Statement Regarding Potential Revisions to FSOC’s Non-Bank Designation Guidance

Today the Financial Stability Oversight Council (FSOC) received a briefing from Treasury staff on potential revisions to the Council's interpretative guidance regarding nonbank financial company determinations. And I was especially encouraged to see revising the non-bank designation guidance on the agenda. Secretary Bessent's leadership on this issue is welcome, and I believe that this Council cannot begin to undo the damage of the last administration fast enough.

The idea of non-bank designation was misguided from the start. Designation, in the wrong hands, is poised to become a weapon for an activist Council to push an arbitrary agenda and punish companies that are not onboard. It is urgent that we fix this.

When companies are subject to the risk of arbitrary designation, they are unable to plan for growth and undertake strategic decisions, impairing their ability to deploy capital efficiently and meet the needs of customers. For example, in 2016, General Electric sold off its financial division specifically to avoid the burdens associated with being labeled a systemically important financial institution. As we learned from designations under the 2012 guidance, companies view designation as an existential threat.

This should not be surprising. For a nonbank institution, designation brings with it a new regulator that does not have the primary regulator's expertise in its business-and quite possibly with its industry overall. I do not mean that to disparage our colleagues at the Federal Reserve. I am quite sure that they would have very strong negative feelings about the SEC stepping in to regulate a bank holding company. I would share those feelings. Furthermore, the Fed's primary regulatory tool is capital standards. These are meaningless in the context of an asset manager, insurance company, or investment fund.

Instead, FSOC's activities since 2016 demonstrate that regulators can effectively address the risks of nonbank financial companies without resorting to arbitrary designation. I have no concerns with the SEC's ability to address the risks falling within its own jurisdiction and trust other regulators to do the same.

The advantage of undertaking this rulemaking is that we now have three examples to draw on. As with any regulation, the 2019 guidance was not perfect and there were opportunities to improve it. However, the 2023 guidance did not build on this foundation but instead threw out the approach in favor of moving back toward the approach in the 2012 guidance, which was successfully challenged in court.

I feel strongly that the Council should prioritize reintroducing the use of important safeguards against arbitrary and capricious designation, such as cost-benefit analysis and an assessment of the likelihood of material financial distress. Without these safeguards, the Council risks litigation in the response to designation. Its track record in this regard should raise serious concerns.

I encourage my fellow councilmembers to think creatively, and I look forward to working with all of them on this effort.