FSOC Oversight Could Be Catastrophic for Funds


Originally published in Ignites on May 31, 2012

The Dodd-Frank Act provides for enhanced prudential standards not just for banks and bank holding companies, but also for other large financial institutions that the government perceives pose a grave threat to U.S. financial stability. And your mutual fund may be one of them, even if it seems like a stretch for your fund to be classified as a systemic risk.

The law created the Financial Stability Oversight Council (FSOC) to sniff out these grave threats to America’s financial stability. FSOC is authorized to bestow status as a systemically important financial institution, or SIFI. These enhanced SIFI requirements include risk-based capital requirements and leverage limits; liquidity requirements; single-counterparty credit limits; risk management; stress tests; debt-to-equity ceiling; and early remediation in the event of a bankruptcy.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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