Nonbank Institution Regulation & More


FSOC Interprets Its Own Authority to Regulate Nonbank Financial Companies

The Financial Stability Oversight Council (“FSOC”) finalized interpretive guidance on its authority to require the supervision and regulation of certain nonbank financial companies.

In the final guidance, FSOC referred to Dodd-Frank Section 113, which permits FSOC to place a nonbank financial company under the supervision of the Federal Reserve Board (“FRB”) and prudential standards if it determines that (i) “material financial distress” could pose a systemic threat or (ii) the “nature, scope, size, scale, concentration, interconnectedness, or mix of the [company’s] activities” could pose a systemic threat.

FSOC said it will use a two-step activities-based approach to identify companies that pose a threat to U.S. financial stability. FINRA said it will (i) monitor a broad swath of different “financial products, activities, and practices” to identify potential risks, and (ii) consider characteristics like the “extension of credit, maturity and liquidity transformation, market making and trading” to determine the extent of the threat. Once threats are identified, FSOC said it will work with financial regulators to address the potential risks.

FSOC stated that a nonbank financial company determined to be a threat to the financial stability of the United States will be (i) supervised by the FRB and (ii) subject to prudential standards. If the activity-based approach fails to properly address a potential risk, FSOC can transition to an entity-specific approach to “evaluate a nonbank financial company for a potential determination.”

In a statement at an FSOC meeting, SEC Chair Gary Gensler supported the FSOC action and provided updates on SEC regulatory actions concerning money market funds, open-end bond funds, and hedge funds. Mr. Gensler stated that money market funds and open-end bond funds have a potential “liquidity mismatch” between investors’ ability to redeem daily and the possible lower liquidity of funds’ securities, which he said raises systemic issues during “stress times.” He also emphasized the financial resiliency risks hedge funds present through “leverage or derivatives positions.”

“FSOC’s authority to regulate nonbank financial institutions is overly discretionary and ought to be done away with (see previous commentary). If Chair Gensler believes that money market funds present a systemic risk, the SEC should propose rules under the Investment Company Act.  Lending to private funds can be monitored through the regulation of banks and broker-dealers. (See also CFS Senior Fellow Proposes Framework for Quantifying SIFI Complexity.) ,” said Steven Loftchie.

Treasury Offers Recommendations to Mitigate Money Laundering Risk in High-Value Art Market

In a study published pursuant to the Anti-Money Laundering Act of 2020, Treasury (i) examined aspects of the high-value art market that could present money laundering risks, and (ii) described efforts by regulators and market participants to prevent or mitigate money laundering risk in that market.

Treasury found that the market participants that are most vulnerable to money laundering in the art market include businesses that offer financial services, such as art-collateralized loans, and those that are not subject to anti-money laundering/countering the financing of terrorism (“AML/CFT”) rules. Galleries that have larger annual sales and regularly transact in high-value art may present a higher risk. Further, the digital art market and its utilization of non-fungible tokens (or “NFTs”) may present new risks.

To address the money laundering risks identified in the study, Treasury recommends several non-regulatory and regulatory options, including:

  • encouraging private sector information-sharing programs to foster transparency;

  • updating guidance and training for law enforcement, customs enforcement, and asset recovery agencies;

  • using FinCEN recordkeeping authority to support information collection and enhanced due diligence; and

  • applying AML/CFT requirements (such as suspicious activity reporting and know-your-customer procedures) to certain art market participants.

SEC Staff Issues New FAQ for SBSD CCO Reports

The SEC Division of Trading and Markets issued new guidance for chief compliance officers submitting annual reports on behalf of security-based swap dealers.

The new FAQ addresses (1) the method and format for submitting the report (through the EDGAR system); (2) when the reports are due; and (3) how firms may request an extension of time to submit reports.

FINRA Urges the SEC to Affirm Disapproval of a NYSE Petition on Certain Proxy Fees

FINRA urged the SEC to affirm its disapproval of a NYSE proposal to amend rules establishing maximum fee rates to be charged by member organizations for forwarding proxy and other materials to beneficial owners.

In a formal statement in connection with the Commission’s Order Granting the Petition…



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