On June 22, 2016, the Financial Stability Board (the “FSB”), an international body that monitors and makes recommendations about the global financial system, released its report, titled “Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities” (the “FSB Recommendations”). The FSB Recommendations provide the FSB’s members, consisting of financial regulatory officials of G20 countries (including the Chair of the SEC), a list of recommended steps that the FSB believes should be followed to address financial stability risks arising from asset management activities within the officials’ jurisdictions.

The FSB Recommendations discuss four areas of structural vulnerabilities from asset management activities: (i) liquidity transformation by investment funds; (ii) leverage within funds; (iii) operational risk challenges in transferring investment mandates in stressed conditions; and (iv) securities lending activities of asset managers and funds. For each of these four areas, the FSB Recommendations propose policies to address the related financial stability risks. Comments on the FSB Recommendations are due no later than September 21, 2016.

The four areas of structural vulnerabilities from asset management activities covered in the FSB Recommendations were discussed earlier this year by the U.S. Financial Stability Oversight Council (“FSOC”) in its report, Update on Review of Asset Management Products and Activities (the “Review”), which we described in this IM Update. With respect to liquidity risk, FSOC’s recommendations were similar to those made in the FSB Recommendations. The Review noted the SEC’s May 2015 proposal to modernize and enhance data reporting by funds (described here), as well as the SEC’s September 2015 proposal to enhance liquidity risk management by open-end funds (described here). The Review stated that FSOC “welcomes the SEC’s policy initiatives in this area.” In contrast, with respect to leverage risk, operational (resolution/transition) risk and securities lending risk, the Review cited insufficient data and incomplete analyses as the basis for FSOC’s refraining from making any recommendations on these topics in the Review. For the time being, it remains unclear how the FSB Recommendations will affect recommendations from FSOC.