US officials led by Treasury Secretary Janet Yellen are seeking by year’s end to make it easier to stick firms other than banks with the systemically important label, according to people familiar with the matter.

Top American regulators are holding a closed-door meeting Friday to discuss the changes. The prospect of a reduced timeline — and greater discretion to make determinations — means that more companies could eventually wind up with the tag.

Financial titans are preparing for battle. The too-big-to-fail tag spells greater oversight and fresh compliance headaches, and long-simmering concerns about the threat are boiling over in Washington.

Leading trade groups like the Investment Company Institute, the Managed Funds Association and the Mortgage Bankers Association have been urging regulators to tread carefully. BlackRock Inc., Fidelity Investments, Vanguard Group Inc., and other big players in finance have also sent in comment letters, objecting to aspects of a proposal released in April.

A systemically important financial institution designation places a firm under direct Federal Reserve oversight. That level of scrutiny has been applied mainly to large Wall Street banks since it was introduced more than a decade ago, but investment companies, hedge funds and nonbank mortgage firms are worried they will be next. That would mark a stark reversal from the Trump era, when officials made it harder to designate firms.

“If the Financial Stability Oversight Council were to use its designation authority to designate a nonbank institution, it would set off the biggest political battle between finance and the federal government since the passage of Dodd-Frank,” said John Rizzo, who was a Treasury spokesman on the issue until leaving government last year.

A representative for the Treasury Department declined to comment on FSOC’s plans.

Biden-era regulators say nonbanks’ footprints across finance have significantly expanded, though oversight hasn’t kept pace. Officials say that unforeseen risks may be lurking as the firms have grabbed more market share, while their ties to traditional lenders have become more complex.

More Discretion
During the Trump administration, the Treasury Department said that regulators should focus on risk across the whole financial system, rather than singling out individual firms for tougher scrutiny. That activities-based approach was a win for industry groups that had long lobbied against designating specific companies.

In a reversal, the plans now under consideration would give officials more discretion to label a firm a Sifi based on an entity’s perceived systemic risk.

ICI, whose members manage tens of trillions of dollars, met this week with officials to ask for clarity on how asset managers would be affected, said another person, who also asked not to be identified discussing private discussions. The group argued that designation isn’t an appropriate tool for mutual funds and exchange-traded funds, said the person.

“They clearly are equipping themselves to be able to designate,” said Eric Pan, the head of ICI. “I think it’s the uncertainty of the use of this power that is quite concerning.”

BlackRock, the world’s biggest money manager, met with Treasury officials in July on the issue. BlackRock, Fidelity and Vanguard have all sent letters to the government asking officials to reconsider.

Widespread Angst
Hedge fund group MFA and MBA, which represents mortgage lenders, have also sent letters, and been holding private meetings with officials to make their case, according to people familiar with the matter. The American Council of Life Insurers weighed in on the plans with a comment letter.

MFA President and Chief Executive Officer Bryan Corbett said in an interview that the plans under consideration are “critically flawed” and would make the financial system riskier. MBA head Bob Broeksmit said that the government should take other steps to reduce risks in the mortgage market.

In addition to eight US banks that have been deemed systemically important on a global basis, FSOC also previously designated three large insurers, Prudential Financial Inc., American International Group Inc. and MetLife Inc., as systemically important. All three eventually were allowed to shed the label.

Martin Gruenberg, the chairman of the Federal Deposit Insurance Corp., gave a speech this week saying that regulators needed more information from financial firms that aren’t banks. “It is important that the FSOC has renewed its efforts to review the risks in these sectors and to consider whether our current regulatory authority is sufficient to address them,” he said.

Meanwhile, Securities and Exchange Commission Chair Gary Gensler has frequently said that the hedge-fund industry needs to be more transparent, and has been pushing to make them share more data with regulators. Gensler and Gruenberg are both members of FSOC, along with the head of the Federal Reserve and other top US financial regulators.

If the Treasury Department completes its blueprint as planned by the end of December, the government will still have to take multiple steps to tag a firm with a Sifi label. Officials also face political constraints with a presidential election just a little more than a year away.

New Process
Under the plan described in April, FSOC would first study a company using public data and information from regulators. The company under scrutiny would then receive a formal notice and the chance to submit relevant information. Regulators would then conduct an in-depth evaluation and review firm submissions.

If the council thinks a company should be a Sifi at the end of this process, the company can ask for a hearing, after which the council would vote on a final designation. FSOC would reevaluate prior designations every year and companies can show how they’ve addressed risks.

Kathryn Judge, a law professor at Columbia University, said that even if the government doesn’t actually designate a nonbank firm, the threat could help limit risky behavior.

“One of the most important benefits of designation authority—even if not utilized—is the way the threat of designation can deter financial companies from growing in ways that threaten stability,” she said.

--With assistance from Christopher Condon, Bill Allison and Tom Metcalf.

This article was provided by Bloomberg News.