Chairman Jeb Hensarling (R-TX), Representative Scott Garrett (R-NJ), and other House Financial Services Subcommittee Chairmen (the “Representatives”) requested that the Financial Stability Board and the Financial Stability Oversight Council provide all memoranda or communiques between the Basel Committee, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors concerning the methodologies used to designate global systemically important financial institutions (“G-SIFIs”).
The letter is addressed to Secretary of the Treasury Jacob Lew, Board of Governors of the Federal Reserve System Chair Janet Yellen, and SEC Chair Mary Jo White, in their capacities as members of the Financial Stability Board (“FSB”) and the Financial Stability Oversight Council (“FSOC”). In the letter, the Representatives state that they have concerns that decisions are being made that “could have significant impact on the U.S. economy and its citizens through a nontransparent process, by an international body [the FSB] that is not accountable to the American people.”
Although the Representatives state that the letter was written specifically to request information from the FSB and the FSOC, it also details broader concerns regarding the FSOC and the FSB including, according to the letter, (i) the lack of transparency and due process in the designation of firms as SIFIs or G-SIFIs, (ii) the types of firms that are being considered for designation and why, and (iii) the consequences of designation on individual companies, industries and the economy as a whole.
The letter goes on to recommend that the FSOC and the FSB address these concerns by:
- explaining how the FSOC’s designation process relates to the FSB’s, and provide assurances that decisions on the systemic importance of U.S. firms are not being outsourced to the G-20;
- providing specific metrics to support designation of nonbank financial companies that provide a clear definition of “systemic risk,” and explain the basis for determining which firms pose such risks;
- clarifying the FSOC’s capital standards applicable to designated insurers as well as the consequences of designation, and identify the gaps in the FSOC’s financial regulation before further designating any insurers;
- offering to meet with firms being considered for SIFI or G-SIFI designation;
- allowing members of multi-member boards of commissions, such as the SEC, to participate in the FSOC’s deliberations;
- clarifying the “national authority” designation and explaining how the FSB has implemented this provision; and
- generally providing greater FSB transparency on all of its activities.
The Representatives stated that the FSOC and the FSB should submit the requested information and answer questions by May 16, 2014.
Lofchie Comment: The underlying problem is Section 113 of Dodd-Frank (“Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies”). This provision grants the FSOC broad discretion to designate entities as SIFIs, based on terms (such as “interconnectedness”) that are so open-ended that there is no objective measure under the terms of the statute by which the designations of the FSOC can be assessed (See May 6th comment). One can defend the FSOC on the basis that its’ actions derive from the unfettered grant of power contained in the statute, for which Congress is to blame, and not the FSOC. While it is true that the underlying problem is statutory, it does not follow that because the FSOC is legally authorized to act in a completely secretive manner that it should do so. There is nothing in the statute that prevents the FSOC from acting more transparently. This would allow Congress and the public to more fairly assess any determinations made by the FSOC and, of at least equal importance, it would allow companies that might be subject to SIFI designation to modify their activities so as to avoid the designation.
See: House Financial Services Subcommittee Chairmen Letter.
See also: Financial Stability Board (home page).
Related news: House Financial Services Committee Chairman Hensarling Urges Secretary Lew to Cease Using “Too Big to Fail” Designations (May 9, 2014); Representative Garrett Questions the SIFI Designation Authority Granted to FSOC by Dodd-Frank (May 6, 2014); House Subcommittee Chair Garrett Delivers Opening Remarks at Oversight of SEC Hearing, Focuses on FSOC and NMS (April 30, 2014); House Financial Services Subcommittee Chairman Introduces Legislation to Reform FSOC (April 4, 2014); SEC Commissioner Aguilar Gives FSOC Thumbs-Down on Mutual Funds, Discusses Cybersecurity and Reg. NMS (April 3, 2014).