July 27, 2023

Financial Stability Oversight Council
Attn: Eric Froman
1500 Pennsylvania Avenue, NW
Room 2308
Washington, DC 20220

Via Electronic Filing

Re:       Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies; RIN 4030-[XXXX] & Analytic Framework for Financial Stability Risk Identification, Assessment, and Response; RIN 4030-[XXXX]

Dear Mr. Froman:

The Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG”) [1] appreciates the opportunity to provide comments to the Financial Stability Oversight Council (“FSOC”) in response to its proposed interpretive guidance (“Proposed Guidance”)[2] and proposed analytic framework (“Proposed Analytic Framework”)[3] (together, “Proposals”) relating to FSOC’s authority to require supervision and regulation of certain nonbank financial companies (“NBFCs”).

Overview

We strongly urge FSOC to retain its current prioritization of an activities-based approach to identifying and addressing systemic risk and to consider entity-based designation only as a last resort, as articulated in its current guidance.  As explained in greater detail below, we believe that FSOC’s existing guidance continues to be the most effective and efficient mechanism to identify and address potential risks to U.S. financial stability, including with respect to NBFCs and the products and services they offer.

Our letter is organized in the following manner.  Section I provides an Executive Summary of our key points, concerns and recommendations.  Section II explains that the “activities-based approach,” which FSOC finalized in 2019 (“2019 Guidance”),[4] continues to serve as the most effective means for FSOC to identify and address potential risks to U.S. financial stability.  Section III discusses several process-related concerns we have regarding the Proposals and provides recommendations concerning safeguards and other elements that would be necessary and appropriate if FSOC, counter to our overarching recommendation, ultimately decides to proceed with adopting the Proposals.

Executive Summary

1. FSOC should not finalize the Proposals, as the “activities-based approach” continues to serve as the most effective means of addressing financial stability risk for NBFCs.

• The activities-based approach that FSOC adopted in 2019 continues to be appropriate and should be continued. It is the most effective means for FSOC to fulfill its mission.  As FSOC stated when it proposed the 2019 Guidance, adherence to an activities-based approach reduces the potential for competitive distortions among companies and in markets that could arise from entity-specific regulation and supervision.
• An activities-based approach also best leverages the expertise, skills and experience of the individual financial regulators that are experts in a given domain, as previously recognized by FSOC.

Further analysis of the Proposals is necessary, as they raise important procedural concerns, and the Proposed Guidance has failed to articulate a compelling or satisfactory need for changing FSOC’s approach.

• FSOC’s 2019 Guidance was the culmination of a methodical and rigorous process to examine and improve FSOC’s nonbank systemically important financial institution (“SIFI”) designation approach and process, particularly in light of numerous criticisms that had been raised over the years, including by a U.S. District Court. In its Proposals, FSOC has not provided a data- or an evidence-based rationale for changing the 2019 Guidance, nor has FSOC engaged in a rigorous process to evaluate or examine changing the guidance.  We believe that these investigative and observational processes, alongside thorough engagement with market participants, bolster and enhance the effectiveness of the rulemaking process.
• If FSOC believes changes are necessary, especially changes that eliminate important procedural safeguards and protections, then FSOC should conduct a study or engage in a rigorous analysis concerning why any such changes are necessary—and ultimately develop a report, similar to the general process that the Treasury Department followed in 2017 when it engaged in a holistic assessment of FSOC’s approach and developed recommendations for improvement.

Additional safeguards and elements are necessary if, counter to our central recommendation, FSOC ultimately decides to proceed with the Proposals.

• Consistent with the 2019 Guidance, any finalized guidance should include a cost-benefit analysis. FSOC’s current requirement to conduct a cost-benefit analysis prior to making a nonbank SIFI designation is necessary and appropriate because it imposes a disciplined, rigorous analytical process that will ultimately lead FSOC to better, more reasoned decisions and better public policy outcomes.  Not only is the proposed elimination of the cost-benefit analysis requirement problematic from a policy and optics perspective, but it is inconsistent with legal requirements and judicial precedent.
• Consistent with the 2019 Guidance, any finalized guidance should include a requirement to determine the likelihood of a company’s material financial distress if and when FSOC considers a designation. FSOC should specify in the Proposed Guidance that it will consider not just the impact of an identifiable risk, but also the likelihood that the risk will be realized.  Any amended guidance should furthermore state that FSOC will assess the likelihood of a company’s material financial distress, based on its vulnerability to a range of factors, when evaluating the overall impact of a potential FSOC designation for a company under review in Stage 1.
• Consistent with the 2019 Guidance, the Proposed Analytic Framework should require FSOC to consider the extent to which assets are managed rather than owned by the company and the extent to which ownership of assets under management is diffuse. As stated in the 2019 Guidance, this approach is “required by statute” and recognizes the distinct nature of exposure risks when the company is acting as an agent rather than as principal.
• Consistent with the 2019 Guidance, the Proposed Guidance should explicitly acknowledge the availability and importance of a pre-designation “off-ramp” mechanism—e., that FSOC’s communication to a company under review during Stage 1 regarding the focus of FSOC’s analysis may enable the company to act to mitigate any purported risks to financial stability and thereby potentially avoid becoming subject to an FSOC designation.
• The Proposed Analytic Framework’s definition of “financial stability” is overly broad and could result in FSOC having the power to review all aspects of the economy, including the real economy, which would exceed FSOC’s mission. We recommend that FSOC retain the interpretation of “threat to financial stability” as provided in the 2019 Guidance.  Otherwise, as currently proposed, the scope of potential threats to financial stability is not clearly defined, nor is it clear that it excludes aspects of the real economy.  In the alternative, FSOC could largely retain the interpretation of “threat to financial stability” in the 2019 Guidance and address its interpretive concerns with a one-word change to the definition.
• Certain of the Proposed Analytic Framework’s sample quantitative metrics should be revised to more appropriately measure the vulnerabilities associated with NBFCs. Otherwise, as currently proposed, certain metrics are more applicable to banks than NBFCs, such as the metrics proposed to assess inadequate risk management and leverage.  In addition, more specific articulation of the metrics in the Proposed Analytic Framework would help to positively inform NBFC behavior and guide expectations as well as facilitate engagement among NBFCs with FSOC, should they become subject to an initial review (and during regular risk monitoring activities).
• The 60-day advance notice requirement for companies under review in Stage 1 should be lengthened to no less than 90 days to allow companies adequate time to engage with FSOC and provide relevant information to FSOC to assist in its evaluation.

[1] SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices.  SIFMA AMG’s members represent U.S. and global asset management firms—both independent and broker-dealer affiliated—whose combined assets under management exceed $62 trillion.  The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.

[2] Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies, 88 Fed. Reg. 26234 (Apr. 28, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-04-28/pdf/2023-08964.pdf.

[3] Analytic Framework for Financial Stability Risk Identification, Assessment, and Response, 88 Fed. Reg. 26305 (Apr. 28, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-04-28/pdf/2023-08969.pdf.

[4] Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies, 84 Fed. Reg. 71740 (Dec. 30, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-12-30/pdf/2019-27108.pdf.