutory considerations in Dodd-Frank. Because the statutory considerations, individually as well as in combination cannot be reduced to a simple formula, explained FSOC, the guidance will set forth both quantitative metrics the Council expects to use, in addition to the qualitative considerations that will allow FSOC to evaluate the threat that particular companies may pose to financial stability.

The guidance will describe the Council’s view of the primary factors relevant to a designation that may be adjusted over time to respond to emerging threats as financial markets and companies evolve. The proposed guidance will be released for public comment together with the re-proposed rule, said FSOC, and will not be finalized until the Council has considered the comments. The comment period is expected to be 60 days.

The FSOC is actively engaged in of the establishment of effective criteria and procedures for hedge fund and other non-bank designations, said Deputy Treasury Secretary Neil Wolin in recent testimony before the Senate Banking Committee. The Council issued an ANPR in October 2010 and an NPR in January 2010. According to the Deputy Secretary, FSOC received significant input from interested parties in this rulemaking process in an effort to develop a consistent approach that incorporates both quantitative and qualitative criteria.

He noted that Council would provide additional guidance regarding the criteria for designations, including specific metrics to help clarify on the FSOC’s evaluation of firms for potential designation. The guidance will also outline both the quantitative and qualitative elements of the analytical framework to be used. The designation process will employ the judgment of the Council’s members based on a comprehensive understanding of a firm’s risks.

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