U.S. regulators have cleared the way to increase oversight of asset managers, hedge funds and other nonbanks that they believe pose risks to the financial system, reviving a tough new regime that had been sidelined under former President Donald Trump, Reuters reported. The Financial Stability Oversight Council (FSOC), led by the Treasury Department and comprised of other major agencies, also adopted a new framework for identifying looming risks in the financial system in an effort to make the council's work more transparent. Both changes to the process for designating a nonbank as a systemically important financial institution (SIFI) were proposed in April. Regulatory concerns are growing that more and more financial activity, including lending, is migrating to nonbanks, which have less transparency, but the new approach was met with swift criticism from the financial industry. While the FSOC has not named any potential nonbank SIFIs, it is expected to focus on major global asset managers and hedge funds, such as BlackRock and Bridgewater, potentially subjecting them to U.S. Federal Reserve oversight and heightened capital and liquidity requirements. The vote reversed a Trump administration policy that regulators should police risky activities rather than single out individual firms. Treasury Secretary Janet Yellen said that approach was based on "a flawed view of how financial risks develop and spread," but emphasized that designating firms is one of several tools the panel can employ. Under the revamped process, the FSOC will identify potential SIFIs based on existing information and give the company a chance to respond. If the FSOC decides to proceed, the company would then discuss the matter with its primary regulator and the FSOC. It would only be designated if two-thirds of the FSOC’s 10 members vote in favor. Designations will be reviewed annually.
