The Financial Stability Oversight Council (“FSOC”) has taken the next step in its consideration of the asset management industry, by issuing a notice requesting public comment on whether asset management products and activities may pose potential risks to the U.S. financial system (“Notice”).¹ In this regard, the FSOC has decided to analyze industry-wide asset management products and activities to assess potential financial stability risks. This may be viewed as a move away from focusing on potential designations of individual asset managers or asset management vehicles as systemically important financial institutions (“SIFIs”) and a move toward greater prudential regulation of the overall industry.

This action follows a set of meetings that FSOC staff initiated in November with a wide variety of industry representatives to gather intelligence on the improvements that can be made to the SIFI designation process. Dechert has provided detailed input to the FSOC in connection with those meetings.

The FSOC has not made any determinations as to the existence or nature of any potential risks to U.S. financial stability related to the asset management industry, but its review is focused on the following areas:

• Liquidity and Redemptions
• Leverage
• Operational Risk
• Resolution
   

The Notice encourages commenters to address the unique characteristics of different types of investment vehicles. This may be in response to criticisms from numerous commenters that the Office of Financial Research’s Report on Asset Management did not appropriately distinguish among such vehicles.²

The Notice expresses a broad view of potential financial stability threats that could be related to the asset management industry, even where existing measures protect individual market participants. The Notice also suggests that some risks may not result from the actions of any individual entity, but rather appear collectively across market participants. While certain activities may not pose financial stability risks during normal times, the Notice suggests these activities may pose such risks during periods of financial market stress or stress at an individual firm.

The FSOC may be headed towards seeking an increasing level of prudential regulation of the asset management industry and less reliance on market regulation. As an example, the FSOC recently sought to impact the regulation of money market funds by the Securities and Exchange Commission (“SEC”) through the issuance of proposed recommendations under Section 120 of the Dodd-Frank Act.³ The SEC subsequently acted on money market reforms on its own initiative.

Comments will be due no later than 60 days after publication of the Notice in the Federal Register. We encourage all interested parties to file comments.

Please let us know if we can provide additional insight as to the FSOC events that have transpired in the last few months.