Paul Schott Stevens, President & CEO of the Investment Company Institute recently wrote an "ICI Letter on FSOC Proposal Regarding "SIFI" Designations to the Financial Stability Oversight Council. The letter, which is labelled "Re: Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies (RIN 4030-AA00)," says, "The Investment Company Institute appreciates the opportunity to comment on the Financial Stability Oversight Council's revised notice of proposed rulemaking and proposed interpretive guidance regarding the designation of certain nonbank financial companies for consolidated supervision and regulation by the Federal Reserve Board. As both issuers of securities and large investors in U.S. and international financial markets, ICI's registered investment company members are keenly interested in the Council's efforts to identify and address potential risks to U.S. financial system stability."

Stevens explains, "In two prior comment letters, ICI has discussed in detail how the FSOC should use its authority under Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to designate particular companies as so-called systemically important financial institutions ("SIFIs"). Those letters (see www.ici.org/pdf/24696.pdf and www.ici.org/pdf/24994.pdf) -- which continue to reflect ICI's views in this area -- emphasized the following: The Dodd-Frank Act, by design, provides regulators with an array of new tools to address abuses and excessive risk taking by financial market participants, and to detect new buildups of risk in the financial system. The broad scope of those authorities should allow the FSOC to reserve SIFI designation for those circumstances in which other regulatory actions clearly would be inadequate to address or limit the perceived risks to the financial system.... Registered investment companies are at the "less risky" end of the spectrum when considering the potential for systemic risk. In addition, a registered fund is a separate legal entity, whose assets are owned pro rata by its shareholders. Accordingly, a registered fund's assets should not be attributed to the registered investment adviser that manages those assets. SIFI designation is an inappropriate regulatory tool for further strengthening the resilience of money market funds to severe market distress."

He continues, "In this letter, we provide our views with regard to the Proposed Rule and Proposed Guidance. In particular, we recommend that the Proposed Guidance (once finalized) not be materially changed unless the Council first provides notice and the opportunity for public comment on such changes. We further recommend that the Council strengthen the confidentiality provisions in the Proposed Rule. The letter also comments on statements in the Release regarding the FSOC's intention to conduct further analysis into what threats to financial stability, if any, arise from asset management companies and how any such threats are best addressed. We urge the Council to make clear that it will refrain from evaluating asset management companies under the Proposed Rule and Proposed Guidance until (1) its further analysis of asset management companies has been completed and (2) the Council provides the public with some indication of its findings and conclusions. It is our belief that this review will lead the FSOC to conclude, at the very least, that neither investment advisers to registered funds, nor the funds themselves, present the risks that SIFI designation was intended to address."

The ICI's comments to FSOC also say, "At the outset, we wish to acknowledge the Council's efforts to address the various concerns raised by ICI and other interested parties in the two prior comment periods. Chief among these concerns had been the lack of specificity about how the FSOC would select nonbank financial companies for evaluation and how it would apply the criteria and determination standards set forth in Section 113 of the Dodd Frank Act. In issuing the Release, the Council has provided much needed insight into how it views the Section 113 criteria and standards and how it intends to exercise its SIFI designation authority. Importantly, the Release also acknowledges that SIFI designation is just one of the tools available to regulators to address potential systemic risk."

Stevens comments, "We are pleased that the Release includes the proposed quantitative thresholds by which the FSOC intends to identify nonbank financial companies for further evaluation, as well as the proposed metrics the FSOC may use in applying the six-category analytical framework to each company selected for evaluation. It is critical for financial market participants to have the opportunity to consider the proposed thresholds and metrics, and provide input to inform the Council as to their appropriateness. As ICI previously has advised, the Council's ability to determine that an individual company poses potential risk to the entire U.S. financial system -- and the regulatory oversight and heightened standards that would flow from that determination -- is an extraordinarily potent legal authority, and one that should be used with great care. Market participants can and should be called upon to offer their expertise and, in so doing, help the FSOC to properly delineate its SIFI designation process."

He adds, "The Release states that the FSOC, its member agencies and the OFR will undertake a further analysis to consider what threats to financial stability -- if any -- arise from asset management companies and whether such threats can be mitigated by SIFI regulation or better addressed through other regulatory measures. We welcome this development, as it suggests that the FSOC recognizes the different risk profile of asset management companies and is committed to exercising its SIFI designation authority in a careful and thoughtful manner. In addition, we believe this review will lead the FSOC to conclude, at the very least, that neither investment advisers to registered funds, nor the funds themselves, present the risks that SIFI designation was intended to address."

Finally, Stevens writes, "We urge the Council to make clear that it will refrain from evaluating asset management companies under the Proposed Rule and Proposed Guidance until (1) its further analysis of asset management companies has been completed and (2) the Council provides the public with some indication of its findings and conclusions. Our recommendation is based on the fact that, for asset management companies, the Release raises more questions than it answers about the determination process. These include such fundamental questions as how the FSOC would apply the total consolidated assets threshold in "Stage 1" to an asset manager and what is meant by the FSOC's intention to "take into account ... assets under management in a manner that recognizes [their] unique and distinct nature." As to the former question, ICI reiterates its view that a registered fund's assets should not be attributed to that fund's investment adviser. Until the FSOC fully answers these questions, however, the financial markets and market participants are left with exactly the sort of uncertainty that the Council intended the Release to minimize. Moreover, leaving these issues open to speculation is at odds with the FSOC's stated "commit[ment] to fostering transparency with respect to the Designation Process." ICI and its members stand ready to assist the Council in its further work on this rulemaking."

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