Congressional Hearing on FSOC's Designation Process and its Impact on the U.S. Financial System

On May 20, 2014, the Financial Services Committee (FSC) held a hearing entitled "Examining the Dangers of the FSOC's Designation Process and its Impact on the U.S. Financial System." Testimony was presented by:

  • Paul S. Atkins, CEO, Patomak Global Partners
  • F. William McNabb, Chairman and CEO, Vanguard, on behalf of the Investment Company Institute
  • Eugene Scalia, Partner, Gibson, Dunn & Crutcher
  • Michael S. Barr, Professor of Law, University of Michigan Law School
  • Deron Smithy, Treasurer, Regions Bank, on behalf of the Regional Bank Coalition
  • Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute

This hearing focused on the Financial Stability Oversight Council's (FSOC) process for designating nonbank financial institutions as systemically important financial institutions (SIFI). There was also discussion regarding FSOC's voting structure, the criteria used in the SIFI designation process and a perceived lack of transparency in FSOC's deliberations.

The hearing memo circulated by the FSC's majority staff prior to the hearing noted that "[t]he FSOC has repeatedly been criticized for operating with little transparency. . . [and] typically excludes members of the public, the media, Members of Congress, and regulators who are not FSOC Members from its meetings." The memo also states that "the FSOC does not keep detailed minutes of its meetings . . . [and some] have complained that the FSOC's designation decisions provide minimal data and little analysis to justify those decisions." Several members of the FSC called on FSOC to halt the consideration of additional companies for SIFI designation.

Highlights from the Hearing

  • Rep. Randy Neugebauer (R-TX), noting the strongly-worded dissents to FSOC's designation of Prudential, asked several of the witnesses about that designation. Scalia argued that the Prudential decision was "poorly reasoned" and "thinly substantiated." Scalia noted that the FSOC members with insurance expertise were "very troubled" by the analysis of the majority. Wallison stated that none of FSOC's SIFI designations have included "specific information" describing how the financial difficulty at the designated companies could lead to economic instability.
  • Rep. Jeb Hensarling (R-TX) asked Wallison whether the Financial Stability Board (FSB) would have designated U.S. insurers as global systemically important financial institutions (G-SIFI) without the consent of the U.S. members of the FSB, including the Treasury Department. Wallison stated that he believes that the FSB must have had the "agreement" of its U.S. participants. Separately, he expressed concern that the FSB's development of global standards might be viewed by some as similar to the Basel III process, where bank capital standards are developed internationally and then implemented by U.S. regulators. Accordingly, Wallison explained that some people - including members of the FSB - may expect that since a company has been designated as a G-SIFI, it will necessarily be designated as a SIFI by the FSOC.
  • Rep. Robert Pittenger (R-NC) asked what will happen in five to ten years if nonbank SIFIs are subject to bank capital standards, as is required under the Collins Amendment. Scalia stated that there may be competitive risks as insurers determined to be SIFIs will be subject to different standards than the rest of the industry. He continued that bank capital standards may impact the ability of regulators to monitor insurance company nonbank SIFIs, as the standards may not accurately reflect and/or address an insurer's risks.

Additional Topics Covered at the Hearing

  • The role of the FSB in identifying systemically important companies and addressing systemic risk.
  • Concerns regarding the designation of SIFIs before the Federal Reserve develops capital standards for regulating designated companies.
  • The appeal process for companies designated as SIFIs, including whether companies have access to the information FSOC considered.
  • Whether credit default swaps should be regulated as insurance.
  • The market risk posed by cyber threats and attacks.
  • Whether the Office of Financial Research (OFR) reports should be subject to public comment and if the OFR should be required to discuss their findings with prudential regulators.
  • The potential impact of SIFI designations on state-based insurance regulation.
  • Potential changes/improvements in the FSOC's SIFI designation process and/or FSOC's statutory authority.

Legislation Covered at the Hearing

On April 3, 2014, Rep. Scott Garrett (R-NJ) introduced H.R. 4387, or the ''FSOC Transparency and Accountability Act'' to address the concerns of some members of Congress, including how certain agencies will make their decisions on FSOC matters. The legislation amends Section 111 of the Dodd-Frank Act that provides that the following persons are voting members of FSOC:

  • Chairman of the Board of Governors of the Federal Reserve System
  • Chairman of the Securities and Exchange Commission
  • Chairperson Commodity Futures Trading Commission
  • Chairman of the National Credit Union Administration Board
  • Chairperson of the Federal Deposit Insurance Corporation

Under the proposed legislation, the votes of these individuals would be determined by using the agency's normal voting procedures.

The proposed legislation would also make the following changes:

  • FSOC members would be able to allow their staff members to attend FSOC meetings;
  • Members of the FSC and the Senate Banking, Housing and Urban Affairs (Senate Banking) would be allowed to attend and participate in all FSOC meetings, whether public or not;
  • FSC and Senate Banking members and staff would be able to attend and participate in meetings of the member agencies of FSOC; and
  • FSOC meetings would be subject to 5 USC § 552b, "The Government in the Sunshine Act."

Congressional Hearing on Legislative Proposals

On May 20, 2014, the Housing and Insurance Subcommittee of the Financial Services Committee held a hearing entitled "Legislative Proposals to Reform Domestic Insurance Policy." Testimony was presented by:

  • Joe E. Carter, Vice President, Business Development and Marketing, United Educators
  • Gary Hughes, Executive Vice President and General Counsel, American Council of Life Insurers
  • Tom Karol, Federal Affairs Counsel, National Association of Mutual Insurance Companies
  • Joseph C. Kohmann, CFO and Treasurer, Westfield Group, on behalf of the Property Casualty Insurers Association of America
  • Daniel Schwarcz, Associate Professor of Law, University of Minnesota Law School

The bills/discussion drafts discussed at the hearing included:

  • H.R. 605, the Insurance Consumer Protection and Solvency Act of 2013. The legislation exempts insurance companies from an assessment by the FDIC in connection with the "orderly liquidation" of a failed financial institution. The assessment was provided for in Title II of the Dodd-Frank Act.
  • H.R. 4557, the Policyholder Protection Act of 2014. The legislation extends the policyholder protections of the Bank Holding Company Act to bank-affiliated insurers organized as thrift holding companies. The legislation limits the authority of the regulator of a thrift holding company to require that insurance company funds be provided to a subsidiary or affiliated depository institution.
  • H.R. __, the Risk Retention Modernization Act of 2014. The discussion draft grants risk retention groups the authority to offer additional types of commercial lines of insurance. The discussion draft includes language that would pre-empt state laws that limit or prohibit risk retention groups from offering any type of commercial insurance, except for group health, life or disability insurance or workers' compensation insurance.
  • H.R. __, the Insurance Data Protection Act. The discussion draft provides additional procedural limitations on the authority of the FIO and the OFR to subpoena data from insurance companies. Under the discussion draft, subpoenas will require approval of the Secretary of the Treasury Department and an agreement to reimburse companies for the cost of producing subpoenaed data and/or documents. The discussion draft also provides that state or federal regulators must maintain the confidentiality of nonpublic information collected from other regulators.
  • H.R. 4510, the Capital Standards Clarification Act of 2014 gives the Federal Reserve flexibility in determining the capital standards that insurers will be subject to under the Collins Amendment. FIO Focus issue 51 provides additional information on H.R. 4510 and its companion bill, S. 2270.

TRIA Discussed at the Legislative Proposals Hearing

At the outset of the hearing Rep. Neugebauer said he expects that the FSC will release legislation to extend TRIA sometime in June. Rep. Steven Horsford (D-NV) and Rep. Joyce Beatty (D-OH) expressed disappointment that TRIA legislation was not being discussed at the hearing.