[This story previously appeared in Securities Regulation Daily.]
By Amy Leisinger, J.D.
In remarks at the Investment Adviser Association’s 2015 Compliance Conference, Treasury’s Deputy Assistant Secretary for the Financial Stability Oversight Council (FSOC) Patrick Pinschmidt discussed the organization’s work and recent changes to its nonbank-designation process, as well as its consideration of potential risks related to asset management products and activities. In his speech, the official noted that FSOC was designed to bring regulators together to look at the entirety of the financial system for potential risks to financial stability, to take a broad view in order to mitigate or even prevent a future financial crisis. “[R]isks are not always neatly packaged within particular asset classes or institutions and they don’t always align within the contours of our regulatory system,” he explained.
FSOC activities. Pinschmidt noted that FSOC’s primary role is to look across regulatory and industry-specific silos to assess and respond to vulnerabilities by means of interagency cooperative efforts. The council has established separate committees to conduct regular, focused discussions on market developments and emerging risks and, most recently, has considered issues surrounding market volatility, interest rate risk, benchmark reforms, and cybersecurity threats. FSOC’s annual report to Congress provides the council’s views with respect to particular risks throughout the financial industry and how those risks might be transmitted to the system as a whole, according to Pinschmidt. In addition, the official stated, FSOC makes recommendations as to how those risks could be addressed or mitigated that serve as guidance for the council’s agenda in the year ahead.
Asset management. Recently, FSOC has been more closely analyzing whether risks within the asset management industry could affect U.S. financial stability. To gather as much information as possible, Pinschmidt explained, the council has held public conferences and directed staff to study industry-wide products and activities to assess potential risks. FSOC is engaged in an ongoing dialogue with the industry, as high-quality information is central to FSOC’s efforts, the official stated, but more data is still needed to better understand the nature and impact of potential risks. “There is no universally accepted, bright-line definition for what constitutes a potential threat to financial stability,” he explained.
Pinschmidt also clarified that FSOC is not aiming to regulate the day-to-day operations of asset managers but instead is striving to assess potential financial-stability risks. In its request for comments on asset management and key risks, FSOC is seeking input on liquidity and redemption risk, leverage, operational risk, and resolution. Specifically, the official noted, the council wants to understand whether the structure of pooled investment vehicles fosters a “first-mover advantage” and how redemption rights and liquidity-management practices may affect investor incentives. FSOC also requests information as to the degree to which leverage use may increase the potential for forced asset sales and expose others to losses or unanticipated risks, according to Pinschmidt. As to operational risk, FSOC seeks input on the potential risks associated with significant transfers of client accounts or assets and asks whether asset managers’ reliance on service providers for key functions could have a negative impact in the case of serious service disruptions. The council also requests comment on various financial interconnections that could affect or complicate a resolution.
“[T]here is no predetermined outcome, and no final decisions have been made in terms of potential risks relating to asset management products and activities,” the official noted, and “it is premature to speculate on any particular course of action the [c]ouncil may take.”
Since the enactment of the Dodd-Frank Act, consumers are more informed, markets are more resilient, and regulators are more apt at identifying and responding to potential concerns, but “we must remain vigilant to potential threats, and that requires us to keep an eye on the full breadth of the financial markets,” Pinschmidt concluded.