In November 2023, the Financial Stability Oversight Council (FSOC) issued new procedural guidance regarding the designation of non-bank financial institutions as “systemically important financial institutions” (SIFI). SIFI designations subject financial institutions to additional  regulatory oversight. The 2023 guidance drew the attention of the business community and attracted congressional oversight because it replaced the 2019 guidance and made it easier for FSOC to designate a company as a SIFI.

On January 10, 2024, Jeffrey Dinwoodie of Cravath, Swaine, & Moore, LLP, who is a co-chair of the Federalist Society’s Corporations, Securities, and Antitrust Executive Committee, testified before the Financial Services Committee of the U.S. House of Representatives in a hearing titled “Regulatory Whiplash: Examining the Impact of FSOC’s Ever-Changing Designation Framework on Innovation.”

Dinwoodie was joined by Bill Hulse, Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce; Ji Kim, General Counsel & Head of Global Policy, Digital Assets, Crypto Council for Innovation; Paul Kupiec, Senior Fellow, American Enterprise Institute; and Amias Gerety, Partner, QED Investors.

As the panelists noted, FSOC received its authority, including its SIFI-designation powers, after the financial crisis of 2008 in response to concerns about institutions which posed threats to the stability of financial markets and therefore required additional regulation. 

SIFI designations are done through authority granted by Section 113 of the Dodd-Frank Act, and they may impose new and appreciable burdens on financial institutions. A SIFI designation’s new burdens and costs could potentially limit an impacted corporation’s ability to innovate and respond strategically as a result of additional oversight by the Federal Reserve, liquidity requirements that limit strategic leverage, and fiduciary duties which require more complex oversight of corporate activities.

Dinwoodie’s testimony focused on FSOC’s 2019 guidance, which required the use of cost-benefit analysis and a series of procedural safeguards, including an “activities-based approach,” to avoid improperly designating an institution as a SIFI. Dinwoodie, who previously served in the Treasury Department and the SEC, argued that FSOC’s November 2023 rollback of the 2019 guidance would result in SIFI designations that would burden institutions without providing much benefit in terms of financial stability. His testimony examined remarks from FSOC that it hoped to put SIFI designations “on equal footing” with other tools at FSOC’s disposal to regulate financial markets.

He also focused on the perils of broad and routine use of SIFI designations in the marketplace, especially the contradictory realities that could result. Dinwoodie noted, on the one hand, the potential for saddling companies with extensive regulatory burdens and costs, which could reduce their competitive edge. On the other hand, some could view a SIFI designation as an “implicit guarantee” of a firm’s value and importance by the United States government.  

Dinwoodie drew attention to the important role that FSOC plays in the regulating the financial services sector but stressed that SIFI designations should function as a “tool of last resort” rather than a routine weapon in the regulatory arsenal. Instead, he and other panelists argued, the focus of FSOC regulation should be on making assessments of financial stability in the market.  

A recording of the hearing is available here.

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