U.S. Senate Banking Committee Holds Hearing on FSOC Accountability and Non-Bank Designations (with Lofchie Comment)

The U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing titled "FSOC Accountability: Nonbank Designations." Witnesses discussed the process whereby the Financial Stability Oversight Council ("FSOC") designates non-bank financial institutions as systemically important financial institutions ("SIFIs").

American Council of Life Insurers ("ACLI") Vice President and General Counsel Gary Hughes (view written testimony here) argued that FSOC must develop a more transparent designation process. He outlined six procedural safeguards that he felt FSOC should adopt:

• giving companies that receive notice of a proposed SIFI determination full access to the record upon which the determination is to be made;
• not allowing the FSOC staff that makes the original SIFI designation to be the same staff that adjudicates a company's administrative challenge to the designation;
• in the case of an insurance company, giving greater weight to the views of an FSOC voting member with insurance expertise, and according deference to the insurer's primary state insurance regulator;
• allowing more than 30 days for companies to initiate a judicial review of a final determination;
• not imposing the oversight of the Board of Governors of the Federal Reserve System on a company that challenges FSOC's designation; and
• making SIFI determinations independent of international regulatory activities.

Other witnesses included Secretary of the Treasury Jacob Lew (view written testimony), American Action Forum President Douglas Holtz-Eakin (view written testimony), Better Markets Inc. President and CEO Dennis Kelleher (view written testimony), and Investment Company Institute President and CEO Paul Schott Stevens (view written testimony).

Lofchie Comment: Secretary Lew testified that "many of the objections as to FSOC are not based on the actual record, and opponents object to our efforts to bring regulators together to act collaboratively to monitor risks and to protect the U.S. financial system" (page 4). Although this might be true, it might also be possible to object to FSOC's provenance based on (i) the undefined but very substantial power granted to it (i.e., to the establishing legislation) or (ii) on the basis of FSOC's actual record. As to the actual record, it is easy to object to the designation of an insurance company as a SIFI over the objection of the sole regulatory member of FSOC from the insurance industry. Similarly, it is easy to object to any consideration of investment advisers as SIFIs.No one disagrees with the notion that regulators should work together. What's troubling is this: (i) although the organization is composed of regulators from different disciplines, it seems unduly weighted towards a bank regulators' view of the world and (ii) even though most of the regulatory agencies are made up of members of both parties, FSOC is essentially a single-party agency. Given the closed-door manner in which it operates, FSOC does not provide the transparency that is necessary to allow for important public dissent. See also the testimony of ICI President Stevens (whose introductory statement on pages 1-3 makes some of these same points, including present observations about the relative expertise of the SEC in matters relating to the securities markets).

See: Senate Banking Committee Hearing Information; Webcast of the Hearing; ACLI New Release.