Commentary: ATR Supports Fight Against FSOC's Nonbank Designation Guidance

Targeted News Service

WASHINGTON, April 18 -- Americans for Tax Reform issued the following commentary:

By Bryan Bashur

The Financial Stability Oversight Council (FSOC) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as a response to financial instability emanating from the 2008 financial crisis. The Dodd-Frank Act allows the FSOC to designate certain nonbank financial companies, such as asset managers, stablecoin issuers, hedge funds, mortgage companies, insurance companies, and private equity funds, as systemically important financial institutions (SIFIs) subject to prudential regulation and oversight by the Federal Reserve (Fed). This would allow the Fed to set capital and liquidity requirements, and leverage limits on these firms--restricting the return potential nonbanks can offer investors and retirees.

Enhancing the Fed's authority over new firms, many of which are already regulated by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), would bolster the executive branch's control over nonbanks with little input from elected officials in Congress. One article found that "many of the traditional bank regulatory tools used by the Fed are either inapplicable to asset managers or would create unwanted market distortions."

One of the most egregious amendments made in the guidance is the removal of the cost-benefit analysis that was included in the FSOC's 2019 interpretive guidance. The new guidance contravenes MetLife Inc. v. Financial Stability Oversight Council. The MetLife ruling was incorporated into the 2019 guidance to mitigate governmental overreach and appropriately analyze the benefits and costs of additional regulation on nonbanks.

The ruling in the MetLife case found that "FSOC failed to consider the costs associated with designating MetLife as a SIFI." The court also cited Michigan v. Environmental Protection Agency, stating that the FSOC needed to account for the cost of designating MetLife as a SIFI because "[n]o regulation is 'appropriate' if it does significantly more harm than good." Additionally, federal statute requires the FSOC "to consider the cost of designating a company for enhanced supervision, provided that cost is a 'risk-related' factor." In the MetLife case, the FSOC refused to consider the costs associated with designating MetLife as a SIFI. However, the consideration of cost "is essential to reasoned rulemaking."

Consequently, Rep. French Hill (R-Ark.) introduced a joint resolution of disapproval pursuant to the Congressional Review Act (CRA). If the resolution is signed into law, the FSOC's nonbank guidance would be nullified, and the FSOC would be prohibited from publishing a substantially similar proposal in the future.