The Dodd-Frank financial reform law enacted in 2010 in response to the crippling financial crisis imposed new regulations on financial markets and companies. Unfortunately, the law’s vast reach sweeps manufacturers into areas of new oversight and regulation, even though manufacturers had nothing to do with the financial crisis.
We have written many times before about the negative impact of Dodd-Frank derivatives requirements on manufacturers, but another provision of the law, which grants broad regulatory authority over companies involved in financial activities, threatens to designate some manufacturers as systemically important financial institutions (SIFIs).
The Dodd-Frank Act created a council of regulators made up of representatives from several different regulatory bodies called the Financial Stability Oversight Council (FSOC) that is charged with identifing existing or emerging systemic risks to the financial system. Section 113 of the Act authorizes the Council to consider whether a nonbank financial company could pose a threat to financial stability and if they determine that there is a threat, then they can subject that company to Federal Reserve supervision and “enhanced” prudential standards – aka more regulation.
The problem is the FSOC looks at a company’s size and scope as part of its determination for what is a nonbank financial SIFI, threatening some large global manufacturers that must engage in lending and financing as part of their everyday course of business. Despite the global reach of these companies, manufacturers did not contribute to the financial crisis and do not engage in the same type of financial activities that banks do, especially not ones that would threaten the financial system. A SIFI designation can bring unnecessary costs for companies that could be put to better use by investing in the business and creating jobs. The NAM wrote to FSOC previously to express concerns with their proposal.
FSOC has already begun to designate companies as nonbank SIFIs, but the House this week adopted an amendment to the financial services appropriations bill offered by Rep. Garrett (R-NJ) to the put an end to this process by ceasing funding for the FSOC designation of non-bank companies as SIFIs. Manufacturers that need to be engaged in financing large projects or machinery as a part of their regular business, should not be regulated as if they were large banks. The NAM applauds the House action. Global manufacturing companies already face enough challenges remaining competitive internationally, and the NAM will continue to support efforts aimed at preventing unnecessary regulation of these businesses.