U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

99–794 PDF 2016

OVERSIGHT OF THE FINANCIAL 

STABILITY OVERSIGHT COUNCIL: 

DUE PROCESS AND TRANSPARENCY 

IN NON-BANK SIFI DESIGNATIONS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

NOVEMBER 19, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–63 

( 

(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 OVERSIGHT AND INVESTIGATIONS

SEAN P. DUFFY, Wisconsin, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

ROBERT HURT, Virginia 

STEPHEN LEE FINCHER, Tennessee 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

ANN WAGNER, Missouri 

SCOTT TIPTON, Colorado 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

AL GREEN, Texas, Ranking Member 

MICHAEL E. CAPUANO, Massachusetts 

EMANUEL CLEAVER, Missouri 

KEITH ELLISON, Minnesota 

JOHN K. DELANEY, Maryland 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

November 19, 2015 ........................................................................................... 1 

Appendix: 

November 19, 2015 ........................................................................................... 31 

WITNESSES 

THURSDAY, NOVEMBER 19, 2015 

Hockett, Robert, Edward Cornell Professor of Law, Cornell Law School ........... 9 

Macey, Jonathan R., Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law, Yale Law School ...................................................... 5 

Scott, Hal S., Professor and Director, Program on International Financial 

Systems, Harvard Law School ............................................................................ 6 

White, Adam J., Visiting Fellow, The Hoover Institution .................................... 8 

APPENDIX 

Prepared statements: 

Hockett, Robert ................................................................................................. 32 

Macey, Jonathan R. .......................................................................................... 56 

Scott, Hal S. ...................................................................................................... 71 

White, Adam J. ................................................................................................. 84 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Duffy, Hon. Sean: 

Written statement of the American Enterprise Institute for Public Policy 

Research ........................................................................................................ 102 

Green, Hon. Al: 

‘‘Basis for the Financial Stability Oversight Council’s Final Determination 

Regarding MetLife, Inc.,’’ dated December 18, 2014 .................................. 109 

Letter to Representative Waters and Representative Green from Chairman Hensarling, dated August 6, 2014 ...................................................... 140 

Amici Curiae brief in MetLife, Inc., v. Financial Stability Oversight Council, dated May 22, 2015 ................................................................................ 142 

(1) 

OVERSIGHT OF THE FINANCIAL 

STABILITY OVERSIGHT COUNCIL: 

DUE PROCESS AND TRANSPARENCY 

IN NON-BANK SIFI DESIGNATIONS 

Thursday, November 19, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:18 a.m., in room 

2128, Rayburn House Office Building, Hon. Sean P. Duffy [chairman of the subcommittee] presiding. 

Members present: Representatives Duffy, Fitzpatrick, Hultgren, 

Wagner, Tipton, Poliquin, Hill; Green, Cleaver, Beatty, and 

Sinema. 

Chairman DUFFY. The Oversight and Investigations Subcommittee will come to order. Today’s hearing is entitled, ‘‘Oversight of the Financial Stability Oversight Council: Due Process and 

Transparency in Non-Bank SIFI Designations.’’ 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. 

The Chair now recognizes himself for 5 minutes for an opening 

statement. 

Since the passage of the Dodd-Frank Act, this committee has 

spent significant time examining the law and considering how to 

improve its numerous imperfections. Among them, Title I of DoddFrank creates the Financial Stability Oversight Council, better 

known as FSOC, which is tasked with identifying risk to the financial stability of the United States from the distress or failure of 

large, interconnected bank holding companies and non-bank financial companies. 

Section 113 of Dodd-Frank vests the FSOC with the authority to 

determine whether non-bank financial companies should be subject 

to heightened prudential standards and supervision by the Federal 

Reserve. Dodd-Frank rewarded the very regulators that missed the 

warning signs leading up to the 2008 financial crisis with additional power and responsibility with the creation of the FSOC. 

By design, the FSOC was intended to facilitate dialogue amongst 

the Federal financial regulators. While seemingly rational in theory, in practice it has enabled the Treasury Secretary to override 

the jurisdiction of Federal financial regulators and weaponize the 

concept of risk management. Moreover, the FSOC and its actions 

2 

are riddled with opacity and uncertainty, despite continued requests for information from Congress, and specifically from this 

committee. 

Aside from operational and process concerns, FSOC’s SIFI designation may be unconstitutional because they violate due process 

requirements and legislative nondelegation principles. 

Companies designated as SIFIs under the FSOC’s informal adjudication process are denied access to records and given little to no 

guidance about the process and prospects for the respective examinations. For non-banks, there are no defined designation thresholds, no definitions of how designation factors are weighed against 

each other, and no disclosure by the FSOC of prior designation 

precedents. 

The designation process is wholly subjective and casts data history and economic analysis aside. The FSOC bases its designations 

on highly speculative worst-case scenarios to justify its expansive 

regulatory agenda. 

Additionally, the non-bank SIFI designation process violates separation of power requirements. FSOC officials who investigate a 

company and propose a designation also conduct the evidentiary 

hearing and issue the final designation. This makes the members 

of the FSOC the judge, the jury, and the executioner. 

Once designated, there is no clear path for a company to appeal 

or to seek de-designation. 

Further, the FSOC has highly politicized their regulatory process 

by concentrating authority in the hands of FSOC members. FSOC 

members are all Presidentially-appointed leaders of regulatory 

agencies. 

The closed-door nature of FSOC’s operations strips authority 

from the other commissioners of multimember agencies who are 

part of the agency’s bipartisan commission structure. The individual agencies that constitute FSOC are not properly represented 

on the Council and are limited in their access to information. 

Rather than leveraging the expertise of the regulators having 

primary responsibility for particular industries in the financial system, the FSOC’s voting structure makes it possible for FSOC members who know little or nothing about systemic risk in these markets to vote on questions affecting an entire industry. 

While cross-border regulatory coordination is critical to the safety 

and soundness of our global financial markets, the relationship of 

the FSOC and the Financial Stability Board (FSB) still remains 

unclear. The FSOC has followed the lead of the FSB on money 

market funds, on the designation of AIG, MetLife, and Prudential, 

and asset managers. 

The goal of international coordination has turned into an apparent outsourcing of U.S. regulation to the FSB. 

Wholly capitulating to the whims of the FSB is inconsistent with 

congressional intent, puts the U.S. financial system at risk, and 

curbs any competitive advantage of our domestic companies. 

So today, I look forward to our witnesses and hearing their views 

and perspectives on the constitutionality of the FSOC’s actions, 

lack of due process, and transparency concerns in the FSOC’s nonbank SIFI designation process. 

3 

With that, I recognize the gentleman from Texas, Mr. Green, the 

ranking member of the subcommittee, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

I thank the witnesses for appearing, as well. 

And, Mr. Chairman, I would properly label this hearing, ‘‘the 

MetLife Hearing.’’ It appears to me that we are going to be abundantly fair and make sure that MetLife has a fair hearing, but I 

see a double standard. 

I see a double standard because in 2001, when women brought 

a gender discrimination lawsuit against MetLife, it was not litigated in Congress; it was litigated in court. When employment discrimination lawsuits have been brought against MetLife, they have 

not been litigated in Congress; they were litigated in court. When 

disabled persons filed lawsuits against MetLife, they were not litigated in Congress; they were litigated in court. 

And the day before MetLife sued in the current litigation that it 

has in the D.C. court, MetLife was sued for having what has been 

called a shadow insurance practice. That will be litigated in court. 

It will not be litigated in the Congress of the United States of 

America. 

There is a double standard. If you are a hardworking American 

and you have litigation, you will go to court, you will have to hire 

your lawyers, and you will have to defend. But if you are a $900 

billion company, you can file your case in the Congress of the 

United States of America. 

Some would say, ‘‘But how do you know they asked for this?’’ If 

they didn’t ask for it and they are getting it, I think it makes it 

even more egregious that we would, of our own volition, decide that 

we are going to make sure MetLife gets a fair hearing. 

I thank God that there are Federal courts, and those Federal 

courts are going to hear the case, at least one in particular. And 

you can’t intimidate Federal judges. Federal judges have lifetime 

appointments. 

So I just hope that we in the future can be as fair to hardworking Americans, people who find themselves in need of some assistance, that we can be as fair to them as we will be to MetLife. 

Case in point: The ranking member and I sent a letter to the 

Chair of this subcommittee and the Chair of the full Financial 

Services Committee, asking for a hearing concerning allegations of 

discrimination in a major financial institution. And when we sent 

that letter we did it in good faith, assuming that since we were 

having discrimination hearings, we would have a discrimination 

hearing with reference to the allegations of discrimination at this 

major financial institution. 

It turns out that we couldn’t do that. We received a letter back 

from my colleagues—whom I love dearly, by the way—Mr. Hensarling and Mr. McHenry at the time; not you, Mr. Chairman. But 

it reads in part, ‘‘We trust that the reason you elected not to investigate these matters when you controlled the House is because you 

believe, as we do, that Congress should not exercise its investigative prerogatives with respect to matters of fact and law that are 

currently being adjudicated in Federal court,’’ somewhat similar to 

what we are encountering today. 

4 

MetLife down the street in a D.C. court case that we were asking 

about was in court. MetLife has its case litigated before the Congress of the United States of America. Hardworking Americans 

with allegations of discrimination can’t get such a hearing. 

But, now there is an exception. If you happen to be the Consumer Financial Protection Bureau, aka the CFPB, you can have 

your witnesses come over and have allegations of discrimination 

leveled against you because that is the agency that is designed to 

protect the consumer, and there are people who want to eliminate 

that agency. So it is okay to make allegations of discrimination 

with reference to them, but not with reference to these major financial institutions. 

Okay, there has been the allegation made that, ‘‘We don’t regulate these major banking institutions.’’ Interesting point, given that 

we have something called a Financial Services Committee and a Financial Institutions Subcommittee. It just seems to me that it 

would be something we would look into. 

I will have more to say on these points, and I yield back the balance of my time, Mr. Chairman, and I thank you. 

Chairman DUFFY. The gentleman yields back. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Fitzpatrick, for 1 minute for an opening statement. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Transparency and government accountability is what sets the 

United States of America apart from most other countries in the 

world. It allows democratically elected representatives to ensure 

government entities are acting in the best interest of the American 

people, and also gives us the ability to communicate what is happening back home to our constituents. 

Transparency also allows Congress to discover shortcomings and 

make necessary changes when necessary. However, albeit slowly, 

Congress is coming to the same conclusion that my constituents 

back home in Bucks County discovered a long time ago: government is too big; government is too opaque; and government is increasingly unaccountable to Congress. 

The CFPB and the FSOC are two examples of this type of runaway bureaucracy, which has enabled government to regulate our 

financial decisions, limit choices, threaten our capital markets, and 

suppress economic opportunity for many American families. 

I look forward to the testimony from our witnesses, and I hope 

that this committee can find honest and legitimate ways to bring 

more transparency to our system, and be more accountable to Congress while encouraging growth and innovation in every sector of 

our economy. 

I yield back. 

Chairman DUFFY. The gentleman yields back. 

I now want to welcome our distinguished panel. 

By way of a brief introduction, first, we have Professor Jonathan 

Macey, the Sam Harris professor of corporate law, corporate finance and securities law at Yale University. 

Second, Professor Hal Scott, the director of the program on international financial systems at Harvard Law School. 

5 

Third, Mr. Adam White, a visiting fellow at The Hoover Institution, where he researches and writes on the administrative state 

and the courts. 

And finally, we have Professor Robert Hockett, the Edward Cornell professor of law at Cornell Law School. 

Thank you all for being here. Each of you will be recognized for 

5 minutes to give an oral presentation of your testimony. 

And without objection, all of your written statements will be 

made a part of the record. 

Once the witnesses have finished their testimony, each member 

of the subcommittee will have 5 minutes within which to ask the 

panel questions. 

Now, please note on your table you have three lights: one is 

green; one is yellow; and one is red. Yellow means that you have 

1 minute left. Red means your time is up. 

The microphones are very sensitive, so please make sure that 

you are speaking directly into them. 

With that, Professor Macey, you are now recognized for 5 minutes for a summary of your testimony. 

STATEMENT OF JONATHAN R. MACEY, SAM HARRIS PROFESSOR OF CORPORATE LAW, CORPORATE FINANCE AND 

SECURITIES LAW, YALE LAW SCHOOL 

Mr. MACEY. Thank you very much. It is an honor to be here. 

Thank you, Chairman Duffy and Ranking Member Green. I appreciate the opportunity to speak to you today. 

In evaluating the work of the Financial Stability Oversight 

Council, I think it is very easy to summarize the problem that we 

are facing, which is that the FSOC has been given an impossible 

task and they are performing that task very poorly. What I mean 

by that is they are asked to regulate something, which is called 

‘‘systemic risk,’’ that they are unable to define. 

And therefore, it is not a very big surprise that they have been 

unsuccessful in coming up with regulations that provide basic protections for regulated entities, such as objective regulations, non-idiosyncratic or non-ad hoc regulations. 

The problem is, I think, very significant. It doesn’t mean that 

regulation should not be attempted at all. Systemic risk, despite 

our inability to define the term with any precision, is still an important risk, and things like asset bubbles and cascade effects are, 

as we saw in the financial crisis that began in 2007, a significant 

source of concern. 

Even with that obstacle, though, the major point that I would 

like to share with you today is that I think we can do significantly 

better than we are doing. There are a couple of problems that I 

think should be focused on, and I think this is a very good start 

in beginning that focus. 

I think it is useful to think about this regulatory problem from 

the perspective of the FSOC. And if you will allow me to make the 

academic assumption that the FSOC is not perfect, then I will say 

that in designating an institution as systemically important, there 

are basically two kinds of errors that the FSOC can make. 

One is what statisticians call a type one error, which in essence 

would be to say that a financial institution is not systemically imVerDate Nov 24 2008 13:41 Oct 07, 2016 Jkt 099794 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\99794.TXT TERI
6 

portant when that financial institution actually is systemically important. 

The second kind of mistake that might be made by a regulator 

or bureaucrat is what is called a type two error, which is simply 

saying that a financial institution is systemically importantly when 

the financial institution, in fact, is not systemically important. 

And the problem there is that from the standpoint of the regulator, there are no consequences to making a type two error. There 

are no consequences to saying, ‘‘You—this financial institution, 

whether it is MetLife or GE Capital or AIG—are systemically risky 

and pose systemic risk, when in fact, it is not. The only consequence is less competition, higher prices for consumers, and the 

like. 

On the other hand, a type one error, which is to fail to give a 

systemic designation to an institution that is systemically important, would be catastrophic to the career of a regulator. 

So it isn’t at all surprising—we should expect and we should plan 

our regulatory policy around the fact that the game is going to be 

tilted dramatically in favor of the over-designation of institutions 

as systemically important. 

The second point that I want to make in closing is that the concerns that we have on the basis of the record thus far, with respect 

to the actions that the FSOC has already taken, is that there is 

a significant danger of increasing, rather than decreasing, systemic 

risk. And the reason for that is because the narrow criteria that 

are used and the fact that the FSOC is ignoring certain risk-reduction strategies is going to herd entities into particular risk strategies and undermine the diversification of risk avoidance strategies 

that will reduce systemic risk, and we are losing that by the onesize-fits-all approach that has been taken to designations thus far. 

Thank you. 

[The prepared statement of Mr. Macey can be found on page 56 

of the appendix.] 

Chairman DUFFY. Thank you, Mr. Macey. 

The Chair now recognizes Mr. Scott for 5 minutes for a summary 

of his testimony. 

STATEMENT OF HAL S. SCOTT, PROFESSOR AND DIRECTOR, 

PROGRAM ON INTERNATIONAL FINANCIAL SYSTEMS, HARVARD LAW SCHOOL 

Mr. SCOTT. Thank you, Chairman Duffy, Ranking Member 

Green, and members of the subcommittee, for permitting me to testify before you today. I am testifying in my own capacity and do 

not purport to represent the views of any organizations with which 

I am affiliated, although some of my testimony is consistent with 

the publicly stated views of the Committee on Capital Markets 

Regulation, which I direct. 

I want to focus on three points in my testimony today. 

First, FSOC is an inadequate substitute for real reform of the 

regulatory structure, which is itself badly needed. Second, FSOC’s 

principal role to designate non-banks as systemically important financial institutions (SIFIs) is ill-advised. And third, the non-bank 

SIFI designation process should be revised to provide the public 

7 

and the potential designee with adequate transparency, including 

a cost-benefit analysis. 

The U.S. financial regulatory structure is highly fragmented and 

ineffective, as multiple agencies have responsibilities for the same 

or closely related entities and markets. Following the 2008 crisis, 

other leading financial centers, including the United Kingdom and 

the European Union, reorganized and consolidated their regulatory 

structure. The United States did not. 

The FSOC authority to coordinate this fragmented regulatory 

structure is severely limited. 

First, while FSOC has the authority to mediate disagreements 

between its members, this requires an affirmative vote of two 

thirds of the members of FSOC. Even if FSOC is able to make recommendations about what to do about problems, it has no mechanism for enforcing them. 

Second, a simple majority of FSOC members can recommend 

that another agency, one of its members, issue a specific rulemaking if FSOC determines that such a rulemaking is necessary 

to mitigate risk to the financial system. However, FSOC does not 

have the authority to require agencies to actually implement these 

rulings. 

So its ability to coordinate this fragmented regulatory structure 

is highly limited. 

Let me turn to SIFIs. 

One key point is that there is no evidence for the principle underlying SIFI designations: that large financial institutions are so 

interconnected to each other that the bankruptcy of one will directly cause the bankruptcy of others. 

In the 2008 financial crisis, no large financial firms failed as a 

direct result of their exposures to Lehman Brothers. And analyses 

show that direct losses due to the failure of AIG would also not 

have caused the bankruptcy of its large counterparties. They limited their risk at AIG, as prudent counterparties do. 

Instead, in 2008 systemic risk existed due to contagion, which is 

an indiscriminate run by short-term creditors across the entire financial system. Thus, designating certain large non-banks as systemically important and then subjecting these institutions to more 

stringent regulation does not meaningfully reduce systemic risk. 

It also potentially increases moral hazard and could introduce 

competitive distortions into the marketplace if these designees 

enjoy reduced funding cost, a subject of some debate. 

Finally, the non-bank SIFI designation process is also in need of 

reform. Currently, the general public and potential future designees, or ones that have been, in fact, designated, receive inadequate information regarding the basis for FSOC’s determination. 

FSOC does not conduct a cost-benefit analysis when making a 

non-bank SIFI designation, and the potential designee does not receive an opportunity to present its position to FSOC until FSOC is 

nearly complete with its process. Furthermore, FSOC does not provide the designee with the opportunity to review the record upon 

which its decision is based. 

These inadequacies in the process should be corrected by the 

FSOC. And if FSOC does not do so, then Congress should revise 

8 

the Dodd-Frank Act so that FSOC is statutorily obligated to provide such transparency. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Scott can be found on page 71 

of the appendix.] 

Chairman DUFFY. Thank you, Professor Scott. 

Mr. White, you are now recognized for 5 minutes for a summary 

of your testimony. 

STATEMENT OF ADAM J. WHITE, VISITING FELLOW, THE 

HOOVER INSTITUTION 

Mr. WHITE. Thank you. 

Chairman Duffy, Ranking Member Green, and members of the 

subcommittee, thank you for inviting me to testify today. 

As my fellow panelists and others have observed, FSOC raises 

significant concerns in the manner in which it conducts its business: its severely narrow view of due process; its reliance on secret 

evidence; its preference for perpetual regulation instead of a regulatory off-ramp; and, perhaps most disconcertingly, its stretching of 

the statutory text to empower itself to designate SIFIs without any 

consideration of the plausibility of the risk scenarios at issue. 

As the FSOC’s independent member with insurance expertise 

said, in dissenting on the MetLife designation, ‘‘FSOC has created 

an impossible burden of proof for companies to meet, as it effectively requires companies to prove that there are no circumstances 

under which the material financial distress of a company could 

pose a threat to the financial stability of the United States.’’ He 

added, ‘‘It remains to be seen whether this approach is legally tenable.’’ 

These are all serious concerns. But in pursuing reform, it is crucial to keep in mind that the problems we are discussing today are 

really symptoms of more fundamental structural concerns—namely, the breadth of power that Dodd-Frank gave to the FSOC, and 

the dearth of structural constitutional checks and balances that 

would otherwise limit and guide the FSOC’s exercise of this power. 

Ultimately, the Constitution and administrative law strike a balance between efficiency and procedural rights, between powers and 

protections, between action and deliberation. That is why the Administrative Procedure Act’s (APA’s) original sponsor in 1946 called 

it a regulatory bill of rights, not a bill of powers. 

Or, as the Chief Justice wrote for the Court a few years ago in 

striking down a similar part of Sarbanes-Oxley, ‘‘Convenience and 

efficiency are not the primary objectives or the hallmarks of democratic government.’’ What he meant was efficiency is important, but 

checks and balances are indispensable. 

With all due respect to the ranking member, I would urge 

against thinking of this hearing as ‘‘the MetLife hearing’’ because 

the issues we are discussing today are of importance far beyond 

just the FSOC and the companies that it designates. 

These decisions also affect companies that compete with designated SIFIs—companies including community banks and other 

smaller financial institutions. It also affects the public, who is injured no less than the companies being designated by the FSOC’s 

insistence upon secrecy. 

9 

The FSOC, like other parts of Dodd-Frank, the Affordable Care 

Act, and Sarbanes-Oxley, are not simply new iterations of the same 

old regulatory arrangements we have had since the New Deal. 

They go beyond that old paradigm in terms of the agency’s powers, 

their tactics, and their independence from Congress. 

It is crucial that Congress reform these structural problems now 

before these new agency structures become the administrative 

state’s new normal, the regulatory paradigm for decades to come. 

Thank you. 

[The prepared statement of Mr. White can be found on page 84 

of the appendix.] 

Chairman DUFFY. Thank you, Mr. White. 

And Mr. Hockett, you are recognized for 5 minutes for a summary of your testimony. 

STATEMENT OF ROBERT HOCKETT, EDWARD CORNELL 

PROFESSOR OF LAW, CORNELL LAW SCHOOL 

Mr. HOCKETT. Thanks so much for inviting me here today. It is 

a pleasure to be here and an honor, as well. 

So, Ranking Member Green issued me a challenge when he 

walked in this morning. He said, ‘‘I would like to see you condense 

that lengthy written testimony of yours into 5 minutes.’’ 

My friend Jon Macey said, ‘‘Yes, I would like to see that.’’ 

So watch this. 

Basically, the simple point I want to make is that the FSOC, I 

think, is best regarded as a pragmatic and sort of quintessentially 

American way of dealing with two particular dilemmas. One of 

those dilemmas is very longstanding, and the other one is of more 

recent vintage. 

The longstanding one is how to reconcile efficient governance on 

the one hand with fundamental constitutional values and constraints on the other. This is not a new dilemma by any means. 

The United States began to encounter it or began to experience it 

in the late 19th Century as the economy began to grow by leaps 

and bounds, became more complex, more dynamic, changing much 

more rapidly than it had done previously. 

What that meant, of course, is that it was much more difficult 

for Congress alone to sort of handle problems, or for the President’s 

sake alone or with a very small Cabinet, to handle problems that 

might emerge. 

If a new form of fraud or a new form of artifice were to emerge, 

let’s say, every month or every couple of months, one couldn’t well 

expect Congress to come into session to legislate some sort of rule 

against this new form of fraud say every week, or every month, or 

even every year necessarily, because, of course, Congress has many 

fish to fry. 

So the idea then, of course, was that, maybe what we can do is 

delegate some of that authority to Executive Branch agencies since 

the Executive Branch is, after all, there to enforce the laws that 

Congress enacts. 

Now, the sense in which this gave rise to a problem, of course, 

is that that can lead to an agency seeming to be engaging not only 

in enforcing the laws, not only, in other words, in discharging Executive Branch functions, but it would seem also to be engaging in 

10 

some form of legislation or quasi legislation, for example, if it was 

enacting rules to sort of fill in gaps that statutory language left 

open. 

By the same token, if an agency decided to deliberate in some 

sort of formal way before deciding to take some form of enforcement action against some accused perpetrator of some infraction, 

that could look like a kind of adjudication and that would then 

mean that we were sort of muddying the waters, essentially muddling the distinctions between Article One, Article Two, and Article 

Three functions. 

So the big question, then, was how do we reconcile, on the one 

hand, this need for government efficiency, with these constitutional 

constraints on the other hand. And the answer that we came up 

with—it took a while, of course, to get there, but it is largely codified, it is largely embodied in the APA that my friend Mr. White 

just mentioned. 

And I am going to submit to you that the way the FSOC conducts its operations is entirely in keeping with APA norms, and 

APA values. It is not in any sense an outlier when it comes to regulators. There are countless regulators that act exactly as FSOC 

does in particular respects that people have called into question. 

And if you give me the opportunity during the Q&A, I would be 

happy to adduce examples. 

The second dilemma that I mentioned as sort of a more recent 

vintage is reconciling regulatory depth, say, with regulatory 

breadth, particularly in the financial sphere. 

So what do I mean by that? As you know, and as many people 

have noted, our financial regulatory system is very siloed, very 

much fragmented. And the reason for that is that at one time our 

financial system was very much siloed and very much fragmented. 

In other words, they were quite distinct, quite categorically distinct subsectors of the financial sector. And so it seems to make 

sense to have a specific regulator for each of those subsectors; that 

way, each regulator could get to know the field of its regulation in 

depth, right? 

The problem, of course, was that beginning in the 1980s and 

really accelerating over the course of the 1990s, we began to experience a form of what is known as financial convergence. And what 

that means is basically two things. It means on the one hand, institutions that used to be categorically distinct—like insurance companies on the one hand, commercial banks on the other—began to 

engage in some very similar-looking transactions, right? 

Convergence also could be understood in a more institutional 

sense. And what that means is you actually found institutions 

affiliating under a single holding company or conglomerate structures. 

That, of course, presented a new challenge. If you think about it, 

one thing that has not been mentioned here yet is that MetLife 

was a bank holding company as recently as 2012, and it failed 

stress tests that were conducted when it was a holding company. 

This is just one example, but it shows you the sense in which you 

can’t draw the same categorical distinctions. 

11 

FSOC is a way of trying to kind of keep sector-specific regulators 

on the one hand, but to get regulatory breadth on the other by joining them into a council. 

Thank you very much. 

[The prepared statement of Mr. Hockett can be found on page 32 

of the appendix.] 

Chairman DUFFY. Very impressive, with about 5 seconds to 

spare, Professor Hockett. 

Mr. HOCKETT. Thank you, Mr. Chairman. 

Chairman DUFFY. Without objection, the Chair would like to submit for inclusion into the record a written statement from Peter 

Wallison and Arthur Burns, fellows in financial policy studies at 

the American Enterprise Institute, on the troubling interactions between the FSOC and the Financial Stability Board. 

Without objection, it is so ordered. 

The Chair now recognizes himself for 5 minutes for questions. 

I want to be clear: This is a hearing about the FSOC. This is not 

a hearing about discrimination. We have had those hearings and 

we may have more. 

This is not a hearing about anyone who has been designated. 

This is about the process, and I want to be clear on that. 

I don’t think FSOC is being litigated in the Federal courts. But 

it is a role for Congress to look at the structure of FSOC and how 

well it works or how well it doesn’t work. 

So with that in mind, Dodd-Frank implicitly provides that any 

hearing by FSOC would be an informal adjudication under the Administrative Procedure Act. And as a result, FSOC could base its 

decision to designate a company on materials that aren’t part of 

the hearing record. 

Thus, FSOC could designate the company on the basis of evidence not subject to adversarial scrutiny by the company in its 

hearing itself. I think this potentially undermines the reliability of 

the designation process. 

And so with that, Mr. White, is it fair to go through this kind 

of a process without being able to confront the evidence in a hearing for a company who is potentially going to be designated? 

Mr. WHITE. No, I don’t think it is fair. As you indicated, the best 

test of fact is to try it from both sides and both directions. The adversarial process has been key both in the courts and also in administrative procedures. 

The courts have recognized limited instances in which it is okay 

for an agency to withhold evidence when national security is truly 

at stake, but nothing as far as I can tell—and, of course, I don’t 

have access to the full record—in the FSOC procedures so far seem 

to justify the withholding of evidence. It injures the public. 

Chairman DUFFY. And so what would be the—what is the benefit? If there is no national security interest in withholding that 

evidence, why couldn’t FSOC present all of the evidence in these 

hearings to the subject company and let them confront it? Is there 

a good reason why they wouldn’t allow all the evidence to be 

shown? 

Mr. WHITE. As far as I could tell, no. I think they should show 

all the evidence, both for the benefit of the designated company 

and for the public at large. 

12 

Chairman DUFFY. And is this a good way to identify systemic 

risk? 

Mr. WHITE. No, I don’t think it is. 

Chairman DUFFY. Okay. 

And again, maybe to Mr. Macey or Mr. Scott, is this a fair way 

to hold a hearing? 

Mr. MACEY. I wrote an amicus brief in the ongoing litigation regarding MetLife’s designation as a non-bank SIFI, and I wasn’t 

even able to obtain access to the actual basis for the decision, putting aside the supporting documents. There is a public version of 

the rationale, and then there is a version that the public is not permitted to see even of the rationale that presumably adduces the 

evidence. 

So I think it is unfair, but it is also perplexing as to what is their 

motivation. 

I just would add simply that I think this is a significant problem. 

I think that it is a symptom of a much broader problem, which is 

that when someone is under scrutiny—when a company is under 

scrutiny for potentially being—or being accused, if you will, of 

being systemically important, it is counterpunching—it is fighting 

against a moving target. There are no established criteria. There 

is nothing that the firm can do in order to make a convincing argument because there are no rules. 

And so we have—the role played by evidence is very unclear because evidence is generally adduced so that you can show something. Here we have evidence being adduced for no clear reason 

other than apparently to support a conclusion that has already 

been made by the regulators, which is certainly what appears to be 

the case in the designations we have observed thus far. 

Chairman DUFFY. And my time is almost up. 

One other quick question: Does it present any concern for the 

panel when you have, say with the designation of a MetLife or a 

Prudential, where you have the one FSOC member who has expertise in this area who votes no, and everyone else really without any 

expertise is voting yes, that those who have expertise are going 

against the grain of the rest of the FSOC members? 

Does that pose a concern, maybe, Mr. Scott, to you or Mr. White? 

Mr. SCOTT. It is a concern, obviously, that the person with the 

most expertise thinks it is ill-advised. Of course, one has to be careful because that person could be seen as a representative of the insurance industry, in this case. 

So I think the deeper problem is having votes by committee on 

such a matter. If you are going to engage in this process, it doesn’t 

seem it should be subject to a vote, which includes, by the way, 

people on that committee who have no knowledge of this industry— 

none. 

You could argue that the SEC has some knowledge of the capital 

markets and therefore some knowledge of what the insurance industry is all about. I think it shouldn’t be just left to the insurance 

regulator, because the designation has an impact on the entire financial system. 

So I think it is a concern, but it is a reflection of a deeper problem. 

13 

Chairman DUFFY. And, Professor, my apologies. I asked you a 

question as I was running out of time. So thank you for your answer, but I am a minute over. 

So with that, I will recognize the gentleman from Missouri, Mr. 

Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

About 3 years ago, my daughter married a guy who had just 

graduated from the K.U. Law School, and as a Missourian you 

have to understand, which I know that my colleague and friend 

from St. Louis, Mrs. Wagner, understands, that this is serious business if you live in Missouri. It is almost betrayal. 

And for people around the country who are probably unaware of 

the rivalry between Missouri and Kansas, I will just tell you very 

quickly that a few years ago K.U. won the national basketball 

championship, and Ike Skelton was the dean of our delegation, and 

as Members were asked to stand, Ike Skelton told the Missouri delegation not to stand. Now, he was considered to be one of the last 

gentlemen of the Congress, but that will get to it. 

But let me now say that we are proud in Missouri to have Professor Hockett here with us, who is a K.U. Law School graduate. 

And so times have changed, and we are very thrilled and proud 

of you, and claim you from your base in Cornell. So thank you very 

much. 

Professor Macey, one of your criticisms of the FSOC is that the 

Council does not distinguish plausible risk from implausible, so 

what is likely to occur, rather than what could occur. Maybe you 

have a stop sign, there is a possibility that could be an accident. 

That is why you have the stop sign. 

And so I am a little concerned about and hopeful that you can 

provide me with some more information on this whole issue. FSOC 

doesn’t have as its purpose to examine what could occur so that potential—they are trying to find ways in which bad things don’t happen again to the American public. 

I will remind everybody that the reason we have FSOC is because we discovered in this very room back in 2008 that we had 

lost about 9 million jobs and about $20 trillion in household 

wealth—$20 trillion. And so we took this action, and I am pleased 

that we did so. But the criticism sometimes, I think, forgets about 

that. 

So can you please help us understand your statements concerning risk? 

Mr. MACEY. Certainly, Congressman. I very much appreciate the 

question and the opportunity to respond. 

Basically, my concern is that it is an elemental characteristic of 

risk regulation of any variety that the two vectors along which an 

analysis must occur are: one, the severity of the event about which 

one is concerned, the severity of a systemic event; and two, the 

probability that particular factors will cause that event to occur. 

And the basic insight is that if regulation were free, then we 

would regulate everything and have no risks whatsoever. But regulation is costly if we want to—we could vastly reduce the number 

of fatalities on the highway if we required everyone on the highway 

to drive a tank instead of an automobile, but there would be a cost 

to doing that. 

14 

The same thing is true with risk regulation. 

What is of concern to me is that in its explanation of the basis 

of its final determination with respect to MetLife, the FSOC specifically asserted that because the statute—because Dodd-Frank 

does not expressly incorporate a standard of likelihood, the FSOC 

may assess harm to the financial stability of the United States 

based on risks that lack even basic plausibility— 

Mr. CLEAVER. I hate to— 

Mr. MACEY. —context. 

Mr. CLEAVER. I apologize, but I only have 16 seconds and I am 

just interested, what would you assign as a probability for another 

2008 crash? 

Mr. MACEY. I’m sorry, another what? 

Mr. CLEAVER. Probability. 

Mr. MACEY. I know, a probability of what? I didn’t hear— 

Mr. CLEAVER. Of another 2008 economic collapse? 

Mr. MACEY. In the next week, or year, or— 

Mr. CLEAVER. I will finish, but as I understand, maybe Mr. 

Green and I are the only ones who were here; 4 months before we 

had the crash, we had the credit rating agencies in this committee 

hearing room— 

Mr. MACEY. Okay. 

Mr. CLEAVER. —telling us everything was great. 

Mr. MACEY. Right. Yes, I am aware of that. 

I think that there is a reasonable probability. Let’s take a 5-year 

time horizon. I would say that there is a reasonable probably: less 

than 50 percent but greater than 10 percent. 

As I said in my original testimony, I think that certain aspects 

of Dodd-Frank have increased, unfortunately, rather than decreased the probability of that occurring because of herding effects 

and the like. 

I certainly don’t think it is the case that we have eliminated systemic risk. The problem of asset bubbles remains. Many other problems remain. So I think there is some reasonable probability. 

I wish I could be more precise than that, but I am doing the best 

I can for you, sir. 

Chairman DUFFY. The gentleman’s time has expired. 

The Chair now recognizes the Vice Chair of the subcommittee, 

the gentleman from Pennsylvania, Mr. Fitzpatrick, for 5 minutes. 

Mr. FITZPATRICK. I thank the chairman for the recognition. 

And as a matter of history, right before the 2008 crisis, we also 

had Fannie Mae before the committee, who also said everything 

was great right before they required about $180 billion in resources 

to sort of stand up that organization and likely—and it has been 

written extensively about—had more to do with housing policy and 

what was happening. There certainly were problems within the 

banking sector, but housing policy, in my view, had much more to 

do with it. 

I thank the witnesses for their testimony here today. 

Professor Macey and Professor Scott, I want to ask you about a 

specific section of Dodd-Frank, Section 113, which lays out 10 factors that FSOC is required to consider when evaluating a non-bank 

entity company for SIFI designation. 

15 

Does the FSOC explain how it uses the 10 factors when it issues 

the designation? For instance, does it explain how it weighs those 

factors? And specifically, when it is weighing those factors, is it 

considering, as it is thinking about those factors, whether a particular company is at risk or in distress, or is it just assuming the 

company is going to fail or the company is at risk and how those 

10 factors then would—and that bank’s or the non-bank’s company 

would—how their failure would affect the economy? 

Am I clear on that question? 

Mr. SCOTT. The short answer is ‘‘no.’’ I do think, however, that 

in general—that is ‘‘no’’ with respect to any particular designation. 

There is a general methodology that FSOC has about the use of 

these factors, which uses similar factors to those of the Financial 

Stability Board. So these factors actually emerge out of a more general G-20 consensus. 

But the application of these factors and how much they weigh 

those factors on any specific determination is not revealed by 

FSOC. 

And I would just add, going back to my oral testimony, that all 

of these factors are aimed at the idea of connectedness. So, for instance, one of the factors is how interconnected is a particular institution to somebody else. All financial institutions are very interconnected in a sense, but that doesn’t prove that if one financial 

institution would fail, its counterparties would fail, which is the 

real concern about interconnectedness. 

So they don’t demonstrate is that interconnectedness really important? If there were a failure, what would the consequences be? 

That is what we really care about, and they don’t do that. 

So I would say, again, the short answer to your question is no, 

they don’t. 

Mr. FITZPATRICK. But isn’t it true, Professor Scott, that banks 

pose a special risk because of their interconnectedness? Do insurance companies or other financial non-bank companies pose that 

same sort of interconnected risk that you are talking about? 

Mr. SCOTT. They are connected, Congressman, obviously. We 

have an integrated global financial system. People do business with 

other financial firms. That is connectedness. 

But that doesn’t provide the justification for singling out a firm 

and saying, ‘‘You are connected, therefore we are going to impose 

more capital on you,’’ or we don’t even know what we are going to 

do to you, which is another issue. We don’t even know what the 

consequence of this designation is. 

But just to say people are connected is to say, they are financial 

firms. Yes, they are all connected. 

But why do we care about that? Why is that important? Is it at 

the level—which is what we should care about—if they fail, that 

other firms will be severely affected? 

Now, back to the Congressman’s point, sure, if MetLife or a big 

firm failed, there would be a tremendous economic impact. I don’t— 

clear argument, okay? You could say that about a lot of firms in 

our economy. 

So I don’t think we are going around designating firms as important whose failure would affect the economy. The focus here is the 

16 

financial system and what the impact would be on the failure of 

MetLife to the rest of— 

Mr. FITZPATRICK. Professor Macey? 

Mr. MACEY. I largely agree— 

Mr. FITZPATRICK. Can you turn your microphone on? 

Mr. MACEY. I largely agree with Professor Scott. 

Just to provide another example, it would be—one could observe 

two financial institutions and one could say on a—during a particular day these financial institutions consummated 50,000 transactions with one another and had 87,000 electronic messages with 

regard to trading actions, and therefore these institutions are very 

interconnected. 

But as Professor Scott’s point indicates, that doesn’t tell us anything about whether the failure of one of these would result in the 

failure of another. One would need to know a lot more about the 

balance sheet of the entity; one would have to know about how the 

clearing and settlement is done, what the netting is done. 

And so, I think your point is exactly right, which is that it is— 

there is no weighting and there is no indication of how the criteria 

should be used properly, which is to say how are the—how are 

these criteria related to systemic risk as opposed to just existing 

in some form that is really very benign? 

Mr. FITZPATRICK. I am out of time. I appreciate the witnesses’ 

views. 

Thank you. 

Chairman DUFFY. The gentleman yields back. 

The Chair now recognizes the gentlelady from Missouri, Mrs. 

Wagner, for 5 minutes. 

Mrs. WAGNER. Thank you all for joining us today to discuss the 

process by which FSOC designates non-bank firms as systemically 

important. 

Such a process goes far beyond the companies that are being designated, as these designations have a far-reaching impact on the 

broader economy, as we have discussed, and millions of customers 

who would be affected. 

According to research, designating asset management firms as 

SIFIs could ultimately cost as much—investors who rely on those 

services as much as 25 percent of the return on their investments 

over the long term, which is approximately $108,000 per investor. 

In addition, designating insurance companies as SIFIs could reduce 

consumer benefits, increase prices, and make some products no 

longer available. 

Mr. White, Dodd-Frank does not require the FSOC to justify its 

SIFI designations by demonstrating that the designated financial 

company poses a substantial likelihood of causing systemic financial harm. Rather, it allows the FSOC to designate a financial company as a SIFI if it merely could pose a threat to the financial stability of the United States. In that way, FSOC can present certain 

cataclysmic events as a model no matter how unlikely they are. 

Do you think that FSOC needs to show actual significant risk of 

systemic financial harm in its designations, sir? 

Mr. WHITE. Yes. I think it is the best reading of the law. And 

to the extent that courts ultimately disagree, I think it is incumbent upon Congress to place that standard on the FSOC. 

17 

Mrs. WAGNER. In a way, don’t you think that FSOC considering 

unlikely yet cataclysmic events in a way takes away focus from actually observing legitimate systemic risk existing in the market? 

Mr. WHITE. Yes, I do. And if I may expand on this point for just 

a moment, I don’t mean to understate the difficulty of the task for 

the FSOC in terms of trying to regulate against these uncertain 

risks in what Secretary Rumsfeld once called the ‘‘unknown unknowns,’’ or Nassim Taleb called ‘‘black swans.’’ I don’t want to underestimate that. 

But the task should then fall to Congress, really, to deliberate on 

this to identify more specific standards for the agency and then set 

the regulators forward to execute them within clear legislative limits. Then, the courts can enforce those limits. 

Mrs. WAGNER. I agree, and I think that it is the entire point of 

FSOC in the first place. 

Specifically in FSOC’s designation of insurance companies, they 

have often presented the scenario of a run on the bank situation 

happening. Could you please explain how this scenario in fact is 

unlikely for insurance companies and how using it as a basis for 

designation is off base? 

Mr. WHITE. I have to confess, of all the panelists here, I am probably the least expert on the specifics of financial regulation. But I 

will say that even a novice like me knows that an insurance company isn’t the same as a Wall Street bank. Insurance companies 

are facing what is called maturity mismatch issues, where they 

aren’t basing these things. 

I think to the extent that the FSOC is lumping everything together in one regulatory approach, it is a mistake. 

Mrs. WAGNER. For Professors Macey and Scott, with regard to 

the asset management industry, while FSOC has not entirely ruled 

out designating specific companies, it has said that they will try an 

activities-based approach. Do you believe that FSOC should also 

consider this approach for designating insurers, rather than simply 

relying on the size of the company? 

Professor Scott or Macey, whomever? 

Mr. MACEY. I think that this is the kind of regulatory initiative 

that increases rather than decreases systemic risk. The most basic 

concept in finance is the idea of safety through diversification. 

And one way that diversification manifests itself from a systemic 

perspective is if you have a lot of firms in the economy and they 

are all doing different things, so that if somebody is doing something that is stupid and causes the firm to fail, that is not such 

a big problem, because there are other firms in this heterogeneous 

economy that are doing other things that are successful. 

And if we take all firms and we move them under the aegis of 

a single risk regulator such as FSOC, and we regulate them, we 

lose the societal benefits of this heterogeneity and increase systemic risk. 

Mrs. WAGNER. And let me, in my brief time that is left, ask, 

what is the rationale for using the activities-based approach in the 

asset management industry but not in the insurance sector? 

Professor Scott? 

Mr. SCOTT. I think we learned a lot from the asset management 

experience that demonstrated that whatever concerns you have in 

18 

the asset management industry are not going to be solved by designating two or three large firms as SIFIs, because we have different 

firms holding different assets, and if there is an asset class concern, it might not involve the people that we designated as SIFIs. 

So we learned a lot. It seems to me we should go back and say, 

‘‘What did we learn from that, that would apply to the insurance 

industry?’’ 

Now I think there is one problem with insurance, Congresswoman. That is, unlike asset management where you have a Federal regulator of the asset managers, which is the SEC, in the case 

of insurance, we have no Federal regulator. And as you know, this 

committee in the past, even before the crisis, has considered the 

appropriateness of the Federal regulator on an optional or mandatory basis for insurance companies. 

I think that the lack of such a regulator actually plays into the 

SIFI process because if there were such a regulator you could say, 

just the way we did with asset management, the SEC or the Federal regulator can handle this. In the case of insurance companies, 

it is the States, okay? 

Mrs. WAGNER. Right, which is to say that— 

Mr. SCOTT. So we have to have— 

Mrs. WAGNER. —that deals ultimate jurisdiction— 

Mr. SCOTT. —we have to have a lot of confidence in the ability 

of the States to do that. Maybe we should. But the issue is slightly 

different for insurance than asset management. 

Mrs. WAGNER. I am way over my time. 

Chairman DUFFY. You are— 

Mrs. WAGNER. I thank the Chair for his indulgence. 

And I thank you all. 

Chairman DUFFY. The gentlelady’s time has expired. 

The Chair now recognizes the gentleman from Colorado, Mr. Tipton, for 5 minutes. 

Mr. TIPTON. Thank you, Mr. Chairman. 

And I would like to thank the panel for taking the time to be 

here today. 

I am a small business guy from Colorado and I had a very simple 

business premise: If it is broken, fix it; if not, stop doing it. 

And, Professor Macey, when I was listening to your comments, 

I found them very concerning in terms of the potential impacts on 

our economy. You had made the comment that the FSOC has an 

impossible task that they are performing poorly—I may be paraphrasing you just a little bit—and there is no consequence for a 

type two error, designating an institution as a SIFI when it is not. 

Have we literally incentivized regulation and a broadening net of 

regulation in this country under Dodd-Frank? 

Mr. MACEY. I think we have. I think that you can think about 

regulation pre-Dodd-Frank and post-Dodd-Frank in the following 

way: We used to think of the basic idea of risk regulation as the 

virtue of diversification; don’t put all your eggs in one basket. 

Dodd-Frank says the opposite. It says, ‘‘Let’s put all of our eggs 

in one basket and watch the basket very carefully.’’ And we have 

to have a lot of confidence and faith in those regulators. 

For example, take what Professor Scott was saying about insurance regulation. I think the evidence is pretty clear that despite 

19 

what might be the lack of prestige of these State insurance regulators, the fact is the insurance industry in this country is extremely sound, with very strong balance sheets; a lack of mismatch 

between the term structure of assets and liabilities; is very wellcollateralized; and is extremely responsible. Say securities borrowing, the entire business, I think, is a model. 

And I think there is a concern that was suggested by Professor 

Scott that when FSOC looks at insurance companies and they say, 

‘‘Of course they should be systemically important because they 

don’t have a Federal regulator. So we will be their Federal regulator.’’ Because once we designate them as systemically important, 

the Fed comes in. 

I think that it is a basic choice, and I think Dodd-Frank makes 

a choice that I personally don’t think is the right one. 

Mr. TIPTON. And that lends itself back—you just made the comment that we have to be able to have confidence in the regulators 

to be able to make these decisions. And this gets back to the point 

of likelihood, the actual exposure that is really going to be there. 

Professor Scott, would you like to comment on that? 

Mr. SCOTT. I personally do not have confidence in the ability of 

FSOC to reach the right result with respect to these designations. 

I don’t think doing this by committee vote, including people who 

don’t know much about the industry that we are talking about in 

any given situation, is just not the way to run a railroad. If we 

were going to do this kind of thing, at least we should have experts. So that undermines confidence. 

Now we have this bizarre situation where we don’t know what 

the consequence is of designating them. So we designate them, and 

now the Fed is looking at, how are we going to regulate insurance 

companies that have been designated? 

You would think logic would say, let’s know what the consequence of the designation is before we designate them. But we 

don’t know what it is. That undermines confidence. 

It really comes back, Congressman, to the fact that we created 

this instrument, FSOC, to deal with our failure collectively to really reform the regulatory structure. And this is not the answer. And 

we are seeing now in spades why that is the case. 

Mr. TIPTON. So you don’t want the cobbler running the railroad, 

even though they are both in transportation. You have to be able 

to have some real common sense actually applied to the process. 

When we are talking about getting Congress involved—and, Mr. 

White, you might want to be able to jump in on this, as well—I am 

incredibly passionate about Congress being able to have a role. The 

only reason FSOC exists—I wasn’t here when Dodd-Frank was 

passed, but the only reason that they—Dodd-Frank and a lot of the 

entities, CFPB, we can go down the list, that they come out is because of an act of Congress. 

Is it incredibly important that we get Congress involved once 

again into the rulemaking process? You had cited having clear perimeters and we will let the courts decide. Would it actually be appropriate to have the people who wrote the laws actually play a 

role in that rulemaking process? 

Mr. WHITE. Absolutely. The Supreme Court said in a recent case, 

the Free Enterprise Fund case, that often it is in one President’s 

20 

interest to give away his own powers, but that doesn’t mean that 

should be allowed to happen. And the same could be said for Congress. 

You asked a moment ago, ‘‘Are we just trusting the regulators?’’ 

I guess I would use the line, ‘‘trust but verify,’’ and that requires 

three things: Congress setting clear standards; regulatory procedures in the sunshine; and meaningful judicial review. 

Mr. TIPTON. Thank you. 

Mr. Chairman, my time has expired. Thank you. 

Chairman DUFFY. The gentleman yields back. 

The Chair now recognizes the gentleman from Maine, Mr. 

Poliquin, for 5 minutes. 

Mr. POLIQUIN. Thank you, Mr. Chairman. I appreciate it very 

much. 

And thank you, gentlemen, for all being here today. 

I am sure you folks are all familiar with a study done a couple 

of years ago by the former Director of the nonpartisan CBO, Mr. 

Holtz-Eakin. If you aren’t familiar with the study, effectively it 

says if you look at the long-term rate of return that asset managers, pension fund managers, and mutual funds, and so forth and 

so on, can generate for their clients, there is about a 25 percent reduction in the long-term rate of return if these non-bank financial 

institutions, i.e. asset managers, are designated as SIFIs. 

The reason for that, of course, is that the costs go up because the 

regulations, the product offerings shrink, and rates of return go 

down. 

Now, at a time where many Americans are concerned about running out of money before they run out of time, I would hope that 

you folks would agree that we want to make sure that we help 

small investors throughout our country prepare for retirement, 

help to save for college study, and so forth and so on. 

No, morphing into specifically some of the companies I have been 

talking about—or talking to over these last few months, many of 

them have come to me with business plans that are dramatically 

altered as compared to a few years ago. They are shedding product 

lines. They are consolidating. They are getting out of businesses 

that they normally would be in because of the regulatory burden 

of Dodd-Frank—in particular, the threat of being designated as a 

SIFI. 

Now, when you are an asset manager, we all know. And if Mr. 

Tipton and I run two different mutual funds and our performance 

is different, well the clients from one firm are going to go to the 

client of another where the better performance is. In this case, of 

course, my performance is better than Mr. Tipton’s. 

Now, in which case these assets are not held on Mr. Tipton’s balance sheet as his firm or mine. The assets are held at a custodial 

bank in another State, another country, or down the road. And so 

there is no systemic risk to the economy if one of these companies—they are not too-big-to-fail. It doesn’t make any sense. 

There is no systemic risk posed by asset managers. So to so designate them as SIFIs and threaten the long-term rate of return of 

small investors doesn’t make any sense to me. 

So my question to you is the following: Don’t you think it makes 

sense if you are running an asset management firm, you should 

21 

have clear, written criteria so you know if you are in these certain 

business lines? Then, the chances of you being designated a SIFI 

and having to go through all this is clear. 

And then once you are designated a SIFI, don’t you think it 

makes sense that you should know what the off-ramp should be so 

I can make a decision, if I am in this business now or going to be 

in this business or offering this product line, that I know how to 

get out of the SIFI designation if I do certain things? 

Mr. Macey, why don’t you take a shot at that, if you don’t mind, 

sir? 

Mr. MACEY. You raise a number of interesting points, and I want 

to focus on two. 

The first is the lack of any process, procedure, or guidelines, 

guidance of any kind about how an entity can stop being a SIFI 

once it receives that designation. 

We are seeing an interesting natural experiment, of course, with 

GE Capital, which has been designated as a SIFI, is consistent 

with your observations and the Congressional Budget Office’s intuition. They looked at the cost of that and said, ‘‘We don’t want to 

be in the finance business any more in a significant way.’’ So that 

is a very significant concern. 

Generally speaking, I think if somebody came down to Earth 

from Mars and was handed Dodd-Frank, along with a number of 

other Federal statutes regulating the financial industry, and was 

asked, ‘‘Can you build a plausible case that these are intended to 

hurt small business?’’ the answer would have to be ‘‘yes.’’ 

Maybe they weren’t intended to do that, but it certainly is the 

consequence and if you—so reasoning backwards from the consequence, one has to make that inference, in my view. 

Mr. POLIQUIN. Mr. Scott, we are a country of laws. And whether 

you are a defendant individually or you are a company lawfully 

conducting business in the financial services space in this country, 

don’t you think it is reasonable and appropriate to make sure your 

government provides you with due process, to make sure you know 

the path going forward, what is best for you, your stockholders, and 

your customers? 

Mr. SCOTT. Certainly, Congressman. That is a hallmark of our 

country. 

Mr. POLIQUIN. And do you think that this whole SIFI designation 

process offers that due process? 

Mr. SCOTT. I am not a constitutional expert. I will defer to my 

colleagues. But in terms of a common understanding of that term, 

I don’t think it offers due process. 

But just to stress the point, this is not just an issue for that company. This designation affects the entire financial system. It affects 

competitors, and it affects customers. 

So, yes, we worry about the due process to the company, but I 

am just as concerned with the economic impact on everybody else 

outside this company of that designation. 

Mr. POLIQUIN. Thank you, gentlemen, for being here. I appreciate 

it very much. 

Thank you, Mr. Chairman. I yield back my time. 

Chairman DUFFY. The gentleman’s time has expired. 

22 

The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty, 

for 5 minutes. 

Mrs. BEATTY. Thank you, Mr. Chairman and Mr. Ranking Member. I am having a little voice problem this morning. 

And thank you, to the witnesses. 

I have just a few brief comments, and then, Mr. Chairman, if it 

is okay, I would like to relinquish the balance of my time to Congressman Green. 

First, let me just say thank you for being here this morning. I 

have a lot of insurance companies located in my 3rd congressional 

district. If one of my local or State domicile insurers were to be designated, can you explain to me what would be the process for determining the issues of regulatory jurisdiction between the Ohio Department of Insurance and the Financial Stability Oversight Council, if any? 

Mr. MACEY. I guess in a nutshell, I would say it is sort of like 

being at a dance where you can dance with more than one person 

at the same time. So if there is an insurance company in your district and the FSOC designates that insurance company as a SIFI, 

it will continue to be regulated by your State insurance department 

and commissioner. 

In addition to that, Dodd-Frank provides that after the designation as a SIFI, the Federal Reserve has the authority to promulgate sort of customized bespoke regulation for that insurance company. And at the time of the designation, nobody has—it is going 

to be a mystery as to what the consequences are. 

So there will be regulation. And this is what we saw with GE 

Capital; this is what we saw with MetLife. We have seen it in 

every instance of a non-bank SIFI designation. 

And it will be—one of—if they think that your—the management 

of your—the insurance company in your district is not sharp or 

doesn’t have experience, it will be more heavily regulated. If they 

think that the products, certain insurance lines of business, are 

riskier than others, it will be more heavily regulated. 

If there is a difference between what the Fed thinks should be 

done and what the State insurance office in your State thinks 

should be done, the regulators will tell them they have to comply 

with both sets of regulation, notwithstanding the fact that they 

may be in conflict. 

It is difficult, which is why I prefer academia to the real world. 

But it is a tough position that your constituent would be in, your 

insurance company constituent. 

Mrs. BEATTY. Thank you. 

Mr. Chairman, I would like to relinquish the balance of my time 

to Congressman Green. 

Mr. GREEN. Thank you. And I pray that the gentlelady will recover quickly because her strong voice is very much needed in the 

Congress. 

Mr. Macey, dear sir, we were talking earlier—in fact, you and 

one of the members—about withholding evidence. And you had 

some concern about this withholding of evidence in the MetLife 

case. My assumption is that you are concerned about due process 

being afforded. Is that a fair statement? 

Sir, first we will have to— 

23 

Mr. MACEY. I was just saying I was— 

Mr. GREEN. I am going to have to do this—I have a little bit of 

time— 

Mr. MACEY. Okay. 

Mr. GREEN. Let me just ask you. 

Mr. MACEY. Okay. 

Mr. GREEN. Are you concerned about due process? Is that your 

rationale? 

Mr. MACEY. A little bit. Not overwhelmingly. I would be more 

concerned if somebody—an individual citizen—I am concerned with 

their due process rights. I don’t really, frankly, stay up at night— 

Mr. GREEN. You are not concerned about due process for— 

Mr. MACEY. —worrying about— 

Mr. GREEN. You are not concerned about due process for a corporation? 

Mr. MACEY. It is not my primary concern. 

Mr. GREEN. Okay. 

Mr. MACEY. I am a little bit worried about it. I would like them 

to have due process. But my view is much more the societal consequences of— 

Mr. GREEN. And when we were talking about the withholding of 

this evidence, we were talking specifically—you and a member 

were talking about in the MetLife case, because that is the case in 

question, is it not? 

Mr. MACEY. I thought we were just talking generally about— 

Mr. GREEN. No, you were talking about MetLife, because— 

Mr. MACEY. Okay. I am happy to talk about MetLife. 

Mr. GREEN. Your testimony, sir, that—your written testimony is 

replete with comments about MetLife. 

Mr. MACEY. Yes. 

Mr. GREEN. You haven’t said much about it in your oral testimony, and I suspect that when I came in and threw the marker 

down, it created some problems for a lot of people. But your written 

testimony is replete— 

Mr. MACEY. That is true. 

Mr. GREEN. —as is yours, Mr. Scott, with MetLife. 

And of course, Mr. Hockett, yours is too. 

And, Mr. White, let me commend you. You spoke of it when you 

gave your verbal testimony. 

So you are all talking about MetLife, and let’s just be honest 

today: It is MetLife that we are talking about. If MetLife were not 

in a Federal district court here in D.C., we wouldn’t be having this 

hearing. It is all about MetLife, a $900 billion company. 

Now, I am going to insist that I place some things in the record. 

The first will be the letter that I referenced earlier, wherein the 

ranking member and I made a request that persons who are not 

major corporations have an opportunity to have their cases litigated before the Congress—in a fair way, of course. Any objections— 

Chairman DUFFY. Without objection, it is so ordered. 

Mr. GREEN. Thank you very much. We will place that in the 

record. 

I would also, given that this is about MetLife, like to place in the 

record a brief from many of the law professors who are in support 

24 

of the position of FSOC as it relates to the litigation against 

MetLife. 

Chairman DUFFY. Without objection, it is so ordered. 

Mr. GREEN. Thank you, Mr. Chairman. 

And now, let’s just talk about these companies. MetLife, as you 

know, deals in derivatives, about $200 billion worth, according to 

Bloomberg. With these $200 billion worth of derivatives, I find that 

I have to be concerned about them. 

MetLife, while it is not AIG, we do know that AIG created a 

problem because of its derivatives. And that was so stated, as a 

matter of fact, by the Office of Thrift Supervision. They acknowledged it. 

So MetLife has $200 billion worth of derivatives, and it is a $900 

billion company. So are you saying that under no circumstances, 

Mr. Macey, a $900 billion company with $200 billion in derivatives—under no circumstances should it ever be a SIFI? 

Mr. MACEY. No. 

Mr. GREEN. Thank you. 

Mr. Scott, are you saying that a $900 billion company, with $200 

billion in derivatives—and if you want to know about its interconnectedness I can share that with you, because we have 

MetLife’s own comments about how connected it is in the world— 

are you saying that it should not be, under any circumstances, a 

SIFI? 

Mr. SCOTT. You will have to give me the opportunity to put this 

in context. 

Mr. GREEN. Okay. Let’s do this then; we will pass. 

Let’s go to Mr. Hockett. 

Mr. Hockett, sir, is it easier to place a bank holding company— 

a chartered bank—is it easier for a chartered bank to become a 

chartered bank through the OCC than for a major corporation that 

is a non-SIFI to become a SIFI? 

Mr. HOCKETT. That is actually a great example to bring up. The 

processes are actually quite similar. 

What is really interesting is that the OCC has a great deal of 

discretion in deciding whether to confer a charter on a bank. There 

is no formal sort of adjudication required, only informal, as in the 

case of SIFIs. 

A six-factor balancing test is applied. There is no sort of algorithmic tradeoff between different factors. They are not weighted. 

Indeed, the law is actually replete with multi-factor balancing tests 

that don’t have sort of weighted factors. 

So actually, there are very strong, very close similarities between 

those two decision-making processes. 

If I could add in a quick note on transparency matters, it really 

makes a difference that this is an informal sort of adjudication. The 

transparency requirements in cases like that by law are less than 

they are in actual formal adjudications. 

The other thing that is worth noting is that one reason that you 

have less transparency in an informal process is there is a—an interest group that we are completely leaving out of account here so 

far, and that is the counterparties, right, of the prospective SIFI. 

That is to say, the institution that is being evaluated with a view 

25 

to whether it is a SIFI is being evaluated partly by reference to its 

counterparties. 

Mr. GREEN. I have to reclaim my time. The— 

Mr. HOCKETT. That is confidential stuff. 

Mr. GREEN. I will have to reclaim my time and yield because of 

the essence of— 

Chairman DUFFY. The gentleman’s time completely expired 4 

minutes ago—rather, the gentlelady’s time. 

The Chair now recognizes the gentleman from Arkansas, Mr. 

Hill, for 5 minutes. 

Mr. HILL. Thank you, Mr. Chairman. Thank you for hosting this 

hearing today on FSOC. 

I look at this whole FSOC process and the FSB world of looking 

at the idea of designating SIFIs, and I always try to follow Charlie 

Munger’s long advice about life, which is to invert the question and 

look at it from the reverse. 

And so the first thing that always strikes me is after Dodd-Frank 

and after we have an FSOC established, we ought to ask, is there 

significant weakness in how, for example, insurance companies are 

overseen today, and then more specifically, life versus property and 

casualty? Or should we ask the question, is there something dramatically wrong with the way asset management firms are regulated today, instead of taking it as I think we have, which is kind 

of charging forward with the presumption that they probably are 

ultimately SIFIs and then justifying that outcome. 

So I really do approach it from the inverse. And part of that is 

based on my experience. I was at Treasury from 1989 to 1991, and 

in that time the insurance industry had a very difficult time—the 

life industry particularly—due to GIT contracts; and the famous 

failure of Executive Life in California; and the state of the real estate market in a post-market crash, post-Tax Reform Act of 1986. 

But the Treasury studied the existing State system, the guaranty 

system, the focus, and they found that it was amazingly resilient 

at that time. And so, I entered this debate with the presumption 

that American life insurance regulation is quite resilient, quite protective of consumers, and quite prudential in its oversight of the 

companies. 

It concerns me when FSOC has an expert, Roy Woodall, who dissents in FSOC’s decision and he is not listened to. 

So a question I have is, maybe for Professor Macey to start out, 

the reasoning behind trying to even designate insurance companies 

as SIFIs before the Fed has even established what the rules of the 

road are just strikes me as premature and kind of nuts, from a 

Charlie Munger inversion question point of view or from a linear 

point of view, that we are going to make the presumption that they 

are. 

Could you just comment on that for me? 

Mr. MACEY. I really appreciate that question for many reasons, 

not the least of which is that Charlie Munger is a hero of mine and 

he is a very practical, commonsense, smart guy. 

I think it is a concern, and the reason this is a concern for me, 

and the reason that MetLife is a concern for me, is I don’t think 

the world will come to an end if MetLife maintains its designation 

26 

as a SIFI. I think the problem you identify is the vagueness in the 

standard and the lack of any connection to an actual problem. 

And this type-one, type-two error issue raises the following specter, which is we are sitting here right now talking about MetLife. 

I could easily imagine, based on plausible scenarios I have seen in 

other areas of economic regulation, that we would be in here 5 

years from now, or maybe a year-and-a-half from now if there is 

another financial crisis, talking about firms that are not in the 

hundreds-of-billion-dollar category, but in the hundreds-of-milliondollar category, that you could—that every firm is—in the insurance industry is interconnected. 

So it would be plausible, under the vague standards we have 

that caused the designation of MetLife, to designate hundreds of 

insurance companies as SIFIs. 

Is it going to happen today? No. But that is why I think this is 

about more than MetLife and why I think your question is very 

germane. 

Mr. HILL. Yes. It concerns me because when you look over at the 

banking side. I feel like the left hand doesn’t know what the right 

hand is doing. If you look at the capital surcharge that has been 

proposed for G-SIFIs, the Fed has a set of metrics that measure liabilities, interconnectedness, dependency, and maybe short-term 

funding flows, and a whole variety of things that one can pull effectively from public information, either 10-Ks or Y-9s. 

But we don’t even attempt to do something similar for the nonbank holding company entities before we start down this road. So 

it is misdirected, I think, that we jump out and designate people 

before we have even decided what the rules are. 

I thank you, and I look forward to the next round of questions. 

Thanks, Mr. Chairman. 

Chairman DUFFY. The gentleman yields back. 

Votes have been called, but we have two more Members here, 

and I think we can get through them before we walk off to vote. 

The Chair now recognizes the ranking member of the subcommittee, the gentleman from Texas, Mr. Green, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

Let’s go back to you, Mr. Hockett. You were giving us some intelligence about the OCC and its methodology and comparing that to 

a SIFI designation by FSOC. Could you please continue, or would 

you? 

Mr. HOCKETT. Yes, sure. Thanks for the question. 

So again, throughout the regulatory state, you could say, and 

throughout our body of law there are lots of multi-factor balancing 

tests that don’t have weighted factors. I suspect that is partly in 

recognition of the fact that many decisions that have to be made 

are much too complex to be captured by an algorithm, that in other 

words, legislators, regulators, and judges probably won’t ever be 

able to be replaced by machines. 

And so, you actually have lots of chartering decisions that oftentimes will be challenges, typically either by a would-be bank that 

is denied a charter, or by an incumbent bank that objects to a charter having been granted to an institution that will end up being in 

competition with that institution, and they routinely raise the 

same sorts of objections to the bank chartering authority, whether 

27 

it be the OCC at the Federal level or whether it be a State banking 

commissioner who makes the chartering decision at the State level. 

Often, the arguments that they will make are very much like the 

arguments that MetLife has made against the FSOC in this particular instance. 

Mr. GREEN. Thank you. 

Mr. Chairman, I would also like to place in the record a document styled, ‘‘The Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, Inc.,’’ and I shall read 

from this document on page 29. 

It reads, and this relates to how interconnected MetLife is, ‘‘By 

design, the winding-down of a failed insurer’s estate may take several years to accomplish while policyholders and contract holder liabilities are paid off as they come due and are transferred to solvent issuers. 

‘‘MetLife is a highly complex and interconnected financial services organization that operates in approximately 50 countries and 

provides services to approximately 100 customers globally. The 

complexity of MetLife’s operations and intercompany relations, including intra-group dependences for derivatives management, investment management, risk management, cross-border operations, 

and critical services, creates complexities that could pose obstacles 

to a rapid and orderly resolution.’’ 

And then it goes on to indicate that, ‘‘there is no precedent for 

the resolution of an insurance organization the size, scope, and 

complexity of MetLife.’’ Now, this comment is being made after 

AIG. And as we found out, AIG was a part of the glue that was 

holding the economic order together. So— 

Chairman DUFFY. Mr. Green, without objection, the document 

will be included in the record. 

Mr. GREEN. Thank you, Mr. Chairman. 

With AIG, we found that we eventually had to bail them out— $182.3 billion, in fact. So the question is, given the complexity of 

MetLife, why would FSOC not seek to ascertain whether or not it 

should be designated as a SIFI? This is a huge, mega corporation. 

Mr. Hockett, would you kindly give some commentary? 

Mr. HOCKETT. Yes. Thanks so much for the question. 

Again, this goes back to something I mentioned in my opening 

statement, and that is that, again, there was a time when insurance companies were sort of categorically distinct from the other 

kinds of financial institution. And that is still largely true of many 

smaller insurance companies. 

But the fact is there are some very large insurance companies 

that are not traditional insurance companies and that depart in 

various ways from the traditional insurance company model. That 

is why I actually mentioned MetLife in my opening testimony just 

briefly, but I mentioned it in order to note, first, that it was a bank 

holding company as recently as 2012, that it failed a stress test at 

that time, and while it has since relinquished its bank holding company status, it nevertheless remains a very large, far-flung, highly 

complex financial institution. 

And indeed, the FSOC and many experts, including terrific business professors at the University of Chicago, at Stanford University, Yale, and elsewhere, and law professors, have noted that its— 

28 

the term structure of its balance sheet—that is to say the term 

structure of its liabilities on the one hand and its assets on the 

other—are not those of the traditional insurance company and, indeed, there can be significant maturity mismatch in as much as 

some of the policies that MetLife in particular offers can be liquidated quickly. 

But again, I don’t want to get too hung up on just MetLife. I 

think as a general matter, this is an important phenomenon. 

Mr. GREEN. I will have to yield back now. 

Chairman DUFFY. The gentleman yields back. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

Mr. White, first question: In your written testimony, you note 

that SIFI designations can in some cases provide a competitive advantage despite the heightened regulatory requirements because of 

the lowered cost of capital an institution might receive due to the 

perception of being too-big-to-fail. What reforms would you recommend to remedy the market distortion that could be caused by 

FSOC’s unchecked authority? 

Mr. WHITE. First of all, I am very glad you asked that, because 

I wanted to point out earlier that while MetLife is one case that 

is litigating these issues, a small West, Texas community bank that 

I represented in a lawsuit challenging the SIFI designation process, 

challenging it as a subsidy, that is where a lot of these issues were 

first raised. 

I think in terms of fixing the problem, first of all, I think clear 

standards are important. I think it is inevitable that this designation is going to operate as a subsidy, and so I think the regulators’ 

discretion needs to be cabined so that they can’t just hand it out 

willy-nilly. I think it is important that there are clear standards by 

Congress as to which companies these designations can be placed 

upon. 

Mr. HULTGREN. Thank you. 

Professor Scott, in your testimony you note that the FSOC 

should involve potential designees in its process at the very start 

and should provide the designees with complete transparency into 

the basis for any potential designation. Two-part question: First, 

based upon FSOC’s actions to date, do you think they are inclined 

to provide this due process? And second, should they be required 

to do so and what can Congress do? 

Mr. SCOTT. Congressman, I don’t think they have been provided 

that due process. They have not been able to see the record on 

which FSOC made this determination, and I think they should be 

provided that. As I said in my testimony, if FSOC doesn’t do so on 

its own, I think the Congress should require that. 

Mr. HULTGREN. Thank you. 

Professor Macey, if I can address this to you, as you know, in 

April 2012 FSOC issued a rule claiming the authority to require 

supervision and regulation of certain non-bank financial companies 

but determined a cost-benefit analysis was not required under the 

Regulatory Flexibility Act. 

Two-part question: First, what do you think would have been the 

outcome of a thorough cost-benefit analysis? And second, what 

29 

costs is the FSOC imposing on life insurance policyholders and possibly investors through its SIFI designation, and does this threat 

or risk of a designation impose any costs? 

Mr. MACEY. The designation certainly imposes significant costs. 

Really underlying your question, I believe, is the question of, does 

a SIFI designation convey too-big-to-fail status? And the answer to 

that is inevitably, definitively, ‘‘yes.’’ 

One of the things that we know as an institutional fact is that 

once an organization is designated as a SIFI, particularly a nonbank SIFI, there are regulators who are assigned to regulate that 

entity, and their entire career depends on that entity remaining in 

business and in operation. 

So inevitably, there will be both costs and benefits to being designated as a SIFI: massive regulatory burden; and higher capital 

requirements. And for different firms, those costs will or will not 

be outweighed by the benefits, which come in the form of a credit 

enhancement for this implicit too-big-to-fail status. 

So it is generally just sort of a deadweight efficiency loss. 

It would be important to do a cost-benefit analysis. People talk 

about this, though, as though it is kind of a binary choice, which 

is to say, as you point out, if I don’t have to do a cost-benefit analysis, maybe you should have to do one. 

A middle ground would be to say, okay, unlike, say, certain SEC 

rules, the cost-benefit analysis does not have to generate a result 

such that the benefits are greater than the costs. That doesn’t 

mean you can’t do the analysis. 

One could do the analysis just for informational purposes to kind 

of get a handle on what is at stake here. And at a minimum, it 

seems to me strange that we don’t even make that attempt. 

Thank you. 

Mr. HULTGREN. Mr. Chairman, I have about 20 seconds left. If 

the chairman wants, I would yield back to him. Otherwise, I yield 

back the balance of my time. 

Chairman DUFFY. The gentleman yields back. 

In about an hour-and-a-half, we have packed a pretty good 

punch. I want to thank the panel for their testimony. 

As I have indicated, votes have been called. There is about zero 

left on the clock, so we are going to have to go do our constitutional 

duty and cast our votes right now. 

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. 

Again, thank you for your testimony. 

And without objection, this hearing is now adjourned. 

[Whereupon, at 10:52 a.m., the hearing was adjourned.] 

(31) 

A P P E N D I X 

November 19, 2015 

32 


99794.001
33 


99794.002
34 


99794.003
35 


99794.004
36 


99794.005
37 


99794.006
38 


99794.007
39 


99794.008
40 


99794.009
41 


99794.010
42 


99794.011
43 


99794.012
44 


99794.013
45 


99794.014
46 


99794.015
47 


99794.016
48 


99794.017
49 


99794.018
50 


99794.019
51 


99794.020
52 


99794.021
53 


99794.022
54 


99794.023
55 


99794.024
56 


99794.025
57 


99794.026
58 


99794.027
59 


99794.028
60 


99794.029
61 


99794.030
62 


99794.031
63 


99794.032
64 


99794.033
65 


99794.034
66 


99794.035
67 


99794.036
68 


99794.037
69 


99794.038
70 


99794.039
71 


99794.040
72 


99794.041
73 


99794.042
74 


99794.043
75 


99794.044
76 


99794.045
77 


99794.046
78 


99794.047
79 


99794.048
80 


99794.049
81 


99794.050
82 


99794.051
83 


99794.052
84 


99794.053
85 


99794.054
86 


99794.055
87 


99794.056
88 


99794.057
89 


99794.058
90 


99794.059
91 


99794.060
92 


99794.061
93 


99794.062
94 


99794.063
95 


99794.064
96 


99794.065
97 


99794.066
98 


99794.067
99 


99794.068
100 


99794.069
101 


99794.070
102 


99794.071
103 


99794.072
104 


99794.073
105 


99794.074
106 


99794.075
107 


99794.076
108 


99794.077
109 


99794.078
110 


99794.079
111 


99794.080
112 


99794.081
113 


99794.082
114 


99794.083
115 


99794.084
116 


99794.085
117 


99794.086
118 


99794.087
119 


99794.088
120 


99794.089
121 


99794.090
122 


99794.091
123 


99794.092
124 


99794.093
125 


99794.094
126 


99794.095
127 


99794.096
128 


99794.097
129 


99794.098
130 


99794.099
131 


99794.100
132 


99794.101
133 


99794.102
134 


99794.103
135 


99794.104
136 


99794.105
137 


99794.106
138 


99794.107
139 


99794.108
140 


99794.109
141 


99794.110
142 


99794.111
143 


99794.112
144 


99794.113
145 


99794.114
146 


99794.115
147 


99794.116
148 


99794.117
149 


99794.118
150 


99794.119
151 


99794.120
152 


99794.121
153 


99794.122
154 


99794.123
155 


99794.124
156 


99794.125
157 


99794.126
158 


99794.127
159 


99794.128
160 


99794.129
161 


99794.130
162 


99794.131
163 


99794.132
164 


99794.133
165 


99794.134
166 


99794.135
167 


99794.136
168 


99794.137
169 


99794.138
170 


99794.139
171 


99794.140
172 


99794.141
173 


99794.142