Establishing Certainty in Financial Regulations

ICI supports efforts to bolster financial stability that promote accountability and transparency without stifling innovation or harming investors.

In the wake of the 2008 financial crisis, Congress created the Financial Stability Oversight Council (FSOC), a group of financial regulators that was given the broad-reaching ability to designate nonbanks as systemically important, meaning the failure of these companies could risk larger economic collapse. While this is an important goal, several issues with the council need to be addressed, including transparency into how the FSOC makes its decisions on whether or not to use designation authority and whether the FSOC has conducted a proper cost-benefit analysis to determine whether the designation would inadvertently cause more harm than good. 

If the FSOC designates a nonbank financial institution systemically important, there can be broad-reaching consequences, including:

• Increased regulatory scrutiny and additional costs that can fundamentally change the way nonbanks do business; and
• Remedies that are designed to moderate bank-like risks (e.g. a run) and are therefore ill-suited to registered funds and their managers.

Instead of using its designation authority as a first step, ICI supports the FSOC leveraging the expertise of its members by requiring them to engage in rulemaking to address the risky activities and use enforcement authority to punish misconduct. The FSOC should seek a systemically important designation only after activities-based options have been exhausted. The FSOC should also provide more transparency into its decision-making, including robust cost-benefit analysis. 

The bipartisan Financial Stability Oversight Council Improvement Act, introduced in the House, would revise the flawed risk assessment framework and designation guidance governing the systemically important financial institution (SIFI) designation process for nonbank financial institutions. 

This legislation would limit the FSOC’s potential for overreach and instead put more authority in the hands of expert primary financial regulators like the SEC and the CFTC. Such designations should be used only when supported by rigorous, transparent analysis and after exploring less disruptive alternatives.

Legislation is needed to strengthen the checks and balances that underpin sound regulation. This reform would benefit:

• Everyday investors: Establishing greater certainty for registered funds means continued access to cost-effective, well-regulated investment options.
• Fund managers and nonbank financial institutions, such as registered funds: Reducing the risk of unpredictable, costly designations that could hinder innovation and efficiency.
• The broader economy: Keeping capital flowing to productive uses while maintaining appropriate safeguards for financial stability.

ICI supports this bipartisan legislation to restore transparency and rigor to the SIFI designation process, ensuring that the FSOC remains focused on real risks to financial stability while protecting the millions of Americans who save and invest for their futures.