WASHINGTON — Representatives of the U.S. securities industry today asked Congress to scrutinize carefully the role of the Financial Stability Board (FSB), an international financial monitoring body, especially voicing concern that its influence may ultimately lead to designating such asset managers as mutual funds as systemically important financial institutions.
Such a step “could have grave implications for U.S. regulated funds and the 90 million Americans who depend on them for their financial goals,” said Paul Schott Stevens, president and CEO of the Investment Company Institute.
He said the ICI is concerned that the FSB’s designation work could “front-run and prejudge issues at the U.S. Financial Stability Oversight Council (FSOC).
It appeared that the main concern for ICI’s Schott is that mutual funds would be designated as systemically significant, just like non-banks such as American International Group and Prudential Financial. MetLife has also been designated, but Federal Reserve officials left its offices after Judge Rosemary Collyer declared the designation arbitrary and capricious March 30. The government is appealing that decision and oral arguments are scheduled on that appeal for Oct. 24 before a panel of the U.S. Court of Appeals for the D.C. Circuit.
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Noting that the U.S. representatives to the FSB are the principal players on the FSOC, the FSB’s designation of three US-based insurance companies “presaged FSOC’s designation of those same companies.”
Similarly, “a flawed FSB ‘methodology’ that identifies U.S. funds for scrutiny might very well be used as justification for designating those funds by the FSOC.”
His argument is that SIFI designation for U.S. mutual funds would subject them to “inappropriate bank-style regulation,” which would generate “higher costs that will harm investors’ returns and create competitive imbalances, potentially reducing investor choice.”
Schott added that, “Fed supervision could put the interests of the banking system ahead of funds’ fiduciary duty to their own shareholders.” Moreover, he said, “America’s retirement savers could be on the hook to help bail out other failing financial institutions.
Carter McDowell, managing director and associate general counsel for the Securities Industry and Financial Markets Association (SIFMA) added that, “the more U.S. regulators base their rules on standards adopted internationally, without adequately taking into account the unique characteristics of U.S. markets,” the more U.S. financial institutions become subject to rules that in significant ways “do not make sense” for the U.S. financial markets or broader economy.
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The asset management industry’s comments were made at a hearing of the House Financial Services Committee’s Subcommittee on Monetary Policy and Trade on the “Financial Stability Board’s Implications for U.S. Growth and Competitiveness.”
The FSB was established in 2009 by the G-20, the largest world economies, in response to the financial crisis. The FSB is a group of finance ministers, central bankers and financial regulators tasked with promoting international financial stability.
While the asset managers decried the implications of the FSB’s work, Marcus Stanley, policy director for Americans for Financial Reform, cautioned that the role of the FSB is not as threatening to the U.S. financial services industry as portrayed by the asset managers. “There are no direct implications” for U.S. financial services firms from the FSB, Stanley said, because FSB recommendations and standards “have no legal force in the U.S. or anywhere else.”
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He said this is “in sharp contrast to some other international discussions,” for example, in those talks that result in trade agreements.
In his testimony, Schott reiterated support for the Securities and Exchange Commission’s examination of asset management practices and related rulemakings in contrast to the SIFI designation approach.
“From its inception, the FSB has been dominated by central bankers and a banking mentality,” Schott said. He noted that central bankers, capital market activity constitutes “shadow banking, a risky form of finance because it is not regulated like banks.”
“While the International Organization of Securities Commissions (IOSCO) and securities regulators are beginning to take a larger role, the FSB’s work on asset management is still overseen by banking regulators who lack understanding of the capital markets,” Schott said.
He said that is reflected in FSB’s emphasis on “distress” and “disorderly failure” — concepts derived from banking experience. The FSB’s return to SIFI designation for funds would bring asset management under bank-style regulation — no matter how harmful or inappropriate that might be,” Schott said.
He argued that ICI officials “have serious reservations about transparency, fairness, and accountability in the FSB’s work.” He added that as members of this subcommittee know, “Congress cannot even determine what positions the US delegation takes in FSB deliberations — the Treasury Department and Federal Reserve simply will not say.”
McDowell said Congress should understand that international regulatory processes are not as exact as those required in the U.S. He cited the lack of procedural safeguards at international bodies during their rulemaking processes, the lack of public records; the lack of public positions of members of international rulemaking bodies; the lack of requirement for meaningful consideration of public comments; little explanation of basis for rules; the reliance on non-public data and the fact there is no cost-benefit analysis of international rulemaking.
McDowell also voiced concerned that international standard-setting can impact the public comment process in the U.S., adding that “SIFMA believes it is time for a critical examination of how U.S. regulators engage with international bodies that impact domestic policy.”
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