Financial Stability Oversight Council voted Tuesday to proceed with rule-making that gives the council oversight authority to regulate large non-bank financial institutions that have at least $50 billion in assets and $20 billion in debt.
The criteria approved for further rule-making would apply to financial institutions with at least $50 billion in assets, $20 billion in debt, $3.5 billion in derivatives liabilities, short-term debt equal to 10% of total assets, and other measures. Once meeting those criteria, companies would still be evaluated further before the council would vote to take regulatory action.
The council, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act to help prevent another financial crisis, is chaired by Treasury Secretary Timothy Geithner and includes the heads of all Washington financial regulatory agencies, including the SEC, CFTC and Federal Reserve.
The council will coordinate regulatory activity among all the agencies and has the authority to designate “systemic financial market utilities” that would be subject to tighter regulations, according to the new rule-making proposal.
The Tuesday vote approved rule-making to give the Federal Reserve supervisory authority for determining ”material financial distress” at non-bank firms and will take public comment for 60 days.
In January, the FSOC issued a related proposal for designating “the largest, most interconnected and highly leveraged companies” for stricter prudential regulation, including higher capital requirements and “more robust“ supervision.
In a Feb. 25 comment letter to the council, Barbara G. Novick, BlackRock vice chairwoman, and Robert P. Connolly, BlackRock's senior managing director and general counsel, argued that assets managers should not be considered systemically important financial institutions in need of further controls. “The business model of an asset manager is fundamentally different than that of other financial institutions … and these differences are critical in assessing systemic importance.”
They wrote that asset managers have no government guarantees, which asset managers “clearly disclose to clients,” and cannot turn to the Fed for emergency liquidity needs. Also, while some asset managers were affiliated with companies that received government assistance during the 2008-‘09 financial crisis, none received TARP funds.
“In the unlikely event that an asset manager did fail in the future, there would be multiple competitors ready and willing to serve the clients of the failed manager,” Ms. Novick and Mr. Connolly wrote.
Given the “extensive and strict” regulation of asset managers as fiduciaries, “we do not believe that further regulation by the council would provide additional protections to investors or to taxpayers,” the letter concluded.