U.S. Treasury Jacob Lew pledged Wednesday to protect the goals set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act and those of the Financial Stability Oversight Council (FSOC).
"No law is perfect," Lew told the Senate Committee on Banking, Housing and Urban Affairs members. "But let me be clear: we will vigilantly defend Wall Street Reform against any change that increases risk within the financial system, weakens consumer, investor or taxpayer protections, or impedes the ability of regulators to carry out their mission."
FSOC, which Lew chairs, grew out of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which is challenged with preventing future risk of financial institute failures. The council monitors market developments for potential risks to financial stability and then takes action against those that it deems threaten the nation’s financial system.
As a young organization, it “should be open to changes to its procedures when good ideas are raised by stakeholders,” Lew said. What constitutes a good idea differs among stakeholders and other interested parties, however.
A panel of FSOC’s critics voiced their concerns at the hearing. Speakers were comprised of Douglas Holtz-Eakin, president of the American Action Forum; Gary Hughes, executive vice president and general counsel of the American Council of Life Insurers; Dennis M. Kelleher, president and CEO of Better Markets, Inc.; and Paul Schott Stevens, president and CEO of the Investment Company Institute.
In response to concerns previously voiced, FSOC adopted a set of supplemental procedures last month. “Companies will know early in the process where they stand, and they will have earlier opportunities to provide input,” Lew said. “The changes will provide the public with additional information about the process, while still allowing FSOC to meet its obligation to protect sensitive, nonpublic materials. FSOC will provide companies with a clearer and more robust annual review process.” Holtz-Eakin characterized the changes “as a good first step,” stressing that more needs to be done.
Points of contention center around the desire for greater clarity on the metrics leading to designation. Lew, however, stated factors leading to a company's designation as a systematically important financial institution (SIFI) could not be quantified because the structure of each firm differs. Numerical metrics would not sufficiently capture a firm’s complex structure, he stressed.
“It is not clear the weight given to certain factors over others or what makes a designation more likely,” Holtz-Eakin said. “FSOC’s process needs more rigorous quantitative analysis, respect for other regulators and their expertise, greater concern for market impacts and a clear path for the removal of a designation.” Three of the four nonbank financial companies identified as SIFIs are insurance companies.
Hughes argued the designation and de-designation process lack procedural safeguards such as separate staff assigned to enforcement and adjudicative functions and clear explanation as to why particular companies were designated. “A company should have access to the entire record that is the basis for an FSOC determination.”
The problems and criticisms surrounding FSOC could reflect that part of the process still needs to be developed, said Jim Wise, NACM’s Washington lobbyist and managing partner of Pace, LLP, in a phone interview. “Is it transparent enough? Is it uniform enough? Does it allow for entities to prepare for this? Some people think it takes too broad an approach. It raises the question of whether Dodd-Frank really oversteps its boundaries.” In November, the Government Accountability Office released a report that analyzes the FSOC’s designation process for SIFIs. The report supports those that believe the process lacks transparency and accountability, adding that process should be systematic and measurable.
- Diana Mota, NACM associate editor
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