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.
But surely considerations of interagency comity should lead the FSOC principals not only to await the outcome of SEC deliberations on the question, but to give significant deference to the findings and rationale put forth by that agency at such time as it indicates what action, if any, it intends to propose. The FSOC should not act as the new bully on the block, ready to override any decision by a member agency with which its majority may disagree. Indeed, the heads of the independent regulatory agencies who sit on the FSOC would do well to remember that their own independence could also be invaded if a majority of their colleagues on the council had different views on an issue.
I have argued that no additional changes in MMF structure or regulation are called for, and that before consideration is given to any changes time should be allowed for a thorough evaluation of the efficacy of the SEC’s amendments to its regulation governing MMFs. I have also urged that significant study and evaluation of the costs and the disruption that would be caused for the users of MMFs should be conducted before any action is considered.
It would be unfortunate indeed if the commission were to feel itself intimidated by threats of being muscled by the FSOC or to compromise its role as the primary regulator of MMFs — a highly successful regulator, at that — by taking action simply because of clamor coming from other agencies not involved in MMF regulation. This is particularly true where the threats are leveled not by the FSOC itself, but by individuals purporting to speak for the FSOC.
If the SEC does the kind of detailed investigation that is called for, evaluates carefully the impact, costs and potential adverse consequences of various possible alternatives, and issues a thoughtful, reasoned explanation for its conclusions, one might expect that considerations of comity among the FSOC members would lead them to defer to the commission's judgment — even if that judgment were to take no action at the present time
John D. Hawke Jr., a partner in Arnold & Porter LLP, formerly served as Comptroller of the Currency, under secretary of the Treasury for Domestic Finance, and general counsel to the Board of Governors of the Federal Reserve System. He represents Federated Investors, Inc.