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SEC Commissioner Gallagher Submits Critical Public Comments on OFR Report

SEC Commissioner Gallagher recently took an unusual step for an SEC Commissioner by submitting public comments on the OFR’s report on the asset management industry.  Commissioner Gallagher reiterated his frustration regarding the SEC Commissioners’ lack of standing on the FSOC and the fact he “will therefore play no formal role in the FSOC’s misguided debate over whether to designate asset managers as systemically important financial institutions . . .” 

Like the House Financial Services Sub-Committee chairs, Commissioner Gallagher views the FSOC’s SIFI designation process as suspiciously similar to the FSB’s initiative to designate global SIFIs.  He stated “[t]he FSOC and FSB initiatives are pure – and dangerous folly.  Applying bank regulatory principles to capital markets regulation is a fatally misguided approach, the regulatory equivalent of trying to jam a square peg in a round hole.”  He cautioned that imposing bank regulation on capital markets would not help investors and at the same time have negative implications for the economy as a whole.

Commissioner Gallagher discussed the FSOC’s “unprecedented and extraordinary regulatory powers,” including the Council’s ability to designate non-banks as SIFIs and “to make a ‘recommendation’ that an independent agency engage in a particular rulemaking.”  He noted that the FSOC has already exercised its authority to recommend rulemakings in its 2012 proposed recommendations for money market fund reform.  According to Commissioner Gallagher, Dodd-Frank’s requirement that an agency that receives a recommendation from the FSOC to choose to undertake the requested rulemaking, choose an alternative rulemaking that achieves a similar result, or explain in writing why it is not following the recommendation makes the situation worse.  He warned that such power “heightens the risk of ‘regulatory sabotage’ – the selective use of legislative authority, regulatory authority, or both by one set of market participants to competitively harm another set of market participants.”

Turning his attention to the OFR Report, Commissioner Gallagher stated

It offers up speculative conclusions of systemic risk without any reference to the data used to support them – unsurprising, given that clearly, little if any data was actually considered – and without any reasoned policy arguments about how to address them.  The end product was a botched analysis that grossly overstates – indeed, in many cases simply invents without supporting data – the potential risks to the stability of our financial markets posed by asset management firms.

Compounding his issues with the report was “OFR’s brazen refusal to consider the comments and input of experts from the SEC, the very agency charged by Congress with regulating asset managers.”  He reiterated his concerns about lack of SEC Commissioner input on the FSOC, this time in the form of the lack of opportunity to provide comments on the OFR Report. 

In addition to his issues with the OFR Repot, Commissioner Gallagher unequivocally stated that asset managers should not be designated as SIFIs.  In addition to the issues that would arise by subjecting capital markets participants to bank regulatory principles, he noted the following reasons that SIFI designation would not be appropriate for asset managers:

  • The resolution process for asset managers is simpler than for other types of institutions
  • Asset managers do not participate directly in the capital markets unlike banks and some insurance companies
  • Bank depositors and investors with asset managers have different objectives – bank depositors attempt to avoid risk whereas investors seek risk and corresponding returns
  • Asset managers are currently “highly regulated and subject to extensive public disclosure requirements.”