GAO issued a report that examines (i) FSOC’s process for designating systemically important non-bank financial companies (“non-bank SIFIs”) for enhanced supervision by the Board of Governors of the Federal Reserve System, and (ii) the extent to which this process has been transparent and systematic.
GAO stated that its reason for compiling the report was because these designations could have “significant implications for the companies as well as the stability of the financial system.” In the report, GAO recommended that FSOC (i) track key evaluation information, including additional details in public documentation about the rationale for determination decisions, and (ii) establish procedures to evaluate companies under both statutory determination standards for designating SIFIs.
According to the report, FSOC has designated three non-bank entities as systemically important to date, but the publicly released documents surrounding the designations have not clearly established the criteria involved in the designation process. GAO determined that making FSOC’s designation process more systematic and transparent could improve both public and market confidence and, in the process, help FSOC to achieve its intended goals.
Upon the report’s release, Senate Banking Committee Ranking Member Mike Crapo (R-ID) issued a statement saying that “the non-bank SIFI designation process has proved immeasurable and unclear, with serious regulatory consequences for firms that receive the designation. . . . Threatening to subject firms to a new regulatory regime without clear and objective standards is not only contrary to the long established principles of our regulatory framework, but doing so will lead to legal uncertainty that will undermine the very objective of FSOC.”
Lofchie Comment: The statutory provision that forms the basis of the designation of SIFIs is problematic. It affords regulators discretion to impose substantial regulatory burdens on the companies that it selects by using an arbitrary process (or, as FSOC might put it, “using judgment”). On matters of such importance, government regulators should be subject to clear standards. The GAO report is critical of FSOC for its own failure to be transparent and to establish such clear standards.
The GAO report criticizes as random, FSOC staffing determinations. “FSOC uses a volunteer staffing practice for selecting and assigning staff to conduct and lead company evaluations.” The report notes that the volunteers (or, more precisely, the persons volunteered by the agencies for which they work), are heavily drawn from the banking regulators. Accordingly, this practice is inconsistent with Congress’ intent for FSOC to draw on a broad range of expertise from a number of government organizations. It may also explain the outcomes in some of FSOC’s most questionable decisions – e.g., to investigate whether investment advisers are systemically significant – and whether they reflect an over-reliance on staffers who are outside of the banking world and/or who may be unfamiliar with the capital markets.
Treasury’s characterization of the GAO report is interesting. According to the GAO report, “Treasury staff noted that the report’s findings largely were positive, yet the findings associated with the recommendations appeared exaggerated” (i.e., negative) (at page 60). A more accurate description of the report is that its’ findings were generally negative, particularly given the importance of the subject matter. If FSOC disagrees with GAO’s assessment of whether FSOC can and should be more transparent, then FSOC should say so. Direct disagreement could allow for an open discussion of how FSOC works, which could result in either continued support for FSOC or revisions to its mandate. By glossing over the issues of the absence of transparency and standards, FSOC makes it difficult to have a full and reasonable discussion of the agency’s mandate and conduct.
See: Text of GAO Report.
See also: Senator Crapo’s Statement about the GAO Report on FSOC.
Related news: FSOC Updates FAQ on Non-Bank Financial Company Designations Process (November 18, 2014); FSOC Releases Q&A on Nonbank Financial Company Designations (September 26, 2014); GAO Issues Report on FSOC (September 18, 2014); FSOC Proposes Preliminary Designation of MetLife as a Non-Bank Systematically Important Financial Institution (September 4, 2014); Representative Maloney Recommends Changes to FSOC Designation Process (August 4, 2014); House Financial Services Committee Approves FSOC Reform Legislation (June 23, 2014); House Financial Services Committee Hearing: “Examining the Dangers of the FSOC’s Designation Process and Its Impact on the U.S. Financial System” (May 22, 2014); SEC Commissioner Gallagher Submits Comment Letter in Opposition to FSOC Process (May 16, 2014); House Financial Services Subcommittee Chairmen Send Letter to FSB and FSOC Requesting Information on Methodologies Used to Designate G-SIFIs (May 12, 2014); Representative Garrett Questions the SIFI Designation Authority Granted to FSOC by Dodd-Frank (May 6, 2014).