Draft ICI Letter on FSOC Proposal Regarding Designation of Nonbank Firms for Heightened Supervision; Respond by 2/24
[24983]
February 22, 2011
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 12-11MONEY MARKET FUNDS ADVISORY COMMITTEE No. 11-11
SEC RULES COMMITTEE No. 18-11 RE: DRAFT ICI LETTER ON FSOC PROPOSAL REGARDING DESIGNATION OF NONBANK FIRMS FOR HEIGHTENED SUPERVISION; RESPOND BY 2/24
As previously indicated, last month, the Financial Stability Oversight Council (FSOC) issued a proposed rule regarding the criteria it will consider in designating certain nonbank financial companies for consolidated supervision and regulation by the Federal Reserve Board, as authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). [1] ICI’s draft comment letter on the proposal is attached and briefly summarized below.
Comments on the proposed rule are due to the FSOC by Friday, February 25th. If you have any comments on the attached draft letter, please provide them to Frances Stadler (frances@ici.org; 202/326-5822) by the close of business on Thursday, February 24th.
The draft letter expresses disappointment that the proposed rule does not specify how the FSOC intends to apply the criteria set forth in Section 113 of the Dodd-Frank Act when analyzing a particular company. It notes that while the proposed rule does little more than recite the statutory text, the Release proposes an analytical framework that provides some insight into the FSOC’s interpretation of the Section 113 criteria. The letter points out that ICI’s November 2010 letter to the FSOC discussed the Section 113 criteria in a way that largely tracks the six broad categories that form the foundation of the proposed analytical framework outlined in the Release. [2]
The draft letter states that the FSOC’s proposed analytical framework provides for a more focused inquiry than would result from simply ticking through each of the criteria listed in the Dodd-Frank Act, and that the framework provides companies and markets with a somewhat better understanding of how the FSOC intends to approach its analysis. The letter recommends that the formally adopt its proposed framework, either by incorporation into the text of the final rule or through an explicit discussion of the framework in the rule’s adopting release. [3]
The draft letter refers to the considerable uncertainty and concern among financial market participants about how the FSOC will apply the Section 113 criteria in making its determinations and suggests that this rulemaking provides an opportunity for the FSOC to make known some of its policy judgments about those criteria, without unduly constraining its flexibility. It suggests that a logical place to start would be with areas of general consensus among those who commented on the FSOC’s Advance Notice of Proposed Rulemaking. The letter recommends that the adopting release discuss, to the greatest extent possible, the FSOC’s views on the Section 113 criteria.
The draft letter reiterates ICI’s recommendation that the FSOC should use its Section 113 designation authority with care, and reserve its application for those circumstances when the FSOC has determined that a specific company poses significant risks to the financial system that cannot otherwise be adequately addressed through enhancements to existing financial regulation and/or other regulatory authorities provided by the Dodd-Frank Act. It notes that such an approach is consistent with legislative intent as articulated by former Senate Banking Committee Chairman Christopher S. Dodd and with comments made by Federal Reserve Board Chairman Ben Bernanke. It further recommends that the FSOC state in the adopting release that it intends to use its Section 113 designation authority judiciously.
Finally, the draft letter addresses the suggestion by some commentators that certain money market funds should be designated for heightened supervision pursuant to Section 113. The draft letter explains why such company-by-company designation would not be an appropriate regulatory tool for further strengthening the resilience of money market funds to severe market distress. Instead, to the extent the FSOC has any remaining concerns with respect to money market funds, the draft letter urges it to evaluate these funds under the separate path outlined in the report on money market fund reform options by the President’s Working Group on Financial Markets.
Frances M. Stadler
Senior Counsel - Securities Regulation
Rachel H. Graham
Senior Associate Counsel
Jane G. Heinrichs
Senior Associate Counsel
endnotes
[1] See ICI Memorandum No. 24901, dated January 21, 2011; Financial Stability Oversight Council, Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 76 Fed. Reg. 4555 (Jan. 26, 2011) (“Release”).
[2] See ICI Memorandum No. 24696, dated November 10, 2010 (summarizing ICI’s reponse to the FSOC’s Advance Notice of Proposed Rulemaking. For convenience, the attached draft letter briefly summarizes ICI’s primary observations about those categories, both in general terms and how they should apply specifically to registered investment companies and their investment advisers.
[3] The draft letter states that if the latter approach is followed, the rule text should contain a specific reference to the adopting release.