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THE FINANCIAL STABILITY BOARD’S 

IMPLICATIONS FOR U.S. GROWTH 

AND COMPETITIVENESS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 27, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–106 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON MONETARY POLICY AND TRADE

BILL HUIZENGA, Michigan, Chairman 

MICK MULVANEY, South Carolina, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

MARLIN A. STUTZMAN, Indiana 

ROBERT PITTENGER, North Carolina 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

MIA LOVE, Utah 

TOM EMMER, Minnesota 

GWEN MOORE, Wisconsin, Ranking Member 

BILL FOSTER, Illinois 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

DANIEL T. KILDEE, Michigan 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 27, 2016 .......................................................................................... 1 

Appendix: 

September 27, 2016 .......................................................................................... 21 

WITNESSES 

TUESDAY, SEPTEMBER 27, 2016 

Bergner, Jonathan, Assistant Vice President for Federal Policy, National Association of Mutual Insurance Companies (NAMIC) ........................................ 9 

McDowell, Carter, Managing Director and Associate General Counsel, the 

Securities Industry and Financial Markets Association (SIFMA) ................... 6 

Stanley, Marcus, Policy Director, Americans for Financial Reform .................... 7 

Stevens, Paul Schott, President and Chief Executive Officer, the Investment 

Company Institute (ICI) ...................................................................................... 4 

APPENDIX 

Prepared statements: 

Bergner, Jonathan ............................................................................................ 22 

McDowell, Carter .............................................................................................. 29 

Stanley, Marcus ................................................................................................ 43 

Stevens, Paul Schott ........................................................................................ 49 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Huizenga, Hon. Bill: 

Written statement of the American Council of Life Insurers ....................... 73 

Written statement of the Property Casualty Insurers Association of 

America .......................................................................................................... 76 

(1) 

THE FINANCIAL STABILITY BOARD’S 

IMPLICATIONS FOR U.S. GROWTH 

AND COMPETITIVENESS 

Tuesday, September 27, 2016 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON MONETARY

POLICY AND TRADE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2 p.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Members present: Representatives Huizenga, Mulvaney, Pearce, 

Pittenger, Schweikert, Guinta; Moore, Foster, Himes, Murphy, and 

Heck. 

Chairman HUIZENGA. The Subcommittee on Monetary Policy and 

Trade will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. 

Today’s hearing is entitled, ‘‘The Financial Stability Board’s Implications for U.S. Growth and Competitiveness.’’ 

Just for notification, they have called votes. We are going to keep 

an eye on this. We are going to try to get as far as we can. We 

will do some opening statements here of the two members and we 

will kind of be assessing our timing. And then, we would just ask 

for members and for staff who are with members to try to get people back here as soon as possible right after votes and we will continue. 

So, with that, I now recognize myself for 5 minutes to give an 

opening statement. 

The 2007–2008 financial crisis and subsequent global economic 

turmoil underscored the interconnectedness of the global financial 

system as well as its weaknesses. Following the crisis, leaders from 

the United States and other countries have pursued a wide range 

of reforms to the international financial regulatory system. 

In 2009, the Group of 20, or G20, created the Financial Stability 

Board (FSB) as a group of finance ministers, central bankers, and 

financial regulators tasked with promoting international financial 

stability. Primary U.S. representatives to the FSB are the Board of 

Governors of the Federal Reserve System, the Securities and Exchange Commission, and the Treasury Department. The FSB is 

charged with a very broad mandate to address vulnerabilities affecting the global financial system and to develop and promote imVerDate Nov 24 2008 12:19 Nov 17, 2017 Jkt 025966 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\25966.TXT TERI
2 

plementation of effective supervisory and regulatory policies promoting financial stability. 

According to the FSB, while its decisions are not legally binding 

on its members, ‘‘The organization operates by moral suasion and 

peer pressure in order to set internationally agreed-upon policies 

and minimum standards that its members commit to implementing 

at national level.’’ However, to ensure domestic implementation of 

FSB standards, the FSB has adopted measures to pressure jurisdictions to comply with these criteria. 

Since 2008, the FSB has aggressively designated large banks and 

insurers as global systemically important financial institutions, or 

G-SIFIs. In fact, in July of 2013, the FSB designated nine large insurance groups as G-SIFIs, including three from the United States: 

American International Group; Prudential Financial; and MetLife, 

Incorporated. Shortly thereafter, the Financial Stability Oversight 

Council (FSOC) appeared to rubber-stamp the FSB’s decision and 

named AIG, Prudential, and MetLife as SIFIs. 

Although the AIG decision was expected by many, since the company had famously been bailed out by the Treasury and the Federal Reserve during the financial crisis, it is unclear as to why Prudential and MetLife were deemed SIFIs. If the FSOC SIFI designation has any validity, it must have the ability to act independently, 

meaning without interference from international regulatory entities, and describe how each decision was reached. 

For example, the Prudential decision was the first designation of 

a nonbank financial institution as a SIFI, although the firm had 

not yet suffered any significant financial distress during the financial crisis. However, the available evidence indicates that rather 

than exercising its own independent judgment about SIFI designations and other regulatory initiatives, the FSOC, led by the Treasury and the Federal Reserve, instead outsourced its regulatory authority to the FSB. 

It is very troubling that American regulators would relinquish 

any regulatory authority to unelected European bureaucrats who 

meet behind closed doors in a secretive fashion to determine the 

fate of U.S. financial institutions. Because very little is known 

about the FSB, I have very serious concerns about the arbitrary decision-making process used to formulate policy that is devoid of any 

and all public participation. 

It is important to note that the FSB has no supervisory authority 

or regulatory power to compel compliance with internationally 

agreed-upon standards. However, it appears the FSB has become 

a shadow regulatory agency, using backdoor channels to determine 

a one-size-fits-all approach to applying European standards on 

American financial institutions. 

Even in today’s challenging economic environment, America has 

consistently outperformed our friends across the Atlantic. I find it 

mind-boggling that U.S. regulators would allow themselves to be 

‘‘pressured into ceding regulatory sovereignty to the very bureaucrats who have crippled innovation and ground economic growth to 

a halt in Europe.’’ It is completely unacceptable, and I look forward 

to hearing from our witnesses today on these issues. 

3 

The Chair now recognizes the ranking member of the subcommittee, the gentlelady from Wisconsin, Ms. Moore, for 5 minutes for an opening statement. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

And I just want to thank this distinguished panel. We do apologize ahead of time for having to run off, but we will return eager 

to hear your testimony. 

You guys are veterans on this subject, and so I just want to begin 

with some perspective. We have learned, kind of the hard way, that 

there is nothing as global as capital, and it moves and it moves 

very fast. We have literally drilled holes in the sides of mountains 

so that we could lay the fiberoptic cable from Chicago to New York 

to facilitate trades at near the speed of light. And the cost to lay 

that cable was $300 million, built to arbitrage the difference in 

price between New York Stock Exchange and CME option prices. 

And it got trades down from 13.1 milliseconds to 12.98 milliseconds. 

What is my point here? Global markets are moving in nanoseconds, and weaknesses in our financial regulation will be exploited with the same ruthless efficiency. 

The reality today is that these firms operate globally and have 

trillions of dollars in assets under management. We talk a lot 

about size, but neither Lehman Brothers nor Bear Stearns were 

the largest players, but in the post-Dodd-Frank Wild West of Wall 

Street, they were able to cause untold financial pain on untold 

Americans. 

And I think that the overarching regulatory goals of the FSOC 

and FSB are exactly on point. I have listened and I have been very 

sympathetic to some of the concerns regarding both the domestic 

FSOC designation process and the FSOC–FSB coordination with 

respect to differences in U.S. and European regulatory models, primarily in the area of insurance and also in the mutual fund industry. 

Specifically, I pushed back against money market mutual fund 

rules that require floating the net asset value of funds by introducing bipartisan legislation. We are seeing a five-time increase in 

borrowing costs for our State and local governments as a result of 

this floating NAV, and it is just not acceptable in Europe. And Europe abandoned a similar proposal already. 

But overall, we need to collectively breathe and understand that 

the decisions of the FSB are not binding on the United States. 

Equivalent does not mean identical, though, and the FSOC/FSB 

have generally moved cautiously and worked with tremendous coordination among the various regulators, industry, and this Congress. 

I have stated my strong support for State-based regulation of insurance. And I think we all clearly understand the different approaches to regulation in the United States and Europe. What is 

more, U.S. regulators understand and appreciate the differences. 

With that, I can tell you one thing: Going back to a pre-DoddFrank world does not help U.S. competitiveness nor growth. U.S. 

markets run on confidence. Savers want confidence that financial 

firms are being operated in a safe and sane manner and that their 

employees at those firms are acting on behalf of their clients. 

4 

Markets mean taking risks, yes. Tolerating and harboring 

schemes, fraud, and scams is something entirely different. 

With that, I yield back, and I look forward to our continued discussion. 

Chairman HUIZENGA. The gentlelady yields back. 

And I, too, look forward to our continued conversation. 

We are down to 5 minutes left in this vote across the street, so 

I believe we are going to have to hustle over there. I would like 

for any staff listening as well, if you could make sure that your 

Members know that at 5 minutes after the last vote, we would like 

to reconvene. 

[recess] 

Chairman HUIZENGA. The subcommittee will come to order. 

Thank you for your patience. I appreciate that. 

Today, we welcome the testimony of Mr. Paul Stevens, president 

and chief executive officer of the Investment Company Institute 

(ICI); Mr. Carter McDowell, managing director and associate general counsel for the Securities Industry and Financial Markets Association (SIFMA); Dr. Marcus Stanley, the policy director at Americans for Financial Reform; and Mr. Jonathan Bergner, assistant 

vice president for Federal policy, National Association of Mutual 

Insurance Companies (NAMIC). 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. And without objection, each of your 

written statements will be made a part of the record. 

And with that, Mr. Stevens, you are now recognized for 5 minutes. 

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, THE INVESTMENT COMPANY 

INSTITUTE (ICI) 

Mr. STEVENS. Thank you, Chairman Huizenga, Ranking Member 

Moore, and members of the subcommittee. I am pleased to be here 

to testify on the role of the Financial Stability Board. 

ICI supports appropriate regulation to ensure a resilient financial system, and that includes looking at potential risks in asset 

management. We also favor international regulatory coordination, 

and we have responded constructively to the FSB’s efforts to date. 

Just last week, we filed a comment letter commending the FSB for 

its focus on activities across the asset management sector and for 

referring specific recommendations to the International Organization of Securities Commissions (IOSCO) and to its securities regulatory members. Here in the United States, we have supported 

SEC Chair Mary Jo White’s examination of asset management 

practices and related rulemakings. 

And all that having been said, the work of the FSB remains a 

cause for deep concern. Why? Because the FSB has promised to return to the question of designating institutions like large U.S. stock 

and bond funds as ‘‘systemically important,’’ a step that could have 

grave implications for U.S.-regulated funds and the 90 million 

Americans who depend upon them. 

From its inception, the FSB has been dominated by central bankers and a banking mentality. To these central bankers, capital 

markets activity constitutes ‘‘shadow banking,’’ a risky, shadowy 

5 

form of finance. Why? Because it is not regulated like banks. While 

IOSCO and securities regulators are beginning to take a larger 

role, the FSB’s work on asset management is still overseen by 

banking regulators who, frankly, lack understanding of capital 

markets. That is reflected in FSB’s emphasis on distress and disorderly failure, concepts that are derived from banking. And the 

FSB’s return to SIFI designation for funds could bring asset management under bank-style regulation, no matter how harmful or inappropriate that might be. 

We have serious reservations about transparency, fairness, and 

accountability in the FSB’s work. As members of this subcommittee 

know, Congress cannot even determine what positions the U.S. delegation takes in the FSB’s deliberations. The FSB’s work falls far 

short of being evidence-based. It disregards empirical data and 

analysis in favor of conjectures, conjuring up visions of fire sales 

and spillover effects to claim that regulated funds may pose threats 

to financial stability. 

ICI and its members have provided extensive analysis that 

squarely rebuts the FSB’s hypotheses about regulated funds and 

fund managers, and we have urged, thus far to no avail, that the 

FSB reexamine its work in light of empirical evidence. Taken together, all of these problems raise questions as to whether the 

FSB’s work in asset management is simply results oriented, that 

is, intended to ensure the designation of the largest and most successful funds on the globe, almost all of them U.S. funds. After all, 

the FSB’s very purpose is to influence and shape regulation in the 

United States and other countries. 

We are concerned that the FSB’s designation work could front 

run and prejudge issues at our Financial Stability Oversight Council. The U.S. representatives to the FSB are principal players on 

our FSOC. The FSB’s designation of three U.S.-based insurance 

companies presaged FSOC’s designation of those very same companies. Similarly, a flawed FSB methodology that identifies U.S. 

funds might very well lead to designation of those funds by the 

FSOC. If that happens, we believe the consequences for funds and 

their millions of investors will be serious indeed. 

Under Dodd-Frank, designated funds would be subject to inappropriate bank-style regulation, including capital requirements. Investors will face higher costs and lower returns. Fed supervision 

could put the interests of the banking system ahead of the fund’s 

fiduciary duty to their own shareholders, and America’s retirement 

savers could be on the hook to help bail out other failing financial 

institutions. 

For all of these reasons, we urge that Congress provide effective 

oversight of the U.S. agencies participating in the FSB and encourage constructive reforms. Congress must extend its oversight to 

multilateral bodies like the FSB that are expressly designed to 

shape domestic U.S. regulations. 

Finally, Mr. Chairman, let me just note that the FSB’s process, 

transparency, and analytical shortcomings are also apparent at the 

FSOC. That is why the ICI strongly supports H.R. 1550, the bipartisan Ross-Delaney FSOC Improvement Act, a bill that will codify 

improvements to the SIFI designation process and advance the goal 

of reducing systemic risk. 

6 

Thank you for your attention. I look forward to your questions. 

[The prepared statement of Mr. Stevens can be found on page 49 

of the appendix.] 

Chairman HUIZENGA. Thank you. 

With that, Mr. McDowell, you are recognized for 5 minutes. 

STATEMENT OF CARTER MCDOWELL, MANAGING DIRECTOR 

AND ASSOCIATE GENERAL COUNSEL, THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. MCDOWELL. Thank you, Chairman Huizenga, Ranking Member Moore, and distinguished members of the subcommittee. Thank 

you for providing me the opportunity to testify today on behalf of 

SIFMA and to share our perspectives on the effect that international standard-setting bodies such as the FSB, the Basel Committee, and IOSCO have on the financial services industry and the 

U.S. economy. 

I begin with an observation that echos what many on this committee have identified: U.S. financial markets are unparalleled in 

their size, depth, dynamism, diversification, and resiliency. These 

attributes and qualities are not a given, and SIFMA works with its 

members to preserve these attributes. Capital markets play a more 

significant role in the U.S. economy than they do elsewhere. In 

fact, here in the United States, about 80 percent of capital formation happens in the capital markets, and only about 20 percent of 

lending happens in the banking sector. In the rest of the world, 

those percentage are reversed. 

As Ranking Member Moore stated in her opening statement, 

there is nothing more global than capital. And U.S. firms operate 

both domestically and globally in all of these markets, and they 

compete among themselves and with U.S. nonfinancial firms. 

Our industry has worked with regulators since the financial crisis to make top-to-bottom reforms, implement the requirements of 

the Dodd-Frank Act, and establish other robust risk management 

practices to rebuild trust in the financial services industry. 

One of the strengths of the U.S. financial markets has been the 

result of a regulatory system that has historically been transparent 

and collaborative, involved robust public participation, and considered the particular circumstances of U.S. markets. However, in recent times global policymakers have found it increasingly necessary 

to establish harmonized regulatory standards for financial institutions internationally with the goal of leveling the playing field 

among financial institutions based in different jurisdictions, minimizing the opportunity for cross-border arbitrage, and creating 

more consistent rules of the road for financial institutions and their 

customers and counterparts. SIFMA supports and shares these 

goals. 

The result of this dynamic, however, is that major changes affecting the regulatory framework of the United States’ prudential and 

market regulation increasingly originate in international regulatory standard-setting bodies. The process typically begins with 

the adoption of an international standard at the FSB, the Basel 

Committee, or somewhat less frequently, IOSCO. And only after 

final adoption of the international standards, do U.S. regulators 

typically initiate a notice-and-comment rulemaking procedure 

7 

under the Administrative Procedures Act to translate the international standard into U.S. law. 

SIFMA recognizes that international standard-setting bodies 

have necessary and appropriate roles to play in coordinating global 

regulatory efforts. However, these bodies and the U.S. regulators’ 

participation in them should be subject to much more robust scrutiny, transparency, and procedural requirements than they are currently. Procedural reforms that enhance public participation in the 

rulemaking process would improve the quality and fit of international and domestic regulation, ultimately to the benefit of U.S. 

financial markets and the businesses and customers who rely on 

these markets. 

In light of the increasing internationalization of financial regulation and the many serious issues outlined in my written statement, 

SIFMA believes it is time for a critical examination of how U.S. 

regulators engage with international bodies because of the impact 

these bodies have on U.S. domestic policy. 

We hope that Congress will use this opportunity to mandate improvements in the international standard-setting process in two 

ways. First, Congress should require the U.S. regulators to improve 

the process they use when they participate in international rulemaking. SIFMA strongly supports Section 10 of H.R. 3189, the Fed 

Oversight Reform and Modernization Act, or the FORM Act, which 

would require the U.S. banking regulators—the U.S. Treasury and 

the SEC—to notify the public before participating in a process of 

setting international financial standards and to seek public comment on the subject matter, scope, and goals of such process. 

Secondly, Congress should require, through legislation, reforms 

in the standard-setting process of the international bodies themselves. These reforms could include requiring the holding of public 

meetings, publication of records, more reliance on data, public disclosure of the cost-benefit analysis, and republication of any material changes that are made to the accords prior to their adoption. 

It is clear Congress does not have the authority to impose requirements directly on international regulatory bodies. However, 

you can impose conditions on the participation of U.S. regulators 

in these bodies. And participation of the United States is so important to the legitimacy and influence of these bodies that they would 

likely adopt any reasonable conditions that Congress imposed. The 

important role these bodies play can be coordinated, and we underscore the need for that. I look forward to your questions. 

[The prepared statement of Mr. McDowell can be found on page 

29 of the appendix.] 

Chairman HUIZENGA. Thank you. 

Dr. Stanley, you are recognized for 5 minutes. 

STATEMENT OF MARCUS STANLEY, POLICY DIRECTOR, 

AMERICANS FOR FINANCIAL REFORM 

Mr. STANLEY. Chairman Huizenga, Ranking Member Moore, and 

members of the subcommittee, thank you for the opportunity to testify today. 

I believe our starting point in thinking about the implications of 

the Financial Stability Board for the U.S. economy should be the 

actual powers of the FSB. It is a nongovernmental association with 

8 

no statutory powers under U.S. law. Its output consists of reports 

and recommendations, not laws or regulations. The FSB’s standards and recommendations can only be legally realized through the 

actions of legislative or administrative bodies in member states. In 

the United States, such actions require either laws to be made 

through the constitutional processes or regulations passed through 

notice-and-comment rulemaking. 

Since the FSB does not have legal status under U.S. law, its direct impact on the U.S. economy is close to nonexistent. This is in 

sharp contrast to some other international discussions, such as 

those resulting in trade agreements. The negotiation process for 

trade agreements provides far less transparency than the FSB 

process, and such agreements become part of U.S. law once they 

are ratified. It is ironic that many who do not question the effect 

of trade agreements on U.S. sovereignty are expressing such concerns about the impact of the FSB. 

At the same time, the standards set by the FSB do indicate the 

consensus of the international regulatory community. Elements of 

this consensus have come under strong attack from industry interests in the United States. These attacks are sometimes made, even 

when there is no strong difference in views on FSB policy recommendations. For example, the latest comment letter from the Investment Company Institute to the FSB states: ‘‘And large, we 

have few objections to the proposed policy recommendations.’’ 

The ICI’s concern seems to be less with the FSB’s actual recommendations than with the very fact that the FSB believes there 

is the possibility of systemic risk in the asset management sector. 

It is useful to consider the general role of the FSB as a forum 

for international coordination of financial regulation. Given the 

globalized nature of financial markets, the need for such a forum 

is obvious. We regularly see industry calling for improvements in 

cross-border regulatory coordination. From a different perspective, 

public interest groups such as my own have fought for high standards of financial regulations across all global financial centers. If 

an international forum like the FSB did not exist, we would probably all be urging regulators to create it. 

But international coordination should not mean a one-size-fits-all 

approach. National circumstances and preferences differ. AFR has 

consistently fought for super equivalence of U.S. regulations when 

the consensus of international regulators fell short of the level or 

type of oversight needed to ensure the safety of the U.S. financial 

system. 

Much of the specific criticism of the FSB relates to regulation of 

nonbanks, particularly investment funds, and insurance companies. 

We support the efforts of the FSB to examine potential risks in 

these sectors. At the heart of the 2008 financial crisis was a comprehensive failure of capital market liquidity. As major players in 

the capital markets, asset managers and insurance companies can 

contribute to such failures of liquidity through disorderly forced 

selling of assets and/or an inability to execute on commitments to 

investors. 

This concern is not simply theoretical. As outlined in my written 

testimony, we know that insurance companies played a major role 

in the 2008 financial crisis, both directly and indirectly. My written 

9 

testimony also outlines a variety of ways in which poor management of investment funds can contribute to systemic risk. 

Investigating these potential threats to financial stability is exactly what we should be asking our regulators to do. International 

coordination can only help in that effort. Regulations should be tailored to the specific national markets being regulated. However, 

since the FSB does not directly regulate U.S. markets, FSB involvement does not remove control of these issues from the U.S. political or regulatory system. Specific regulation can be promulgated 

by U.S. agencies and, indeed, must be promulgated through U.S. 

agencies through the notice-and-comment process. 

This is exactly what is happening today. The SEC has responded 

to concerns about asset management by issuing several proposed 

rules addressing issues ranging from fund disclosure to planning 

for investor redemptions. The Federal Reserve has issued proposals 

related to the oversight of insurance companies within their jurisdiction. Both industry and the public can respond to these proposals, and both industry and the public are currently doing so. 

The international dialogue facilitated through the FSB is a helpful 

supplement to this process. 

Thank you for the opportunity to testify before you today, and I 

am happy to answer any questions you may have. 

[The prepared statement of Dr. Stanley can be found on page 43 

of the appendix.] 

Chairman HUIZENGA. Thank you. 

And Mr. Bergner, you are recognized for 5 minutes. 

STATEMENT OF JONATHAN BERGNER, ASSISTANT VICE PRESIDENT FOR FEDERAL POLICY, NATIONAL ASSOCIATION OF 

MUTUAL INSURANCE COMPANIES (NAMIC) 

Mr. BERGNER. Good afternoon, Chairman Huizenga, Ranking 

Member Moore, and members of the subcommittee. Thank you for 

the opportunity to speak to you today. My name is Jonathan 

Bergner, and I am the assistant vice president for Federal policy 

for the National Association of Mutual Insurance Companies. 

NAMIC is the largest property casualty insurance trade association in the country, with more than 1,400 member companies, representing 40 percent of the total market. We are very appreciative 

of this subcommittee’s focus on the activities of the Financial Stability Board. Let me start by saying that NAMIC believes that 

international organizations which focus on joint monitoring, coordinating, and communicating among regulatory jurisdictions can play 

an important role in helping to protect a global economy. 

However, NAMIC maintains that provisions in the FSB’s charter 

go well beyond generally expressed objectives and have resulted in 

the FSB taking a more direct and prescriptive role in monitoring 

how various countries implement global rules at home. This extensive role has become particularly troubling for the U.S. property 

casualty insurance industry. 

NAMIC has significant concerns with many of the activities at 

the FSB, as well as the opaque processes by which they are conducted. Little is known about the decision-making process at the 

FSB, and there is no formal process for communicating NAMIC 

members’ concerns to the U.S. representatives, which are the 

10 

Treasury, the Fed, and the SEC. But most importantly, there are 

no U.S. State insurance regulators serving on the FSB. This calls 

into question their ability to effectively determine what is appropriate for insurance regulation. Nonetheless, this bank-centric organization is directly guiding the policy work and the timing of 

that work for the International Association of Insurance Supervisors (IAIS). 

In 2013, the global insurance industry was informed that the 

FSB had directed the IAIS to develop a new group capital standard 

for all large internationally active insurance groups. These groups 

were arbitrarily defined and include over 50 companies that have 

not been designated as globally significant insurance institutions. 

The IAIS has been working on this capital standard since 2013, yet 

neither the FSB nor the IAIS have ever actually defined the problem they were trying to solve and have offered little substantive explanation as to why these decisions were made. 

Despite the intentions of the FSB and the IAIS, the application 

of a global capital standard to individual companies that come from 

very different regulatory environments with very different economic and political objectives will not produce comparable indicators of capital adequacy. But in their zeal to achieve comparability, 

the FSB, through the IAIS, will succeed only in generating unnecessary costs to governments, insurers, and ultimately to the policyholders, and those costs to the United States could be substantial. 

In this process, our country has had to consider major changes 

to our supervisory regulations, corporate law, and accounting systems in order to accommodate the proposed group capital requirements. These proposed standards are largely derived from existing 

European standards, which will result in U.S. insurers being 

placed at a competitive disadvantage relative to their European 

counterparts. Indeed, some experts have suggested that is entirely 

the point. 

The FSB also appears to be having an undue influence on the Financial Stability Oversight Council’s designation of systemically 

important financial institutions here in the United States. The FSB 

had already decided that two U.S. insurers, MetLife and Prudential, were global systemically important insurers prior to the FSOC 

conducting its own supposedly fair, objective, and evidence-based 

designation process. 

These questionable designations of Prudential and MetLife were 

made over the objections of the single voting member of the Council 

who possessed insurance expertise, Roy Woodall, as well as the 

State insurance regulator on the FSOC, John Huff. Apparently, the 

Treasury, the Federal Reserve, and the SEC valued the findings of 

the foreign-dominated FSB over that of U.S. insurance experts. 

Even more concerning is that the FSB determinations did not include any involvement or consultation by the functional State insurance regulators of the actual U.S. insurance entities being designated. 

Mr. Woodall has stated in congressional testimony that he has 

concerns about inappropriate FSB influence on the development of 

U.S. regulatory policy. NAMIC believes the evidence clearly demonstrates that he is right to be concerned. 

11 

In summary, it is the position of NAMIC that the impact of FSB 

actions on the U.S. insurance industry has not been positive and, 

in fact, may very well operate to inhibit the growth and competitiveness of the U.S. insurance industry in the future. Again, thank 

you for the opportunity to speak to you today, and I look forward 

to answering any questions you may have. 

[The prepared statement of Mr. Bergner can be found on page 22 

of the appendix.] 

Chairman HUIZENGA. Thank you. 

The Chair now recognizes himself for 5 minutes for questions. 

I personally believe the FSB has become a bit of a shadow regulatory authority. I had an opportunity to travel to Europe, with a 

bipartisan group that went last October, and that became pretty 

clear, I think, to many of us. It doesn’t hold public hearings. It 

doesn’t provide the public with any written record of its deliberations. In fact, neither Congress nor the American public even know 

the positions that U.S. regulators have taken on these critical regulatory decisions. And that was something that has been attempted 

to be made clear, our displeasure with Treasury and with others 

at various times. 

I am curious. I am going to start with you, Mr. Stevens. Dr. 

Stanley asserts that—I think I wrote this down properly—there is 

‘‘no real effect on the U.S. economy’’ from the FSB because they 

don’t have direct regulatory and enforcement on that. Is it really 

that benign? 

Mr. STEVENS. I find it really an extraordinary statement. It is 

not that benign. It is not an idle exercise. If it were, we wouldn’t 

have some of the most senior financial regulators in the United 

States actively participating in every phase of it. It is intended to 

shape U.S. regulation. 

And just to be clear, how we got concerned about this at the beginning was, the first of the consultations about asset management 

made it very clear the FSB was on a path to recommend for designation as SIFIs every fund over $100 billion in assets under management. As we sit here today, there are 17 such funds in the 

world. Sixteen of them are U.S. funds. One is a Chinese fund. So 

think about this. The head of the regulatory efforts at the Fed is 

over in Europe devising methodologies to designate SIFIs that 

would be recommended to the FSOC here in the United States on 

which the Fed is an important member, the decisions out of which 

would determine the Fed’s jurisdiction over additional portions of 

the financial system. So, this is not an idle game. 

Chairman HUIZENGA. Mr. McDowell, I will let you address that 

as well. But are firms, companies, given information about why 

they are designated or how to become dedesignated? That is a softball. 

Mr. MCDOWELL. I wouldn’t even dance around the designation. 

No. With the FSB, we know who sits on the FSB for the United 

States, but all of the work is done through committees. You can’t 

even find out who’s on the committees that are actually doing the 

work. It is very hard to get a schedule of when they are going to 

meet. So if you don’t know who’s on the committee, and you don’t 

know when they are going to meet, it is hard to have any sort of 

influence— 

12 

Chairman HUIZENGA. That doesn’t sound benign. 

So, Mr. Stevens, in your testimony you stated that public comment has really been discarded and not taken in on consultation. 

Do you care to expand on that? 

Mr. STEVENS. Well, to be fair, we have had the opportunity to 

submit comment letters. We have been invited to roundtables, sort 

of off-the-record discussions. The problem is that we submit extensive empirical data and analysis of our experience as an industry 

in one market crisis after another, none of which appears to be 

taken into account in the next consultation. So it just simply seems 

to be a process that is unhinged from any evidence-based approach. 

Chairman HUIZENGA. Do you believe the FSB’s sort of parameters really fit reality on sort of their hypotheses and what their 

assumptions are? Do you think they fit the reality of what— 

Mr. STEVENS. I think the bank regulators at the table have preconceived notions, the very best evidence of which is they continue 

to refer to mutual funds, one of the most comprehensively regulated portions of our financial system, as shadow banks. We are not 

shadowy, and we don’t bear any relationship to banks, except that 

is the way they begin. And, of course, if anything not regulated like 

a bank is dangerous, and we are not regulated as banks and never 

thought necessary to be, then to them we look dangerous. And I 

think in some ways it is as simple as that. 

Chairman HUIZENGA. Okay. 

Mr. McDowell, I am going to quickly move on. You mentioned, 

thank you, my Section 10 of the FORM Act. I appreciate that. But 

does Section 10 really go far enough or are there other reforms that 

you think Congress ought to be looking at? 

Mr. MCDOWELL. It is a great start. As I said in the written testimony, probably the principal thing is there needs to be more costbenefit analysis of what is happening at the FSB. Another big objection—I guess it echoes something that Mr. Stevens said—is we 

are given an opportunity to comment, but one of the things that 

we have noticed is there are, many times, material changes made 

in the final accord that is adopted, that we didn’t have an opportunity to comment on. They will put a proposal out before something is finalized, so it is like they are throwing a lot of things on 

the wall. 

We will write comments talking about all of those, and then 

when they put out the final proposal, it is materially different from 

what we even talked about, and we don’t get a second chance to 

comment on what they are now proposing be adopted. 

Chairman HUIZENGA. Okay. My time has expired. 

With that, the Chair now recognizes the ranking member for 5 

minutes. 

Ms. MOORE. Thank you so much, Mr. Chairman. And once again, 

I thank the panel for sticking around. 

I want to start with Mr. McDowell, just some clarification about 

your testimony. I was looking through it, and you talked on page 

3 about the dynamic of a lot of the regulatory framework that we 

look at in the United States that starts from an international level. 

And I am wondering if you think that is somehow appropriate, 

given the rest of your testimony where you talked about—you listed a number of bullets here about how different international bodVerDate Nov 24 2008 12:19 Nov 17, 2017 Jkt 025966 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\25966.TXT TERI
13 

ies are, that they lack procedural safeguards, international bodies 

lacking public records, lacking public positions by members, lack of 

public comment, a little explanation for the basis of rules, the reliance on nonpublic data, no cost-benefit analysis, and yet in your 

testimony, you say that some of the regulatory framework that we 

eventually adopt comes from an international perspective. Can you 

just give me some clarification? 

Mr. MCDOWELL. Yes, I will try. One of the most important 

things, I think, you have to realize is, in the United States, about 

80 percent of lending happens in the capital markets and only 

about 20 percent happens through commercial bank lending. In the 

rest of the world, those percentages are reversed. So when Mr. Stevens talks about a bank-centric approach, we may have a bank-centric approach here in the United States, but it is even more bankcentric outside of the United States. 

Another sort of anecdote. I have been at SIFMA for about 7 

years. When I started, I would basically write comment letters on 

behalf of the industry in the prudential space. I would say that I 

spent about 85 percent of my time in the beginning writing domestic comment letters to the Fed or the OCC or the Treasury Department, and only about 15 percent would be spent writing letters to 

Basel or one of the international standard-setting bodies. Today, I 

would say it is about 50/50. 

Almost everything that the U.S. regulators are doing in the prudential space is first being considered in the global arena. And 

look, we support the existence of the FSB, and we realize that 

there needs to be harmonization. And there is a role here. What 

we are arguing is there just needs to be more of a process in place 

for doing that. 

Ms. MOORE. Let me ask Mr. Stevens some questions then. You 

have mentioned that it is so bank-centric—many of you have said 

that—and yet, as we heard Mr. McDowell explain, that the FSB 

and international bodies are kind of driving the train here. Can 

you just explain the impact of bank-like requirements of capital for 

mutual funds and the relationship of mutual fund companies to individual funds in a family and how stress in a particular fund 

would impact the other funds in a fund company? 

Mr. STEVENS. Thank you, ma’am. It is an excellent question. We 

know from Dodd-Frank what happens to a financial institution 

that is designated as a SIFI in the United States. It is subject to 

capital requirements. Mutual funds have never been subject to capital requirements, because the best way to think of them is 100 

percent capital. It is all risk capital. But bank regulators have a 

sense that, well, we need a cushion. So the capital requirement of 

8 percent, or whatever it might be, is likely to be put into the fund 

as a cash cushion. Now, you put that into a fund as a cash cushion, 

it is going to be a fund that doesn’t perform as well as other funds. 

So it is going to make it uncompetitive right from the beginning. 

It shows you how nonsensical a capital standard is with respect to 

a fund. 

Secondly, they would be subject to enhanced prudential supervision by the Fed. We already have a thorough regime of regulation 

and oversight by the SEC. Enhanced prudential supervision by the 

Fed would mean that the Fed could come in and tell the fund’s 

14 

portfolio manager how to manage the fund in a crisis, not in the 

best interests of the shareholders, but in the best interests of what 

the Fed thinks the financial system or the banking system or the 

issuers in the portfolio might need at a given moment. 

Ms. MOORE. Okay. 

Mr. STEVENS. That completely changes the nature of a fund’s duties and obligations to their shareholders. 

Ms. MOORE. Right. We just have a few seconds left. And so, Mr. 

Stevens, I just want you to—you predicted, and I was concerned, 

that floating the NAV here would raise the costs for State and local 

governments. And so now our municipalities and governmental entities are not having their bonds purchased. Can you just talk 

about the trillions of dollars that are being lost? 

Mr. STEVENS. We estimate that about $910 billion so far has left 

prime and tax-exempt money market funds. The cost of municipal 

finance for short-term purposes has risen 77 basis points. So the 

predictions that we made about the impacts on markets, I think, 

have come true and much of that increase is as a result of changes 

in money market fund rules. The costs in the short-term borrowing 

space certainly have risen, as we feared. 

Ms. MOORE. Sorry. My time has expired. Thank you. I think we 

had an objection from the other side. 

Chairman HUIZENGA. I will resist any temptation to gavel down 

any outbursts on this side of the aisle at this point, but I would 

like to welcome Olivia Schweikert. I am not sure of her legal standing here as a voting member, but she certainly adds color and is 

welcome any time. 

You are welcome. 

With that, the Chair recognizes the Vice Chair of the subcommittee, Mr. Mulvaney of South Carolina, for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. I thank each of you 

gentlemen for coming and doing this today. 

One of the things—and you all have seen this, if you follow this 

at all—we have tried to do over the course of the last couple of 

years is to try and figure out exactly not only how you get to be 

a SIFI, but how you get to unbe a SIFI. Okay. I mean, because I 

think that is probably just as important a question. Yes, we are 

starting to understand, maybe, a little bit about the process of 

being designated, but what about the process of being undesignated? Or is it a lifetime sentence? And I think the MetLife case 

sort of raised the very real possibility for all of us that maybe this 

isn’t permanent and that maybe one day you might be a SIFI and 

then the next day you aren’t. 

So here is one of my questions. That seems like a fairly reasonable thing to ask of the FSB, tell us how you get to be one and then 

tell us how you get to unbe one? 

Mr. Bergner, I will start with you. Why haven’t they done that? 

Mr. BERGNER. I think the transparency question answers that. 

We don’t know why they haven’t done it. We don’t know much of 

why they do anything. I would just start by pointing that out. I 

would also note that they haven’t de-designated MetLife, although 

as we know, the Federal case has a— 

Mr. MULVANEY. That is a great point, and we don’t know why 

they haven’t. 

15 

Mr. BERGNER. No, we don’t. And I think the point was made, perhaps by Mr. McDowell earlier, that Congress can’t pass a law to 

direct the FSB to do something. However, there may be options 

that Congress can pursue to work with the U.S. representatives to 

say, listen, we need you to abide by ABC and XYZ before you are 

permitted to go participate at these international forums. 

Mr. MULVANEY. Dr. Stanley, since you are sort of the sacrificial 

lamb here to try and defend the FSB today, why haven’t they done 

this? Why haven’t they made a transparent and reasonable, rational explanation of what it takes to be undeclared a SIFI? 

Mr. STANLEY. We have seen that GE Capital has been 

undeclared a SIFI, and I think FSOC explained the set of things 

that GE did in order to reduce its systemic significance. And the 

FSOC is required to reexamine its SIFI designations on a regular 

basis. So I think we do have a roadmap for how to become undesignated a SIFI. 

And I just want to say something about this issue, the impact of 

the FSB on the U.S. economy. What I said in my testimony is that 

there is no direct impact of the FSB because the FSB’s recommendations only take effect when U.S. regulators act on them. 

And we have not seen, despite the FSB’s discussion of asset manager designation, any indication that the FSOC is going to designate any entity as any asset manager as systemically significant. 

And to me that is a good example that if U.S. regulators don’t pick 

up on it, the FSB’s lists or whatever they come up with don’t make 

a difference within the U.S. regulatory system. 

Mr. MULVANEY. We get lost here in the alphabet soup. I know 

that I do. I asked my staff a question. I think we are right about 

this. I think while GE came off of the FSOC list, they didn’t come 

off of the FSB list. Let’s see if there is something we can agree on 

in a bipartisan basis. 

Is there any objection, from your point of view, to having the 

FSB codify the things that would go into the decisionmaking about 

de-identifying or delisting a SIFI? Is there any objection to doing 

that, writing it down so we know what the law is or know what 

the rules are? That is a good idea, right? 

Mr. STANLEY. We don’t have an objection to it, but I don’t think 

it is necessary because the FSB’s lists are not U.S. law. For the 

FSOC, it makes sense, but for the FSB, I don’t see that it is called 

for. 

Mr. MULVANEY. Generally speaking, isn’t it a good idea to let everybody here, on both sides of the aisle, whether you are a banker 

or a politician, know what the rules are that you play by and to 

maybe have those written down? You would agree with that generally, right? 

Mr. STANLEY. Sure. 

Mr. MULVANEY. Okay, good. That is progress. We might be able 

to build on that. 

I want ask you, Mr. Stevens, a couple of questions about your industry because you said something that caught my attention, 

which is that they are dealing with you as shadow banks, which 

frightens me because I know this much about mutual funds and I 

know they are not banks. I know that a capital requirement for a 

16 

mutual fund is a non sequitur, that you are using language to talk 

about something that is completely unrelated. 

What happens if a mutual fund gets designated as a SIFI? What 

is it going to mean to the folks in my district who invest in those 

facilities? 

Mr. STEVENS. As I said, capital requirements, which will make 

the fund perform worse and less competitive. Prudential regulations by the Fed, which can mean the fund is no longer being run 

solely in the interests of its investors, but instead in the interests 

of whatever the Fed’s policy concerns are at a given time. If a SIFI 

bank or some other systemically important institution were to fail, 

that fund would have to put money, according to Dodd-Frank, into 

a pool to help bail it out. From my point of view, a fund that is 

designated as a SIFI is not going to be too-big-to-fail. It is going 

to be too-burdened-to-succeed. 

Mr. MULVANEY. Thank you for that. Let me do this in wrapping 

up, well, as long as some of my Democrat friends are here. I think 

this is one of the things we might be able to work on. Because understanding what the rules are, having people play by the rules, 

probably just makes sense. Sooner or later, hopefully, my party is 

going to be in charge of this organization. My guess is, at that 

time, you all will want to know what the rules are that we are 

playing by. So maybe that is one of those little things we can do. 

By the way, the other thing we do that surprises me, which is 

I have heard this story many times about the AIG—I can’t remember whether it was AIG designation or MetLife designation, that 

the one person that we put on there—by ‘‘we,’’ I mean you, because 

you all created this—who actually knew about insurance said we 

should not have designated those folks. We should look at possibly 

allowing the people that we put on there to have influence in the 

field they actually know something about. 

Thank you, Mr. Chairman, for your indulgence. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the Chair recognizes Mr. Heck of Washington for 5 

minutes. 

Mr. HECK. Thank you, Mr. Chairman. Let’s keep talking some 

about insurance. 

Mr. Bergner, let me pick on you. I have some legislation I am 

working on and it is predicated on a couple of principles, and I 

want to get your reaction to those. The first is that when we, the 

United States, discuss insurance in an international forum, that 

our representatives should include our primary insurance regulators. Does that make sense to you? 

Mr. BERGNER. It is a great principle. 

Mr. HECK. And why do you agree with me on that? 

Mr. BERGNER. Because they are the ones that know how to regulate insurance companies. 

Mr. HECK. So I imagine that it would not be too far of a stretch 

if I were to ask you that we ought to actually include that requirement statutorily, that they should be included and at a minimum 

consulted? 

Mr. BERGNER. I think it is a wonderful idea. 

Mr. HECK. So here is what I believe. I believe that if we fail to 

do that, we literally are undermining the very national framework 

17 

for insurance regulation, which is McCarran-Ferguson, and that we 

have done it through the back door without actually having come 

back here and asking the Congress to do that. Your reaction, sir? 

Mr. BERGNER. I think, certainly, Congress exercising its legitimate authority to be involved in the creation of regulatory standards that are ultimately going to impact your constituents should 

never be viewed as somehow inappropriate. And I know NAMIC 

very much supports the idea of legislation that will ensure that our 

U.S. representatives seek standards that are reflective of U.S. practice and law and that, ultimately, are not going to require changes 

to that practice or law. 

Mr. HECK. So it would follow that if members of this committee 

had an opportunity to support or co-sponsor legislation as such, 

that you would encourage them to do so? 

Mr. BERGNER. Strongly encourage them, yes. 

Mr. HECK. Thank you. But let’s not be hasty. There is a second 

principle, a little bit more straightforward, which is that U.S. financial policy should be made in the United States. 

Mr. BERGNER. I agree, 100 percent, and particularly in the insurance context given how different the regulatory models are in other 

jurisdictions. 

Mr. HECK. Do you think we are adhering to these two principles 

now? 

Mr. BERGNER. I think there are many reasons to believe that we 

could do better at adhering to those principles. 

Mr. HECK. So if we, in fact, engage in international discussions 

and do not have these people at the table, we are, by implication, 

not setting U.S. financial policy in the United States and are not 

adhering to either of those principles? 

Mr. BERGNER. That would seem to be the case to me, yes. 

Mr. HECK. And as with the first one, does it make sense to you 

that we codify the statement that U.S. financial policy should be 

set in the United States? 

Mr. BERGNER. Absolutely. 

Mr. HECK. Mr. McDowell, I liked your body language. If I am 

misreading you, go ahead and feel free to pass, but if you have 

something to add with respect to this line— 

Mr. MCDOWELL. I was just saying that I think your principles 

apply beyond just insurance. I don’t represent insurance companies, but I think one of the things that we are talking about is 

there ought to be an opportunity for notice and public comment on 

what the U.S. regulators are going to do in these international bodies. So, before they get on a plane and start discussing something, 

they ought to know what people think about the topic that they are 

going to be discussing. 

Mr. HECK. So since I agreed with the principles that my good 

friend from South Carolina expressed, and since he went so far 

over his own time, and I have time left, I will gladly yield back the 

balance of my time, Mr. Chairman, and thank you. 

Chairman HUIZENGA. Thank you. I think a number of us over 

here are looking forward to working with you on this principle, and 

I am sure we will make great progress. 

The Chair recognizes Mr. Pittenger of North Carolina for 5 minutes. 

18 

Mr. PITTENGER. Thank you, Mr. Chairman. Thank you for this 

important hearing, and I thank each of you for your participation. 

Given that the U.S. economy is quite different than the rest of 

the world and that we have more reliance on capital markets rather than on traditional bank lending, do you think we are put at a 

disadvantage, Mr. McDowell, with our domestic regulations? 

Mr. MCDOWELL. That possibility certainly exists. And, we see it 

where in Europe and in Asia, they have a universal bank model 

where they are doing insurance, capital markets, bank lending, 

under one charter. Here we have functional regulation. So in the 

broker-dealer space or asset management space, we have the SEC. 

We have the banking agencies. We have the States involved in insurance. It is just a different setup. We have the Fed with a holding company structure, and others don’t have that at all. And so 

people just come at it from a different perspective. 

And I am not saying that there isn’t something to be gained from 

a diversity of perspectives. I guess I just come back to what I was 

saying earlier. I think that before the United States signs on to any 

of these principles, it would be nice if we had the opportunity to 

apply something like the Administrative Procedures Act, which 

happens domestically, so that we have a chance to really weigh in 

and know that the points we are going to make will have to be considered. 

A lot of the commenting that happens at the global level—and 

I would love to know what others think—is it just seems like a lot 

of window dressing. We are writing letters, but I am not sure that 

they are really being read or considered. 

Mr. PITTENGER. So, you are in total agreement then that our domestic regulators follow too closely the international standards for 

us without taking into account our own markets? 

Mr. MCDOWELL. They take into account the markets, but they 

have competing interests too. One thing I would say here is that 

the goal is harmonization, but we need to be very clear, that is a 

goal that we are never going to achieve and for some very simple 

reasons. One, we have different legal systems. We have different 

tax systems, different corporate structures, as I have described. 

And so, it just depends on where you put the emphasis and the balance. And I think what Congress needs to do is help sort of weigh 

in on this balancing that takes place. 

Mr. PITTENGER. We have heard a lot of concerns about transparency with the international groups and their standards, having 

the potential of locking up tens of billions of dollars or credit in the 

U.S. economy. Should this be a concern to policymakers? 

Mr. MCDOWELL. Absolutely. We are spending billions and billions of dollars on compliance. And in a lot of cases, we are having 

to build new systems. We haven’t talked much about it, but also, 

the timelines that are done for some of these things are often very 

arbitrary and don’t take into account what is necessary in order to 

build compliance. 

Mr. PITTENGER. What type of measures would you have to improve the transparency that would benefit the entire process? 

Mr. MCDOWELL. We made two recommendations. One was there 

could be more process around what the U.S. regulators do when 

they go to these meetings. So the principal one would be if they are 

19 

going to, say, talk about international capital standards, before the 

United States goes, they ought to do a notice and public comment 

about the types of things that they are going to be proposing so 

that we are seeing it in advance so that it is not vague. So that 

would be one area where you can change what the regulators are 

doing in the bodies. 

The other thing is you could order the U.S. regulators to argue 

for a change in the international body itself. Congress doesn’t have 

the ability to force your will on other countries, but we are an important player in these bodies. And something akin to what we are 

talking about with the FORM Act or with the Administrative Procedures Act, requiring more cost-benefit analysis to take place at 

the global level, I think would go a long way towards improving the 

process. 

Mr. PITTENGER. The regulatory standards that have been developed since the crisis, what does it mean on a community basis in 

terms of our economy? 

Mr. MCDOWELL. We can’t get to the bottom of that. There is nobody out there that is looking at the cumulative impact, at the 

global or the domestic level. It is one of the things that we have 

been calling for. They are starting to do some of this work in Europe and in the UK. We have been calling for it to be done here. 

A lot of these rules that are written—the other thing about the 

FSB or the Basel Committee, is that it isn’t just one committee. 

There are different silos within each of these bodies working on individual regulation, and oftentimes they don’t talk to each other 

and they don’t coordinate. Sometimes you get policies that are divergent, and that don’t work in harmony together, and no one is 

looking at the cumulative impact, whether it be the FSB or the 

FSOC here in the United States. And it is one of the things that 

we think need to happen. 

Mr. PITTENGER. Should we? 

Mr. MCDOWELL. We absolutely should. 

Mr. PITTENGER. Thank you. My time is up. 

I yield back. 

Chairman HUIZENGA. The gentleman’s time has expired. 

This has been very helpful. I think this has been very enlightening. I appreciate your time and your patience as we had a little 

40-, 45-minute interruption there. 

So with that, I would like to thank our witnesses for their testimony today, both written and oral. And without objection, I would 

also like to submit the following statements for the record: the 

Property Casualty Insurers Association of America; and the American Council of Life Insurers. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And again, I appreciate your time and your patience today, and 

your insight. So with that, the hearing is adjourned. 

[Whereupon, at 3:43 p.m., the hearing was adjourned.] 

(21) 

A P P E N D I X 

September 27, 2016 

22 


25966.001

~ ........ ...,. I ~ ........ .,..® ---- .'¥". c : 

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Statement 

of the 

National Association of Mutual Insurance Companies 

to the 

United States 

House Financial Services Subcommittee 

On Monetary Policy and Trade 

Hearing on 

The Financial Stability Board's Implications for U.S. Growth and 

Competitiveness 

September 27, 2016 
23 


25966.002

Comments of the National Association of Mutual Insurance Companies 

The Financial Stability Board - Implications 

September 27, 2016 

Page 2 

The National Association of Mutual Insurance Companies (NAMIC) is pleased to 

provide comments to the House Financial Services Subcommittee on Monetary Policy 

and Trade on the Financial Stability Board's implications for U.S. growth and 

competitiveness, in particular the growth and competitiveness of the property/casualty 

insurance industry. 

NAMIC is the largest property/casualty insurance trade association in the country, with 

more than 1 ,400 member companies representing 39 percent of the total market. 

NAMIC supports regional and local mutual insurance companies on main streets across 

America and many of the country's largest national insurers. NAMIC member 

companies serve more than 170 million policyholders and write more than $230 billion 

in annual premiums. Our members account for 54 percent of homeowners, 43 percent 

of automobile, and 32 percent of the business insurance markets. 

Introduction 

Over the last several years, the Financial Stability Board (FSB) has become an 

increasingly important and influential regulatory organization for the global financial 

services sector. Re-established in 2009 in the wake of the financial crisis, the FSB's 

core mission is to promote regulatory standards that ensure the stability and soundness 

of the world's financial system. Pre-crisis, the precursor organization the Financial 

Stability Forum had a role of monitoring, coordinating, and communicating between 

regulatory jurisdictions. However, the mandates provided in the FSB's charter go well 

beyond generally-expressed objectives and require that the FSB assume a direct role in 

monitoring how various countries implement global rules at home. 

Beyond the overreach of a group of mostly foreign policymakers exerting their vision of 

regulation on our banking system, it is particularly troubling for the U.S. 

property/casualty insurance industry. During a Senate Banking Committee hearing in 

July of 2015, Dr. Adam Posen- testifying in support of many of the FSB's activities and 

decisions- said, "Where the FSB at present is getting things wrong, in my opinion, 

largely has to do with its approaches to coordinating regulation of the non-bank parts of 

the financial system." 1 NAMIC wholeheartedly agrees. 

Multilateral organizations like the FSB have always been intended to promote and foster 

economic growth, not to regulate financial services markets everywhere in the world. 

NAMIC and its members firmly believe the FSB actions on insurance regulation have in 

fact inhibited, and are likely to continue to inhibit, growth and competitiveness for the 

U.S. insurance industry. 

'Dr. Adam Posen, Testimony before the U.S. Senate Banking Committee, July 2015, Page 8. 

http://www .banking.scnate.govlpubl ic/_ cache/fileslb9f26 I 7 a-7 440-45a8-863 2-

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Specifically, NAMIC has significant concerns with many of the activities at the FSB, to 

say nothing about the opaque processes by which they are conducted. Two of the chief 

concerns we would like to focus on include: 

• The FSB's review and guidance of the policy development work of international 

standard setting bodies, specifically the International Association of Insurance 

Supervisors (IAIS) and; 

• The designation process of Global Systemically Important Insurers (G-SIIs) and 

its influence on the Financial Stability Oversight Council's (FSOC) designation of 

Systemically Important Financial Institutions (SIFis) here in the U.S. 

NAMIC believes the current U.S. state-based insurance regulatory system is robust and 

well-positioned to meet the needs of the nation's insurance marketplace. All NAMIC 

member companies- those that are domestic-only and those that are internationally 

active- will feel the impact of the international standards and regulatory decisions being 

imported to the U.S. Indeed, the movement toward more formulaic, prescriptive 

standards from abroad seems to be accelerating. 

The FSB Structure and Process 

The Plenary of the FSB is housed in Basel, Switzerland, in the Bank for International 

Settlements, and has been chaired by various central banks. It is the sole decisionmaking body of the board and operates on the basis of consensus instead of actual 

voting. That, however, is all that is known about the decision-making process at the 

FSB. The U.S. is represented on the FSB by the Treasury Department, the Federal 

Reserve, and the Securities and Exchange Commission (SEC). Interestingly, there are 

no U.S. state insurance regulators or lawmakers represented on the FSB, and there is 

no formal process for communicating the concerns of NAMIC members, or anyone else, 

to those U.S. representatives. 

Further, the Plenary is dominated by central banks and political appointees. 

Consequently, there is ample reason to doubt that the Board fully understands how its 

decisions affect insurance markets, or that the critical differences between banking and 

insurance are fully appreciated. As a result, most of the regulatory concerns and 

proposed solutions tend to be very bank-centric. The decisions to designate G-SIIs and 

to craft a new global consolidated capital standard for all Internationally Active 

Insurance Groups (IAIGs) are being made by an organization with almost no insurance 

expertise from the U.S. and little expertise from other countries other than the IAIS 

representatives that report to them. 

This lack of insurance expertise is best illustrated by an FSB meeting in 2016 when 

representatives of U.S. Guaranty Funds and companies were invited to participate in 

discussions about potential resolution strategies and plan requirements. During the 

questioning of the invited experts it was clear that the basic guaranty fund structure and 

U.S. insurer assessments for deficiencies were unknown to the FSB members charged 

with decision-making on insurance issues. Incredibly, some were even surprised to 

learn that the guaranty fund system was funded by the insurance companies rather than 
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September 27, 2016 

taxpayers. This was further evidence that this board is not equipped with the facts and 

the understanding of our robust insurance regulatory environment. 

Finally, it is important to note that neither the FSB nor the IAIS are bound by due 

process and neither formally considers the costs of the changes they are making to 

international insurance standards relative to the presumed benefits of these changes. 

With each new or revised standard, costs are added from international regulatory 

enforcement and compliance with seemingly little regard for the impact of these costs 

on governments, insurers, and consumers. 

Financial Stability Board Driving Action on New Insurance Capital 

Requirements 

In 2012, the G-20 and FSB were focused on banks as well as identifying Global 

Systemically Important Financial Institutions (G-SIIs) and developing a new regulatory 

framework for them. The FSB enlisted the help of the IAIS in identifying G-SIIs for 

designation and with the crafting of new regulations for them. Without warning or clear 

reasons, in the summer of 2013 the FSB met with IAIS leadership and informed them 

that, in addition to G-SIIs, other large IAIGs should also adhere to a global consolidated 

capital requirement similar to the Basel II and Ill requirements for banks. The IAIS was 

ordered to design, field test and adopt such global capital requirements first for G-SIIs 

by the end of 2014 and then for the IAIGs by 2016. The pace of this edict was 

unreasonable and unworkable, but IAIS leaders indicated they had no choice but to 

comply. 

Since the FSB's mandate, the IAIS Executive Committee has made numerous decisions 

regarding the structure and design of the International Capital Standard (ICS) for the 

IAIGs without actually stating the problem the FSB was trying to solve, and without 

explaining why the decisions were made. The most troublesome of these decisions 

include: 

• the insistence on a highly detailed, prescriptive formula for the ICS that would be 

applied to all countries; 

• the requirement that all countries use the same valuation/balance sheet without 

regard to the costs and implications; and 

• the insistence that the capital resources that companies use to meet the 

obligation be identical even when the capital instruments available to companies 

vary across countries. 

Since 2013, NAMIC has submitted comments and testified at the IAIS on numerous 

occasions to encourage IAIS members to listen to a different perspective. We have mel 

with stale regulators and federal officials to urge them to make these arguments as well. 

While there has been some recent success resulting in a delay in the "ultimate" 

standard, the IAIS is holding firm on many of the major policy decisions it made in 2013. 

Despite the goal of the IAIS to achieve a comparable ICS for aiiiAIGs around the globe, 

the application of the same capital standard to unique companies that come from very 
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Comments of the National Association of Mutual Insurance Companies Page 5 

The Financial Stability Board - Implications 

September 27, 2016 

different regulatory environments with very different economic and political objectives 

will not produce comparable indicators of capital adequacy or solvency. Every country 

has a unique regulatory system with features that influence the solvency of the 

companies doing business in that regulatory environment. Similarly, every insurance 

group has unique characteristics that cannot be fully captured by a single, one-size-fitsall formula. In their zeal to achieve comparability, the FSB- through the IAIS- will 

succeed only in generating unnecessary costs to governments and insurers. 

The costs to the U.S. will be substantial. In fact, through this process our country is 

being asked to consider major, unnecessary, and ill-fitting changes to its supervision, 

corporate law, and accounting systems to accommodate the new group capital 

requirements. Because the new standards being contemplated are largely derived from 

existing European standards, U.S. insurers will be placed at a competitive disadvantage 

relative to their European counterparts. Indeed, some have suggested that is entirely 

the point: 

The insurers in Europe for the most part rightly hate [European Standards], but 

since it seems inevitable to be imposed on them, they have given up fighting 

Solvency II, and instead back using the FSB to impose it on the US, Japanese, 

and other competing insurers. They figure if they will be limited, they want to be 

sure their global competitors are as well. The US needs to stand up against this 

in the FSB. 2 

NAMIC has asserted that a successful global effort should not create unnecessary 

competitive asymmetries between companies domiciled in different, but equally wellsupervised, jurisdictions. Instead, what is needed is a flexible and dynamic capital 

assessment that would recognize and improve understanding of diverse, successful 

approaches to solvency regulation. Such an approach would be principle-based and 

outcomes-focused. Under this approach, supervisors could achieve the desired goals 

of policyholder protection and insurer solvency without the costs of implementing new 

global systems in nearly every country in the world. 

Unfortunately, the IAIS still seems to be fighting the idea of flexibility. For the time being 

they are willing to field test options that include a variety of accounting systems, but they 

have not agreed that the ultimate ICS could include differing approaches. 

Implementation of the ICS may well favor the local approach of one jurisdiction over 

another, creating further disproportionate costs between similarly situated companies. 

The potential market disruptions could be unintended, but very significant. Although 

they originally were not going to, it now appears that the IAIS is moving forward with a 

cost benefit analysis, though the FSB did not bother to do so. 

2 Dr. Adam Posen, Testimony before UJe U.S. Senate Banking Committee, July 2015, Page 10. 

http://www.banking.scnate.gov/public/ _ cache/files/b9f2617a-7440-45a8-8632-

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September 27,2016 

The FSB Influence on the FSOC SIFI Designation Process 

Page6 

Following the financial crisis, the FSB determined to identify large, international, nonbank financial firms whose failure could threaten the global financial system and 

designate them for enhanced regulation. These designations and enhanced standards 

would be developed in consultation with the IAIS and presumably then implemented by 

the countries of domicile for the designated company. Following the passage of the 

Dodd-Frank Act in 2010, the U.S. established its own process for this type of 

designation of Systemically Important Financial Institutions by the Financial Stability 

Oversight Council. The FSOC would vote and the designated company would be 

subjected to supervision and enhanced regulation by the Federal Reserve. 

We believe that designations of systemic importance should be made by individual 

jurisdictions with appropriate due process, transparency, and accountability. This is to 

avoid what we have seen happening at the FSB. Through incredibly opaque processes, 

the Board appears driven to designate a group of the largest insurers as G-SIIs just for 

the sake of designating insurers. Designations should be based on actual systemic risk, 

not just a selection of the largest companies in each sector. The entire FSB process 

requires more sunshine, clearer focus on actual systemic risk, and a clear path towards 

adequately de-risking to avoid a designation or to get out from under one in the future. 

There is further reason to be concerned about FSB influence on the FSOC designation 

process. Despite the fact that most insurance experts agree that traditional insurance 

activities are not systemically risky, on July 18, 2013, the FSB designated nine large 

international insurers- including U.S. insurers AIG, Prudential, and Metlife- as G-SIIs. 

Although the FSOC had just days before designated AIG, Prudential was not 

designated a SIFI until September 2013, and Metlife was not designated until 

December 2014. We have significant concerns that the sort of deliberative process put 

in place by Congress when it authorized the FSOC to make SIFI designations was 

circumvented and instead processes with pre-determined outcomes were implemented. 

As mentioned above, the Plenary of the FSB makes its decisions by consensus. It is 

simply unfathomable that this group would move ahead with the designation of U.S. 

firms over the objections of the U.S. representatives. This means that the Treasury 

Department, Federal Reserve, and SEC all concurred in the decision to designate AIG, 

Prudential, and Metlife. In the case of Metlife and Prudential, this also means that 

these decisions were reached before the FSOC had conducted its supposedly fair, 

objective, and evidence-based designation process. Three members of the FSOC - the 

Federal Reserve, Treasury Department, and the SEC -had already made their decision 

months before. Perhaps this unusual process explains in part why a federal court has 

seen fit to overturn the Metlife designation as arbitrary and capricious. 

Further, the U.S. insurance industry and its regulatory system are underrepresented at 

the FSB, with no involvement or consultation by the functional state regulators of the 

actual U.S. insurance entities of those designated G-SIIs. When the FSOC designations 

of Prudential and Metlife were made, they were done over the objections of the one 

voting member of the Council with insurance expertise, Roy Woodall as well as the 
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Comments of the National Association of Mutual Insurance Companies Page 7 

The Financial Stability Board - Implications 

September 27, 2016 

state regulator on the council, John Huff. As stated earlier, the court has since 

overturned the Metlife designation. 

Mr. Woodall has stated in congressional testimony that he has a "concern that 

international regulatory organizations may be attempting to exert what I consider to be 

inappropriate influence on the development of U.S. regulatory policy." 3 NAMIC believes 

the evidence clearly demonstrates that he is right to be concerned. 

Conclusion 

In conclusion, the FSB actions on insurance capital requirements and its influence on 

the FSOC SIFI process have not been positive, and have in fact inhibited, and are likely 

to continue to inhibit, growth and competitiveness for the U.S. insurance industry. 

NAMIC believes it is important to ensure that federal agencies representing the U.S. on 

the FSB and at the IAIS are advancing policy positions that represent the interests of 

U.S. insurance consumers, insurance markets, insurance regulators, and the U.S. 

economy in general. To that end, the U.S. should insist on an open and transparent 

policy development process, and the U.S. representatives who engage with 

international bodies should share a common agenda and a common message. That 

message should include a strong defense of the U.S. insurance market and existing 

regulatory structure. It should also promote the interests of U.S. insurers and their 

policyholders. 

Congress has a critically important role to play as these international discussions 

continue. Through oversight and awareness, along with the possible enactment of 

legislation to facilitate a needed course correction, lawmakers can help protect the 

robustly competitive insurance market in this country. NAMIC applauds the Committee 

for holding this important hearing. 

'Roy Woodall, Testimony before the U.S. Senate Banking Committee, April2015, Page 3. 

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.. ~~.fma Invested in America 

Written Testimony of Mr. Carter McDowell 

On behalf of the Securities Industry and Financial Markets Association 

before the U.S. House of Representatives 

Committee on Financial Services 

Subcommittee on Monetary Policy and Trade 

Hearing entitled "The Financial Stability Board's Implications for U.S. 

Growth and Competitiveness" 

September 27, 2016 
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Chairman Huizenga, Ranking Member Moore, and distinguished members of the 

Subcommittee, thank you for providing me the opportunity to testify today on 

behalf of SIFMAI and to share our perspective on the effects of international 

standard-setting at the Financial Stability Board ("FSB"), the Basel Committee on 

Banking Supervision (the "Basel Committee"), and other international financial 

bodies on the United States and our economic growth opportunities. 

I begin with an observation that echoes what many on this Committee have 

identified: U.S. financial markets are unparalleled in their size, depth, dynamism, 

diversification, and resiliency. As the representative of hundreds of banks, broker 

dealers, and asset managers, SIFMA could not agree more. Capital markets play a 

more significant role in fueling the U.S. economy than they do elsewhere. In the 

United States, non-financial corporations obtain approximately 80 percent of their 

aggregate debt financing from bonds, and 20 percent from bank loans; in other 

major economies, those proportions arc nearly reversed.2 

These attributes and qualities are not a given. Our industry has worked with 

regulators since the financial crisis to make top-to-bottom reforms, implement the 

requirements of the Dodd-Frank Act, and establish other robust risk management 

practices to rebuild trust in our financial institutions and markets. U.S. financial 

institutions have worked to make the system safer by raising significant amounts of 

SIFMA is the voice of the U.S. securities industry. We represent the broker·dealers, banks 

and asset managers whose nearly 1 million employees provide access to the capital markets, raising 

over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $20 trillion 

in assets and managing more than $67 trillion in assets for individual and institutional clients 

including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, 

D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more 

information, visit http://www.sifma.org. 

See SIFMA Research: U.S. Capital Markets Deck, at p. 8 (Oct. 2015), available at 

http://www.sifma.org/research/item.aspx?id=8589956851. 

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capital and liquidity, establishing living wills that support their orderly resolution, 

and changing market practices. 

The strength of U.S. financial markets is also the result of a regulatory system that, 

historically, has been transparent and collaborative, involved robust public 

participation, and considered the particular circumstances of U.S. markets. 

Of course, U.S. financial firms operate globally, and likewise, the U.S. capital 

markets are benefited by many non-U.S. domiciled firms that operate and provide 

valuable market capacity in the U.S. SIFMA represents both. In this context, 

global policymakers have found it increasingly necessary to establish harmonized 

regulatory standards for financial institutions internationally, with the goals of 

leveling the playing field among financial institutions based in different 

jurisdictions, minimizing the opportunities for cross-border arbitrage, and creating 

more consistent rules of the road for financial institutions and their customers and 

counterparties. SIFMA supports and shares these goals. 

The result of this dynamic, however, is that major changes affecting the framework 

of United States prudential and market regulation increasingly originate at an 

international regulatory body. The process typically begins with the adoption of an 

international standard at the FSB, the Basel Committee, or, somewhat less 

frequently, the International Organization of Securities Commissions ("'OSCO") or 

the International Accounting Standards Board ("IASB"). Only after final adoption 

of the international standard do U.S. regulators typically initiate a notice-andcomment rule making subject to the Administrative Procedure Act ("AP A") to 

translate the international standard into U.S. law. 

While SIFJ\1A and its members support harmonized and consistent international 

standards, we also believe that there are certain characteristics of U.S. markets 

that are unique or sufficiently different from markets in other jurisdictions that 

they should be subject to significant adjustments and calibration or even different 

standards. In this context, we have become very concerned that the more U.S. 

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regulators base their rules on standards adopted internationally, without 

adequately taking into account the unique characteristics of U.S. markets, the more 

U.S. financial institutions become subject to rules that in significant ways do not 

make sense for the U.S. financial markets or broader economy. To be clear, my 

remarks today are less about our substantive concerns with the particular 

rulemaking outcomes in the United States of standards adopted internationally, 

which we have raised in other testimony and comment letters. Rather, my focus 

today is more on the process for setting international standards and their knock on 

effects on the U.S. rule making process, which we believe can be improved. Indeed, 

insufficient international process has sometimes resulted in the eventual adoption 

of U.S. rules plagued by substantive issues that could have been avoided had they 

been subject to better process from the beginning. Regardless of one's opinion of the 

end product, however, the current international standard setting process lacks the 

equivalent transparency, accountability, and public participation that the APA 

requires for rulemakings promulgated in the United States. 

The important roles that international standard setting bodies can and do play in 

coordinating global regulatory efforts and promoting financial stability underscore 

the need for better process. I will devote the remainder of my remarks to 

summarizing the most significant issues with the international standard-setting 

process, and then identifying ways in which we believe Congress should intervene 

to address these issues. 

Lack of Procedural Safeguards at International Bodies 

The FSB, Basel Committee, and other international bodies are not subject to 

statutory procedural protections such as those embodied in the AP A, the Freedom of 

Information Act, or the Government in the Sunshine Act. As a result, the 

international bodies have adopted their own procedures, which are opaque 

compared to the requirements of U.S. administrative law, and should be reformed: 

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• Lack of public records. The international bodies do not meet or hold 

hearings publicly and do not provide the public with any written record of 

their deliberations. 

• Lack of public positions by members. The international bodies do not 

disclose the positions that their individual members take on any matter. Of 

particular importance to the United States, there is no way for the American 

public to know the positions that U.S. regulators took on critical regulatory 

matters in the international forum. 

• Lack of requirement for meaningful consideration of public 

comments. The international bodies have made some progress in enhancing 

outreach efforts by adopting procedures providing that they will generally 

solicit public comment on their proposals.3 In addition, international bodies 

sometimes hold workshops and roundtables to provide financial market 

participants an opportunity to share views and industry expertise. \Vhile 

industry groups like SIFMA appreciate the opportunity to engage and 

provide input, it remains the case that there is no requirement that these 

international bodies actually consider those comments and views, or 

otherwise address them. In addition, the U.S. regulators and supervisors 

generally do not seek public comment domestically before agreeing to an 

international standard. 

Little explanation of basis for rules. The explanatory text that 

accompanies international standards is generally less robust in quantity and 

quality compared to the commentary that typically accompanies U.S. rules. 

Indeed, it is often not entirely clear why the international bodies choose to 

See FSB Procedural Guidelines at p. 9 (Feb. 1, 2013), available at http://www.fsb.org/wpcontentJuploads/FSB-Procedural-Guidelines-3l.l.l3.pdf ("The Plenary may decide to conduct a 

public consultation"); Basel Committee on Banking Supervision Charter, at p. 7 (Jan. 2013), 

available at https://www.bis.org/bcbs/charter.htm ("'n principle, the BCBS seeks input from all 

relevant stakeholders on policy proposals."). 

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propose a new standard or to make significant changes to a proposal in 

adopting a final standard. Absent more robust explanation, it is difficult for 

the public to understand the concerns underlying the international bodies' 

standards and to provide meaningful comments on them. 

• Reliance on non-public data. The international bodies collect considerable 

amounts of data from financial institutions, including through Quantitative 

Impact Studies (QIS), but generally do not disclose or discuss the results of 

these data exercises on which their decisions rely until after adopting a 

standard. As a result, the public generally does not have the opportunity to 

comment on whether the international bodies have drawn appropriate 

conclusions from their data, or whether their data shows significant 

variances in different jurisdictions and different business models. 

• No cost-benefit analysis. The international bodies are not required to 

conduct any cost-benefit analysis, and even if they do conduct a cost-benefit 

analysis, they typically do not publish or discuss the results. 

International Standard-Setting Can Impact the Public Comment Process 

in the United States 

A meaningful public comment process is not only a legal requirement in the United 

States under section 533 of the AP A, but also makes for better and more 

transparent rulemaking. As the U.S. Court of Appeals for the D.C. Circuit has 

stated: 

The general policy of section 553 [ofthe APA] is to provide 

for public notice and comment procedures before the 

issuance of a rule. This public participation assures that 

the agency will have before it the facts and information 

relevant to a particular administrative problem, as well 

as suggestions for alternative solutions. Public 

rulemaking procedures increase the likelihood of 

administrative responsiveness to the needs and concerns 

of those affected. And the procedure for public 

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participation tends to promote acquiescence in the result 

even when objections remain as to substance. 4 

Yet, we fear that international standard-setting can result in U.S. regulators failing 

to engage adequately in their responsibilities to have relevant facts and suggestions 

before them when considering new rules. While the U.S. regulators still go through 

an AP A notice-and-comment process in the United States, by the time they release 

a proposed rule domestically, we also fear they sometimes do so having already 

made up their minds in the international context when they committed themselves 

to the international standard, making any subsequent change to that standard 

much more difficult than might otherwise have been the case. Even the most wellreasoned and data-driven U.S. public comments may be no match for the weight 

given to a pre-existing international commitment. Stated differently, as one 

commenter has noted, "[a]fter international agreement, the domestic rulemaking 

that follows is the train that follows the engine: Although it may look like any other 

form of administrative action, its outcome is preordained by what has already 

happened abroad."5 

As a result, when implementing an internationally adopted standard domestically, 

U.S. regulators have often been extremely reluctant to deviate in material ways 

from the international standard, especially in recent years- with one notable 

exception: they sometimes adopt a U.S. rule that is more stringent than, but 

conceptually consistent with, the international standard.6 In effect, regulations 

often arrive in the United States appearing to be "pre-baked" before the public 

Guardian Fed. Sav. & Loan Ass'n v. Fed. Sav. & Loan Ins. Corp., 589 F.2d 658, 662 (D.C. Cir. 

1978). 

David Zaring, Best Practices, 81 N.Y.U. Law Review 294, 305 (2006). 

Very occasionally, the U.S. regulators will make changes to an international standard that 

are necessary to comply with other requirements of U.S. law. For instance, the Basel Committee's 

standardized approach to credit risk assigns risk weights to corporate exposures based on their 

external credit ratings. Under section 939A of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act, U.S. regulations may not reference external credit ratings. As a result, the U.S. 

capital rules assign a flat 100 percent risk weight to all corporate exposures. 

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comment period begins. As a result, we believe the AP A process has become far less 

robust as a practical matter than it should be. 

This problem is especially acute when the international bodies add new 

requirements or concepts for the first time not in a proposed standard, but in the 

final standard after ostensibly considering public comments. That is, sometimes an 

international body proposes a standard, receives comments on it, and then makes 

fundamental changes in the final standard without giving the public the 

opportunity to comment on those changes.7 Then, when a U.S. regulation is 

proposed that includes these fundamental changes that were never subject to public 

comment, the U.S. regulators appear to be just as "dug in" and reluctant to make 

changes to these aspects of the rule, which never received any public scrutiny, as 

they are on other aspects of rule that had received such scrutiny. As a result, when 

international bodies fail to re-propose for comment materially changed concepts 

that they develop after their initial proposal, and the U.S. regulators treat such new 

concepts in proposed implementing rules as virtually set in stone, then the public is 

effectively shut out of the comment process altogether. We believe that result is a 

fundamental denial of due process that leads to less effective and less legitimate 

rules. 

International Bodies Are Not Subject to Legislative Oversight or 

Accountability 

The international financial regulatory bodies are not formed or governed by any 

treaty, and therefore have never been authorized by or subject to oversight by 

members' legislatures. And in the cases where an international body is technically 

As an example, the Basel Committee adopted a final standard for the Net Stable Funding 

Ratio that included a number of significant features that the Basel Committee did not include in its 

proposed standard. SIFMA discussed this issue on pages 11 to 14 of our August 5, 2016 comment 

letter with other trade associations on the U.S. Net Stable Funding Ratio Proposed Rule, available at 

http://www.sifma.org/issues/itcm.aspx?id=8589961839. 

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subject to "oversight," it is effectively the international body itself that assumes the 

oversight role. 

For instance, the Basel Committee is "overseen" by the Governors and Heads of 

Supervision. This body is comprised of monetary and supervisory authorities from 

the same member jurisdictions that comprise the Basel Committee. In many cases, 

the same government agencies that are represented on the Basel Committee are 

represented on the Governors and Heads of Supervision. Almost no information is 

publicly available regarding the process, composition, or decisions of the Governors 

and Heads of Supervision. It is not clear that this body provides any true challenge 

to the decisions of the Basel Committee. 

International Standards Often Do Not Permit Adequate Tailoring For 

Unique Circumstances 

Many international standards reflect the assumption that what works in one 

jurisdiction will always work in others. In many significant instances, this is not 

the case. For countries with limited capital markets activity, which describes many 

of the FSB and Basel Committee members, the standards that apply to financial 

institutions reflect a bank-centric approach. While they have made good progress of 

late, the FSB and the Basel Committee historically have not appeared to coordinate 

adequately with IOSCO and market regulators when setting capital and liquidity 

standards that have significant consequences for broker-dealers, asset managers, 

swap dealers, and future commission merchants affiliated with banking 

organizations, as well as the markets they serve. The Basel Committee's Net Stable 

Funding Ratio and Fundamental Review of the Trading Book are just two examples 

of standards that will significantly affect capital markets. 

In the United States, where capital markets are more important sources of funding 

in the economy, a bank-centric approach can result in ill-fitting and artificially 

constraining regulations that impede growth. Even within the sphere of banking, 

the United States is unique. Here, banking institutions are legally separated from 

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securities and insurance affiliates, but many countries that are members ofthe 

international bodies have a universal bank model under which a single entity can 

engage in all types of financial activities. In addition, housing finance and 

consumer finance play much more significant roles in the U.S. economy than they 

do in most other countries. 

SIFMA believes that many ofthe regulations adopted in the past several years that 

have had the most distortive effects are those that do not take into account effects 

on capital markets or the unique aspects ofthe U.S. markets. 

Yet, International Standards Do Not Necessarily Result in Uniformity or 

Cooperation 

International standards do not always result in their stated goal of harmonization, 

for several reasons: 

• U.S. regulators often make their domestic rules more stringent than (or 

"super-equivalent" to) international standards. As one significant example, 

the U.S. has implemented an "enhanced" supplementary leverage ratio that 

is calibrated well above the minimum Basel leverage ratio.s 

• Non-U.S. regulators sometimes make their domestic rules less stringent than 

international standards. 

• International standards sometimes provide special treatment to certain 

member jurisdictions. For instance, the FSB delayed the effectiveness of its 

Total Loss-Absorbing Capacity standard for firms headquartered in emerging 

market economies.H 

See 79 Fed. Reg. 24,528 (May 1, 2014). 

See FSB, Total Loss-Absorbing Capacity Term Sheet, at p. 21 (Nov. 9, 2015), available at 

http://www.fsb.org/2015/ll/total-loss-absorbing-capacity-tlac-principles-and-term-sheeti. 

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In addition, international standards do not always improve coordination among 

regulators from different countries. For instance, the Federal Reserve has proposed 

an internal Total Loss Absorbing Capacity requirement for the U.S. subsidiaries of 

foreign banks that is super-equivalent to the international standard. In the event 

of the failure of a foreign bank, the proposal would effectively allow the U.S. 

regulators to "ring fence" assets in the United States rather than cooperate with the 

bank's home regulator to resolve the bank in an orderly manner. This proposal 

could inspire regulators around the world to retaliate against the foreign 

subsidiaries of U.S. banks by imposing similar requirements on them. 10 

International Standards Continue to Change 

Just as the paint has begun to dry on the Basel III capital and liquidity framework 

in the United States, the Basel Committee has embarked on developing a slew of 

new standards, known collectively to the public as "Basel IV," to make capital 

requirements less risk-sensitive and increase capital requirements for trading 

activities. 

Basel IV represents a move toward further standardization and away from the ways 

that banks manage risk internally. In developing Basel IV, the Basel Committee is 

providing itself even greater power to make judgments about risk and thereby 

dictate the activities in which banks around the world should engage. In addition, 

the part of Basel IV known as the Fundamental Review of the Trading Book would 

impose extremely high capital requirements on trading and securitization activities 

that play a much bigger role in funding the U.S. economy than they do elsewhere. 

SIFMA believes the Fundamental Review of the Trading Book is a prime example of 

10 SIFMA discussed these issues in our February 19, 2016letter to the Federal Reserve on the 

U.S. TL/\C Proposed Rule, available at http://www.sifma.org/issues/itern.aspx?id=8589958980. 

(continued ... ) 

II 
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an international standard that docs not take into account the prominence of capital 

markets in debt financing in the United States.u 

The U.S. regulators have not presented the numerous and highly consequential 

standards that comprise Basel IV for debate in the United States, even as they 

negotiate the standards internationally. Again, this could undermine the 

safeguards that Congress established when it passed the APA and disempower the 

stakeholders that are impacted by any subsequent domestic rulemaking. 

Direction From Congress is Needed 

In light of the increasing internationalization of financial regulation and the many 

serious issues that I have outlined with the process, SIFMA believes it is time for a 

critical examination of how U.S. regulators engage with international bodies that 

impact domestic policy. We hope that Congress uses this opportunity to mandate 

improvements in the international standard-setting process in two ways. 

First, Congress should require the U.S. regulators to improve the process they use 

when participating in international rulemakings. SIFMA strongly supports section 

10 of H.R. 3189, the Fed Oversight Reform and Modernization Act (FORM Act), 

which would require the U.S. banking regulators, U.S. Treasury, and the Securities 

and Exchange Commission to notify the public before participating in a process of 

setting international financial standards, and to seek public comment on the subject 

matter, scope, and goals of such a process. Adopting section 10 of the FORM Act, in 

its current form, would be an important first step that Congress could supplement 

with other reforms. The U.S. regulators should also be required to publish their 

positions and votes on international standards. In addition, Congress could make 

clear in legislation that the U.S. regulators should not follow international 

standards when doing so would be inappropriate in light of the structure, 

II SIFMA discussed these issues in our November 12, 2015 letter to the U.S. banking 

regulators and U.S. Treasury on the Basel Committee's Fundamental Review of the Trading Book, 

available at http://www.sifma.org/issues/item.aspx?id=8589957660. 

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conditions, or scale of U.S. markets. Finally, Congress should require the U.S. 

regulators, when proposing a regulation to implement an international standard, to 

identify and be especially receptive to comments and suggested changes to any 

significant provision that had not been subjected to public comment during the 

international standard-setting process. 

Second, Congress should require, through legislation, reforms in the standardsetting processes of the international bodies themselves. These reforms could 

include, for example, requiring the international bodies to: 

• hold public meetings and hearings, and publish records that include member 

votes; 

• include robust discussion of significant public comments when publishing 

final standards, explaining why comments were rejected, accepted or 

modified; 

• disclose the data on which their standards are based, subjects to appropriate 

safeguards to protect firm-level data; 

• conduct publicly disclosed cost-benefit analyses; and 

• ensure that material changes to a proposed standard will be re-proposed for 

public comment before the standard is finalized. 

To be clear, Congress does not have authority to impose requirements directly on 

international regulatory bodies. However, Congress can impose conditions on the 

participation by U.S. regulators in those bodies. Participation of the United States 

in international standard-setting is so important to the legitimacy and influence of 

those bodies that they would likely adopt any reasonable conditions that Congress 

imposed. 

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There is precedent for this approach. In the International Lending Supervision Act 

of 1983, Congress directed that the FDIC be represented equally with the Federal 

Reserve and the OCC at the predecessor body to the Basel Committee_I2 Shortly 

thereafter, the FDIC was admitted as a member. More fundamentally, in 1983 

Congress directed the U.S. banking regulators to "encourage" regulators of other 

major banking countries to strengthen the capital of internationally active banks. 13 

This mandate from Congress resulted in the international adoption of the Basel I 

accord in 1988, and provided U.S. regulators with the ability to raise capital 

standards domestically without putting U.S. banks at a competitive disadvantage to 

their foreign peers_14 In sum, Congress has taken action to influence international 

regulatory bodies in the past, and can and should do so now. 

Conclusion 

SIFMA recognizes that international standard-setting bodies have necessary and 

appropriate roles to play in the coordination of global regulatory efforts. However, 

these bodies, and the U.S. regulators' participation in them, should be subject to 

much more rigorous scrutiny, transparency and procedural requirements than they 

are currently. Procedural reforms that enhance public participation in the 

rulemaking process would improve the quality and "fit" of international and 

domestic regulation, ultimately to the benefit of U.S. financial markets and the 

businesses, and consumers who rely on those markets. 

12 Pub. L. 98-181 § 912, 97 Stat. 1284 (Nov. 30, 1983) (codified at 12 U.S. C.§ 3911). 

Pub. L. 98-181 § 908. 97 Stat. 1281 (codified at 12 U.S. C.§ 3907(b)(3)(C)). 

11 See Charles Goodhart, The Basel Committee on Banking Supervision: A History of the Early 

Years, 1974-1997, Cambridge University Press, at p. 5 (2011). 

14 
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~!~ 1•~ Americans for 

• ; Financial Reform 

The Financial Stability Board's Implications for U.S. Growth and Competitiveness: Testimony 

before the U.S. House of Representatives Financial Services Committee Subcommittee on 

Monetary Policy and Trade 

Marcus Stanley 

Policy Director 

Americans for Financial Reform 

Tuesday, September 27, 2016 

Chairman Huizenga, Ranking Member Moore, and members of the subcommittee, thank 

you for the opportunity to testify before you here today. My name is Marcus Stanley and I 

am the Policy Director of Americans for Financial Reform. 

In considering the topic oftoday's hearing- the implications of the Financial Stability 

Board for U.S. growth and competitiveness- I believe the starting point should be the 

actual powers and responsibilities of the Financial Stability Board (FSB). The FSB is a 

not-for-profit association with no statutory powers whatsoever under U.S. law, or indeed 

the law of other member countries. Its output consists of reports and recommendations, 

not of laws or regulations. 

The FSB does publish broad conceptual standards in the area of financial regulation, but 

its recommendations can only be legally realized through the actions of legislative or 

administrative bodies in member states. In the U.S., such actions would require either laws 

to be made through constitutional processes, or regulations passed through notice and 

comment rulemaking. 

So the immediate response to the question of the implications of the FSB for the U.S. 

economy seems clear: there arc no direct implications, as FSB recommendations and 

standards have no legal force in the U.S. or anywhere else. This is in sharp contrast to 

some other international discussions such as those resulting in trade agreements. The 

negotiation process for these agreements provides far less transparency than the FSB 

process, and they go into effect as U.S. law once they are ratified. It is notable, and ironic, 

that many who do not question the effects of trade agreements on the U.S. economy or 

U.S. sovereignty are expressing so much concern about the impacts of the FSB. 

At the same time, the standards set by the FSB do have some weight as indicating the 

consensus of the international regulatory community. While the FSB is a purely advisory 

body, its membership contains key leaders of central banks and financial regulators across 

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Americans For Financial Reform Testimony: HFSC Subcommittee on Monetary Policy and Trade 

the G-20 countries. FSB reports therefore indicate a broad conceptual consensus of key 

regulators on the financial regulation and systemic risk. Elements of this conceptual 

consensus have come under strong attack from industry interests in the United States. 

These attacks are sometimes made even when there is no strong difference in views on 

FSB policy recommendations. Such recommendations tend to be rather mild generally. 

For example, the latest comment letter from the Investment Company Institute to the FSB 

states1

: 

"By and large, we have few objections to the proposed policy recommendations. 

They generally envision that IOSCO and authorities in each jurisdiction will 

review existing disclosure and reporting requirements, the availability of risk 

management tools, and potential enhancements to data collection and regulatory 

monitoring. The recommendations further envision that, on the basis of their 

findings, IOSCO and the authorities will make enhancements to existing 

regulation and guidance where appropriate. This approach ... contemplates taking 

into account existing regulation and relevant circumstances in each jurisdiction." 

The letter then proceeds to take issue at length not with the FSB's policy 

recommendations, but with the FSB's empirically supported claims that open-ended funds 

could create some level of systemic risk due to possible mismatches between short-term 

liabilities and illiquid underlying assets. The concern seems to be less with the FSB's 

actual recommendations than with the very fact that they see the possibility of systemic 

risk in the asset management sector. 

These conceptual disagreements with the FSB have been most vocal in the case of 

regulation of non-banks, or what is sometimes called shadow banking, especially 

investment fund regulation and the regulation of large insurance companies. Before 

turning to these topics specifically, however, it is useful to consider the general role of the 

FSB as a forum for international discussion and coordination of financial regulation. 

Given the globalized nature of financial markets, the need for such an international forum 

is obvious. Especially in the context of trade agreements, we regularly see industry calling 

for improvements in regulatory coordination under the rubric of··rcgulatory coherence". 

From a different perspective, public interest groups such as Americans for Financial 

Reform and other civil society groups globally have fought for high standards of financial 

1 Investment Company Institute, "Comment to Financial Stability Board On Consultative Document; Proposed 

Policy Recommendations to Address Structural Vulnerabilities from Asset Management", September 21, 

2016. 

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Americans For Financial Reform Testimony: HFSC Subcommittee on Monetary Policy and Trade 

regulation across all of the various global financial centers. If an international forum like 

the FSB did not exist, we would probably all be urging regulators to invent it. 

But coordination should not mean a "one size fits all" type of regulation. National 

circumstances and cultures differ, as do voter preferences concerning, for example, the 

extent of the national safety net. Americans for Financial Reform and other civil society 

organizations have consistently fought for "super-equivalence'' of U.S. regulations when 

the consensus of international regulators fell short of the level of oversight needed to 

ensure the safety of the U.S. financial system and the protection of consumers. An 

advantage of an organization such as the FSB, as opposed to, for example, trade 

agreements that require a "minimum standard of treatment" enforced by private dispute 

settlement, is that individual nations have the freedom to diverge from FSB 

recommendations. 

The FSB Perspective on Shadow Banking and Insurance Regulation 

Much of the criticism of the FSB has come from financial industry attacks on the FSB 

perspective regarding shadow banking regulation, particularly the regulation of investment 

funds, and also the role of the FSB in coordinating with the International Association of 

Insurance Supervisors (IAIS) concerning global capital standards for insurance 

companies. 

We support the efforts of the FSB to examine these sectors and to highlight potential risks. 

The experience of the financial crisis demonstrates the importance of regulating nonbanks such as investment funds and insurance companies. The 2008 financial crisis 

showed that, particularly in a financial system that lacks firewalls between banking and 

capital markets activities, unforeseen stresses in capital markets can pose grave threats to 

both the banking system and the larger economy. At the heart of the financial crisis was a 

comprehensive failure of capital market liquidity. As major players in the capital markets, 

asset managers and insurance companies can contribute to such failures of liquidity 

through disorderly forced selling of assets ("fire sales") and/or an inability to execute on 

commitments to investors. 

This concern is not simply theoretical. We know that insurance companies played a significant 

role in the 2008 financial crisis, both directly and indirectly. American International Group 

(AIG), the world's largest insurance group at the time, was at the epicenter of the crisis, and of 

course collapsed and required the largest govemment bailout in U.S. history. Mono line financial 

guaranty (bond) insurance companies and mortgage insurance companies also played a major 

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Americans For Financial Reform Testimony: HFSC Subcommittee on Monetary Policy and Trade 

role in the crisis and in some cases also collapsed.2 While these links between the financial crisis 

and the insurance industry were well publicized, it is less well known that life insurance 

companies offering large amounts of variable annuities also took heavy losses and came under 

enormous financial pressure due to market-linked liabilities and the failure of their hedging 

strategies in stressed markets.3 In some cases these pressures, and their intersection with 

regulatory capital requirements, led to fire sales that increased losses in distressed markets.4 

Major life insurance companies also participated in TARP and various Federal Reserve 

emergency lending programs such as the commercial paper program. 

The response of both U.S. and international regulators has been to seek mechanisms for better 

consolidated supervision of insurance companies. In Europe, which has an insurance regulatory 

system very different from that of the United States, the response has centered around the 

Solvency II initiative. In the U.S., the Federal Reserve is acting to introduce a layer of 

consolidated capital oversight of state-regulated insurance companies, which balances the need 

for a comprehensive consolidated view of insurer risks with the role of state supervision. 

In the case of asset managers, although they did not play as central a role in the 2008 crisis, we 

can look both to recent events and to previous historical experience. The 1987 stock market 

crash was related to portfolio insurance implemented using program trading by asset managers. 

The crash triggered emergency Federal Reserve liquidity support and threatened the solvency of 

a major clearinghouse. It is a clear example of a systemic financial event related to operational 

failures by asset managers in planning for and executing mutual fund redemptions. The Long 

Term Capital Management failure in 1998 involved the failure of a major hedge fund that 

became overleveraged using derivatives strategies. As LTCM's failure threatened its prime 

brokers which were major banks, infonnal government intervention to negotiate an orderly wind 

down was necessary. 

Asset managers also played a significant role in the 2008 financial crisis, although they were not 

its central players. The most important link to the fund management industry involved the role of 

money market funds. The exit of money market funds from commercial paper markets during 

2 Schich, Sebastian, "Insurance Companies and the Financial Crisis", OECD journal, Financial Market Trends, 

Volume 2009, Issue 2, Organization for European Cooperation and Development, October, 2009. 3 McKinsey Consulting. "Responding to the Variable Annuity Crisis", McKinsey Working Papers on Risk, April, 

2009; Du David Fengchen and Cynthia Martin, "Yariable Annuities- Recent Trends andJ:h.e Use of Captives", 

Federal Reserve Bank of Boston, October 7, 2014. 4 Acharya, Vidal and Matthew Richardson, "Is The Insurance Industry Systemically Risky?", Conference Paper 

for Brookings Institution Conference On Insurance Regulation, October 14, 2014; Merrill, Craig B. and 

Nadauld, Taylor and Stulz, Rene M. and Sherlund, Shane M., "Were There Fire Sales in the RMBS Market?" 

Charles A. Dice Center Working Paper No. 2014-09; Fisher College of Business Working Paper No. 2014-03-

09, May, 2014. 

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Americans For Financial Reform Testimony: HFSC Subcommittee on Monetary Policy and Trade 

2007 helped trigger extraordinary intervention by the Federal Reserve, and the run on money 

market funds in late 2008 triggered a large-scale Federal government bailout. Beyond the clear 

role of money market funds, other asset managers were significantly involved in other ways. For 

example, hedge funds originated subprime CDOs that helped fuel the crisis, and the failure of 

two credit hedge funds helped trigger the collapse of Bear Steams. 5 In other countries, 

investment funds also played a notable role in the crisis, as can be seen for example in the 

liquidity crisis in the commercial real estate sector in the UK, which was driven to a significant 

degree by forced selling and redemption issues among UK property funds. 6 

Yet seeking a smoking gun in terms of the ability of asset managers or insurance companies to 

singlehandedly "cause" a financial crisis misses the point. Simply because these entities play 

such a vital role in deploying a vast stock of assets, their decisions and behavior are central to the 

financial system and can impact the real economy. A key mechanism here is large-scale fire sales 

of assets, which impact market liquidity and can create spillover effects on banks and the broader 

economy. A recent study provides powerful evidence that disorderly forced selling of bonds by 

mutual funds and insurance companies during the 2008 financial crisis created direct economic 

harm to real economy companies, reducing investment and profitability over a period ofyears.7 

We must also look beyond the experience of the past to current developments in financial 

markets. The large increase in assets held by bond funds since the financial crisis may produce 

vulnerability to forced selling in the case of rapid redemption demands that are not properly 

planned for by asset managers. Such forced sales could impact the stability and liquidity of 

financial markets more broadly, not just investors in the specific fund. A recent modeling 

exercise by economists from the New York Federal Reserve finds that the potential secondary 

price impact of bond sales by mutual funds has increased almost six-fold since the financial 

crisis.8 The existence of this mechanism is also supported by other recent research.9 

! !igh!ighting and investigating these potential threats to financial market stability is exactly what 

we should be asking our regulators to do. Discussion, analysis, research, and coordination on an 

international level can only help in that effort. The proper regulatory response is an involved 

5 Eisinger, jesse and jake Bernstein, "The Magnelar Trade: How One Hedge Fund Helped Keep the Housing 

Bubble Going", Pro Publica, April 9, 2010. 6 Price Waterhouse Cooper UK, "Unlisted Funds-- Lessons From the Crisis Report for the Association of Real 

Estate Funds", january, 2012. 7 Asian, lladiye, and Praveen Kumar, "Spreading the Fire: Investment and Product Market Effects of Bond Fire 

~".American Finance Association Conference Paper, january 5, 2015. 8 Cctorelli, Nicola, Fernando Duarte and Thomas Eisenbach, "Are Asset Managers Vulnerable to Fire Sales", 

Liberty Street Economics Blog, New York Federal Reserve, February 18, 2016. 9 Goldstein, ltay, Hao Jiang and David T. Ng, "Investor Flows and Fragility in Corporate Bond Funds", Wharton 

Finance Working Paper, May, 2016. 

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Americans For Financial Reform Testimony: HFSC Subcommittee on Monetary Policy and Trade 

question and regulations should be tailored to the specific markets being regulated. However, 

since the FSB does not directly regulate these markets, FSB involvement does not remove 

control of these issues from the U.S. political or regulatory system. The issues of specific 

regulation can be addressed by U.S. regulators in a transparent manner, through the notice and 

comment process. 

This is exactly what is happening today. The Securities and Exchange Commission has 

responded to concerns about asset management by issuing several proposed rules that address 

issues ranging from fund disclosures to planning for investor redemptions. The Federal Reserve 

has issued proposals related to oversight of insurance companies within their jurisdiction. Both 

industry and the public can respond to these proposals, and are doing so. The international 

dialogue facilitated through the FSB is a helpful supplement to this process, and where 

appropriate a means of coordinating rules across international borders. 

Thank you for the opportunity to testify before you today. I would he happy to take questions. 

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~ . COMPANY I Alflll'ltf.IINVESTMENT 

~ ~,,; INSTITUTE 

1401 H Street, NW, Washington, DC 20005-2148, USA 

202./326-saoo www.lci.org 

STATF,MENT 

OF 

PAUL SCHOTT STEVENS 

PRESIDENT & CEO 

INVESTMENT COMPANY INSTITUTE 

BEFORE THE 

US HOUSE OF REPRESENTATIVES 

COMMITTEE ON FINANCIAL SERVICES 

SUBCOMMITTEE ON 

MONETARY POLICY AND TRADE 

ON 

THE FINANCIAL STABILITY BOARD'S IMPLICATIONS FOR 

US GROWTH AND COMPETITIVENESS 

SEPTEMBER 23, 2016 
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25966.029

EXECUTIVE SUMMARY 

• ICI supports appropriate regulation to ensure the resiliency and vibrancy of the global financial 

system. We likewise believe it is appropriate for regulators to examine asset management to identifY 

potential risks. Any such review, however, must be thorough, balanced, fact-based, and led by those 

with relevant expertise-i.e., capital markets regulators. 

• From the outset, the Financial Stability Board ("FSB"), whose membership consists largely of 

central bankers and finance ministers, has been predisposed to view virtually all financial activity 

conducted outside ofbanks as "shadow banking" and inadequately regulated because it is not 

subject to bank standards and supervision. As it relates to regulated funds and their managers, this 

orientation is deeply troubling in light of the FSB' s ability to influence regulatory policy in its 

participating jurisdictions. US mutual funds and other regulated funds differ fundamentally from 

banks, and are among tbe most transparent and comprehensively regulated parts of the financial 

system. 

• Over the last three years, the FSB has focused considerable attention on the asset management 

sector. 

o The FSB has proposed methodologies for identifYing individual investment funds and asset 

managers for possible designation as global systemically important financial institutions 

("G-SIFis"). Broadly speaking, these methodologies have been advanced without due 

regard for empirical evidence, historical experience, industry structure and practice, existing 

regulation, and other factors that might bear on the existence or severity of the risks posited 

by the FSB. 

o The FSB is engaged in a review to identifY" structural vulnerabilities" in asset management 

activities raising concerns for global financial stability and to develop policy 

recommendations to address such risks. Regrettably, the justifications underlying the FSB' s 

recommendations reflect the same sort of conjectures and assumptions that are apparent in 

the FSB's G-SIFI work on asset management. 

• There are fundamental problems that pervade the FSB' s work on asset management. 

o First, the FSB's proposed G-SIFI methodologies and its review of asset management 

activities are firmly rooted in concerns with "distress" and "disorderly failure" derived from 

the experience ofbanks and banking regulators. Only the occasional nod is given to 

fundamental distinctions between banking and asset management. 

o Second, the FSB affords an inadequate role to subject matter experts. Of particular concern 

to ICI, capital markets experts are leading neither of the FSB efforts highlighted above. 
51 


25966.030

o Third, the FSB discounts empirical data and analysis that does not comport with the 

theories on which its work in asset management are based. Those theories include the 

potential for "fire sales" of investment fund assets, the transmission of risk from one or 

more investment funds to other market participants, and spillover effects to the global 

financial system. ICI believes the FSB has vastly overstated the potential for such effects. 

And, in the 76-year history of the modern US fund industry, there is no empirical basis for 

the FSB' s concerns. 

In this regard, it is troubling that individual members of the FSB-including the Bank for 

International Settlements (which describes itself as "a bank for central banks") and the 

International Monetary Fund-arc perpetuating the same conjectures about investment 

funds through other means. Our testimony offers several examples. 

o Fourth, there is reason to question whether the FSB's work in asset management is simply 

results-oriented. There is an extensive public comment record that contradicts the FSB 's 

conclusions to date in fundamental respects, yet it appears to have had little impact on the 

FSB's thinking to date. 

o Fifth, as set forth in detail below, we have strong reservations about the transparency and 

fairness of the process that the FSB has followed in its work on asset management and the 

process it envisions for evaluating investment funds and asset managers under its proposed 

G-SIFI methodologies. 

• In many of the five areas enumerated above, we see similar deficiencies in the Financial Stability 

Oversight Council's ("FSOC") SIFI designations and its review of asset management. 

• We are troubled by the fact that a US Federal Reserve Board Governor leads the FSB committee 

overseeing the work on proposed G-SIFI methodologies for investment funds and asset managers. 

This arrangement raises the prospect that the process set in motion by the FSB ultimately could he 

used to exert multilateral int1uenec on the FSOC to expand the reach of the Federal Reserve Board 

itself ro regulated US funds and their managers and, by extension, US capital markets. 

• SIFI or G-SIFI designation of regulated funds or their managers would have severe consequences. 

The requirements prescribed by the Dodd-Frank Act for S!Fis, such as capital and liquidiry 

requirements, would-if applied to a regulated fund-result in higher costs and lower investment 

returns for individuals saving for retirement, education, and other life goals. Designation also could 

have far-reaching implications for how a fund's portfolio is managed, depending on how the Federal 

Reserve exercises irs supervisory charge under the Dodd-frank Act to "prevent or mitigate" the risks 

presented by large, interconnected financial institutions. As I have explained in previous 

Congressional testimony, regulated funds and their managers could be subject to a highly cont1icted 

form of regulation, pitting rhe interests of banks and the banking system against those of millions of 

investors. 

ii 
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• To address several of our concerns with the FSB, ICI recommends that Congress: 

o Continue ro moniror closely US agencies' participation in the FSB' s policy work and seek 

to ensure that their FSB participation does not conflict with the best interests of US 

investors and US capital markets. 

o Encourage US officials who participate in the FSB to support the delegation to the 

International Organization of Securities Commissions (that is, capital markets experts) of 

further work on asset management activities at the global level. 

o Use its influence to encourage the reconstitution of the FSB, with equal roles for capital 

markets, banking, and insurance, to advance the dual objectives of mitigating risk to the 

financial system, while promoting vibrant markets and economic growth. 

• With regard to the FSOC, Congress should enact legislation, such as H.R. 1550, the FSOC 

Improvement Act, to codify in statute important improvements to the SIFI designation process 

that will advance the Dodd-Frank Act's dual goals of reducing systemic risk while reserving SIFI 

designation as a tool to be used only in truly exceptional cases. 

iii 
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25966.032

I. INTRODUCTION 

My name is Paul Schott Stevens. I am President and CEO of the Investment Company Institute 

("ICI") and I am pleased to appear before the Subcommittee today to discuss the role of the Financial 

Stability Board ("FSB") and irs impact on financial regulation and regulated funds. Thank you, 

Chairman Huizenga, Ranking Member Moore, and members of the Subcommittee for inviting me to 

resrify. 

ICI is a leading global association of regulated funds, including mutual funds, exchange-traded funds 

(ETFs), closed-end funds, and unit investment trusts (UITs) in rhe United States, and similar funds 

offered to investors in jurisdictions worldwide.' ICI seeks to encourage adherence to high ethical 

standards, promote public understanding, and otherwise advance the interests of funds, their investors, 

directors, and managers. ICI's US fund members today manage total assets of$18.4 trillion and serve 

more than 90 million US investors. 

For more than 75 years, the Investment Company Act and the Investment Advisers Act have governed 

the regulation of funds and their managers. As administered by the Securities and Exchange 

Commission ("SEC"), those statutes have supported the growth of the modern fund industry, which 

today helps American investors meet their most important financial goals, such as saving for college, 

purchasing a home or providing for a secure retirement. 

ICI members, as both issuers of securities and investors in capital markers worldwide, understand the 

importance of sound, tailored regulation in maintaining a strong and resilient financial system. For this 

reason, ICI and its members seek to engage actively with policymakers and regulators and to provide 

meaningful input on financial policy matters that may have significant implications for funds and their 

investors. As financial policy continues to take on a greater global dimension, so too have ICI's efforts 

to monitor the work of, and engage with, po!icymakers and regulators outside the U nired States2 

In the years since the global financial crisis, the FSB has asserted an expanding role on the world stage. 

The FSB claims a broad mandate-nothing less than the entire global financial system-bur it is 

dominated by cenrral bankers and tlnance ministers. This membership is predisposed to viewing 

financial activity conducted outside of banks as "shadow banking" and to considering such activity to be 

1 In this testimony, rhc term "regulated funds" includes "regulated US funds" (or "US mutual funds," where appropriate), 

which are comprehensively regulated under the Investment Company Act of 1940 ("Investment Company Act"). This 

testimony generally addresses regulated stock and bond funds and not money market funds, given the significant regulatory 

reforms that have been adopted for money market funds. 

1 The international arm of the Investment Company Institute, ICI Glohal serves a fund membership rhar includes regulated 

funds publicly offered ro investors in jurisdictions worldwide, with combined assets ofUS$19.9 trillion. ICI Global seeks to 

advance rhe common interests and promote public understanding of regulated investment funds, their managers, and 

investors. Its policy agenda fiKuses on issues of significance to fimds in the areas of financial stability, cross-border 

regulation, market structure, and pension provision. ICI Global has offices in London, Hong Kong, and Washington, DC. 
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inadequately regulated because it is not subject to bank standards and supervision. Nor surprisingly, we 

strongly disagree with this portrayal and arc deeply troubled by the FSB's ability to perpetuate this view 

through its influence on financial policy in irs participating jurisdictions. 

Our particular concerns about rhe FSB arise in the context of irs work on asset management and 

financial stability. In January 2014, the FSB issued the first of two consultations on the design of 

methodologies for identifYing and potentially designating global systemically important financial 

institutions-or G-SIFis-within the asset management sector. The proposals advanced by the FSB 

(one for investment funds, the other for asset managers) took little or no account of empirical evidence, 

historical experience, industry structure and practice, existing regulation, and other facrors that might 

bear on the existence or severity of the risks posited by the methodologies.' We rhus were, and remain, 

concerned not only about the substance of the FSB's work bur also by the processes by which this work 

is conducred4 

We likewise arc concerned by the FSB' s current review of potential "structural vulnerabilities" in asset 

management activities-' As discussed more fully below, we have few objections to the substance of the 

FSB' s proposed policy recommendations. \Ve strenuously object, however, to the way in which the FSB 

attempts to justifY the need for those recommendations. Again we see the FSB resorring to conjecture 

over empirical evidence and actual experience. 

Several ofiCI's concerns with the FSB parallel those we have with rhe Financial Stability Oversight 

Council ("FSOC") here in the United States. For this reason, my testimony will highlight ICI's 

concerns with, and suggest some improvements relating to, both the FSB and the FSOC. 

In Section II below, we discuss the composition and structure of the FSB, its" macroprudential" focus, 

and its pejorative view of capital markets and other nonbank activity as "shadow banking." In Section 

III, we discuss the FSB's actions to dare with respect to the asset management sector. Section IV 

' ICI has provided extensive data and analysis ro demonstrate rhat regulated funds and their managers do nor pose risks ro 

financial stability. See Letters from Paul Schott Stevens, President & CEO, ICI ro the Financial Stability Board, dared April 

7, 2tll4 and May 29, 2015, available at https:i /w\\'l'.ici.nrgipdf/ H ici fsb gsifi ltr.pdf and 

https:/ /www.ici.org/pdf/ 15 ici fsb commcnt.pdf, respectively. These letters also make the case that SIFI or G-SIFI 

designation is not necessary or appropriate for reb~lated non-US funds (i.e., funds organized or formed omside the United 

Stares and substantively regulated to make them eligible for sale to retail investors). 

4 We have expressed similar concerns to the heads of the US agencies that are members of the FSB. See Letter from Paul 

Schott Stevens, President & CEO, ICI to the Honorable Jacob J- Lt:w, Secretary, Department of the Treasury, The 

Honorable Mary Jo White, Chair, SEC, and The Honorable Janet Yellen, Chair, federal Reserve Board of Governors, dated 

May 28,2015 ("Lcw/\\lhire/Yellen Letter"), available at https:/ 1ww\v.ici.orglpdfi 15 ici fSb lew ydlcn whi~E 

5 Financial Stabiliry Board, Consultative Document, PropMed Policy Recommendation.; to Address Structural Vulnerabilities 

from AJset Management Activitie:; (22 June 2016) ("FSB Activities Consultation"), available at hnp:/ /w\-\'\vJsb.org/wpcontcm/uplo,tds/FSB-Asscr-?vtanaggncnt-Coml.lltativc-Documcnt.pdf. The FSB consultation has four areas of focus: 

(1) liquidity mismatch benvccn fund investments and redemption terms and conditions for fund units; (2) leverage within 

investment fimds; (3) operational risks and challenges in transferring investment mandates in a stressed condition; and 

(4) securities lending activities of asset managers and fUnds. 

2 
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highlights the five reasons why the FSB' s work on asset management has been deficient, and explains 

that some of these reasons apply equally to the FSOC's SIFI designation process and its own asset 

management review. In Section V, we briefly discuss the implications of the FSB' s work for US 

regulated funds, their investors, and the capital markers. Finally, in Section VI, we provide our 

recommendations, including those regarding the involvement of US officials in FSB policymaking. 

IL THE FSB: BACKGROUND INFORMATION FOR THE SUBCOMMITTEE 

To provide important context for our concerns with rhe FSB and its work, below is briefbaekground 

information about: (I) the FSB's composition, structure, and "macroprudential" focus; and (2) its 

pejorative views of the capital markets and nonbank activity more generally. 

A. FSB Composition, Structure and "Macroprudential" Focus 

Established by the Group of20 in 2009 as the successor to the Financial Stability Forum, the FSB by irs 

charter has two broad objectives. These arc: (I) to coordinate at the international level the work of 

national financial authorities and international standard-setting bodies in order to develop and 

promote the implementation of effective regulatory, supervisory, and other financial secror policies; and 

(2) in collaboration with the international financial institutions, to address vulnerabilities affecting 

financial systems in the interest of global financial stability.6 Although the FSB's decisions are not 

legally binding on its members, the FSB nevertheless is able to forge global recommendations regarding 

those activities perceived to pose systemic risk and to require international attention. 

By any measure, the FSB is a bank-centric organization. Among the FSB's members, central bank 

officials, finance ministers, and representatives of banking-related bodies (e.g., the Bank for 

International Settlements ("BIS"), International Monetary Fund ("IMF"), and the Basel Committee on 

Banking Supervision) far outnumber capital markets re1,'11lators. And central bankers and finance 

ministers hold key leadership positions, chairing the FSB, its Steering Committee, its four standing 

committees,7 and its six regional consultative groups. 8 Of particular relevance to today's hearing, the 

FSB' s membership includes three US regulators: the Board of Governors of the Federal Reserve System 

6 .'·iee Charter of the Financial Stability Board (as amended and restated June 20 12) ("FSB Charter"), available at 

h trp: / /\\'\\-·w.financialsrabilityboard.org hvp-con tl:nt /uploads /fSB~C:harter -\\'ith-reYised~ Annex-FIN ALpd( at Section I. 

Article 1. 

7 The standing committees are: {l) Standing Committee on Assessment ofVulnerabilities; (2) Standing Committee on 

Supervisory and Regulatory Cooperation; (3) Standing Committee on Standards Implementation; and { 4) Standing 

Committee on Budget and Resources. 

8 There are six regional consultative groups, one each for the Americas, Asia, Commonwealth ofindependent States, 

Europe, Middle East and North Africa, and Sub~Saharan Africa. They are designed to expand upon and formalize the FSB's 

om reach activities beyond the membership of the G20 and to reflect the global nature of rhe financial sys:tem. 

3 
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("Federal Reserve Board"), the SEC, and the Treasury Department.9 And a Federal Reserve Board 

Governor chairs the FSB's Standing Committee on Supervisory and Regulatory Cooperation-the 

committee overseeing the FSB' s current review of asset management activities. 

While the FSB has its own legal identity and governance structure, the BIS hosts the FSB's Secretariat, 

which operates out of the BIS's head office in Basel, Switzerland. The BIS's mission is to serve central 

banks in their pursuit of monetary and financial stabiliry, to foster international cooperation in those 

areas, and to act as a bank for central banks. 10 The BIS' s website touts the fact that through this 

arrangement with BIS, the FSB receives "synergies of co-location; flexibility and openness in the 

exchange of information; and support from BIS expertise in the field of economics, banking and 

regulation." 11 

The FSB's charter further solidifies the organization's banking orientation. The charter specifies that as 

part of its mandate, the FSB will "assess vulnerabilities affecting the global financial system and identifY 

and review on a timely and ongoing basis within a macro prudential perspective, the regulatory, 

supervisory and related actions needed to address them, and their outcomes." 12 Thus, incorporated into 

the FSB' s organizational documents is a directive to approach its work on vulnerabilities to the global 

financial system "within a macroprudential perspective" -i.e., from the perspective of central bankers. 

B, Views of Capital Markets and Other Nonbank Activity 

From the perspective of central bankers, non-bank financial entities arouse skepticism based on the fact 

that they are not regulated in the same way as banks. Central bankers routinely refer to financial 

entities and activities outside of the banking system as "shadow banks" and "shadow banking" -an 

epithet regularly and deliberately used to suggest that entities like mutual funds present unacceptable 

risks because they are not regulated like banks. 

In 2011, the FSB commenced its efforts to address "shadow banking" by instituting five workstreams to 

strengthen oversight and regulation of non-bank credit intermediation. u In a comment letter to the 

FSB at the commencement of this work, ICI agreed that it was appropriate for rhe FSB "to consider 

whether additional or different regulatory measures for non-bank financial entities may be important to 

9 Under the Dodd-frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), the 'Treasury Secretary 

and the chairs of the Federal Reserve Board and SEC are members off SOC; the Treasury Secretary also serves as t:SOC's 

chair. 

10 See http: I /www.bis.org/ abom/index.htm. 

ll See http://ww\l,.:.bis.org/abour/basd proccss.hrm. 

12 FSB Charter, supra note 6, Section I, Article 2(l)(a) (emphasis added). 

13 See, e.g., FSB Published Recommenda.tions to Strengthen Oversight and Regulation of Shadow Banking {press release 

dated 27 Oct. 20 ll ), available at http:/ /wwwJinancialstabilirybm\-.rd.org/20 1 I! lOihnancia~-stahility· board:.p.ublishcsrccommendarions-to-srrcngthcn-oversight-and-re~rulation-of-shadow·banking/. 

4 
57 


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strengthening the global financial system."" But-in addition to pointing out that the FSB uses 

inherently inaccurate and misleading terminology-our letter made a number ofbroader points that 

continue to be relevant, including: 

• It is imperative for the FSB to acknowledge and respect the differences that exist between 

banking and securities and their respective regulatory frameworks. 

• Banks and capital markers have existed alongside one another in the U nired States for centuries, 

\\~th parallel bodies of regulation and oversight. 

• The US financial system and our economy at large have thrived on the benefits that both banks 

and capital markets provide. 

• Bank-like regulation is not appropriate, necessary or workable for funds registered under the 

Investment Company Act of 1940. 

According to the FSB' s annual report issued this August, "transforming shadow banking into resilient 

market-based finance" continues to be one of the core areas of the FSB's regulatory reform program. 15 

As applied to regulated funds and their managers, this characterization suggests a level of disregard both 

for the way in which such funds and their managers long have operated and been regulated, dnd for the 

contributions they already make today as sources oflong-term capital to finance economic growth. In 

Sections III and IV below, we discuss in detail how this orientation has affected the FSB' s work on asset 

managen1ent. 

III. THE FSB's WORK TO DATE ON ASSET MANAGEMENT 

A. Proposed Assessment Methodologies to IdentifY G-SIFis in the Asset Management Sector 

During the global financial crisis, governments stepped in using public funds to prevent the distress or 

disorderly failure of certain large financial institutions from having cascading effects throughout the 

financial system. In an effort to avoid the systemic and moral hazard risks associated with such bailouts 

in the future, a key priority on rhe FSB's financial stability agenda has been "Ending 'Too Big to Fail' 

14 Letter from Paul Schott Stevens, President and CEO, Investment Company Institute, to Secretariat of the Financial 

Stability Board, dared June 1, 2011 (responding to an FSB background note entitled "Shadow Banking: Scoping the Issues"), 

available at http:/l\nvw.ici.org/pdfi25258.pdf, at 4. We expressed support for "the efforts of the FSB and the regulatory 

bodies it represents to study ways to monitor non-bank financial intermediaries, such as by improving and expanding data 

collection from these entities, as necessary, ro help regulators identifY and manage systemic risk." !d. 

" FSB, Implementation and Effects of the G20 Financial Regulatory Reforms, 2"d Annual Report (31 August 2016) ("FSB 

Report on Reform Implementation"), available at h.rrp,JLw\VW .fsb.org/wp-conrcm/uploads/Rcporr~on~implcmcnrarion­

~nd:.ct!i:_crs-of :L\;'_fu.rnJ.~.~l.df. 

5 
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(TBTF). "16 Starting with banks and then turning to insurance companies, the FSB's approach has been 

ro develop assessment methodologies for identifYing financial entities "whose distress or disorderly 

failure, because of their size, complexity and systemic interconnectedness, would cause significant 

disruption to the global financial system and economic activity across jurisdictions."" 

Having already identified 30 banks and 9 insurance companies as G-SIFis, the FSB intends to adopt 

assessment methodologies to identifY non-bank, non-insurer ("NBNI") G-SIFis. 18 The FSB' s initial 

consultation in January 2014 proposed a methodology for identifYing global systemically important 

investment funds. 19 On the basis of their size alone, the methodology singled our 14 highly regulated 

US funds as the only funds that automatically would be subject to further review for possible G-SIFI 

designation. This was a curious and very troubling result, especially given that these funds belong to the 

part of the financial system that proved most stable during the global financial crisis. 

After receiving extensive public comments, including from I CI, the FSB issued a second consultation in 

March 2015 that included a revised methodology for investment funds and a new proposed 

methodology for asset managers.20 The second consultation discounted key aspects of the public 

comment record on the initial consultation. And the methodologies it proposed again placed undue 

emphasis on size, rhus continuing to single out large, highly regulated US funds (and mostly US asset 

managers) as candidates for potential G-SIFI designation. 

This is particularly troublesome as rhe consequences of designating regulated US funds or their 

managers would be highly adverse to investors and the capital markers. Application of the bankoriented "remedies" prescribed by the Dodd-Frank Act would increase costs and reduce returns for 

16 Jd. See ,zlso Pro'-([!"ess ,md Next Steps Tow,?rds Ending "Too~Big~To~Fait' (TBTf'), Report of the 1·/.nandal St(zbili~y Bo,trd to 

the G-20 {2 September 2013), available at http' /1\\~vw.financialsrabilityboard.org/wp-conrenr/uphrds/r 130902.pdf. 

17 See, e.g., Assessment.AiethodologieJfor IdentifYing Non-Bank JVon~I1Hurer Global.SJstemical~y ImportAnt FinanrLd 

Institutions: Proposed Hi,_t(h-Leve! Framework and Spaific Methodologies (8 January 2014), available ar 

http: 1/v..·"V.'WJinancialstabilityboard.orr/publicadons/r 1·-lO 1 08.pdf, at 2. 

18 See, e.g., Consultative Do<:ument, Proposed Policy Recommend,ltiom to Address. Structu.r.1l Vufnerabilitiesftom As.>et 

Management ActivitieJ (22 June 2016) at 2, available at http:/ I'>V\Vw.fsb.org/wp-coment/uploads/FSB-Assct-Managtmcnt· 

Consttltative-Document....pJ.lf 

19 The consultation also included proposed methodologies for marker intermediaries (securities broker-dealers) and finance 

companies. 

Consultative Document {2nd), Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemic,z/ly 

Important Financial Institutions: Proposed High-Level Framework and Specific Methodologies ( 4 March 2015) ("FSB Second 

Consultation"), available at hn:p: I iwv .rw.financialsrabiliryboard.org/wp-comcnr/up!oadsL2nd-Con-Doc-on-NBNI-G -SIFI. 

!1.1£.dJQ..Qpjg.gies.pdf. 

6 
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fund investors, distort the fund marketplace, introduce a conflicted model of regulation, and 

compromise the important role that funds play as a source of financing in the economy." 

B. Review of"Structural Vulnerabilities" from Asset Management Activities 

In responding to each of the FSB' s consultations on NBNI G-SIFI methodologies, IC! pointed out a 

series of fundamental problems with FSB' s approach to asset management. We strongly urged the FSB 

to pursue an activity-based approach as a better way to address any identified risks to global financial 

stability posed by the asset management sector, given the agency nature of the business and the high 

degree of substitutability of investment funds and asset managers. 

ICI therefore welcomed the FSB'sJuly 2015 announcement that it had set aside the NBNI G-SIFI 

project while conducting a review of asset management activities. Eleven months later, in June 2016, 

the FSB requested public comment on proposed policy recommendations to address potential financial 

stability risks in four areas: liquidity and redemptions in investment funds offering daily redeemability 

("open-end funds"); leverage within investment funds; operational risk and the transfer of investment 

mandates; and securities lending. The consultation discusses the posited "structural vulnerability" in 

each area, describes in broad terms the way in which existing regulation and practices already address 

the vulnerability, and proposes policy recommendations to address any "residual risk" in that area. 

As explained in our letter responding to the consultation, we generally have few objections to the 

substance of the FSB' s proposed policy recommendations." They generally envision that the 

International Organization of Securities Commissions ("!OSC0") 23 and authorities in each 

jurisdiction will review existing regulation and make enhancements where appropriate. This approach 

properly directs these responsibilities to the regulators with deep experience in asset management and 

the capital markets. 

But ICI strenuously objects to the justifications offered by the FSB in this consultation, particularly 

with regard to "liquidity mismatch" in open-end funds. In conclusory terms, the FSB describes the 

potential mismatch between the liquidity of individual fund portfolio holdings and daily redeemability 

of fund shares as a "key structural vulnerability" raising concerns for global financial stability. In 

"

1 See, e.g., Statement of Paul Schott Stevens, President & CEO, ICI before the Committee on Banking, Housing, and 

Urban Affairs, US Senate, on FSOC Accountability' Nonbank Designations (March 25, 20 15) ("Stevens Testimony"). 

available at http~: I /\VW\v.ici.orgipJfili-liC!Utt: f!i-~...d£. 

11 See Lerrer to the FSB from Paul Schott Stevens, President & CEO, !CI. dated Sept. 21,2016 ("'CI Letter on FSB 

Activities Consultation"). 

13 The International Organization of Securities Commissions (IOSCO) is the international body that brings together the 

world's securities regulators and is recognized as the global standard setter for the securities sector. JOSCO develops, 

implements and promotes adherence to imcrnationally recognized standards for securities regulation. for more 

information, ser hrtps: I /W\vvl.iosco.org/abour/?sub.:;ecrion-=about iosco. 

7 
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support of its contention, however, the FSB resorts to conjecture and assumptions about the potential 

for destabilizing impacts from fund redemptions, while discounting empirical evidence and the actual 

experience of open-end funds and their investors. This is a recurring problem in the FSB' s work, and 

one that we discuss more fully below. 

IV. FUNDAMENTAL PROBLEMS PERVADE THE FSB'S WORK-AND THAT OF THE 

FSOC-RELATING TO ASSET MANAGEMENT 

ICI supports appropriate regulation to ensure the resiliency and vibrancy of the global financial system. 

As a related matter, we believe that regulators can-and should-examine different sectors of the 

financial system, including asset management, to identifY potential risks to financial stability. Bur 

reviews of this nature must be thorough, balanced, and fact-based-and, to those ends, led by 

policymakers with requisite expertise. For asset management, this means capital markets regulators. 

Clearly, these regulators are best positioned to determine whether regulated funds and their managers 

do or do not pose potential risks to financial stability. 

The FSB' s work relating to asset management falls far short of these basic standards. We highlight five 

specific areas of concern below. In many of those areas, unfortunately, we see similar deficiencies in the 

FSOC's SIFI designations and its review of asset management. 

A. Misconception of the Business of Asset Management 

The FSB's propensity to view the world through a banking lens is readily apparent in its work on asset 

management and financial stability. Although giving the occasional nod ro fundamental distinctions 

between banking and asset management, the FSB's work on asset management is firmly rooted in 

concerns with "distress" and "disorderly failure" derived from the experience of banks and banking 

rq,'lllators. 

In its G-SIFI work, for example, the FSB states frankly that the proposed methodologies for investment 

funds and asset managers" aim to measure the impact that an NBNI financial entity's failure can have 

on the global financial system and the wider economy, rather than the probability that a failure could 

occur."24 We continue to question how rhc l'SB can simply assume its way past such a fundamental 

lA FSB Second Consultation, supra note 20, at I 0 (emphasis in the original). With regard to rhe SIFI designation process ln 

the United States, the question of whether FSOC is required (by statute or irs own interpretive guidance) to assess rhe 

likelihood that a company will experience material financial distress is currenrly being litigated. See, e.g., kfetLffe, Inc. v. 

Financi,,l Stability Ovmight Council, C.A. No. 15-0045 (D.D.C. Mar. 30, 2016). In MetLife. rhe court rescinded FSOC's 

designation of Met Life, Inc. (identified by the FSB, in consultation with rhe International Association oflnsurancc 

Supervisors and national authorities, as a global systemically imporrant insurer in July 2013) a.·;; a SIFI under US law. The 

court found that F.SOC violated its own analytical framework for assessing nonbank financial companies for possible SIFI 

designation by ( 1) failing to assess MctLife' s vulnerability to material financial distress, and (2) assuming that MctLifc' s 

material financial distress would inflict significant damage on the US economy. The court also found that FSOC failed to 

consider the costs of designation to Met Life, in violation of recent US Supreme Court precedent. FSOC is appealing the 

court's decision .. 

8 
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question-that is, whether an investment fund or asset manager might actually experience such distress 

or disorderly failure. 

This same propensity remains present in the FSB's asset management activities consultation, where the 

FSB bases its operational risk concerns on the notion of distress befalling a large asset manager. For 

example, the FSB states" operational difficulties could potentially become a financial stability concern if 

they were to materialise during stressed market conditions, particularly if they affect an asset manager 

(or managers) of sufficient scale or complexity." The FSB contends that such difficulties could lead to 

redemptions in the manager's funds and that "[r]edemptions at a large manager[s] or manager[s] that 

plays a significant role in certain markets can potentially affect the market prices of investment assets ... 

particularly during a period of market stress." And the FSB focuses its policy recommendations to 

address "residual risks" associated with transferring investment mandates or client accounts solely on 

asset managers that are "large, complex, and/or provide critical services." 

As ICI repeatedly has advised, regulated funds and their managers should not be viewed through a 

banking lens. They do not "rail" like banks do. They are highly substitutable. Regulated funds 

generally use little to no leverage. Fund managers act as agents, not principals. They invest on behalf of 

their clients, leaving rhe risks-and rewards-to the end investors, who knowingly accept this tradeoff. 

And regulated funds and their managers routinely exit the business in an orderly way, with no systemic 

impact, even during periods of severe market stress. 

B. Inadequate Deference to Capital Markets Experts 

As discussed in Section II above, the FSB's membership largely consists of central bankers, finance 

ministers, and representatives ofhanking-related bodies. As a result, capital markets experts arc not 

leading the FSB's work on asset management. 

To its credit, the FSB has seen fit to involve IOSCO in its work on the G-SIFI assessment 

methodologies for investment funds and asset managers. It is our understanding, however, that rather 

than establishing an equal partnership with IOSCO or deferring to IOSCO members' expertise in this 

area, the hank-dominated FSB has remained firmly in charge of the project. And it was not until afi:er 

the IOSCO Board publicly recommended that a full review of asset management activities take 

precedence over consideration of how to designate fi.mds or asset managers as G-SIFis25 that the FSB 

changed the course of its work. While we are pleased that the FSB set aside its work on G-SIFI 

methodologies to conduct an activities-based review, we note that the review likewise is under the FSB' s 

controL 

Why is this a problem? The central bankers who dominate the FSB are experts in banking, and they 

come to their FSB duties with that expertise and experience in mind--in particular, the "safety and 

See IOSCO, Meeting the Challenges of a New Financial World (media release dared 17 June 2015 ), available at 

hrrps;/lwww.iosco.org/r.rews/pdf;j()$CONEWS384.pd£ 

9 
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soundness" goals of bank regulation, rhe inherent riskiness of the highly-leveraged bank model and its 

propensity for "runs," the significant problems rhar banks experienced during the crisis, the 

unprecedented level of government intervention needed to safeguard the banking system, and the 

various regulatory tools that have been employed to strengthen individual banks and the overall 

banking sector. It is not surprising, therefore, that this banking expertise colors rhe FSB's views of 

investment funds and asset managers, leading them to believe that the largest funds and managers may 

pose unaddressed and unacceptable risks to other market participants and the financial system as a 

whole. 

Domestically, we have had similar concerns. FSOC' s review of asset management began most 

inauspiciously with a highly flawed 20 13 report on asset management written by the FSOC' s research 

arm, the Office of Financial Research ("OFR"). Among the range of sharp criticisms the report drew 

was that it reflected deep misunderstandings of the asset management industry26 

As with rhe FSB, the composition of the FSOC is weighted toward bank regulators. This would appear 

to give bank regulators the upper hand in designation decisions and other matters-even if they are not 

the experts with respect to the subject matter under consideration. It is unclear, for example, why 

FSOC felt compelled to offer recommendations relating to issues of mutual fund liquidity during an 

open SEC rulemaking on that very ropic.27 We have seen this concern play our in rhe insurance 

industry, where rhe FSOC has designated firms as SIFis despite the objections and misgivings of rhe 

presidentially appointed independent member of the FSOC with insurance expertise. 

C. Reliance on Conjecture and Theory Rather than Empirical Data and Actual Experience 

The FSB discounts empirical data and analysis that does not comport with the theories on which its 

work in asset management are based. Those theories include the potential for "fire sales" of investment 

fund assets, the transmission of risk from one or more investment funds ro other market participants, 

and spillover effects to rhe global financial system. 

We believe rhe FSB has vastly overstated the potential for such effects. And, in the 7 6-year history of 

the modern US fund industry, there is no empirical basis for the FSB' s concerns. I CI' s submissions to 

the FSB have offered extensive data and analysis showing that regulated stock and bond fundsparticularly US mutual funds-and their investors simply do nor behave in the manner that the FSB 

envisions. Yet all rhis data and analysis does nor appear to have prompted the FSB to re-examine its 

hypotheses, or seek to understand (and, in their models, account for) why the experience of regulated 

funds has been so consistent, across even rhe most severe periods of marker stress. 

26 Stevens Testimony, supra note 21, at 13. 

27 See FSOC, Update on Review of Asset Management Products and Activities (April18, 2016), available at 

b.rr~..;.Ll\V'i'-'\V.treaH!I.}~V/initiatiy_e..,':i/tSoc/news/Documenrs/FS()_C%20Update%20on%20Review%20of%20Asset%20},Ja 

na¥CHlCJt~'!P20Producr.s%20and%20Ac(i)i~Qf. 

10 
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The FSB also has relied on the conjectures of other banking-oriented regulators or their 

representatives-including the FSOC-as support for its positions. For example, in its second G-SIFI 

consultation, issued in March 2015, the FSB appeared to endorse certain statements set forth in the 

FSOC's December 2014 notice seeking comment on asset management products and activities. The 

FSB repeated, without empirical or historical support, the FSOC' s conjectures about possible financial 

stability effects from a "first mover advantage" for investors in investment funds that offer redeemable 

interests, particularly funds investing in less liquid asset classes. This bank-regulatory "echo chamber," 

in which the FSB cites the mere speculations of the FSOC as evidence or authority, is a matter of deep 

concern. 

Also troubling is the fact that individual members of the FSB are perpetuating these conjectures 

through other means. We offer several examples. 

• A representative from the Reserve Bank of Australia sits on the FSB's Steering Committee. 

Last year, staff at the Bank issued a bulletin entitled Recent Developments in Asset 

Management. 28 The hulletin' s discussion of asset management and systemic risk relies heavily 

on the FSB' s two G-SIFI consultations and the widely-discredited 2013 report by the Office of 

Financial Research. The bulletin states baldly-without citation to any source, much less 

empirical or historical evidence-that"[ o ]pen-ended funds that offer daily redemptions are 

susceptible to bank-like runs." The bulletin concludes by staring that the asset management 

industry "poses potential risks to financial stabiliry."29 

• The BIS-which funds the FSB's work and houses the FSB Secretariat within its offices-has 

included similar conjectures about the risks posed by the asset management industry in each of 

last two annual reports. The BIS annual report for 2015 stares, for example, that "asset 

managers' business models ... incentivize short-sighted behaviour that can be destabilising in 

the face of adverse shocks" and that"[ t]he decisions taken by a single large asset manager can 

potentially trigger fund flows with significant system-wide repercussions."30 In a chapter 

devoted to "the challenges the financial sector is facing." the BIS annual report for 2016 points 

to the growth in assets under management, the "increasing presence" of open-end mutual funds 

in corporate bond markets, and concerns ahour marker liquidity." The BIS then suggests that 

28 See Fiona Price and Carl S<.:hwartz, Reserve Bank of Au:-;rralia, Recent Developments in Asset ftfdnagement, Bulletin, June 

Quarter 2015, at 72. The bulletin's reference toopen-endedfimds appears to be targeted to stock and bond funds. !d. at 

71~72 and Graph 4. The bulletin is available at hup:/ i\nv\v.rha.yov.au fpub!ications/bullerin/2015/jun/pdObu-0615-

J4illf. 

30 See Bank for International Settlements, 85'1

' Annual Report, I April20I4~3I March 20IS {Basel, 28June 2015) at 1!8, 

119. The report is available at http: I /\nv\v.bis.org!pubflarpdf/ar2015e.htm. 

"See Bank for International Settlements, 86'' Annual Report, I Aprii20JS .. 3I March 20I6 {Basel, 26 June 2016) at 103, 

120-21. The report, which is available at hrtps:i/www.bis.org/puhllarpdftar201_Q.d1tm?rn:::::-5%7(.21, claims that in the 

United States, open-end mutual fimds "now hold some 22% of corporate debt according to financial accounts data-up 

ll 
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25966.043

"it is investors, not market-makers, who need to internalise the risk that liquidity will evaporate 

when everybody heads for the exits." 32 This is a stark example of banking experts projecting the 

bank experience onto regulated fUnds. Anyone familiar with the basic workings of the capital 

markets can confirm that "everybody" can't "head for the exits" at the same time-because 

trades require both a seller and a buyer. 

• In April 2015, the IMF Global Financial Stability Report included a chapter on "The Asset 

Management Industry and Financial Stability. "33 On its face, the chapter appears to present a 

robust analysis based on empirical data sufficient to support the IMF's declaration that "even 

simple investment fUnds such as mutual fUnds can pose financial stability risks."34 Closer 

examination, however, reveals that the chapter contains numerous data errors, 

misinterpretations, and misleading charrs.35 By and large, these issues arise because the IMF 

lacks expertise in, and institutional knowledge of, regulated flinds. 36 

from about 8% in 2005." In fact, according w revised Federal Reserve Board data, US mumal funds have only a I 5 percent 

share of the corporate bond market, essentially unchanged since 2012. ICl applauds the Federal Reserve Board for 

improving rhc qualiry of these data. The revised data show char fSB concerns about mutual funds (at least those that invest 

in corporate bonds)--which the BIS perpetuates-relied upon the faulty predicate that US mutual funds' share of the 

corporate bond market is large and growing rapidly. Thus, it is incumbent on these and other policy bodies to step back and 

reexamine their conjectures concerning bond funds and systemic risk. 

32 Iti 

31 HviF, The Asset 1\1anagement Industry and FiJMncial S'tability, Chapter 3, Glohal Financial Stability Report: Navigating 

Monetary Policy Challenges and Managing Risks (April2015) ("Asset Management Chapter"), available at 

bn.p_;_lhml_,yj_!)l(.Qrglcxtern,tl/p.ubs_Lft/p-fsr 120 i 5/0 UpQf/c3.pdf. 

h See P&tin Vanilla investment J.tmd> Can Pose Risks, IMF Survey Magazine: Policy (April 8, 20 15) (describing the IM~F's 

conclusions in the Asset Management Chapter), available at 

http: I /v.'\vw.imforg/cxrernallpubs !fr/survev /so/20 15/POL040S I SB.htm. 

'

5 ICI economists have wrirrcn a series ofblog posts explaining various problems in the IMF's analysis of the asset 

management industry. See The L\1F b Entitled ttJ lt5 Opinion, but Not to Its Ourn f:uh, ICI Vk"\\Tpoinrs (AprillO, 201 S); 

The /;\iF Qy.iet(y Ch.mp:t5 lr-- Data, but A'ot hi VioL'S. ICI Vicwpoims (April2l, 201 5): The 1J.\1F on As:\et _Jfanagement: Tbe 

Perili of!nt.\11f'ricna, ICI Vic-..vpoints (:.\try 2R, 20 J 5); The JkJF onA_>:.,·et /1-f,rnaxcment: lFbich lfe1·d to Follim'? ICI 

Viewpoints Qune 1. 2015); The ]J1Fon Asset ]l.fan,r.zement: Sortmg the Retail ,znd ln.;titutitmtZ/]nvestor ''Herds} "ICI 

·viewpoints (lune -1, 201 5). Ail ofrhe blog posts in rhis scric:~ can be acn~~~cd at 

hrrps:/ /www.ici.org/viewpoint~/vicw 15 imf vfsr. 

3

(' Nevertheless, the FSB continues tO eire to this report. See FSB Activities Consultation, supra note 5, at l 0 n.29 (cited as 

support for the FSB's contemion that "lrlhcre may also be cases in which open~cnded funds could create incentives for 

investors to redeem ahead of others (i.l'., create a 'first~rnovcr advantage')_"' 

12 
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25966.044

D. Indications That Desired Results May Drive the FSB's Work Product 

ICI has taken advantage of every available opportunity to participate in the public consultation process 

regarding the FSB's work on asset management.37 Frankly, it is frustrating to see how precious little 

impact the extensive public comment record appears to have had on the FSB' s thinking to date. 

Despite extensive public commentary on the initial G-SIFI consultation that size alone does little to 

indicate the potential for systemic risk, rhe FSB' s second G-SIFI consultation continued to place undue 

emphasis on rhe size of a fund, thus singling our many large regulated US funds for potential 

designation. It also added criteria to sweep large asset managers into the designation net, possibly based 

entirely on the amount of assets under management. The approach, too, would result in identification 

oflarge US asset managers for potential designation. 

This is not the only example of the FSB ignoring public commentary on a significant aspect of its 

proposed G-SIFI methodologies. Virtually all commenters agreed with the FSB' s reasoned decision in 

the initial consultation not to focus on individual asset managers because of the agency nature of their 

business. In other words, the FSB recognized that fund investors and other clients of an asset manager, 

rather than the manager itself, are the bearers of investment risk. Nevertheless, in the second 

consultation, the FSB chose to ignore public comments and its own counsel by adding a separate 

assessment methodology for asset managers. 

What could account for this sharp reversal of views? It is possible that the FSB could have been 

influenced by the views of commenters whose identities, like their comments, have not been made 

publicly available.38 An alternative, and equally unsettling, explanation is that the FSB could have been 

attempting to reverse-engineer the proposed methodologies to achieve a specific outcome. 

Similarly, in the United States, the way in which the FSOC has approached the question of nonbank 

SIFI designation suggests a results-oriented exercise a5 opposed to an objective analysis. In none of its 

nonbank designations thus far has the FSOC chosen to explain the basis for its decision with any 

particularity. The FSOC also has theorized about risks instead of conducting the kind of thorough, 

balanced, empirical analysis that should underlie its decisions. And by avoiding any meaningful 

discussion of the particular aspects or activities of the company that are thought to pose systemic risks, 

the FSOC not only forecloses the prospect of any reasoned justification for its decisions, bur also 

fiustrates Congressional intcnt.39 

37 W c also have participated in numerous meetings with FSB offlcials and sr-af£ 

'

8 See fSB Second Consultation, supra note 20, at 3 (stating that all comments will be published "unless a commcnter 

specifically requests confidential rreatmem. "). 

'

9 Roy Woodall, the independent member ofFSOC having insurance expertise, made a similar observation in dissenting 

from FSOC's decision to designate Met Life Inc. as a SIFI. See Views of the Council's Independent :Member Having 

Insurance Experrise at 2 ("Ir is important to identify particular activities in order to encour:1.ge :1.ppropriare and fi1rther 

action that could lessen any company-specific threat to U.S. financial stability. Paraphrasing what one insurance thought 

13 
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25966.045

E. Insufficient Transparency and Accountability in Consultation and Designation Processes 

In the course of our ongoing engagement with the FSB on asset management issues, ICI has highlighted 

significant concerns with how the FSB conducts its work. In so doing, we have contrasted the FSB's 

flawed processes with the requirements to which US regulators must adhere in developing new 

regulations. Under the Administrative Procedure Act, US regulators must examine relevant data and 

articulate a satisfactory basis for their actions, including a rational connection between the facts found 

and regulatory choices made. Conclusory statements and unsupported conjectures are not sufficient, 

nor may regulators ignore contradictory evidence in the record before them. Regulators may not 

impose substantial new burdens on regulated entities to guard against illusory or wholly improbable 

risks. 

We have urged the FSB to consider adopting similar requirements to guide its work. We also have 

mggested that the FSB consider more robust rules designed to bring greater transparency to rhe input 

that shapes irs initiatives and related deliberations, some of which now escapes public scrutiny.40 

Similarly, ICI is concerned by the process that the FSB has proposed for evaluating investment funds 

and asset managers for possible G-SIFI designation." Among the serious shortcomings of that process 

are the following: 

• Investment funds or asset managers being considered for G-SIFI designation may have little or 

no information as to the basis upon which specific decisions are being or will be made. 

• There is no required notice that an investment fund is being evaluated (i.e., for funds that do 

not meet the specified threshold but are considered by national authorities to be "potentially 

globally systemic") or that a fund will not be designated (for funds that do meet the threshold). 

• There is no assurance that an investment fund or asset manager will be permitted to provide 

information that they believe is relevant to a designation determination (or chat any such 

infOrn1ation would be considered by the FSB and che relevant national authority). 

There is no requirement to consider the relative costs and benefits of a potential designation. 

• There is no formal (or informal) mechanism for an investment fund or asset manager to 

challenge a G-SIFI determination. 

leader once told me: 'We should not tolerate any insurance company posing a threat to our financial system ~ pinpoint what 

nukes them systemically risky and let's fix them."') (citation omitted). Mr. Woodall's dissent is available at 

htrps://;.v,vw.rrcasury.goY.Lilllti_;_u:i~U.&9c/desih'tL<ltions/Documc:ms/Dissenting'}02Qand%201v1inoriry%20Vin'{S,.,pdf. 

40 See ICI Letter on FSB Activities Consultation, supra note 22. 

q: See FSB Second Consultation, :~upra nme 20, at 12-15. 

14 
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25966.046

We have recommended various reforms to the proposed process that, in our view, would help address 

concerns that the FSB has a predetermined outcome in mind-i.e., naming the largest investment funds 

and asset managers as G-SIFls. The most significant of those reforms arc: 

• First, the FSB should provide an entity under review with sufficiently detailed information 

about the potential risks of concern to the FSB. 

• Second, the process should include greater reliance on an entity's primary regulator, including 

consideration of whether potential risks posed by the entity are better addressed through 

regulation targeted to the relevant activity, rather than through G-SIFI designation. 

• Third, the entity should have the opportunity to propose changes to its business, structure or 

operations to address the risks identified by the FSB, and should receive a response from the 

FSB to these proposed changes. 

The FSOC SIFI desiguation process likewise would benefit from these types of common-sense 

improvements. ICI and many other stakeholders, including Financial Services Committee Chairman 

Jeb Hensarling, have expressed concerns with this process.42 In a December 2014letter to the FSOC, 

for example, ICI highlighted the following areas for potential reform: greater engagement with 

companies under evaluation; greater involvement by a company's primary financial regulator; allowing 

a company to propose a" de-risking" plan as an alternative to SIFI designation; greater transparency, 

which would give other companies and the broader public more insight into the FSOC' s concerns 

about systemic risk and the business activities or practices giving rise to such risks; and periodic 

comprehensive review of designated companies.43 

In February 2015, in response to those calls for change, the FSOC voted to approve "supplemental 

procedures" to revise its SIFI designation process. The new procedures call for earlier engagement with 

companies under review, more transparency to the public on the designation process and reasons for 

designating companies, and a more robust process for annual reviews. While a helpful first step, these 

new procedures do not go far enough and can be changed at any time without prior notice. ICI believes 

42 See, e.g., Letter from Rep. Carolyn B. Maloney (D-NY), Ranking Member, Subcommittee on Capital Markets and 

Government Sponsored Enterprises to The Honorable jacob J. Lew, Secretary, Department of the T rcasury, Chairman of 

rhe FSOC, dared July 29, 2014; Statement of ChairmanJcb Hensarling before Committee on Financial Services, Hearing 

on "The Annual Report of the Financial Stabiliry Oversighr Council" Qunc 24, 20 14) (stating that, with rhc exception of 

the national security agencies dealing in classified information, the "fSOC may very well be the nation's least transparent 

federal t::ntity"); Letter fromjcb Hensarling (R-TX), Chair, Committee on Financial Services, et, al. to The Honorable 

Jacob]. Lew, Secretary, Depanment of the Treasury, Chairman of the FSOC, et al., dated May 14,2014 (raising concerns 

about the Slfl and G-SIFI designation process); Letter from Sen. Mark Warner (D-VA) to The HonorableJacobJ. Lew, 

Secretary, Department of the Treasury, Chairman of the FSOC, dared May 9, 2014 (noting that SIFl designation analysis 

"should follow a rigorous and transparent process, using reliable data, so that regulators and the marketplace can be armed 

with the hest information possihlc"). 

·l3 See Letter from Paul Schott Stevens, President & CEO, ICI to Patrick Pinschmldt, Executive Director, FSOC, dared Dec. 

17.2014. 

15 
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25966.047

the changes should be codified in statute to provide greater certainty and predictability to the S!FI 

designation process. 

In this regard, the Subcommittee should be aware of a related issue. In issuing the above-noted 

supplemental procedures, the !'SOC indicated that it would publish "further details explaining how the 

Stage 1 thresholds are calculated."44 The so-called Stage 1 thresholds are the six quantitative metrics 

that the FSOC and its staff use to identifY those companies that will be subject to comprehensive 

review for possible SIFI designation.45 The FSOC and its staff maintain that these metrics "are 

designed to be uniform, transparent, and readily calculable by the Council, nonbank financial 

companies, market participants, and other members of the public." 46 Even with the further details the 

FSOC staff issued in early June, however, the metries fall well short of this standard. With respect to 

the metric focused on derivatives liabilities, for example, the new guidance provides no additional 

details-despite specific industry requests for clarification47 -and merely restates information from the 

FSOC's 2012 release adopting these metrics. At a minimum, if the FSOC and its staff are not willing 

to provide the information needed to make the Stage I thresholds "transparent and readily calculable," 

they should refrain from mischaracterizing this part of the SIFI designation process. 

V. THERE IS A CLEAR PROSPECT OF HARt\1FUL CONSEQUENCES FOR 

REGULA TED US FUNDS, THEIR INVESTORS AND THE CAPITAL MARKETS 

ICI is greatly concerned about the deficiencies discussed in Section III above because of the potential 

for the FSB' s work to have serious negative consequences for regulated US funds, fund investors, and 

the capital markets. In this section, we highlight how the FSB' s work is able to affect US entities and 

reiterate what the consequences of designation would be for US funds or their managers. 

A. Effect of the FSB's Work on US Entities 

As mentioned earlier, three US government agencies represented on the FSOC-the Federal Reserve 

Board, the Treasury Department, and the SEC-also are members of the FSB. The lack of 

transparency and accountability around the FSB's NBNI G-SIFI consultation process makes it 

impo.>Sible to know precisely what role these agencies have played in this project and what their views 

FSOC, Supplemental Procedures Relating to Nonbank Financial Company Determinations (Feb. 4, 2015 ), available at 

http: I /v..n.vw .trcJ.sm:y.gov /initiativcs/fs.oc/ dcsl~:nations/12s2hlJ!I!.~.n.ts.LSupplcmenral%20 Proccdurcs%20Rdared%20w<Jf)? ON 

onbank%20FinatKial%20Companv%20Dererminations%20~%20 Fcbruary%2020 1 5.pdf~ at 5. 

"~We note, however, that FSOC reserves the right to evaluate a company even if it does nor meet the Stage 1 metrics. 

"' FSOC Staff Guidance, Methodologies Related ro Stage I Thresholds U une S, 2015), available at 

http://,v·ww.treasury.gov/initiatives/fsoc/designarions/Document.s/FSOC%20Staff<f·620Guidance(}020-

%20Sta§'"<:%201%20Thresholds.pdf, at 1. 

47 See, e.g., Letter from Gus Saurer, Managing Director and Chieflnvesnncnt Officer, and John Hollyer, Principal and Head 

of Risk Management and Stratebry Analysis, Vanguard, dated Dec. 19, 20 ll (recommending that, in calculating net 

derivative liability under its "'Stage 1" analysis, FSOC take into account not just cash collateral but also co1lateral consisting 

of cash-equivalents, such as Treasuries and other U.S. government agency securities). 

16 
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25966.048

are on it.48 Efforts by members of Congress to gain greater insight into these matters have been largely 

unavailing.''9 

It also is troubling that, as mentioned above, a Federal Reserve Board Governor leads the FSB 

committee overseeing the work on proposed G-SIFI assessment methodologies for investment funds 

and asset managers. This arrangement raises the prospect that the process set in motion by the FSB 

ultimately could be used to exert multilateral influence on the FSOC to expand the reach of the Federal 

Reserve itself to regulated US funds and their managers and, by extension, US capital markets. 

The FSOC maintains that the FSB's decisions do not determine those of the FSOC.50 Federal Reserve 

Board Chair Yellen echoed this view in her June 2015 response to I CI' s letter. Chair Yellen indicated 

that "any recommendations by the FSB with respect to the asset management industry would not be 

binding on the United States. That responsibility remains with the appropriate domestic regulatory 

authorities and the Financial Stability Oversight Council."" Bur these assertions provide little comfort 

insofar as the FSB's decisions may front-run the FSOC process. While the FSB's recommendations 

may not be "binding," they seem certain to have some import for the FSOC. One need only consider 

the experience of the insurance industry. Surely it is more than just a coincidence that the FSOC has 

designated for enhanced prudential regulation and Federal Reserve Board supervision all of the 

US-based insurance firms the FSB named as global systemically important insurers. 

''"Chair Yellen's response to the Lew/White/Yellen Letter (supra note 4) shed no additional light. Chair Yellen stated that 

"as the FSB is made up of participants from many jurisdictions, rhe particular statements and documents produced by the 

FSB do not necessarily reflect my views or those of the Federal Reserve." Letter from Janet L. YeUen, Chair, Board of 

Governors of the Federal Reserve System, to Paul Schott Stevens, President and Chief Executive Officer, Investment 

Company Institute, dated June II, 20 I 5 ("Yellen Response"). 

49 See, e.g., Hearing Transcript, The Anntt~zl Testimony o_fthe SecretdY)1 o_(the Treasury on the State oft he International 

Financial ,))stem, Committee on Financial Services, House of Representatives (MayS, 2014) (exchange between The 

Honorable Jacob Lew, Secretary, Department of the Treasury, and ChairmanJeb Hensarling (R-TX) et ttl. regarding the 

FSOC's interaction with the FSB and the FSB's designation of three U.S. insurance companies as G-SIFis). 

"See, e.g., FSOC Nonbank Designations F AQ< (FAQ # 11 ), available at 

http: i lwww.rrca'iury.gov hnitiativcs ifSoc/dcsignations 1 Pa~:c~/w..n.bank-faq.aspx. f AQ #11 states: 

"II. If international entities such as the Financial Stability Board {FSB) identify a U.S. firm as systemically important, does 

that mean that the fSOC will do the same? 

No. While the FSB and the FSOC are both focused on strengthening financial stability, their processes are 

distinct. Decisions reached in the FSB do not determine decisions made by the FSOC. In fact, the FSOC is under no 

obligation to even consider a firm identified by the FSB for designation. 

The FSB's idemiflcadon of a firm as a global systemically important financial institution does not have legal effect in the 

United States or any other country. In the United States, the FSOC is the only entity rhat can designate nonbank financial 

companies for enhanced prudential standards and Federal Reserve supervision. FSOC designations can be made only 

pursuant to a super-majority vote of its 10 voting members based solely on the standards and processes set forth in U.S. 

fCdcrallaw, after a robust analysis that reflects extensive interaction with the company." 

'i< Yellen Response, supra non: 48. 

17 
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25966.049

Indeed, the FSB's proposed process for identifying NBNI G-SIFis expressly calls for involvement by 

"national authorities" in each member jurisdiction. Thus, if the FSB were to adopt the process outlined 

in its second consultation, regulators in the United States would be called upon to analyze US funds 

and asset managers under the applicable assessment methodology and to develop a preliminary list of 

NBNI G-SIFis. In addition, under the proposal, national authorities would be permitted to add to 

their preliminary lists" other NBNI financial entities that are below the materiality thresholds but 

which they determine should still be added for more detailed assessment." 52 Subsequently, US 

regulators, together with the FSB, would determine the final list. 

Moreover, participation as a member of the FSB carries with it the expectation that member 

jurisdictions will implement any agreed upon standards and policy measures." Consistent with this 

expectation, FSB Chairman Mark Carney has stated that "full consistent and prompt implementation" 

of the standards developed under the FSB "remains essential in order to maintain an open and resilient 

global financial system." 54 Notwithstanding this stern injunction, we believe that the deeply flawed way 

in which the FSB has developed its proposed asset management methodologies means that they simply 

cannot serve as any predicate for rC!j'lllatory action in the United States. 5

5 

B. What is At Stake? The Consequences of Designation 

As ICI has cautioned previously, SIFI or G-SIFI designation of regulated funds or their managers would 

have severe consequences. In both cases (i.e., SIFI and G-SIFI), US law already has established the 

measures that would apply to any fund or manager designated as systemically important. As prescribed 

by the Dodd-Frank Act, these measures include capital and liquidity requirements and prudential 

supervision by the Federal Reserve. 56 These measures are designed to moderate bank-like risks and are 

ill-suited to regulated funds and their managers. 

Based on these requirements, designated funds would face higher costs resulting in lower investment 

returns for individuals saving for retirement, education, and other life goals. The resulting competitive 

imbalances would distort the fund marketplace, potentially reducing investor choice. Designation also 

5

: Second FSB Consultation, supra note 20, at 14. 

51 See, e.g., Letter from Mark Carney, Chairman, FSB to G20 Finance Ministers and Central Bank Governors, dated 9 April 

2015 (emphasis added). 

'i~ !d. See also FSB Reporr on Reform Implementation, JUpra note 15, at 2 ("'G20 Leaders' continued support is needed to 

address identified gaps and inconsistencies in . . core reform areas, and ro overcome legal and operational obstacles w 

implementation by ... ensuring that legal, data and capacity constraints do not hamper implementation efforts.") 

55 Lt:w/White/Ydlen Letter, supra note 4, at 3-4. 

sn In May 2014, ICI' s Chairman testified in greater detail about the consequences of SIFI or G-SIFI design.ation of regulated 

funds or their managers. See Statement ofF. William McNabb III, Chairman and Chief Executive Officer, The Vanguard 

Group, Inc., on behalf of the Investment Company lnst:itute, before the Committee on financial Services, US House of 

Representatives, on Examining rhe Dangers of the FSOC's Designation Process and Its Impact on the US Financial System 

(May 20, 2014 ). 

18 
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25966.050

could have far-reaching implications for how a fund's portfolio is managed, depending on how the 

Federal Reserve exercises its supervisory charge under the Dodd-Frank Act to "prevent or mitigate" the 

risks presented by large, interconnected financial institutions. As I have explained in previous 

Congressional testimony, regnlated funds and their managers could be subject to a highly conflicted 

form of regulation, pitting the interests of banks and the banking system against those of millions of 

investors. 5

7 

VI. RECOMMENDATIONS 

I CI is pleased to offer its recommendations for addressing several of the concerns we discuss 

above. 

• On an ongoing basis, Congress should continue to monitor closely US agencies' participation 

in the FSB's policy work, particularly as it relates to asset management. As part of its oversight 

of these agencies, Congress should seek to ensure that their FSB participation does not conflict 

with the best interests of US investors and US capital markets. 

• In the near term, Congress should encourage US officials who participate in the FSB to support 

the delegation to I OSCO of further work on asset management activities at the global level. 

This would mean having the FSB delegate to IOSCO responsibility for final consideration of 

the policy recommendations set forth in the current consultation (as appropriate after IOSCO 

gives due consideration to public comments) and monitoring progress as the recommendations 

arc implemented. 

• Congress should usc its influence to encourage the reconstitution of the FSB. This reformed 

FSB should give all major sectors of the global financial system-capital markets, banking, and 

insurance-an equal role. In addition, in pursuit of global financial health, the organization's 

mission should be to advance the dual objectives of mitigating risk to the financial system, while 

promoting vibrant markets and economic growth. 

• With regard to the FSOC, Congress should enact legislation, such as H.R. 1550, the FSOC 

Improvement Act, to codify in statute important improvements to the SIFI designation 

process. In particular, ICI strongly believes that Congress must reform the FSOC's designation 

process in ways that will advance the Dodd-Frank Act's dual goals of reducing systemic risk 

while reserving SIFI designation as a tool to be used only in truly exceptional cases. We suggest 

focusing such reforms on three critical areas: 

7 Stevens Testimony, supra note 21, at 15-18 (discussing in greater derail the highly adverse consequences of inappropriate 

designations to investors and the capital markers). See alw Paul Schorr Stevens.Dest~f(llation :, Vast Reach into Investor 

Portfolios, ICI Viewpoints (March 24, 201 S ), available at https: I h.vw\v,ici.org/vicwpoinrs/vicw 15 designation. 

19 
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25966.051

• First, the FSOC should provide notice sufficient to inform a company as to the financial 

stability risks that the FSOC believes the company presents. 

• Second, the primary financial regulator of a company under evaluation should have a 

meaningful opportunity, prior to designation, to address any risks the FSOC identifies as 

systemic. The primary regulator generally will have greater expertise and regulatory 

flexibility than the FSOC to address such risks. 

• Third, a company under evaluation should have an opportunity, prior to designation, to 

propose changes to its structure or business practices that would address the risks the FSOC 

has identified. This "de-risking" option, which would require the FSOC's consent, could 

prove to be a more direct and effective way to achieve the FSOC's goal of risk mitigation. 

ICI is pleased that the House Financial Services Committee approved H.R. 1550 with a strong 

bipartisan vote. 5

8 If adopted, these measures would give the FSOC additional tools and more flexibility 

to ameliorate systemic risks. We emphasize that, if the FSOC determines that neither action by the 

primary regulator nor the company's de-risking proposal is sufficient, the FSOC retains the authority to 

move forward with a SIFI designation. Neither of those two options, moreover, interferes with the 

FSOC's emergency authority to designate. 

I appreciate the opportunity to share these views with the Committee. I CI looks forward to 

continued engagement with Congress on rhese important matters. 

'iR Similar provisions have been included in the Senate as part ofS. 1484, the Financial Regulatory Improvement Act, and 

dlesc policies have garnered bipartisan support. See, e.g., Remarks by Senator Mike Crapo (R-ID) at Oversight q(the 

Finand,lf Stability Oversight Council Des~r:nation Process, Hearing before rhe Committee on Banking, Housing and Urban 

Affairs. U.S. Senate Quly 22, 2015) (''If at that point when the decision apparently has been made and the risks have been 

identified, the activities have been identified, shouldn't the company at that point have an opportunity to evaluate its 

husiness model and structure and determine whether to adjust it?"); Remarks by Senator Robert Menendez (D-NJ) at FSOC 

Accountability: Nonbank Designations, Hearing before the Committee on Banking. Housing and Urban Affairs, U.S. Senate 

(March 25, 201 S) ("what is the usc of engaging with a company if it is not to borh come ro a conclusion as ro whether it is 

systemically risky, what activities are systemically risky, and if it wi$hed to avoid the designation because of the consequences 

rhat flow from that, give it the oppornmity ro do so? To me. that is not theoretical. It just makes common sense."). 

20 
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ffACLI 

fin<mcial SE:'rnrlty for! 

DIRK KEMP1HORNE 

President & Chief Executive Officer 

Statement for the Record 

Governor Dirk Kempthorne, President & CEO 

American Council of Life Insurers 

Subcommittee on Monetary Policy & Trade 

House Committee on Financial Services 

U.S. House of Representatives 

Hearing titled "The Financial Stability Board's Implications for U.S. Growth and Competitiveness." 

September 27, 2016 

On behalf of the American Council of Life Insurers (ACLI), l am pleased to submit this statement for the 

hearing record expressing the views of the life insurance industry regarding the Financial Stability 

Board's (FSB) implications for U.S. growth and competitiveness. 

The American Council of Life Insurers is a Washington, D.C.-based trade association with 

approximately 280 member companies operating in the United States and abroad. ACLI advocates in 

state, federal, and international forums for public policy that supports the industry marketplace and 

the 75 million American families that rely on life insurers' products for financial and retirement 

security. ACLI members offer life insurance, annuities, retirement plans, long-term care and disability 

income insurance, and reinsurance, representing 95 percent of industry assets, 92 percent of life 

insurance premiums, and 97 percent of annuity considerations in the United States. 

ACLI has significant concerns about certain actions of the FSB and the impact of FSB decisions on the 

competitiveness of the U.S. life insurance industry. The FSB has already designated three U.S. insurers 

as Global Systemically Important Insurers (G-SIIs), designations which could shift the competitive 

landscape and increase regulatory complexity. FSB designations and regulatory directives should not 

predetermine decisions by U.S. prudential regulators and could imperil the fundamental contributions 

of the life insurance industry to retirement security. 

The life insurance industry is uniquely suited to provide retirement solutions. Life insurers provide risk 

protection, insurance, and annuities products that help families save for retirement. Annuities are the 

sole means available in the marketplace today by which retirees can receive guaranteed income for 

life. Now more than ever, life insurance companies are essential to helping families build and achieve 

American Couno/J of Ufe Insurers 

101 Constitution Avenue, NW, Washington, DC 20001-2133 

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retirement security. By strengthening retirement security, life insurers are improving the lives of 

retirees. 

Life insurers are also important contributors to economic growth as long-term investors. Life insurers 

are leading purchasers of corporate bonds, which fund business expansion, job growth, and 

infrastructure. Because life insurers make guarantees that often last many decades, they must invest 

in assets that have a long-term horizon. This kind of asset-liability duration matching is not only a 

fundamental principle of prudential regulation of insurers, but also positions life insurers to be a 

powerful source of long-term capital and economic growth. The bonds that life insurers purchase today 

have an average maturity of more than 18 years. 

A major concern of the life insurance industry is that FSB designations of GSIIs seem to have 

prejudged the Financial Stability Oversight Council's (FSOC) designations and may place designated 

companies at a competitive disadvantage. In the case of two GSII designations of U.S. insurers by the 

FSB, the GSII designation preceded the FSOC designation. In the case of the third U.S. insurer, the 

designation occurred at roughly the same time. The timing of these designations raises serious 

concerns about the independence of the two processes, concerns that have been voiced by FSOC 

Independent Member with insurance expertise, Roy Woodall. In his dissents to both the Prudential and 

Metlife designations, Mr. Woodall noted that the FSB's designations were taken in consultation with 

members of FSOC, and that these discussions appear to have predisposed FSOC's independent 

designation process. 

The potential negative consequences of designation are significant. The insurance industry is highly 

competitive, and the additional regulation imposed upon a designated company could place that 

company at a significant competitive disadvantage relative to its non-designated competitors. Capital 

standards are the most obvious example. If capital requirements on designated insurers are materially 

different from those imposed by the state insurance regulators, designated insurers may find it 

difficult to compete against non-designated competitors, resulting in a loss of business or an altered 

product mix. Less competition or less product availability is not in keeping with a healthy market that 

best serves insurance consumers. 

Even before any additional regulation is implemented, the prospect of such regulation has an 

immediate impact as it forces designated companies to manage their operations by taking into 

account looming, but unspecified regulatory requirements. Finally, ACU is troubled that FSB and FSOC 

have taken markedly different approaches in their treatment of different categories of nonbank 

financial companies. While FSB and FSOC have designated insurers for heightened supervision and 

regulation, they are pursuing an "activities-based" approach for asset managers rather than the 

imposition of heightened regulation on individual companies merely because of size. 

ACLI believes that both FSB, in partnership with the International Association of Insurance Supervisors 

(IAIS), and FSOC should pursue an "activities-based" approach to insurers. The authority to 

recommend primary regulator action on activities brings real focus to the specific activities that may 

involve potential systemic risk and avoids the competitive harm that an individual company may face 

following designation. In certain markets, designated companies can be placed at a competitive 

disadvantage to non-designated companies because of different regulatory requirements. The 

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authority to recommend primary regulator action on activities avoids the "too-big-to-fail" stigma that 

some have associated with the designation of individual companies. 

Conclusion 

ACLI appreciates the work of the committee to conduct oversight over the U.S. representatives to the 

FSB, IAIS. and FSOC. Current approaches undertaken by these institutions do not always facilitate the 

goal of reducing systemic risk and could undermine a level playing field in the marketplace. The FSB, 

IAIS, and FSOC must do more to ensure a fair process. Thank you for convening this important hearing 

and for your consideration of the views of ACLI and its member companies. 

American Council of Ufe Insurers 

101 Constitution Avenue, NW, Washington, DC 20001-2133 

ltWW.acli.com 
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STATEMENT 

PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA 

FOR THE HOUSE FINANCIAl SERVICESS COMMITTEE HEARING ON 

THE FINANCIAL STABILITY BOARD'S IMPLICATIONS FOR U.S. GROWTH AND COMPETITIVENESS 

September 23, 2016 

The Property Casualty Insurers Association of America (PCI) represents roughly 1000 insurers and 

reinsurers that write more than $200 billion in coverage throughout the U.S. and the world. We 

appreciate this opportunity to comment on the current status and issues relating to the Financial 

Stability Board, created as one of the global responses to the financial crisis. 

In our statement below, PCI first addresses general areas for possible improvement including enhancing 

the role of state insurance regulators and increasing transparency. Next, we discuss specific work 

streams such as governance, global systemic risk designation and resolution. And finally we suggest that 

policymakers urge the FSB to focus more on stopping the growing international trend of self-defeating 

protectionism in the guise of prudential regulation. 

General Issues 

Include State Insurance Regulators 

The charter of the FSB is exceptionally broad, encompassing insurance regulation as well as banking and 

securities regulation. And, many of its work streams, including macro-prudential risk, resolution, 

conduct of business and governance apply to insurers and reinsurers. FSB members commit to 

developing guidance that local authorizes are encouraged to implement in supervisory regulatory 

frameworks. Yet, the U.S. delegation does not include the primary insurance regulators, the states, 

which have traditionally and effectively regulated insurance in the U.S. This primacy of state regulation 

was recently reiterated by Congress in Dodd-Frank. 

Without formal inclusion of state regulators, errors can be made about how best to apply general 

principles to the very different realities of insurance and insurance regulation when compared to the 

banking and securities sectors. For example, the state resolution system for insurers recognizes that 

there is a long time horizon for resolution for insurers, often years if not decades, when compared to 

banks which may need to be resolved in hours. 

Including insurance regulators from the U.S. more generally in the FSB will also help prevent the 

inappropriate migration of banking regulatory concepts onto insurers. This will avoid a "one size-fits-all" 

regulatory approach that will not work for insurance and may actually harm both consumers and well 

managed companies. 

More Transparency and Consideration of Costs and Benefits 

The OECD in its Policy Framework for Effective and Efficient Financial Regulation recommended a 

transparent approach to regulation and selection by regulators of the policy option that is the least 
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burdensome and yet still effective. We think that a closer adherence to that policy framework would 

improve the work of the FSB. 

The vast majority of meetings of the FSB are conducted behind closed doors. PCI appreciates the formal 

consultations provided to stakeholders and rare invitations to attend meetings. PCI also appreciates that 

confidentiality is appropriate when discussing the specifics of particular companies. However, the FSB is 

unnecessarily secretive with regard to its deliberations on public policy matters of general applicability. 

The lack of transparency reduces the ability of stakeholders to better understand the underlying issues 

and problems sought to be addressed. It also inhibits the ability of regulators to fully understand 

industry practices to be able to tailor any regulatory proposal to effectively address real world gaps. 

Further, any international guidelines are more likely to be implemented in local jurisdictions when 

stakeholders have been involved throughout the process of their development. 

PCI also endorses the notion of the FSB incorporating an element of cost/benefit analysis in its work. 

Regulations can sometimes have consequences such as unnecessarily increasing consumer costs and 

reducing competition and consumer choice. On the other hand, everyone benefits when abusive 

practices are prevented and consumers pay the least they need to, with the greatest degree of choice. 

Current Issues 

Governance 

The FSB is in the midst of reviewing its governance recommendations. PCI is pleased to have drafted 

comments on behalf of the global insurance industry, which are attached. We also much appreciate the 

invitation to appear before the FSB on September 30 to provide further information. 

FSB governance guidelines should remain high level and respect differences in jurisdictional laws and 

should be applied proportionally, based on the nature, scale and complexity of the entity at issue. 

Overall, the OECD/IAIS governance materials focused specifically on the insurance sector currently 

accomplish that goal. Because of this activity specifically geared to the insurance sector, there would be 

little value in the FSB's governance work becoming more prescriptive, at least with respect to insurance. 

Resolution 

The U.S. has a comprehensive, time-tested system of resolution for insurers. Our system works because 

of several factors including comprehensive and consistent laws, a strong role for the courts, and in 

particular the consumer protection and safety net provided by the state guaranty funds. The FSB should 

recognize our system as at least one way to comply with its general principles. 

The FSB's work on resolution should also recognize the unique nature of the insurance business model 

including the long term nature of many insurance liabilities, the lack of runs on insurance companies and 

the very long-term nature of most insurance resolutions in the U.S. Accordingly, PCI recommends a 

principles based, high level and flexible approach that reflects sectoral differences and local 

jurisdictional systems. Vague references in FSB documents to the insurance industry providing "critical 

functions" as a justification for global insurance resolution standards are also problematic and 

unwarranted, particularly if applied beyond the confines of designated systemically important financial 

institutions. 
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Global Systemic Risk Designation Process 

PCI has previously submitted testimony regarding our concerns about the back-room process of 

designating Global Systemically Important Insurers (G-SIIs). That process should seek to manage 

systemic risk by focusing on risky activities. While most international institutions have recognized that 

traditional insurance activities are not systemically risky, the FSB seems driven to designate a group of 

the largest insurers as G-SIIs, even if the systemic importance of those institutions was far less than 

undesignated banks or securities firms. Recent publications promote a methodology focused on 

activities as a more effective way of managing systemic risk. The shift will take time, and we suggest in 

the interim that FSB G-511 designations should be based on a credible demonstration of exposure to 

systemic risk, not based on size and global footprint. In addition, potential G-SIIs should be provided 

with appropriate due process and a clear path towards adequately de-risking to avoid a designation or 

consider working towards a future off ramp. 

An Additional Area for FSB Focus 

Making the Case for Open Markets and Removing Barriers to Trade in Insurance and Reinsurance 

Open, competitive and well-regulated insurance markets provide significant value to the public welfare, 

including financial security, identification of risk and a focus on risk mitigation. Instead of more market 

opening, however, barriers to trade in insurance and reinsurance are increasingly being erected around 

the world. These include discriminatory limits on foreign reinsurance, unfair advantages for state-owned 

enterprises and data localization mandates. As markets become less competitive and more domestically 

focused, they become more vulnerable to systemic shocks. While generally appearing in less developed 

large and small markets, we even see discrimination against U.S. companies in developed markets such 

as the EU. The FSB should take up this challenge, particularly as many of these barriers are being 

erected in the name of prudential regulation. 

Conclusion 

Several fundamental reforms such as enhancing the role of insurance regulators and increasing 

transparency and cost/benefit analysis will greatly improve the work of the FSB. The FSB is considering 

important reforms in corporate governance, resolution, and designation of global systemically important 

insurers, where PCI believes more work needs to be done in appropriately tailoring the approach of 

global standard setting and implementation. Beyond our comments on current work streams, PCI 

encourages the FSB to more strongly advocate for open and well-regulated markets and thereby help 

combat the alarming negative trend of protectionism being imposed in the guise of prudential 

regulation. 

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