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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