In a recent publication, lawyers at Gibson Dunn take a look at "Systemically Significant Financial Companies" under the Dodd-Frank Act. They posit that, under the terms provided in the legislation, it is possible that a wide variety of non-bank institutions may be swept into the Fed's regulatory ambit, including mutual fund complexes:
{T}he kinds of companies subject to such supervision, regulation, examination and enforcement will be expanded to include any systemically significant nonbank company "predominantly engaged" in financial activities. These companies will also be subject to "prudential standards" promulgated by the Federal Reserve. Such a "nonbank financial company" could be, for example: (i) an insurance company; (ii) a securities firm; (iii) a mutual fund group; (iv) a private equity or hedge fund group; or (iv) a finance or lending company.
Under the Act, the {Financial Stability Oversight Council} will designate a systemically significant entity as a covered nonbank financial company if the Council determines that material financial distress at such an entity, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the entity, could pose a threat to the financial stability of the United States. The Act provides a nonexclusive list of items the Council must consider in making such a determination.
Under Dodd-Frank, the Council will be allowed to look at almost any risk factors to make their determinations, but will consider primarily:
1. The extent of the leverage of the company;
2. The extent and nature of the off-balance-sheet exposures of the company;
3. The extent and nature of the transactions and relationships of the company with other significant nonbank financial companies and significant bank holding companies;
4. The importance of the company as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the United States financial system;
5. The importance of the company as a source of credit for low-income, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities;
6. The extent to which assets are managed rather than owned by the company, and the extent to which ownership of assets under management is diffuse;
7. The nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company;
8. The degree to which the company is already regulated by 1 or more primary financial regulatory agencies;
9. The amount and nature of the financial assets of the company; and
10. The amount and types of the liabilities of the company, including the degree of reliance on short-term funding.
It still remains to be seen what factors the Council may use to determine if mutual fund complexes may be considered a "Systemically Significant Financial Company." According to Gibson Dunn, however, such a designation would be fairly traumatic for such and entity.
Overall, for an entity that is designated as a nonbank financial company under the Act, in particular an entity not currently subject to government supervised enterprise-wide risk management or comprehensive consolidated supervision, it is difficult to conceive of a more traumatic conversion. Essentially, the management and operations of such an entity will have to be altered at all levels of the organization to take into account and satisfy its new regulatory regime.
The full text of Gibson Dunn's memorandum is available at: http://www.gibsondunn.com/Publications/Pages/Dodd-FrankAct-ApplicationofHeightenedBank-LikeSupervisionandRegulationtoSystemicallySignificantFinancialCompanies.aspx