Bryan Corbett: “Alternative asset managers do not pose a systemic risk and are already subject to the SEC’s robust regulatory regime. Private funds are not banks, do not carry the same risks as banks, and the business model is incompatible with bank-like regulation. Banking regulators also have very limited experience overseeing the asset management industry. FSOC’s flawed Proposed Guidance would hurt financial stability and increase systemic risk. For the sake of the U.S. capital markets, FSOC needs to considerably overhaul its Proposed Guidance.”
WASHINGTON, DC – Managed Funds Association (MFA) raised significant concerns about the Financial Stability Oversight Council’s (FSOC) Proposed Risk Analytic Framework and Nonbank Designation Guidance Proposal (together, Proposed Guidance) in a comment letter sent to FSOC.
MFA’s letter highlights that private funds do not pose a systemic risk and historically have been a source of stability for the markets during times of stress. Additionally, the letter stresses that the Proposed Guidance fails to provide transparency around how FSOC identifies and assesses risks to financial stability and when FSOC will use its designation authority. MFA argues, for these reasons, that FSOC designation is a blunt tool that would be inappropriate to apply to the private fund industry.
“Alternative asset managers do not pose a systemic risk and are already subject to the SEC’s robust regulatory regime,” said Bryan Corbett MFA President and CEO. “Private funds are not banks, do not carry the same risks as banks, and the business model is incompatible with bank-like regulation. Banking regulators also have very limited experience overseeing the asset management industry. FSOC’s flawed Proposed Guidance would hurt financial stability and increase systemic risk. For the sake of the U.S. capital markets, FSOC needs to considerably overhaul its Proposed Guidance.”
The Proposed Guidance would change how FSOC decides if a nonbank financial company is a threat to financial stability and how FSOC designates an entity as a systemically important financial institution (SIFI). If a firm is designated as a SIFI they are subject to prudential regulation from the Federal Reserve.
MFA’s letter urges FSOC to improve the Proposed Risk Analytic Framework by:
- Providing more detail about how FSOC will evaluate companies for SIFI designation;
- Ensuring that any future revisions are subject to public notice and comment in accordance with the Administrative Procedures Act;
- Reinserting cost-benefit analysis prior to SIFI designation; and
- Making clear that FSOC will evaluate a firm’s threat to financial stability before SIFI designation.
For the Nonbank Designation Guidance Proposal, MFA’s letter urges FSOC to:
- Consider the viability of an activities-based approach prior to designating an entity a SIFI;
- Enhance procedural safeguards to improve the legitimacy of the designation process and provide greater transparency into the work of staff-level committees that will be applying the Proposed Guidance.
MFA’s letter emphasizes how designating a private fund could be fatal to the fund and reduce the resiliency of U.S. markets. From the letter:
“[T]he costs imposed by the capital requirements, supervision and resolution planning requirements that result from designation would be significant and potentially fatal to the private fund. Elimination of private funds reduces the availability of capital for American businesses and would adversely affect innovation and increase financing costs, reducing the resiliency of both U.S. financial markets and the real economy. For investors such as pension funds, foundations, insurance companies, and endowments, a reduced market for private funds associated with markedly higher compliance costs would remove a critical source of uncorrelated returns and harm the beneficiaries of these institutional investors.”
MFA’s letter notes how FSOC fails to incorporate cost-benefit analysis in the Proposed Guidance despite the U.S. District Court for the District of Columbia holding in MetLife v. FSOC that it’s required before designating an entity a SIFI. From the letter:
“MetLife has not been abrogated or otherwise overruled, and the Council ultimately abandoned its appeal of the decision. When it invalidated the Council’s designation of MetLife, the U.S. District Court for the District of Columbia held that the designation: (1) failed to consider the costs associated with designation as compared to the benefits; and (2) did not include an adequately reasoned finding that MetLife’s material financial distress “would impair financial intermediation or market functioning [in a sufficiently severe manner so as] to inflict significant damage on the broader economy.” The Council incorporated these holdings into its 2019 Nonbank Designation Guidance… [T]he Proposed Guidance would remove both above-noted aspects of the 2019 Nonbank Designation Guidance without explanation or justification – just a passing footnote reference. The standards set out in the 2019 Nonbank Designation Guidance, which were based on the decision in MetLife, accordingly should be reincorporated as part of the Proposed Risk Analytic Framework.”
The letter highlights that FSOC’s Proposed Guidance should provide greater transparency, specificity, and guidance to market participants to enhance financial stability and deter systemic risk. From the letter:
“MFA recommends revisions to the Proposed Risk Analytic Framework to provide greater transparency, specificity, and guidance to market participants. First, the Council must make market participants aware of when the enumerated risks or transmission factors become serious enough to, in the Council’s view, pose a potential threat to financial stability. Second, the Proposed Risk Analytic Framework should be revised to require the Counsel to provide meaningful insight into how the Council evaluates the potential systemic risks posed by a specific nonbank financial company. Market participants, and the designation process itself, would benefit from such transparency… The Proposed Guidance is ambiguous in how the Council would consider the enumerated factors, which could deter firms from engaging in particular businesses or practices, despite the fact that the activity would not pose a risk to financial stability. These potential effects of the Proposed Guidance, while unintentional, would undermine the strength and flexibility of U.S. financial markets and market participants. At the same time, also unintentionally, the lack of details may allow risks to grow and amplify where they may be avoided with greater transparency.”
MFA’s letter can be found here.
About the Global Alternative Asset Management Industry
The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of $4 trillion (Q4 2022). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About Managed Funds Association
Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 170 member firms, including traditional hedge funds, credit funds, and crossover funds, that collectively manage nearly $2.2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time