Why FSOC should not designate mutual funds as SIFIs

Article Highlights

  • If FSOC’s treatment of the insurers is any precedent, we should be extremely concerned about equally misguided treatment of investment funds

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  • Mutual funds are the very opposite of the sort of entity enhanced Fed supervision was designed to support

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  • Investment funds are wound up and leave the business regularly with no systemic consequences

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Good morning. I am Paul Atkins, CEO of Patomak Global Partners. For six years ending in 2008, I served as a Commissioner of the Securities and Exchange Commission and was a member of the Congressional Oversight Panel for TARP. I am testifying this morning on my own behalf.

As I am sure you know, under Dodd-Frank, the FSOC has statutory authority to label entities within the financial services industry “Systemically Important Financial Institutions,” abbreviated as S-I-F-I.1 The other day, a former Chairman of this committee, Barney Frank, quipped that “SIFFY,” as some pronounce it, sounds like a disease. He’s right – but there’s more. SIFI designation is the statutory gateway to a new level – and for some entities, a whole new world – of regulation by the Federal Reserve. Those are the reasons why I insist that my pronunciation – Sci-Fi’s – is necessary and correct. FSOC’s “Sci-Fi’s” take us way out there to a world of unreality that exists only in the fertile imaginations of an unaccountable few.

This morning, I would like to focus on the problems inherent in using the FSOC’s authority under section 113 of Dodd-Frank to designate regulated investment funds – specifically, mutual funds – as SIFIs. Section 113 makes clear that the purpose of SIFI designation is to subject designated non-bank entities to prudential supervision by the Federal Reserve in the interest of promoting the safety and soundness of the U.S. financial system. Once under the Fed’s supervisory umbrella, the non-bank financial company will be subject to any “enhanced supervision and prudential standards” that the Federal Reserve may adopt at the FSOC’s recommendation.2 Once under the Fed’s regulatory umbrella, SIFI-designated funds can expect to be subjected to bank-like capital requirements

Therein lies the problem: One simply cannot assume that an enhanced supervisory structure designed to stabilize very large banks is equally well suited to other financial entities with radically different structures and risk profiles. Indeed, given the considerable differences in how such institutions and funds are structured and operate, one should expect that applying the same regulatory standards would yield at least some unexpected and perhaps quite undesirable outcomes. I want to stress that that’s just as true if you are a proponent of the various initiatives taken in
the Dodd-Frank Act as if – like me – you are not. Let me explain.

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Paul S.

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