Unintended Consequences of Dodd-Frank: SIFI Designation vs. FSOC

April 21, 2016

4541Imagine channeling all of the energy that is focused on warding off compliance to creating growth initiatives that reward good compliance and ethics within an organization. Perhaps compliance regimes would then seem less a laboring oar and more akin to revving an engine.

A recent example of a large undertaking to ward off additional compliance activities was a legal battle between an organization designated as a SIFI (systemically important financial institutions) and the Financial Stability Oversight Council (FSOC).

To some it may sound similar to Batman vs. Superman, within the context of financial market regulation. SIFIs and, of more recent importance, those organizations fighting to avoid the near-dreaded SIFI designation, are likely now more emboldened than ever to take on the FSOC in the halls of justice. In a recent ruling from the U.S. District Court for D.C., MetLife was successful in its challenge to the SIFI designation and pending appeal, avoided the “enhanced supervision” and “prudential standards” they would be subject to by federal regulators.

A larger cultural question is why these nonbank organizations fear and avoid additional financial services compliance that may come with such a designation. Insurance companies and other nonbank entities point to the risk-based capital requirements, liquidity requirements, and overall risk management requirements, claiming the SIFI designation would inhibit their ability to compete in the market. The simple fact that these organizations are notified by the FSOC of the designation implies that they have been deemed “too big to fail” under Dodd-Frank and quite likely could implement more prudent standards at minimal impact to their bottom line. Most of us would agree that the bureaucratic maze and documentation components standards should be streamlined, but that doesn’t mean operating a business under more sound ethical principles is wrong.

Is there no argument to be made that consumer trust in an organization would grow knowing additional supervision and a more prudent approach to capital requirements were in place? Fixed-income investors would quite likely find the implementations appealing, exemplifying stability in the business. The implementation of additional compliance measures may seem, on its face, a large undertaking, but for those organizations truly interested in rebuilding trust and mitigating reputational risk, a level of additional risk management implementation to address systemic risk in the organization can have a lasting impact on short-term consumer perception and long-term viability.