Will the FSOC Be a Bully or a Band of Equals?

The Financial Stability Oversight Council, the newest, largest, and surely the most unusual multi-member agency ever to be created by Congress, has begun its work. Comprised of ten voting members — the secretary of the Treasury, the chairman of the Federal Reserve Board, the heads of the independent financial regulatory agencies, and a presidential appointee with insurance expertise — and five "advisory" nonvoting members, the FSOC has been given the mission, broadly stated, of protecting the financial stability of the United States.

While there are many other multi-member agencies in Washington — the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Federal Reserve, the Commodity Futures Trading Commission, the National Credit Union Administration, to name those that operate in the financial arena — none of these, other than the Federal Financial Institutions Examination Council, is made up entirely of ex officio members, as is the FSOC.  In each such agency a majority, if not all of the members, are appointed and committed solely to the work of that agency.

This feature of the FSOC is particularly noteworthy in light of the extraordinary authority it has been given to take certain actions with respect to its own individual members. In particular, in addition to providing a forum for its members to discuss all relevant issues, the council is empowered to:

• Collect information from, and facilitate information sharing and coordination among member agencies;
• Recommend to its members general supervision priorities and principles;
• Make recommendations to the Fed for the establishment of heightened prudential capital standards, leverage, liquidity, resolution plans, concentration limits, disclosures and overall risk management;
• Provide for more stringent regulation of financial  activities and practices by making recommendations to the primary financial regulatory agencies for new or heightened supervisory standards and safeguards; and, perhaps most far-reaching,
• Require the Fed to supervise nonbank financial companies that may pose a risk to financial stability.

Proposed actions in any one of these areas — even though characterized as "recommendations" — could raise questions of comity among the member agencies, that is, as to the extent to which the council will defer to or override the views and practices of agencies that have historically operated independently.

The way in which money market mutual funds may be treated brings this question into sharp focus. MMFs have for decades been subject to SEC regulations, but recently almost everyone in Washington — including individuals at some FSOC agencies having no particular expertise with or explicit responsibility for MMFs — has voiced opinions about the kinds of changes they believe should be made to the operation and regulation of MMFs. One such individual (not a statutory member of the FSOC) is reported to have asserted in a private meeting that if the SEC did not take satisfactory action with regard to MMFs, the FSOC would.

Quite apart from the legal question whether the FSOC, or the Fed as its appointed supervisor for nonbank financial companies, has the statutory authority to adopt substantive rules of general applicability for MMFs, one is struck by the presumptuousness of such a threat from an individual having no vote on the council and no statutory responsibility for its decisions. It might be understandable, in light of such an attempt at muscularity, if SEC commissioners and staff felt it was incumbent on their agency to do something with regard to MMFs, more than it has already done, if only to avoid being trumped by a majority vote of the council.