Establishing Certainty in Financial Regulations

ICI supports efforts to bolster financial stability that promote accountability and transparency without stifling innovation or harming investors.

Key Takeaways:

  • Congress gave the Financial Stability Oversight Council (FSOC) the authority to designate nonbank financial institutions as systemically important, commonly known as “too big to fail.”
  • FSOC should first look at less disruptive options to address activities they deem risky on the widest possible basis and use their designation authority only as a last resort. 
  • FSOC should let the financial regulators with the relevant expertise enact rules that get to the heart of the problem. 
  • The FSOC Improvement Act would require FSOC to determine whether a potential threat to financial stability could be mitigated through other means before contemplating use of its authority to designate nonbank financial institutions as systemically important. 

 

In the wake of the 2008 financial crisis, Congress created FSOC, a group of financial regulators that was given the broad-reaching ability to designate nonbanks as systemically important, meaning the failure of these companies could risk larger economic collapse. While this is an important goal, several issues with FSOC need to be addressed, including:

  • transparency into how the Council makes its decisions on whether or not to use designation authority; and 
  • whether the Council has conducted a proper cost-benefit analysis to determine if a systemically important financial institution (SIFI) designation would cause more harm than good. 

If FSOC designates a nonbank financial institution systemically important, there can be broad-reaching consequences, including: 

  • increased regulatory scrutiny and additional costs that can fundamentally change the way nonbanks do business; and
  • remedies that are designed to moderate bank-like risks (e.g. a run) and are therefore ill-suited to registered funds and their managers.

Instead of using its designation authority as a first step, ICI supports FSOC leveraging the expertise of its members by encouraging them to use their existing authorities to address potential risks to financial stability. FSOC should seek a systemically important designation only after activities-based options have been exhausted. FSOC should also provide more transparency into its decision-making, as well as robust cost-benefit analysis.   

ICI supports the current administration’s efforts to overhaul FSOC, reinforce FSOC’s role as a coordinator of expert regulators, and reorient the Council’s priorities, namely: 

  • We applaud Bessent’s December 2025 announcement that FSOC will work with financial agencies to consider where regulations stifle economic growth and to assess the cumulative burdens of regulatory and supervisory regimes. 

  • We urge FSOC to adopt its May 2026 proposal that would prioritize addressing potential risks to financial stability on the broadest possible basis. If adopted, this proposal would replace FSOC’s 2023 interpretive guidance on nonbank financial company determinations and its 2023 analytic framework for financial stability risks, both of which established a lower standard for SIFI designation. 

Reform Would Benefit Investors and the Economy

The bipartisan Financial Stability Oversight Council Improvement Act, which passed the House with overwhelming support in February 2026 with a companion bill pending in the Senate, would add a straightforward but important safeguard to FSOC’s SIFI designation authority. 

It would require FSOC to consult with the nonbank financial company and its primary regulator to determine what other actions could be taken to address the identified risk to financial stability. FSOC may move to designation only if it determines these alternatives would not be adequate. 

This guardrail would ensure that designation is a last resort. It also helps ensure that bank-style regulatory tools are not needlessly imposed on a company that is already subject to a comprehensive and well-tailored oversight regime. 

This reform would ultimately benefit:

  • Everyday investors: Establishing greater certainty for registered funds means continued access to cost-effective, well-regulated investment options
  • Fund managers and nonbank financial institutions, such as registered funds: Reducing the risk of unpredictable, costly designations that could hinder innovation and efficiency
  • The broader economy: Keeping capital flowing to productive uses while maintaining appropriate safeguards for financial stability

ICI supports this bipartisan legislation to restore transparency and rigor to the SIFI designation process, ensuring that FSOC remains focused on real risks to financial stability while leaving the blunt instrument of designation as a last resort.

Key Resources:

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Financial Stability