The Financial Stability Board (FSB), which was established by the G-20 in response to the 2008 financial crisis, on June 22, 2016 issued proposed specific recommendations to address certain perceived threats that the asset management sector could pose to financial stability (Proposal). In the Proposal, the FSB poses a series of questions for public comment by September 21, 2016.
The FSB had previously issued two proposals in 2014 and 2015, which were directed at identifying individual funds and asset managers (principally impacting U.S. entities) as globally significant entities that would have been subject to enhanced prudential regulation. In the summer of 2015, the FSB instead shifted to an analysis of risks created by activities and products that might require greater regulation of the entire industry.
The Proposal identifies four principal areas of concern and makes related recommendations:
- Liquidity and redemption challenges for funds;
- The use of leverage by funds;
- Operational risks and issues in transferring assets under management; and
- Securities lending by asset managers and funds.
The FSB indicates that it plans to finalize its recommendations by the end of 2016. At that point, the FSB expects that its recommendations will be put into effect through actions by the International Organization of Securities Commissions and FSB working groups.
The Proposal comes at the same time that the U.S. Securities and Exchange Commission (SEC) is considering comments on major proposed rules regarding liquidity management and the use of derivatives by registered investment companies, as well as the U.S. Financial Stability Oversight Council’s (FSOC) formation of an interagency working group to consider a range of issues related to the asset management industry.
Dechert will be issuing a more extensive OnPoint further discussing the issues raised by the Proposal.
The asset management industry should begin to consider responsive comments to the Proposal, which should be viewed in light of ongoing FSOC and SEC efforts. With a change in Administration coming in the United States, the continuing work of the FSB could take on greater significance in terms of the approaches that have been articulated by the FSOC and SEC.