By Bill Flook
Two House Democrats have introduced a bill that would greatly expand the rulemaking authority of the Financial Stability Oversight Council’s (FSOC), including by allowing FSOC to step in to make rules to protect the financial system when the SEC or another member agency fails to act.
Reps. Jesus “Chuy” Garcia of Illinois and Katie Porter of California introduced H.R. 6501, the Systemic Risk Mitigation Act, on April 14, 2020, alongside five other Democrats.
The bill proposes sweeping new authority for the Dodd-Frank systemic risk watchdog, whose oversight activities and influence have waned under the Trump Administration. PL111-203
“While my constituents worry about putting food on the table, poorly regulated shadow banks gamble with our economy and endanger the future recovery,” said Garcia in a statement, using a term that describes large insurers, hedge funds, and asset managers that aren’t regulated as banks. “The Systemic Risk Mitigation Act begins to balance rules that are rigged for Wall Street profits. We are in the midst of a major business slowdown, but the Trump administration won’t stop corporate America from loading up on risk and debt.”
The 2010 Wall Street reform law created FSOC in the wake of the 2008 financial crisis to identify and mitigate systemic risks to the financial system posed by the potential failure of large financial institutions, and other large-scale problems. The panel is headed by the Treasury Secretary, and also includes the chairs of the SEC, Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and other financial regulators.
Among other new powers granted under the bill, FSOC would be able to issue rules “as may be required to regulate an activity or practice if the Council determines that the conduct, scope, nature, size, scale, concentration, or interconnectedness of such activity or practice could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, financial markets of the United States, or low-income, minority, or under-served communities.”
For activities or practices that meet that criteria, FSOC would, under the bill, be able to issue rulemaking recommendations to the primary regulator to address the risk posed by that activity. Should the primary regulator, such as the SEC, fail to issue such a rule in a year, or if FSOC deems that rule inadequate, the bill would empower the council to scrap the agency’s work and issue its own rule.
The bill takes a further step to fill in the gaps left by an inactive financial regulator. Under the measure, FSOC would be granted “backup authority” to step in and issue rules mandated under federal statute in place of one of its member agencies, should that agency not act by the deadline required by statute.
Democratic lawmakers and activist groups have long bemoaned the SEC’s slow completion of its mandates under Dodd-Frank. Several executive-compensation rulemaking mandates under the law remain unfinished by the agency.
The bill reflects renewed interest in FSOC as the global economy begins a downward spiral amid the shutdown necessitated by the COVID-19 pandemic.
Critics have accused the Trump Administration of reducing the council to a shadow of its former self during the Obama Administration, when it fought to apply enhanced regulatory requirements via Systemically Important Financial Institution (SIFI) designations to large non-bank entities such as MetLife and American International Group (AIG).
The FSOC’s non-bank risk designation program, now essentially dormant, would be renewed under the Systemic Risk Mitigation Act to regulate the so-called “shadow banking” sector.
“The U.S. financial system was overly fragile heading into this period of pandemic-induced stress in part because of the weak regulatory framework in place for the shadow banking sector,” said Gregg Gelzinis, senior policy analyst for Economic Policy at the Center for American Progress, in a statement. “The Trump administration has severely undermined the tools and agencies established to address the systemic risks that emerge outside of the traditional banking system. Congress must act to ensure that large, complex, and interconnected shadow banks and their risky activities don’t threaten the real economy.”
This article originally appeared in the April 17, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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