Top American regulators, led by U.S. Treasury Secretary Janet Yellen, held a closed-door meeting on Sept. 22 to discuss a plan to make it easier to designate firms other than banks as systematically important financial institutions (Sifi), Bloomberg reported.

With such a designation comes greater oversight and compliance mandates, and such a specter has prompted objections from trade groups such as the Investment Company Institute (ICI), the Managed Funds Association (MFA) and the Mortgage Bankers Association (MBA), and financial firms such as BlackRock Inc., Fidelity Investments and Vanguard Group Inc.

Such a designation would place a firm under direct Federal Reserve Board oversight. That currently applies to large Wall Street banks, but not investment companies, hedge funds or nonbank mortgage firms.

“If the Financial Stability Oversight Council [FSOC] 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, in an interview with Bloomberg.

The FSOC’s proposal was issued in April.

“They [regulators] clearly are equipping themselves to be able to designate,” said Eric Pan, the head of ICI, whose members manage tens of trillions of dollars. “I think it’s the uncertainty of the use of this power that is quite concerning.”

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 support of extending the designation, FDIC Chair Martin Gruenberg, in a recent speech. said that regulators needed more information from financial firms that are not 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.

Kathryn Judge, a law professor at Columbia University, told Bloomberg 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.