Thursday, August 17, 2017

Repeal of FSOC’s SIFI designation authority urged

By J. Preston Carter, J.D., LL.M.

The Financial Stability Oversight Council’s Dodd-Frank Act authority to designate nonbank financial companies as systemically important financial institutions (SIFIs) should be repealed, according to the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. Absent repeal of the Section 113 determination authority, CCMC believes that exercise of the Section 120 recommendation authority, in coordination with a company’s or industry’s primary federal regulator, is a “more effective means of addressing systemic risk, promoting financial stability, and encouraging economic growth.”

In a letter to Treasury Secretary Steven T. Mnuchin, CCMC called Section 113 determinations “blunt tools that have harmed the efficiency of our capital markets and have not improved the ability of the United States to mitigate systemic risk.” The letter was in response to President Trump’s Presidential Memorandum directing the Treasury Secretary to review the SIFI designation process to ensure that it is "a fair and transparent process." The memorandum also required that the Treasury Secretary issue a report within 180 days of the date of the memorandum.

Recommendations. CCMC argued that, absent a repeal of Section 113, the FSOC should rescind outstanding determinations and refrain from consideration of future determinations. The organization also offered a number of recommendations:
  • Replace SIFI designations with an enhanced role of the primary regulator through Section 120 recommendations to apply new or heightened standards and safeguards for a particular financial activity or practice;
  • The FSOC should establish its jurisdictional authority early in the designation process and provide the company with a detailed preliminary notice of consideration.
  • Exempt certain classes of nonbank financial companies from potential SIFI designation.
  • Make the SIFI determination process transparent and embrace due process by providing designee targets with an opportunity to review the record for the determination recommendation and an opportunity to rebut the record.
  • Ensure that consultation with the primary financial regulatory agency is substantive and meaningful.
  • Conduct a pre-designation economic analysis.
  • Provide an opportunity for a company and its primary functional regulator to address the FSOC’s concerns and make appropriate changes in its operations, or regulations, prior to preliminary designation.
  • Improve policies with respect to annual reevaluations and opportunities to appeal.