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EXAMINING THE DANGERS OF 

THE FSOC’S DESIGNATION 

PROCESS AND ITS IMPACT ON 

THE U.S. FINANCIAL SYSTEM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

MAY 20, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–79 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

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 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

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 

CAROLYN MCCARTHY, New York 

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 

GARY C. PETERS, Michigan 

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 

STEVEN HORSFORD, Nevada 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

May 20, 2014 ..................................................................................................... 1 

Appendix: 

May 20, 2014 ..................................................................................................... 59 

WITNESSES 

TUESDAY, MAY 20, 2014 

Atkins, Paul S., Chief Executive Officer, Patomak Global Partners ................... 8 

Barr, Michael S., Professor of Law, the University of Michigan Law School ..... 13 

McNabb, F. William III, Chairman and Chief Executive Officer, the Vanguard 

Group, Inc., on behalf of the Investment Company Institute (ICI) ................. 10 

Scalia, Eugene, Partner, Gibson, Dunn & Crutcher LLP .................................... 12 

Smithy, Deron, Treasurer, Regions Bank, on behalf of the Regional Bank 

Coalition ................................................................................................................ 15 

Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy Studies, the 

American Enterprise Institute ............................................................................ 17 

APPENDIX 

Prepared statements: 

Atkins, Paul S. .................................................................................................. 60 

Barr, Michael S. ................................................................................................ 70 

McNabb, F. William III .................................................................................... 73 

Scalia, Eugene .................................................................................................. 88 

Smithy, Deron ................................................................................................... 105 

Wallison, Peter J. ............................................................................................. 118 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Lynch, Hon. Stephen: 

‘‘Systemic Risk and the Asset Management Industry,’’ by Douglas J. 

Elliott, Fellow, The Brookings Institution, dated May 2014 ..................... 134 

(1) 

EXAMINING THE DANGERS OF 

THE FSOC’S DESIGNATION 

PROCESS AND ITS IMPACT ON 

THE U.S. FINANCIAL SYSTEM 

Tuesday, May 20, 2014 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:01 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, Bachus, Royce, 

Capito, Garrett, Neugebauer, McHenry, Pearce, Posey, Westmoreland, Luetkemeyer, Huizenga, Hurt, Stivers, Fincher, Stutzman, 

Hultgren, Ross, Pittenger, Barr, Cotton; Waters, Maloney, Sherman, Meeks, Hinojosa, McCarthy of New York, Lynch, Scott, 

Green, Moore, Ellison, Perlmutter, Himes, Peters, Carney, Sewell, 

Foster, Kildee, Delaney, Sinema, Beatty, Heck, and Horsford. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. 

The title of today’s hearing is, ‘‘Examining the Dangers of the 

FSOC’s Designation Process and Its Impact on the U.S. Financial 

System.’’ I now recognize myself for 4 minutes to give an opening 

statement. 

The committee’s hearing today is on the Financial Stability Oversight Council which, like most Washington bureaucracies, has come 

to be known by its acronym, FSOC. FSOC was established, or so 

its supporters tell us, to make it easier for regulators to communicate and share information with each other. But the regulators 

didn’t need an act of Congress to do that, and information-sharing 

is not what FSOC is really all about. 

Instead, FSOC is about one thing: increasing Washington’s control over the U.S. economy, thus curtailing both economic freedom 

and economic prosperity. And FSOC does this through its power to 

designate systemically important financial institutions, or in bureaucratic speak, SIFIs. 

Having failed to prevent the last financial crisis, notwithstanding 

having every regulatory power necessary to do so, regulators were 

rewarded with even more power by the Dodd-Frank Act. The DoddFrank Act represents a breathtaking outsourcing of legislative 

power to the Executive Branch. Federal agencies now have virtually unfettered discretion to expand their regulatory control 

2 

through a designation process that is opaque, secretive, vague, 

open-ended, and highly subjective. And by empowering FSOC to 

designate SIFIs, Dodd-Frank allows the Federal Reserve to impose 

bank-like standards on nonbank institutions. In other words, to 

move institutions from the nonbailout economy to the bailout economy. 

And that is what FSOC is doing, expanding the Fed’s power to 

control the financial system using the pretext that size alone poses 

a systemic risk. Rather than offering up detailed data and compelling analysis to justify its efforts to commandeer large financial institutions, FSOC’s perfunctory explanations are typical of an unaccountable group of agencies that feel they don’t need to justify their 

actions to anyone. 

Many think it odd that FSOC has chosen insurance companies 

and asset managers as targets for SIFI designation when there are 

others that clearly pose far greater risk to financial stability. Insurance companies are already heavily regulated at the State level, 

and asset managers operate with little leverage. And since they 

manage someone else’s funds, it is almost inconceivable that an 

asset manager’s failure could cause systemic risk. 

In contrast, there were Fannie Mae and Freddie Mac, which 

were at the epicenter of the financial crisis. They were highly leveraged before the crisis and remain highly leveraged today. They are 

not only a source of systemic risk; they are its very embodiment. 

Then, there is the Federal Government itself. As I watch the national debt clock turn to my left and right, having borrowed upwards of $17 trillion, it is perhaps the most leveraged institution 

in world history, and, like charity, perhaps SIFI designation should 

begin at home. 

Americans should also be worried that FSOC seems to take its 

direction from an international organization that meets secretly: 

the Financial Stability Board (FSB). Though the United States is 

represented, and I use that word advisedly, on this international 

board by the Treasury Department, the Federal Reserve, and the 

Securities and Exchange Commission, neither the Treasury, the 

Fed, nor the SEC has ever reported to Congress about its participation, nor have they ever asked for Congress’ approval to participate 

in the global organization. 

Now, while Administration officials are fond of invoking the risks 

that supposedly lurk in the so-called shadow banking system, great 

risks also lurk to U.S. financial stability and competitiveness in a 

shadow regulatory system in which Treasury and the Federal Reserve may have ceded U.S. sovereignty over financial regulatory 

matters to a secretive, unaccountable coalition of European bureaucrats. Just days ago, in this very hearing room, Secretary Lew refused to answer key questions regarding Treasury’s participation in 

the FSB designation process. 

To most Americans, the SIFI designation process may seem like 

a classic inside-the-Beltway exercise, but the stakes are enormous. 

Designation anoints institutions as too-big-to-fail. Today’s designations are tomorrow’s taxpayer-funded bailouts. Americans may find 

themselves paying more to insure their homes and their families. 

Investors who relied on mutual funds to save for their children’s 

education or their own retirement will find they have earned less. 

3 

And our economy will suffer as sources of long-term investment 

capital dry up. I once again call upon FSOC to cease and desist further SIFI designations until Congress can review the entire matter. 

I now yield 6 minutes to the ranking member for an opening 

statement. 

Ms. WATERS. Thank you, Mr. Chairman. 

Six years ago this March, our regulators were faced with the first 

of many difficult decisions related to the financial crisis: bail out 

Bear Stearns or risk its bankruptcy, spreading instability worldwide. This was the first of several interventions during an economic collapse that resulted in the destruction of trillions of dollars 

of wealth, millions of families’ economic livelihood, and the world’s 

confidence in our markets and our way of life. 

Despite the revisionist views of my Republican colleagues, this 

crisis resulted in part from an inability of markets to police themselves, which was compounded by the inability of the previous Administration and regulators to stop predatory practices on Wall 

Street. At the end of the day, Wall Street’s greed had disastrous 

effects on Main Street. 

As we picked up the pieces, we learned that regulators lacked authority to regulate entire markets, such as the $600 trillion overthe-counter derivatives market. Even worse, they did not have a 

comprehensive understanding of the companies they regulated, like 

AIG. For example, State regulators were barred from regulating 

AIG’s derivatives as insurance products, but at the same time neither Federal regulators, nor AIG’s own executives, understood the 

massive risk it was taking. 

Democrats responded to the massive vulnerabilities in our system by enacting the Wall Street Reform Act, which created the Financial Stability Oversight Council (FSOC) to identify such risks 

and take the steps necessary to prevent them from threatening our 

economic well-being. Because of the FSOC, supported by the Office 

of Financial Research (OFR), we now have a more complete view 

of the entire market, and when necessary the FSOC can subject financial firms to safeguards intended to prevent certain threats 

from harming the economy, and it can make recommendations to 

address risky activities or practices. 

Congress determined as a starting point that the FSOC would 

look at all bank holding companies with more than $50 billion in 

assets, but also directed the Council to look more broadly. Any firm 

or activity whose unregulated risk could create an economic pandemic should be identified and dealt with now, before it is too late. 

To date, the FSOC has identified two insurance companies that fit 

the designation, AIG and Prudential, as well as a finance company, 

GE Capital. 

It is important to note that these companies weren’t just singled 

out without evidence. FSOC has provided an informative, detailed 

analysis that paints a picture of their exposure. For example, in 

the case of AIG, the FSOC determined that a large number of corporate and financial entities have significant exposure in its capacity as a global insurer and could suffer losses in the event of financial distress at AIG. 

Now, while these designations must be made on a strong analytical basis, at the same time I support a strong appeals process if 

4 

industry stakeholders feel as if FSOC got it wrong. However, to 

date, I have not seen anything to suggest that FSOC’s appeals 

process has failed. I have reviewed this appeals process with my 

staff, and I am convinced that the industries have an opportunity 

to make their case. 

The financial crisis demonstrated a need for heightened supervision of nonbank financial institutions, not just in the United 

States, but globally as well. That is why I have been mystified to 

see FSOC’s decisions criticized as forgone conclusions based on the 

recommendations of the international coordinating body, the Financial Stability Board. Not only is there not a shred of evidence that 

supports this theory, but these critics are missing the point. Constructive engagement by U.S. representatives with the Financial 

Stability Board and the global boards coordinating insurance and 

securities regulation promote our global financial stability. 

Mr. Chairman, we in Congress have been clear that we expect 

FSOC’s actions to be crafted in a way that mitigates specific risks. 

One-size-fits-all solutions are more likely to cause harm than promote stability. But I believe Congress must continue to support the 

Wall Street Reform Act, and as a result we must hold the FSOC 

accountable to its mission to prevent any one company or risky activity from ever threatening our livelihood again. 

Mr. Chairman, I have talked with many representatives from the 

industries that are concerned about whether or not FSOC is attempting to treat them as banks, and I am sympathetic to that argument, and I am looking very closely to see if this is true. And 

I, again, support an appeals process where these companies have 

an opportunity to lay out their case and to challenge the FSOC, 

and I am looking to see how this is going to work, because I do believe that the industries have a right to question this, but I also 

believe that FSOC by law has a responsibility to mitigate risk in 

this country. 

And with that, I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from New Jersey, Mr. Garrett, the chairman of our Capital Markets and GSEs Subcommittee, for a minute and a half. 

Mr. GARRETT. Thank you, Mr. Chairman. 

I thank the witnesses for being here to share their knowledge 

and their insights on this important issue on FSOC. For some time 

now, this committee has been focused on the many failings of 

FSOC and its structure and its operation. We did that in hearings 

and letters and speeches, and we have asked FSOC for explanation 

and changes to address our concerns. So far, however, we have 

been met simply by stonewalling. Apparently some members of 

FSOC feel that public policy is best made under a blanket of secrecy and that argumentativeness is the best way to engage with 

Congress. The few answers that we do get are often strawman arguments that claim the only choices we have are FSOC’s current 

way of doing things or nothing at all. 

Well, I don’t accept that. FSOC did not come down from heaven, 

perfect in every way, and there is certainly room for improvement. 

To that end, I have introduced H.R. 4387, the FSOC Transparency 

and Accountability Act. This bill subjects FSOC to the Sunshine 

Act and Federal Advisory Committee Act. It also allows all memVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
5 

bers of the commission and boards represented on FSOC to attend 

and participate in the meetings. It also requires that an agency’s 

vote represents the collective vote of the entire commission or 

board, not just the Chair. And finally, the bill permits members of 

the House Financial Services Committee and the Senate Banking 

Committee to attend FSOC meetings, as I have tried to do but was 

turned away in the past. So far, FSOC has done little to reassure 

this committee that it is a responsible body, and it would not be 

far-fetched to say that FSOC itself is one of the greatest threats to 

financial stability that we face today. 

Finally, Mr. Chairman, I agree with the chairman that the FSOC 

should be refrained from any additional designations until we understand more about the process and impact of SIFI designation. 

And I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Massachusetts, Mr. Lynch, for 2 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. I thank the ranking 

member, as well, and the witnesses for helping the committee with 

its work. 

In the wake of the historical global financial crisis that cost the 

U.S. economy over $22 trillion, the landmark Dodd-Frank Wall 

Street Reform and Consumer Protection Act set systemic risk mitigation as one of the primary goals of comprehensive financial regulatory reform. To this end, Dodd-Frank created the Financial Stability Oversight Council (FSOC), which is a collaborative body designed to identify institutional sources of risk and instability within 

our financial system. 

In furtherance of that mission, Section 113 of Dodd-Frank authorizes the Council to determine that a U.S. nonbank financial institution is systemically important upon a finding that, and this is 

a quote from the statute, ‘‘material financial distress at the company or the nature, scope, size, scale, concentration, interconnectedness, or mix of activities of the company could pose a threat to 

the financial stability of the U.S.’’ 

Mr. Chairman, I support the FSOC. I think it could be an institutional and collaborative force for stability in our financial markets. However, in order to better ensure that the Council’s evaluation process for all our financial companies under Section 113 of 

Dodd-Frank reflects the seriousness of SIFI designation, I would 

urge the Council to make every effort to conduct its review in a 

manner that maximizes transparency and accountability without 

compromising the laudable goals of our financial reform efforts. 

In addition, I would note that Dodd-Frank specifically contemplates that each financial company is different for the purposes 

of evaluating the risk it poses to the U.S. financial system. That 

is precisely why Dodd-Frank set forth the series of factors that the 

Council must consider in determining whether a nonbank financial 

institution is systemically important. These factors include the extent of a company’s leverage and off-balance sheet exposures, the 

degree to which a company is already subject to regulation by one 

or more primary regulators, and the extent to which the assets are 

managed. 

I see I am running out of time. I think that in many cases those 

factors tend to favor acquittal on behalf of some of our mutual 

6 

funds, and I just ask that FSOC take those recommendations to 

heart. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from West Virginia, 

Mrs. Capito, the chairwoman of our Financial Institutions Subcommittee, for a minute and a half. 

Mrs. CAPITO. Thank you, Mr. Chairman. And I want to thank the 

gentlemen for joining us for the hearing today. 

As we have heard, the FSOC was originally envisioned as a 

mechanism for regulatory agencies to share information about potential risks, but it has morphed into an opaque entity that is subverting the prudential regulatory agencies by ignoring their expertise on specific industries that they are charged with supervising. 

There are some very real economic consequences for many of the 

decisions that the FSOC is making, and this hearing will get to the 

heart of that. One of the tasks FSOC is charged with doing is designating nonbank SIFIs. In September of 2013, the FSOC designated a large life insurer as systemically significant despite extensive dissenting opinions from the FSOC’s independent member 

having insurance experience. The one member of the FSOC who is 

charged with having a significant understanding of the industry argued that the FSOC’s basis for the designation simply did not support the likelihood that the failure of the firm would cause disruption to the financial system. Furthermore, he argued that the majority of the FSOC that had approved the designation simply did 

not understand the basic fundamentals of the insurance industry. 

Similarly, we will hear concerns about a one-size-fits-all ap- proach to the regulation of financial institutions larger than $50 

billion in assets. I have long been concerned about how the various 

asset designations and thresholds are designated in Dodd-Frank. 

We need to move past these ambiguous thresholds and change the 

regulatory agencies, charge them with determining the financial 

risk to the system based on the riskiness of their operations. I yield 

back. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, Mrs. Maloney, the ranking member of our Capital 

Markets Subcommittee, for 2 minutes. 

Mrs. MALONEY. I thank the chairman, and I apologize for being 

late. I was doing an event with Congressman Poe on the anti-trafficking, sex trafficking bills that will be on the Floor later on today, 

and which I hope will enjoy wide bipartisan support. 

Mr. Chairman, one of the key lessons that we have learned from 

the financial crisis was that nonbank financial institutions that 

pose greater systemic risks need to be subject to stricter prudential 

standards. To implement this, Dodd-Frank created the Financial 

Stability Oversight Council, or FSOC, which is in charge of identifying the financial institutions that pose systemic risk and designating them as systemically important financial institutions 

(SIFIs). This is an important and necessary power, and without it 

we would have no protection against examples such as the AIG 

challenge that we faced. 

However, the fact that this power to designate firms as systemically risky is so important also means that it should be exercised 

with great care, especially for firms that don’t operate like tradiVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
7 

tional banks, like asset managers. We must also make sure that 

any proposed changes to the SIFI designation process do not hinder 

the FSOC’s ability to carry out its mission of identifying and mitigating systemic risks in the financial system. Policymakers have to 

strike a careful balance between ensuring that there is a fair and 

thorough process for designating firms as systemically important 

on the one hand, and preserving the FSOC’s ability to identify and 

mitigate systemic risk on the other hand. 

I look forward to the hearing today, and I thank you very much. 

My time has expired. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Texas, Mr. Neugebauer, the chairman of our Housing and Insurance Subcommittee, for a minute and a half. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, for holding this important hearing on the Financial Stability Oversight Council’s designation process. The identification of nonbank systemically important firms is a serious exercise that has major implications for the 

competitiveness of U.S. firms and the stability of our financial markets. 

This has been an area where I have been outspoken since the beginning, as I strongly believe FSOC’s structure and its process for 

designating systemically important firms is fatally flawed. Rather 

than using data, history, and economic analysis to justify SIFI designations, FSOC has used far-fetched, highly speculative, worstcase scenarios to justify an aggressive expansion of regulatory 

power for Washington. In addition, many of the targets of this new 

regulatory overreach had nothing to do with the financial crisis and 

pose very little risk to financial stability. 

No designation has been more symbolic of FSOC’s flaws than the 

recent designation of an insurance company, Prudential Financial, 

as an SIFI. The Prudential designation ignored the expertise of the 

company’s primary regulator, as well as FSOC’s members specifically created to provide expert knowledge in the field of insurance. 

One of those members, Director John Huff, a State insurance commissioner from Missouri, recently stated that FSOC’s misguided 

overreliance on bank concepts is nowhere more apparent than in 

FSOC’s basis for designation of Prudential Financial. He went on 

to say that the basis for the designation was grounded in implausible, even absurd scenarios. The designated insurance expert, Mr. 

Roy Woodall, stated that the underlying analysis used by FSOC on 

the Prudential designation ran counter to fundamental and seasoned understanding of the business of insurance. 

Chairman HENSARLING. The time of the gentleman has expired. 

Finally, the Chair recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, the vice chairman of our Financial Institutions Subcommittee, for a minute and a half. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

For the most part the SIFI designation process seems to be 

shrouded in secrecy. We have seen no meaningful metrics used in 

decisions, and Secretary Lew and other officials have refused to answer questions about the process. While the designation process is 

opaque at best for many firms, it is pretty straightforward for bank 

holding companies—straightforward and thoughtless. If an institution has more than $50 billion in assets, it is an SIFI. It doesn’t 

8 

matter if a bank is smaller but engages in risky behavior or if a 

bank is larger but engages in no risky behavior. The only thing 

that matters is one arbitrary figure related to size. What kind of 

an evaluation is that? 

I understand that common sense is in short supply in this town, 

but FSOC’s designation process has serious implications on the financial system and needs to incorporate some element of logic and 

transparency. I look forward to the hearing with our witnesses 

today. And I yield back the balance of my time, Mr. Chairman. 

Chairman HENSARLING. We now turn to our witnesses. The Honorable Paul Atkins is the CEO of Patomak Global Partners, a financial consulting firm. He previously served as a Member of the 

Congressional Oversight Panel for TARP and as a Commissioner 

on the Securities and Exchange Commission. Mr. Atkins holds a 

law degree from Vanderbilt University. 

Mr. William McNabb is the chairman and CEO of the Vanguard 

Group, a position he has held since 2009. Before becoming CEO, 

Mr. McNabb served as managing director of Vanguard’s institutional and international businesses. Today, we welcome his testimony on behalf of the Investment Company Institute. 

Mr. Eugene Scalia is a partner at Gibson, Dunn & Crutcher, 

where he is co-chair of the firm’s Administrative Law and Regulatory Practice Group. He earned his law degree from the University of Chicago. 

Professor Michael Barr teaches financial institutions, international finance, and other aspects of financial law at the University of Michigan Law School. He previously served as Treasury Secretary Rubin’s Special Assistant, and in other capacities at the 

Treasury Department. He earned his law degree from Yale Law 

School. 

Mr. Deron Smithy is the treasurer of Regions Bank, which is 

based in Birmingham, Alabama. Today, we welcome his testimony 

on behalf of the Regional Bank Coalition. 

Last but not least, and no stranger to our committee, Mr. Peter 

Wallison is the Arthur F. Burns Fellow in Financial Policy Studies 

at the American Enterprise Institute. 

Without objection, each of your written statements will be made 

a part of the record. Hopefully, each of you is familiar with our 

green, yellow, and red lighting system on the witness table. I would 

ask each of you to please observe the 5-minute time allocation. 

Mr. Atkins, you are now recognized for a summary of your testimony. 

STATEMENT OF PAUL S. ATKINS, CHIEF EXECUTIVE OFFICER, 

PATOMAK GLOBAL PARTNERS 

Mr. ATKINS. Thank you. Good morning. Mr. Chairman, Ranking 

Member Waters, and members of the committee, it is a pleasure to 

be back before you all today. As the chairman said, I believe you 

have my formal statement, and I know the chairman is a stickler 

for time, so I shall try to highlight a few of the central points. 

But as a preliminary matter, I believe there is some clarification 

as to basic pronunciation that is in order. As you all know, DoddFrank gives the FSOC authority to label entities within the financial services industry as systemically important financial instituVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
9 

tions, abbreviated as S-I-F-I. Now, former chairman Barney Frank 

quipped the other day that ‘‘SIFFY,’’ as with all due respect some 

people, including on the committee, have pronounced it, sounds like 

a disease, but that is because, I think, with all due respect, that 

there is a mispronunciation. So how does one pronounce this? It is 

WiFi, and this is hi-fi, and this is SIFI. And by no coincidence, it 

has a homonym, sci-fi. And SIFI designation I think is the statutory gateway to a new level, and for some entities a whole new 

world of potentially a twilight zone of regulation by the Federal Reserve. 

I have two fundamental points. First, designating managed investment funds, particularly mutual funds, much less their advisers as SIFIs is a bad idea that lacks any demonstrated or I believe 

demonstrable analytic foundation. That point has nothing whatsoever to do with partisan politics or whether one is in favor of or 

opposed to Dodd-Frank. 

Second, facts matter. Investment funds and investment management are fundamentally different from banks or the banking business. Bank regulators’ prudential regulation of the largest mutual 

funds or their advisers will not be a complement, much less a viable substitute for the existing capital markets’ regulatory regime. 

Let me briefly touch on the two regulatory bodies affected. I am 

not here to defend the SEC’s jurisdiction. If this were some sort of 

turf war, you wouldn’t be hearing from me about it. The SEC is expert at regulating capital markets—risk markets. That is simply 

not what the Fed does, much less the FSOC. The Fed regulates to 

preferred outcomes. Central bankers are central planners. The 

SEC’s entire experience and focus is on maintaining free and fair 

capital markets, while the Fed exists to ensure the safety and 

soundness, the continued viability of the banking system. So there 

is nothing in the Fed’s 100-year history that even begins to suggest 

that applying prudential standards to capital market participants 

would be a benefit or that the Fed would be an effective capital 

markets regulator. 

I want to underscore a further point in that connection. Were the 

Fed to impose capital requirements on SIFI-designated funds or 

even advisers, investors, notably ordinary individual investors saving for retirement or a downpayment in their 401(k) plans, would 

have to pony up or face Fed-imposed redemption restrictions. In 

fact, investment funds are overwhelmingly providers of capital. 

Mutual funds in particular tend to carry little or no leverage. A 

mutual fund does not transmit, but bears counterparty risk. To 

that extent, at least, mutual funds are the very opposite of the sort 

of highly leveraged entity enhanced Federal Reserve supervision 

was designed to address. 

So what, in sum, could we expect if a mutual fund were designated an SIFI and subjected to the Fed’s prudential supervision? 

Besides higher costs and lower returns, there will be less flexibility 

and more exposure to uncertain market risk. The Fed could constrain investors’ ability to redeem their shares on demand or elect 

to require fund managers to remain in positions that they otherwise would have exited. Imagine that disclosure to investors? 

Also, sound funds could be subjected to Fed demands to support 

failing banks under Dodd-Frank Section 210(o). Think of it as an 

10 

investor-funded ‘‘TARPs-are-us.’’ The unfortunate investors in SIFI 

funds would be at risk of supporting too-big-to-fail financial institutions under that section. None of this would provide any advantage 

to fund investors. Indeed, such Fed demands could easily force conflicts with the fund manager’s fiduciary duty to the fund and therefore to investors. 

Moreover, if FSOC’s cavalier treatment of the insurance industry 

is any precedent, we should all be extremely concerned that equally 

misguided and uninformed treatment of regulated investment 

funds, notably mutual funds, is soon to follow. Any FSOC move to 

designate regulated investment funds as SIFIs lacks analytic foundation. There is nothing in last September’s self-serving—I would 

say sophomoric—OFR report (Office of Financial Research report) 

to suggest otherwise. And with that, my time has expired. Thank 

you. 

[The prepared statement of Mr. Atkins can be found on page 60 

of the appendix.] 

Chairman HENSARLING. Mr. McNabb, you are now recognized for 

a summary of your testimony. 

STATEMENT OF F. WILLIAM MCNABB III, CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, THE VANGUARD GROUP, INC., 

ON BEHALF OF THE INVESTMENT COMPANY INSTITUTE (ICI) 

Mr. MCNABB. Thank you, Chairman Hensarling, and members of 

the committee, for the opportunity to participate in today’s hearing. 

I am Bill McNabb, chairman and CEO of the Vanguard Group, one 

of the world’s largest mutual fund organizations. We have some 

$2.6 trillion in U.S. mutual fund assets entrusted to us by everyday 

people saving for college, retirement, education, and other goals. 

I appear today in my capacity as chairman of the Investment 

Company Institute. ICI’s membership includes U.S. mutual funds, 

exchange-traded funds, closed-end funds, and unit investment 

trusts with aggregate assets of nearly $17 trillion. ICI members are 

subject to substantial regulation and oversight by the SEC and 

other agencies, and we support appropriate regulation to ensure 

the resiliency and vibrancy of the global financial system. But we 

are deeply concerned about the way in which regulators in the 

United States and globally are considering large mutual funds and 

their managers for designation as SIFIs. The Financial Stability 

Oversight Council here in Washington, and the FSB operating 

globally, appear to be singling out large U.S. funds or their managers to subject them to an added burden of bank-style regulation. 

Let me speak plainly. There is no justification for designating 

mutual funds or their managers as SIFIs. Stock and bond funds 

did not contribute to the financial crisis and do not pose threats to 

financial stability. If mutual funds or their managers are designated, millions of individual Americans could pay a tremendous 

price. 

ICI is concerned that many of those involved in FSOC are predisposed to view the world through a banking lens. There are important fundamental differences between banks and funds. Unlike 

banks, fund managers act as agents, investing the money of others, 

not as principals putting their own capital at risk. Unlike bank depositors, fund investors understand they can lose money, and unVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
11 

like banks, funds operate without any need for government intervention. 

There are several compelling reasons why even the largest funds 

are not SIFIs. First, mutual funds use little to no leverage, which 

is the essential fuel of most financial crises. The very largest U.S. 

funds have roughly 4 cents of debt for every dollar of shareholder 

equity. The largest U.S. banks by contrast have $9.70 of debt for 

every dollar of equity. 

Second, funds don’t experience financial distress that can threaten U.S. financial stability. Hundreds of funds exit the business 

every year, and none of them requires government intervention or 

assistance. 

Third, stock and bond funds don’t face so-called runs even in the 

most turbulent markets. While domestic stock funds own about 25 

percent of U.S. stocks, their gross stock sales during the financial 

crisis represented less than 6 percent of market trading per month. 

If anything, these funds and their long-term investors have a 

dampening effect on market volatility. They enjoy a stable investor 

base because 95 percent of assets in stock and bond funds are held 

by everyday households, and virtually all of those households report that they are investing for long-term goals, such as retirement 

and education. 

Fourth, the structure and comprehensive regulation of mutual 

funds limits risk and the transmission of risk. For example, daily 

valuation of fund portfolios, portfolio liquidity requirements, limits 

on borrowing, and simple transparent structures are among the 

features that both protect investors and limit risk. If the FSOC 

designates funds as SIFIs, the consequences for investors would be 

severe. Under Dodd-Frank, a designated fund could be subject to 

bank-level capital requirements with investors bearing the cost 

through higher fees and lower returns. 

It is particularly troubling that investors in a designated fund 

could be forced to help shoulder the costs of bailing out large failing 

financial institutions under the orderly liquidation provisions. This 

is essentially a tax on retail investors, and Congress wrote DoddFrank specifically to avoid burdening taxpayers with these costs. 

We are also concerned that the Federal Reserve’s prudential supervision could conflict with a fund manager’s fiduciary duty to act 

in the best interests of the fund. To protect the stability of the 

banking system, the Fed might pressure a fund manager to stay 

in certain markets or to maintain financing for troubled institutions, even if the manager believes those actions would harm investors. We don’t believe that Congress created Dodd-Frank to target 

funds or to appoint the Fed as a significant capital markets regulator, and it is clear to us that SIFI designation, which was intended to be used quite sparingly, is not the right tool for addressing risk in these markets. If regulators believe specific activities or 

practices pose risk, they appropriately have considerable authority 

to address those risks. 

Members of this committee from both sides of the aisle have focused a great deal of attention on the FSOC’s lack of transparency 

and vague processes. We share your concern. Mr. Chairman, we 

agree that FSOC should cease and desist on further designations 

until Congress can better understand the process. 

12 

Thank you, and I will be happy to take questions at the appropriate time. 

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

73 of the appendix.] 

Chairman HENSARLING. Mr. Scalia, you are now recognized for 5 

minutes. 

STATEMENT OF EUGENE SCALIA, PARTNER, GIBSON, DUNN & 

CRUTCHER LLP 

Mr. SCALIA. Mr. Chairman, Ranking Member Waters, and members of the committee, thank you for the opportunity to testify 

today regarding the Financial Stability Oversight Council. I am a 

lawyer at the firm of Gibson, Dunn & Crutcher, and this morning 

I would like to offer a few observations on FSOC from the perspective of the requirements of administrative law. 

The FSOC designation process is an unusual one. If there is a 

similar process before another government agency, I am unaware 

of it. The process begins with a company being told that it is being 

considered for designation. It is not told why, yet it is singled out 

and considered on a solitary and secretive basis. This is very different than a rulemaking, for instance, where the companies in an 

industry are publicly told that the government is considering 

changing the requirements that apply to them, and what follows is 

an open and public discussion about the proper outcome. 

A company that has been notified of potential designation is kept 

in the dark in at least two ways. First, the process itself is largely 

closed and unknown to the company. Until the very late stages it 

does not know why it is being considered, it does not know what 

opinions have been formed about it or what concerns and tentative 

conclusions have been reached. FSOC compiles extensive information on the company. None of that information is shared until after 

the FSOC members’ proposed designation. Access to FSOC decision-makers is closely guarded, and as a practical matter is impossible. 

Second, the company has inadequate notice on the legal standards that will be applied to it. As a Nation, we value fair notice 

to the public of their legal obligations for two principal reasons. 

First, when we are told what the law is, we are able to conform 

our conduct to comply in order to avoid sanctions. Second, when 

the government commits itself in writing to what the law is, it limits its discretion and power, and that in turn helps prevent arbitrary government conduct. 

When it comes to SIFI designation, though, FSOC has done little 

more than list numerous factors it will consider without identifying 

the relative weight the factors will be given or what constitutes a 

passing grade under any one factor. Moreover, its SIFI designation 

decisions to date have applied such loose and subjective reasoning 

that other companies being considered have no way of knowing 

whether they will be designated or what changes they could make 

so they are not designated. 

This brings me to the substance of FSOC’s designation decisions 

to date as reflected in the leading Prudential decision. That decision is an exceptionally weak specimen of regulatory reasoning by 

a government agency. I do not believe it would have survived reVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
13 

view in a court. The problems with their decision are addressed at 

length in my written testimony. They include unsubstantiated conjecture; a subjective, standardless notion of excessive risk; and repeated disregard, as a number of you have mentioned, for the existing system of insurance regulation by the States. 

I want to conclude by emphasizing another aspect of the FSOC 

designation process that is very unusual and is a terrible way to 

make government decisions. FSOC is not considering the consequences of its actions. It is singling out individual companies and 

subjecting them to an entirely new regulatory regime without 

knowing what effect that regulatory framework will have. Suppose 

that just two or three companies in a robustly competitive industry 

are designated systemic, and suppose that SIFI designation will 

subject those companies to significantly more costly regulatory requirements than their competitors. Those increased costs should be 

an extremely important consideration for FSOC. Remember, designation is supposed to be buttressing companies, supposed to be 

shoring them up, but what if it actually weakens them by making 

them less competitive? In that case, SIFI designation may be doing 

exactly the opposite of what is intended. 

The government should never act without considering the consequences of its action. That is elementary. But FSOC does not 

make the consequences of designation part of its decision-making 

process. Worse, FSOC does not know what regulatory requirements 

will result from designation. It does not know what capital standards will apply to companies that are designated, although it has 

every reason to believe that under current law, those capital standards will be essentially bank-based, which are improper for other 

financial firms, such as insurance companies. 

Before asserting that designation is appropriate because it will 

bring better protections, the government must determine what 

those protections are and what effects they will have. Until then, 

designation decisions are premature. 

I want to conclude by commending the members of this committee for bringing attention to these issues. Our system of government rests on the belief that the government makes better, fairer 

decisions when it acts openly, through processes where the public, 

including Congress, have insight and input. Thank you for inviting 

me to speak here today, and I look forward to your questions. 

[The prepared statement of Mr. Scalia can be found on page 88 

of the appendix.] 

Chairman HENSARLING. Professor Barr, you are now recognized 

for 5 minutes. 

STATEMENT OF MICHAEL S. BARR, PROFESSOR OF LAW, THE 

UNIVERSITY OF MICHIGAN LAW SCHOOL 

Mr. BARR. Thank you, Mr. Chairman, and Ranking Member 

Waters. I am pleased to appear before you today to discuss the key 

role of the Financial Stability Oversight Council in reducing risks 

in the financial system. 

In 2008, the United States plunged into a severe financial crisis 

that shuttered American businesses and cost millions of households 

their jobs, their homes, and their livelihoods. The crisis called for 

a strong response. Under the Dodd-Frank Act, there is new authorVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
14 

ity to regulate major firms that pose a threat to financial stability 

without regard to their corporate form; to wind down such firms in 

the event of a crisis without feeding a panic or putting taxpayers 

on the hook; to attack regulatory arbitrage, restrict risky activities, 

and beef up supervision; to require central clearing and exchange 

trading of standardized derivatives, and capital, margin, and transparency throughout the market; to improve investor protections; 

and to establish a new Consumer Financial Protection Bureau to 

look out for American families. 

The Act also established a Financial Stability Oversight Council, 

with the authority to designate systemically important firms and 

financial market utilities for heightened prudential oversight, to 

recommend that member agencies put in place higher prudential 

standards when warranted, and to look out for risks across the financial system. 

One of the major problems in the lead-up to the financial crisis 

was there was not a coherent system of supervision for major financial institutions. The Federal financial regulatory system that 

existed was broken. Major financial firms were regulated according 

to their formal labels, as banks, thrifts, investment banks, insurance companies, and the like, rather than according to what they 

actually did. Risk migrated to the less well-regulated parts of the 

system and leverage grew to dangerous levels. 

The designation of systemically important financial institutions 

is a cornerstone of the Dodd-Frank Act. A key goal of reform was 

to create a system of supervision which ensured that if an institution posed a risk to the financial system, it would be regulated, supervised, and have capital requirements that reflected its risk regardless of its corporate form. The Dodd-Frank Act established a 

process through which the largest and most interconnected firms 

could be designated as systemically important and then supervised 

and regulated by the Fed. 

The Council has developed detailed rules, interpretive guidance, 

and a hearing process, including extensive engagement with affected firms, to implement this designation process. The existing 

rules provide for a sound deliberative process, protection of confidential and proprietary information, and meaningful and timely 

participation by affected firms. 

Critics of designation contend that it fosters too-big-to-fail, but 

the opposite is the case. Regulating systemically important firms 

reduces the risk that failure could harm the real economy and destabilize the financial system. It provides for robust supervision in 

advance and provides for a mechanism to wind down such a firm 

in the event of a crisis. 

Other critics argue that the FSOC should be more beholden to 

the regulatory agencies that are its members, but again the opposite is true. Congress wisely provided for its voting members, all 

of whom are confirmed by the Senate, to participate based on their 

individual assessment of risks in the financial system, not based on 

the position of their individual agencies, however comprised. 

Some critics also contend that certain types of firms in certain 

industries or under certain sizes should be categorically walled off 

from heightened prudential supervision, but such steps will expose 

the United States to the very risks we faced in the lead-up to the 

15 

last devastating crisis. The failure of firms of diverse types and diverse sizes at many points, even in very recent memory, from LongTerm Capital Management to Lehman and AIG, suggests that 

blind spots in the system should at the very least not be intentionally chosen in advance by the Congress. 

The way to deal with the diversity of sizes and types of institutions is to develop regulation, oversight, and capital requirements 

that are graduated and tailored to the types of risks that such 

firms might pose to the financial system. Beyond designation, 

FSOC and member agencies have other tools available, including 

increased data collection, transparency, collateral and margin 

rules, operational and client safeguards, risk management standards, and other measures that can be used in appropriate circumstances. 

Lastly, some critics complain that the FSOC’s work is too tied to 

global reforms, including reforms by the Financial Stability Board, 

but global coordination is essential to making the financial system 

safer. And these global efforts are not binding on the United 

States. Rather, the FSOC and U.S. regulators make independent 

regulatory judgments about domestic implementation based on 

U.S. law. 

In sum, significant progress has been made in making the financial system safer and fairer and better focused on serving households, businesses, and the real economy. Now is not the time to 

turn it back. 

[The prepared statement of Mr. Barr can be found on page 70 of 

the appendix.] 

Chairman HENSARLING. Thank you. 

The Chair now recognizes Mr. Smithy for 5 minutes. 

STATEMENT OF DERON SMITHY, TREASURER, REGIONS BANK, 

ON BEHALF OF THE REGIONAL BANK COALITION 

Mr. SMITHY. Good morning, Chairman Hensarling, Ranking 

Member Waters, and members of the Financial Services Committee. My name is Deron Smithy, and I am the treasurer of Regions Bank, based in Birmingham, Alabama. I appreciate the opportunity to speak to the committee about the systemic risk designation, its impact on regional banks, and the ways in which it 

can be improved. 

Regions Bank is a member of the Regional Bank Coalition, a 

group of 18 traditional lending institutions that play a critical role 

in the Main Street economy. Each of these banks are larger than 

$50 billion in assets, but operate basic, straightforward businesses 

that do not individually threaten the U.S. financial system. Regions 

Bank, for example, is a diversified, community-focused lender offering a full range of consumer and business lending products and 

services in 16 States. We have a time-honored and relatively simple operating model that focuses on relationship banking, matching 

high-quality customer service with industry expertise. Regions 

serves more than 500,000 commercial customers, including 450,000 

small business owners, and we bank nearly 4.5 million consumer 

households. 

Collectively, the banks in our coalition operate in all 50 States, 

hold one-fourth of the U.S. banking deposits, and have credit relaVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
16 

tionships with more than 60 million American households, yet no 

regional bank maintains a national deposit share greater than 3 

percent of total deposits. In aggregate, our asset base is less than 

2 percent of GDP, roughly equivalent to that of the single largest 

U.S. bank. We are traditional banks that fund ourselves primarily 

through deposits, and we loan those deposits back into our communities. 

Regional banks are an important source of credit to small and 

medium-sized firms, competing against banks of all sizes throughout our markets. Regional banks are not complex. We do not engage in significant trading or international activities, make markets in securities, or have meaningful interconnections with other 

financial firms. Regional banks are not systemic and do not threaten U.S. financial stability. 

The Dodd-Frank Act adopted a blunt definition of systemic risk for banks, relying on a simple $50 billion asset threshold. I would 

note Federal Reserve Governor Tarullo’s recent speech in which he 

highlighted the need to rationalize the regulatory structures so 

that regulators can more precisely consider differences among 

firms. He questioned many of the existing bright line, asset-only 

thresholds and contended that the aims of prudential regulation 

should vary according to the business activities. He also suggested 

that the 80-plus banks larger than $10 billion, but those not 

deemed global systemically important, are overwhelmingly recognizable as traditional commercial banks. 

On these points we would agree with Governor Tarullo, and we 

would support the bipartisan bill, H.R. 4060, introduced by Congressman Luetkemeyer and five other members of the committee. 

The bill would have regulators review five factors—size, complexity, interconnectedness, international activity, and substitutability—before making a systemic designation. All are factors that 

regulators have used in other contexts to determine how firms 

might impact U.S. financial stability. 

Regional banks constantly react to regulatory and policy changes 

made in Washington, and these rules affect how we manage our organizations. Systemic regulation has both direct and indirect cost, 

and for individual regional banks these costs add up to hundreds 

of millions of dollars each year. They impact how we lend and how 

we price credit. 

Even absent systemic designation, protective regulatory guardrails that have evolved since the financial crisis would remain in 

place for regional banks. The Federal Reserve has the authority to 

continue the capital planning and stress testing processes started 

before Dodd-Frank. Moreover, regional banks would remain subject 

to new Basel III capital and liquidity requirements, as well as numerous other rules outside of Title I’s enhanced prudential standards. 

To reiterate, the current designation process is imprecise and the 

costs incurred by regional banks are not commensurate with its impacts. Regional bank activities do not threaten the country’s financial stability, nor are we complex organizations that would be difficult to resolve in a crisis. The current standard does not best 

serve the banks, taxpayers, and communities we serve, or the regulators. The regulators have requested clearer, less ambiguous ways 

17 

to determine systemic risk. A multifactor, activity-based test would 

do this. 

Thank you again for the opportunity to testify before the committee today, and I look forward to answering any questions you 

may have. 

[The prepared statement of Mr. Smithy can be found on page 105 

of the appendix.] 

Chairman HENSARLING. To bat cleanup, Mr. Wallison, you are 

now recognized for your testimony. 

STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN FINANCIAL POLICY STUDIES, THE AMERICAN ENTERPRISE INSTITUTE 

Mr. WALLISON. Thank you, Mr. Chairman, Ranking Member 

Waters, and members of the committee. Thank you for the opportunity to testify this morning. 

Under Dodd-Frank, the Financial Stability Oversight Council 

(FSOC) has the authority to designate any nonbank financial firm 

as a systemically important financial institution, or SIFI. That is 

if the institution’s financial distress will cause instability in the 

U.S. financial system. Firms designated as SIFIs are turned over 

to the Fed for what appears to be bank-like regulation. 

The troubling aspects of the FSOC’s authority were revealed recently when it designated Prudential Financial as an SIFI. Every 

FSOC member who was expert in insurance and not an employee 

of the Treasury Department itself dissented from that decision. Virtually all of the other members, knowing nothing about insurance 

or insurance regulation, dutifully voted in favor of Prudential’s designation. 

Now, how could we entrust the decision to regulate a large insurer like a bank to a group with no expertise about insurance regulation, and when the FSOC could not possibly have known how 

the Fed would actually regulate an insurance firm? 

Even more troubling was the fact that the FSOC offered no facts, 

no analysis, and no standards in support of its decision. For example, interconnections are supposed to be one of the main reasons 

that SIFIs are SIFIs. All financial institutions are interconnected 

in some way, but the FSOC’s Prudential decision says nothing 

about the degree of Prudential’s interconnections or why they are 

a danger to the financial system. The same is true of all the other 

prior FSOC designations. 

Let me say it plainly: On the evidence of the Prudential decision, 

this emperor has no clothes. The FSOC seems to have no idea how 

to assess the danger of interconnections or any of the other reasons 

that SIFIs are considered such a threat to the financial stability 

that they require Fed bank-like regulation. This means the decisions are completely arbitrary. And since these decisions have a seriously adverse effect on competition and economic growth, they 

should not be allowed to continue until the FSOC can explain its 

decisions to Congress. 

There are other reasons to be concerned. Two months before the 

FSOC’s Prudential decision, the Financial Stability Board (FSB), 

an international body of regulators empowered by the G-20 leaders 

to reform the international financial system, had already declared 

18 

Prudential an SIFI, also without facts and analysis. Since the 

Treasury and the Fed are members of the FSB, they had already 

approved the FSB’s designation well before the FSOC designated 

Prudential as an SIFI in September. 

This raises two questions: first, the fairness and objectivity of the 

FSOC’s designation process; and second, whether the FSOC will 

simply rubber-stamp the decisions of the FSB in the future. This 

is important because the FSB looks to be a very aggressive source 

of new regulation of nonbank financial firms. 

In early September, the FSB published plans to apply what it 

called its SIFI Framework to securities firms, finance companies, 

asset managers, and investment funds, including hedge funds. 

These firms are the so-called shadow banks that bank regulators 

are so eager to regulate. It will be very difficult to show that these 

nonbank firms are a threat to the financial system, but the Prudential decision shows that neither the FSB, nor the FSOC believes 

it has any obligation to demonstrate this. 

The question before this committee is not solely whether investment funds are SIFIs. The FSB has already suggested it will apply 

the SIFI Framework to securities firms, mutual funds, hedge 

funds, and many, many others. If the FSOC follows suit, and that 

has been the pattern, we may see many of the largest nonbank 

firms in the U.S. financial system brought under bank-like regulation. 

As shown in my prepared testimony, these capital markets firms 

and not the banks are the main funding sources for U.S. business. 

Subjecting them to bank-like regulation will reduce their risk-taking and innovation and thus have a disastrous effect on competition and economic growth, and this outcome would be the result of 

decisions by the FSB carried out by the FSOC. 

About 2 weeks ago, Mr. Chairman, you said that the FSOC 

should cease and desist on designations until Congress can assess 

the consequences. I hope that request is honored. 

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

118 of the appendix.] 

Chairman HENSARLING. Thank you. 

The Chair now recognizes himself for 5 minutes for questioning. 

Mr. McNabb, you run one of the largest mutual fund companies 

in America. I assume there are a lot of mom and pops who entrust 

their savings with you to send somebody to college, maybe start a 

small business, maybe plan for retirement. 

Recently, I had a study come across my desk by Douglas HoltzEakin, the former Director of the Congressional Budget Office, 

which estimated that designating asset managers as SIFIs—sorry, 

Mr. Atkins, I am not sure the ‘‘sci-fi’’ is going to catch on, but it 

was compelling—over the lifetime of their investment, their investment portfolio could be hurt by as much as 25 percent, $108,000 

per investor. 

Have you seen this study? Have your people analyzed it? And if 

that is in the ballpark, knowing that you deal with a lot of hardworking Americans’ savings, what is this SIFI designation going to 

mean to the individual trying to save for retirement or send a kid 

to college? 

19 

Mr. MCNABB. Thank you for the question, Mr. Chairman. You 

are right. We do serve a lot of mom and pops. We have 25 million 

investors, roughly, scattered around the country. Savings for retirement and for education would be the two primary reasons. 

I actually have a copy of that study; it just came across my desk 

yesterday. I am guessing the numbers are actually conservative in 

terms of the calculations because they did it as a one-time—they 

looked at a one-time investment and what would the consequences 

of bank-like capital be on the accrual of the account, if you will, 

and the estimate was that over a long period of time, the account 

value would be 75 percent of what it would have been were there 

no capital requirements. 

We have also looked at a couple of other analyses that are similar, where instead of looking at capital requirements, we looked at 

some of the proposed so-called SIFI taxes. In those cases, if you are 

an investor, for example, in our S&P 500 Fund, which is one of the 

more basic funds we offer, your fees would quadruple. And at that 

level, it would be pretty disastrous for many investors. 

Chairman HENSARLING. Mr. Wallison, as I was listening to your 

testimony, I think you said to some extent that the decision-making formula for FSOC to designate a nonbank SIFI was completely 

arbitrary. You mentioned about the G-20 Financial Stability Board, 

their process that designated, I think, three U.S. insurers as global 

SIFIs. Wasn’t it, I don’t know, 10 or 12 days ago that we had Secretary Lew in this hearing room where I asked him, as head of 

FSOC, did Treasury consent or object to these designations? He refused to answer the question 3 different times. I suppose there is 

a possibility their representatives fell asleep during the proceedings and neither objected or consented. So that would seem to 

suggest that either the United States adopted whatever the criteria 

is of SSB, or they have their own, but yet they refuse to reveal it. 

I am not sure that anyone has been able to discern what this approach is. 

I noticed that yesterday, Treasury Under Secretary Mary Miller 

said that she was surprised that anyone would believe that FSOC 

is considering possibly designating the asset management industry 

as an SIFI. And she was quite adamant that FSOC did not follow 

the G-20’s Financial Stability Board’s designation of these three 

U.S. insurers. 

How credible is it to you that the FSB would have made these 

designations without the consent of Treasury and other U.S. participants? 

Mr. WALLISON. It seems to me completely unreasonable to believe that the FSB would go ahead with a designation of U.S. firms 

without the agreement of the U.S. participants, particularly the 

Treasury Department and the Fed. 

Chairman HENSARLING. What concerns do you have if the United 

States would continue to follow the FSB’s lead? 

Mr. WALLISON. I have a very serious concern about process here, 

because at least in the banking area, the Basel capital requirements are put into place by a group of regulators, and then they 

are put into place by the U.S. bank regulators here in the United 

States. I am afraid that some people are looking at the process of 

the FSB as similar to the bank capital process that is undertaken 

20 

in Basel, and if that is so, they are expecting at the FSB that once 

they designate an institution as an SIFI, the FSOC here in the 

United States will simply take that designation and apply it in the 

United States. 

That is not, I think, what Congress intended when it set up the 

FSOC and expected some kind of analysis. And it is not getting 

that analysis anyway. 

Chairman HENSARLING. The Chair needs to gavel himself down. 

The Chair now recognizes the ranking member, Ms. Waters, for 

5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Mr. McNabb, I spent a considerable amount of time following 

this subprime meltdown that we had in this country, and I worked 

very hard to convince a lot of people, despite the fact I and others 

were criticized for it, to do this bailout because we felt that this 

country’s economic future was at stake. And we felt that the recession could morph into a depression, and so we worked very hard 

to try and do what we thought was the best thing. 

In all of the work that we were doing, AIG, for example, emerged 

as a real problem, an insurance company. So my decision about 

whether or not I support FSOC being able to take a look at 

nonbank companies is based on some of what I learned during that 

awful period of time that we went through. 

Now, we find that AIG again is designated as an SIFI, and so 

I want to understand from you why you think FSOC is wrong in 

taking a look at something like AIG. It doesn’t have to be specific, 

but I use that as an example. 

Mr. MCNABB. Thank you, Ranking Member Waters. 

The AIG question actually, I think, highlights an important 

point. When you look at what happened at AIG, it was the activities at the firm. AIG had morphed into much more than an insurance company, and it was the activities that really led to their demise. The activities were extraordinary leverage and excessive risktaking. And I would say both those kinds of activities have been 

present in almost every financial crisis going back 500 years. 

When we talk about the mutual fund industry, as an example, 

funds employ no leverage. And the other difference, of course, is 

that funds are acting as agents as opposed to proprietary traders 

and so forth, and that is a very big difference. 

And so the activities that drove AIG to the brink are certainly 

the kinds of activities that should be looked at. But it is not really 

based on the firm, it is really the leverage and the activities, much 

as my colleague Mr. Smithy here on the panel suggested regarding 

the regional banks. 

Ms. WATERS. So you don’t think that AIG, Prudential, as well as 

maybe GE Capital should be designated? 

Mr. MCNABB. I am not expert enough on GE Capital or Prudential. Again, my take would be to look at the factors that make those 

firms either more risky or less risky. And it is not the firm’s size 

or even the assets under— 

Ms. WATERS. It is about risk, Mr. McNabb. 

I want to move to Mr. Barr now. Mr. Barr, I have heard a lot 

about the incompetence of FSOC. They don’t know what they are 

21 

doing, they don’t know how to regulate or determine risk of insurance companies, et cetera. 

Do you agree that the FSOC has both the expertise and the authority to appropriately assess nonbank financial institutions such 

as insurance companies? Do they have the authority and the expertise? 

Mr. BARR. I believe they do, Ranking Member Waters. I believe 

that the FSOC has developed a quite extensive staff and expertise 

across the financial sector. They could always do more. I think the 

process of building expertise in a new agency is a challenging one. 

I think they should do more to build up their staff and the staff 

of the independent Office of Financial Research as well. 

But they certainly have the authority, and they have plenty of 

people with experience. 

Ms. WATERS. Mr. Wallison, you made quite a point of talking 

about the lack of competence and expertise at the FSOC. If they 

were competent, if they had the expertise, if they could be designed 

in a way that you would design them, do you think there should 

be an FSOC? 

Mr. WALLISON. Yes, I always thought there should be an opportunity, as there was with the Presidential Council that used to 

meet and talk about common problems in the regulatory area. And, 

in fact, something like FSOC could get together and talk about 

whether they think that there are systemic issues developing in the 

economy. 

My problem with FSOC is that it has the power to make decisions to turn over certain institutions to the Fed for bank-like regulation without even knowing what bank-like regulation would be, 

for example, for an insurance company, and without actually showing us the basis for those decisions. 

If we think about those decisions, they have to do with the future. Will a firm’s distress cause instability in the U.S. economy? 

Those are guesses about the future, and if they provide no data 

about what they think will happen, I don’t think this is a credible 

decision. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, the chairman of our Capital Markets Subcommittee, for 5 

minutes. 

Mr. GARRETT. Thanks, Mr. Chairman. 

Mr. Wallison, can you briefly say, in your view, does SIFI designation reinforce too-big-to-fail? 

Mr. WALLISON. Yes, I think that is one of the problems with it, 

of course, and that is once you are said to be an institution whose 

failure might cause the instability in the United States economy, 

you are saying it is too-big-to-fail. 

Mr. GARRETT. Right. 

You heard the testimony of Professor Barr. He seemed to be saying that all is well with FSOC, with their expertise and the like. 

Do you concur? 

Mr. WALLISON. I don’t know any of the experts they have, but if 

you look at the decision that they made in the Prudential case, 

they provided no data that would suggest that they are experts. 

And— 

22 

Mr. GARRETT. That is a good point. So, Professor Barr, you just 

said a minute ago that they had the expertise, and you referred to 

the OFR. Have you read the OFR report that was—but for the fact 

that SEC put it up on their Web site would not have been disclosed? Have you looked at that? And is that what you base the 

fact that you think they have the expertise to do the job? 

Mr. BARR. I believe the question was asked about the expertise 

of the FSOC, which I think is strong. I think the OFR is a new 

organization and is still building. 

Mr. GARRETT. You referred back to them and said—you referred 

back and said one of their bases of expertise is the OFR. So have 

you looked at the report? 

Mr. BARR. Yes, I have. 

Mr. GARRETT. And do you know that virtually every one of the 

commentators on there have basically criticized it and said there 

is absolutely no empirical data in it? Did you find empirical data 

it in? 

Mr. BARR. The report was not something I would hang my hat 

on. 

Mr. GARRETT. All right. So, you wouldn’t hang your hat on it, but 

apparently FSOC hung their hat on it. So if that is— 

Mr. BARR. I have no idea—sorry, sir, to interrupt—one way or 

another about that. 

Mr. GARRETT. That is a good point. So then, how can you say 

that they are acting with empirical data if you are not able to say, 

and we are not able to say, and I think that is Mr. Wallison’s and 

Mr. Atkins’ points as well, that when we look at FSOC, we cannot 

figure out what are their facts, what is their analysis, and what are 

their standards? And if we can’t figure those things out from 

FSOC, how can you sit there and say that they are operating with 

facts, analysis, and standards? 

Mr. BARR. I am not privy to the internal processes at all of what 

is going on at the FSOC, but my understanding is they have not 

acted in any way with respect to some designation of asset managers. So I have no way of knowing one way or the other the extent 

to which the OFR report may or may not play a role in that process. 

Mr. GARRETT. And isn’t that really the point? That not only are 

you not privy to it, Members of Congress are not privy to it. I guess 

no one actually is privy to it. Even commissioners from the various 

agencies where the chairmen are members of are not privy to it. 

And I think that is one of the simple things that we could do is 

to allow the American public to be privy to this information, to be 

privy to how they make the decisions, what the facts are, what the 

analysis is. 

Mr. Atkins, would you agree that this sort of information by 

FSOC, how they make this, what the standards are, should be open 

to the American public and the industry as well? 

Mr. ATKINS. Absolutely, Congressman Garrett. 

Mr. GARRETT. Why is that? 

Mr. ATKINS. Because when you look at it—this goes back to the 

essence of bank regulation, I think, versus other sorts of regulation—it comes down to transparency. And bank regulators love, because they are focusing on safety and soundness, to lurk in the 

23 

shadows and do their regulation not in the broad daylight like 

other regulators do. I think that is part of the problem here with 

the FSOC. 

Mr. GARRETT. I have a bill out there, and basically it would subject FSOC to the Sunshine Act and the Federal Advisory Committee Act. I will just throw this out to the whole panel. 

Is there anybody on the panel who would say that there should 

not be more transparency with FSOC? Is there anybody on the 

panel who would say that they should not have to operate like just 

about every other agency in the Federal Government and have a 

little bit of sunshine? Does anybody disagree with more transparency at FSOC? 

Mr. BARR. I think, Mr. Garrett, there ought to be regularized 

processes and transparency. I am not sure that the Sunshine Act 

is always the best way of doing that. And if you are asking me 

about the other regulatory agencies, I think that the Sunshine Act 

often makes, in its particular formulations, it difficult to do their 

job in a transparent way and in a way that is considered. 

So I would be for more transparency and regularization, but 

maybe not quite with that particular mechanism as the tool to do 

it. 

Mr. GARRETT. Okay. I appreciate that. And I guess the rest of the 

panel is, instead, open to more transparency. 

Let me ask this, then. Until we get to that point, whether it is 

as far as I would like to go and other Members would like to go, 

or, as Professor Barr finds, some intermediate, is there anyone who 

would disagree with this statement, that until we get more transparency, more openness, and understand what the facts, analysis, 

and standards are, and they should cease and desist what they are 

doing right now? Does anybody disagree that they should be on 

hold until we know this? 

Mr. SCALIA. I certainly agree with that prescription for two reasons: first, so that there can be a better public understanding of 

what the law is that they are applying; and second, because they 

need to look more closely at what the consequences of their designation decisions are going to be. And until we have those things, 

I do think it is precipitous for them to continue designations. 

Mr. GARRETT. I appreciate that. And I thank the chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, the ranking member of our Capital Markets Subcommittee, for 5 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman, and Ranking Member 

Waters. 

Professor Barr, I am looking at the law right now, and there is 

an appeals process, and an open appeals process, in Title 1 of the 

bill. And it says, notice and opportunity for hearing and final determination. 

If I remember, we had a whole appeals process. If someone was 

designated, they could say, I disagree. There could be other hearings, another whole determination. And people say that the FSOC 

Board is not competent. It is composed of the head of the Treasury, 

the Federal Reserve, the OCC, the FDIC, the SEC, the CFTC, the 

24 

CFPB, the FHFA, and the NCUA, and the independent insurance 

expert. So, it is the basic financial regulators. 

I would say we are in big trouble if our financial regulators, the 

head of these departments, are incompetent. That is just my statement. I think they are fully vetted and very competent. 

But, in any event, they can appeal the process, and even if they 

are designated over their objections, there is an appeal to the 

courts, where everything is publicly debated, and assessments are 

made before a court. Is that correct? 

Mr. BARR. That is correct. 

Mrs. MALONEY. So I would argue there is an extensive appeal 

process as we see it. 

Now, there has been a lot of designation, or, rather, conversation, 

about AIG. And AIG was an insurance company, but what designated them as an SIFI was their financial entrepreneurship, 

shall we say. It was not the insurance area. The insurance area 

was well-run, was not a problem. It was the London office where 

they were in all types of risky products, which brought this country 

to a debt of $185 billion. So, that is what designated them. 

I have one question for the panel: Has any insurance company 

that is just totally insurance been preliminary designated or designated as an SIFI? 

It is my understanding that no insurance company that is a real 

insurance company—if you are experimenting in financial products, 

then they have been designated, but not one that is a pure insurance company. Has anyone been designated that is a pure insurance company? 

Mr. SCALIA. Prudential was designated essentially exclusively on 

the basis of its insurance activities, which drew dissents from both 

members of FSOC who have expert in insurance. They spoke at 

length about how their colleagues on FSOC appeared to have no 

appreciation whatsoever for the industry. 

Mrs. MALONEY. Then, why was that designated and other insurance companies were not? What was Prudential doing that was different in financial areas? I would like to ask Mr. Barr, since he is 

a professor and not involved in the industry. I respect the industry, 

but I want to hear from the professor and then from you. 

Mr. BARR. I don’t know whether other insurance companies will 

or won’t be designated in the future. My understanding is that the 

FSOC was concerned with the extent of the activity of Prudential 

that occurred both with respect to its investment activities and the 

relationship of various of its subcomponents. But I don’t know 

whether or not the FSOC will be similarly concerned with other 

types of insurance firms in that regard. 

And I think that you are correct to point out with respect to AIG 

that AIG’s activities obviously extended far beyond the regular activity of an insurance firm. There were also problems within AIG 

with respect to securities financing among the various affiliates 

within AIG that created additional risk. 

Mrs. MALONEY. Let’s go to Prudential. Was Prudential involved 

in any innovative entrepreneurship financing that was different 

from regular insurance? No? 

Mr. BARR. I have not examined with any detail for this hearing 

the balance-sheet and off-balance-sheet activities of Prudential. 

25 

Mrs. MALONEY. I would like to look at it and read the report and 

then get back with more questions. 

But I also have some other questions. I wanted to ask Mr. 

McNabb, in your testimony you noted that under the current law, 

the SEC now requires, I believe, at least 83 percent or 85 percent 

to be liquid in their portfolios. And in your experience, during the 

crisis, did this remain liquid or not? 

Mr. MCNABB. In our experience, it remained fully liquid. 

Mrs. MALONEY. Okay. Would anybody else like to comment? 

And also during the redemption period when people—there was 

a run really on mutual funds and everything else. During the redemption period, were they in any stress at all that you are aware 

of? 

Mr. MCNABB. First of all, I would say there was not a run, with 

all due respect. 

Mrs. MALONEY. Okay. 

Mr. MCNABB. A run really refers— 

Mrs. MALONEY. Demand, shall we say, a demand. 

Mr. MCNABB. Redemptions—monthly redemptions never totaled 

more than roughly 2 percent of fund assets on average; even in the 

most extreme cases it was single digits. And again— 

Mrs. MALONEY. So there wasn’t a— 

Mr. MCNABB. There was plenty of liquidity in the equity markets. 

Mrs. MALONEY. There was no crisis. 

Mr. GARRETT [presiding]. The gentlelady’s time has expired. 

Mrs. MALONEY. Unfortunately. This is a fascinating panel. I 

want to thank all of you. 

Mr. GARRETT. It is. 

I now yield to the gentleman from Alabama, Mr. Bachus, the 

chairman emeritus of the committee, for 5 minutes. 

Mr. BACHUS. Thank you. 

The first point Mrs. Maloney has made is that AIG—it was their 

counterparty risk arising from the credit default swaps, which was 

nothing to do with your traditional insurance business. And any argument that insurance companies ought to be regulated because of 

AIG just simply fails on the facts. 

Insurance companies don’t have the same problems with banks. 

Their obligations are long-term. They don’t depend on short-term 

deposits and then lend long. So, it is just an absolute fallacy. 

Mr. Barr, I remember you sitting in the conference committee 

where about a third of Dodd-Frank was written, sort of orchestrating the different pieces with Chairman Dodd and Chairman 

Frank. So I think you are probably as close as anybody to being 

the author of it. It probably ought to be called Dodd-Frank-Barr. 

So, I am not surprised— 

Mr. BARR. I doubt they would agree with that. 

Mr. BACHUS. I am not surprised you are here defending it. 

I think Mr. McNabb makes an excellent point that I didn’t know. 

I always learn something in these hearings that I didn’t know, and 

that is that while the market was dropping 40, 50 percent, and 

people were liquidating their entire portfolios, the mutual funds 

only sold 6 percent of their stock. So they were really more of a stabilizing influence during the financial crisis. Thank goodness that 

26 

some of the pension funds weren’t unloading, and the mutual funds 

weren’t unloading. I can’t imagine what it would have been like 

otherwise. And their structure, their operation, their risk profile, 

comparing them to a bank is—it is apples and oranges. 

Is there anybody who disagrees with that, maybe other than Mr. 

Barr? 

Mr. BARR. Let me address an aspect of that if I could, Mr. Bachus. I think that the portion of the industry that did experience a 

run is the money market mutual fund part of the industry. Money 

market mutual funds experienced quite a destabilizing run in the 

wake of Lehman Brothers’ failure, and it was stemmed only with 

a $3 trillion guarantee— 

Mr. BACHUS. It was less than 1 percent. 

Mr. BARR. —from the Treasury Department. 

Mr. BACHUS. Again, their problems were sort of—when you have 

a panic, there was certainly maybe a perception, but there was absolutely no reality. And I am sure a lot of people went there because they were losing money and liquidity and cash from some of 

the pullback in lending. 

I understand what you are talking about. You are talking about 

maybe one money market fund, and it was less than 1 percent. You 

are talking about ‘‘breaking the buck.’’ Is that what you are referring to? 

Mr. BARR. I am talking about the breaking the buck and the Reserve Primary Fund, but also the run that occurred in the money 

market mutual fund system that was arrested— 

Mr. BACHUS. Was there really a run? 

Mr. BARR. —with a $3 trillion guaranteed— 

Mr. BACHUS. Let me call on— 

Mr. BARR. —by the Federal Government. 

Mr. BACHUS. Mr. Atkins, was there a run? 

Mr. ATKINS. No. Well, I just heard of that. I think the empirical 

evidence and studies, like one by the firm Treasury Strategies, 

shows that was actually not the case. 

Mr. BACHUS. I just think that there is a perception, just like this 

perception that AIG, their insurance business; they were fully reserved, their insurance business. 

Mr. BARR. I think we just have a— 

Mr. BACHUS. I think we have to start with the facts, and the 

facts are when you are talking about a mutual fund, you are talking about a bank regulator regulating something that is not a bank 

in any way. 

Mr. BARR. I was—I’m sorry. 

Mr. BACHUS. Let me ask you this. I am a cosponsor of Mr. 

Luetkemeyer’s bill, for two reasons. One, Mr. Scalia mentioned, 

that we don’t know what their criteria is. It is not an open process. 

You don’t know what to address because you don’t know what— 

why they are deciding, which, to me, is against the whole democratic process, rule of law. You don’t know what the law is—Mr. 

Garrett going over and not being able to even attend. 

Don’t you see a problem with that, that it is not open and transparent and— 

Mr. BARR. I think actually having congressional involvement in 

the FSOC would undermine the ability of the Congress to provide 

27 

independent and effective oversight of the FSOC through forums 

such as this. 

Mr. BACHUS. Okay. So if we understood what was going on, it 

would undermine our ability to have oversight? 

Mr. BARR. I do. 

Mr. BACHUS. Okay. That makes a lot of sense. 

Thank you. 

Mr. GARRETT. On that note, I yield now to the gentleman from 

California. 

Mr. SHERMAN. Mr. Atkins, I refuse to use ‘‘sci-fi’’ in lieu of SIFI 

because I don’t want to besmirch my favorite genre of fiction. 

The gentlelady from New York points out that there is an appeals process, but, Mr. Scalia, I think you point out there are no 

standards to be applied. So if you can appeal to the Supreme Court 

and say, we don’t meet the standard, but the standard is you are 

an SIFI because we say you are an SIFI, I think the Supreme 

Court would say, yes, you meet the standard. 

But, Mr. Scalia, I think you have it wrong when you say the 

FSOC is the most opaque government agency in making its decisions because you are clearly not familiar with the Financial Accounting Standards Board and its process. So at most, they are in 

second place. 

I think the FSOC got it wrong. By looking at everyone in this 

room, you all represent folks, with the exception of the professor, 

who might be designated SIFIs. The entities that were at the core 

of the meltdown were the credit rating agencies. They are not here 

because their balance sheets are in the millions, and your balance 

sheets are in the trillions. 

But the fact is that the decisions made by the credit rating agencies, paid for by the issuers, selected by the issuers, umpire selected by one of the teams, controls far more trillions of dollars 

than decisions made by the witnesses in this room. 

And the fact that the SEC hasn’t even implemented the modest 

provisions of Dodd-Frank with regard to the selection of credit rating agencies makes me think I am going to be back in this room 

in 5 or 10 years talking about another meltdown. 

The gentleman from Alabama, I think, points out that insurance 

companies are different. I think the proof that we had better regulation in the States than we had in Washington is that AIG was 

obviously run at the top by drunken sailors. They crashed on the 

rocks all the ships that they were allowed to control. But even 

under that management, all of the ships, that is to say subsidiaries, that were subject to State insurance regulations survived 

and have even provided sufficient profits to resurrect the fleet. 

The problem, therefore, is not in the States, it is here in Washington, where we prohibit calling a credit default swap insurance, 

which is, of course, crazy. If I ran a fire insurance company and 

said, I am unregulated; if your house burns down, I won’t give you 

a check, I will give you a U.S. bond; you can trade your house, your 

burnt-down house for a U.S. bond, that would be an end run 

around, say, fire insurance regulation, and we wouldn’t allow it. 

But instead, we have this bizarre notion that if we insure your 

portfolio, that is insurance, but if you can trade your burned-down 

portfolio for U.S. bonds, that is not insurance. 

28 

And so Congress allowed AIG and continues to allow these unregulated insurance policies on portfolios to be issued without any 

insurance regulation. 

Finally, I will point out that too-big-to-fail is too-big-to-exist. It 

shouldn’t be just a matter that these entities are so large that we 

will give them special regulation, and then they will save 80 basis 

points on their cost of funds. 

Mr. McNabb, you have all my money. You may not know this. 

The only way you are an SIFI in the sense that you could take an 

action that could cost Americans trillions of dollars would be if the 

money you say you are holding for me isn’t in your vault. 

I am responsible for the investment decisions. Putting aside all 

the things you do voluntarily, and all the things you do as part of 

industry, and looking only at the requirements imposed by government, what requirements are there so that I know that the value 

of the assets in your vault is equal to all the statements you have 

mailed out to everybody in the country? 

Mr. MCNABB. First of all, thank you, sir, for being an investor. 

I am very grateful for that. 

Mr. SHERMAN. Thanks for the low fees. 

Mr. MCNABB. We are endeavoring to keep them as low as possible. 

The structure of mutual funds is very different—this is the big 

difference between funds and a bank-like organization. Each fund 

is a separate entity and is separately managed, has a separate 

board of directors, and the assets are custodied separately. So actually, there is no Vanguard vault where your assets reside; they are 

held by a separate custodian. And funds cannot be commingled. 

So, let us use the S&P 500 Fund as an example. If Vanguard— 

Mr. SHERMAN. You picked the one that has all my money. 

Mr. MCNABB. If Vanguard went out of business tomorrow, then 

the fund’s board would simply arrange another advisory agreement 

with another firm to manage these assets. Those assets would be 

separate and whole. Different funds also cannot commingle assets. 

So one fund being down can’t borrow from another fund in order 

to ‘‘make it whole.’’ Each fund has to be treated as a separate entity. 

And again, this goes to the whole nature of the difference between funds and banks. We are acting as agents. You are an equity 

holder in a fund, and we are acting on your behalf, whereas a bank 

is a proprietary institution. 

Chairman HENSARLING. The time of the gentleman has expired, 

but the Chair found the answer interesting. 

The Chair now recognizes the gentleman from Texas, Mr. Neugebauer, the chairman of our Housing and Insurance Subcommittee, 

for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

The identification of a nonbank systemically important firm is a 

fairly serious exercise. And I think it has a lot of implications for 

the competitiveness of some of those firms. It says to the world 

that this institution has systemic risk to the financial markets. 

It has been discussed that recently Prudential was found to be 

one of these SIFIs. And it was interesting, and I think it has been 

brought out in testimony, that several of the people who sit on 

29 

FSOC, either in an advisory capacity or a voting capacity, didn’t 

agree with that decision. In fact, John Huff said that FSOC’s misguided overreliance on banking concepts is no more apparent than 

FSOC’s basis for the designation of Prudential Financial. He went 

on to say that the basis for that designation was grounded in implausible, even absurd scenarios. 

Mr. Scalia, what were your views on FSOC’s mythology and their 

final decision? 

Mr. SCALIA. The Prudential decision is an unusually thinly reasoned and poorly substantiated decision for a government agency 

in several ways. As you note, the members of FSOC who had the 

expertise in insurance were very troubled by the analysis or lack 

thereof. 

Mr. Wallison talked about the coordinating function of FSOC. We 

have talked about the expertise of FSOC. Those can be valuable 

things, but if those members of FSOC who have the expertise in 

that specific industry are deeply troubled and ignored, that is going 

to yield a very poor government decision, which is exactly what 

happened there. So I don’t think that FSOC—to the extent it has 

expertise—functioned properly in that case. 

Mr. NEUGEBAUER. There has been a lot of discussion about what 

does that mean, and what does that mean to that company. What 

would you see some of the consequences that a firm might experience, and its customers, for being designated as an SIFI? 

Mr. SCALIA. The consequence of SIFI designation that is, I think, 

most apparent is being subjected to different capital requirements. 

And we currently, under Dodd-Frank as written and as interpreted 

by the Fed, have every reason to believe that a designated company 

will be held to the capital requirements applied to a bank, which 

is remarkable, because I think there is unanimity that bank-based 

capital standards are really inappropriate for other kinds of financial institutions. 

I think what is transpiring is that FSOC is taking the position, 

‘‘We don’t make the capital standards decision, the Fed does;’’ and 

the Fed says, ‘‘We don’t make the designation decision, really, 

FSOC does.’’ And so, you have designation with consequences that 

everybody recognizes are quite problematic, but the answer seems 

to be, that is okay because the left hand doesn’t know what the 

right hand is doing, which is not ordinarily how the government 

ought to defend its actions, particularly when you have this body, 

FSOC, which is supposed to be coordinating and ensuring consistent intelligence in how regulatory matters are approached. 

Mr. NEUGEBAUER. Thank you. 

Mr. Wallison, you described FSOC’s designation of Prudential as 

perfunctory and data-free, I believe. In fact, you said that the only 

useful numbers in its designation were the page numbers. 

So should the FSOC’s designation process be more rigorous or 

more transparent, or what would you think is a more appropriate 

process for FSOC to go through for these designations? 

Mr. WALLISON. I think we have to recognize from the beginning 

that what they are doing is very serious for the firms involved, and 

serious, actually, for the economy as a whole. And so we would expect that when they make a designation, they would actually be 

30 

able to show us, especially show Congress, what it was they based 

the designation on. 

I also said in my remarks that the FSOC used the word ‘‘significant’’ 47 times in a 12-page paper, which was their entire justification for designating Prudential as an SIFI. This is not adequate. 

And one of the reasons I said that they seemed to be an emperor 

without any clothes is that I went back and looked at what they 

did for the other previous designees, AIG and for GE Capital. Same 

thing. No specifics. 

So I have the idea—and I would like to see it disproved—that 

they have no way of demonstrating the things that they are required to demonstrate, which is that a firm’s financial difficulties 

would lead to instability in the U.S. economy. And if they have no 

way of demonstrating that, they shouldn’t be allowed to make these 

decisions arbitrarily. 

Mr. NEUGEBAUER. Thank you. My time has expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Hinojosa, for 5 minutes. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

Before the financial crisis, the financial regulators focused on different segments of the market, which caused a fragmented approach to oversight. There was no organization tasked with taking 

an eagle’s-eye view of the entire financial system to watch for impending trouble. 

The Financial Stability Oversight Council was created to do just 

that. Had there been a council in place, it is possible they might 

have identified the systemic risk infecting the economy and could 

have diverted the crisis. 

The Financial Stability Oversight Council is the cornerstone of 

the Dodd-Frank Act. Let us not forget the cost of the disjointed approach to financial regulation prior to that crisis. The Government 

Accountability Office estimates that the 2008 financial crisis cost 

the U.S. economy more than $22 trillion. Whereas today’s hearing 

supposedly seeks to examine the dangers of the FSOC’s designation 

process, the real danger to the American economy arises when our 

regulators are asleep at the switch. 

As the Financial Stability Oversight Council proceeds with identifying systemically important institutions, Congress should seek to 

improve its effectiveness, not hinder it. 

Some criticize that the FSOC’s designation process has been 

opaque. My first question is to Mr. Barr. Do you have any suggestions for increasing transparency in this process? 

Mr. BARR. I think that you are correct that the FSOC designation process is essential to policing the boundaries of systemically 

important financial institutions and ensuring that there is a safe 

system in place. 

There are undoubtedly ways that the process, which is a quite 

new process, can be made more standardized and more transparent 

over time. I think that the FSOC has done a good job, given the 

new nature of the proceedings, to get started. There may be ways 

of providing more information in advance to firms that are more 

specific about the types of showings that will be required. As it currently exists, a lot of that information is provided to firms during 

31 

the process of the—the provisional designation, and it may be possible over time to move that data and information up further in the 

process. 

Mr. HINOJOSA. Mr. Barr, is the FSOC appropriately balancing 

the need for transparency against the need to protect sensitive 

market and supervisory information? 

Mr. BARR. I think the balance they have struck so far is a reasonable one. It is not the only one you could strike, but I think that 

it is a reasonable one. And I think that firms have a great deal of 

time to participate in the process, the ability to provide essential 

information to the FSOC that is necessary for a designation. 

Again, I think over time it may be that the FSOC, after reviewing its experience over the initial period, may move the process one 

way or another along the lines of providing greater transparency, 

but I think the path they have chosen thus far is a reasonable one, 

given the newness of the process. 

Mr. HINOJOSA. Lastly, Mr. Barr, do you agree that the FSOC has 

both the expertise and the authority to appropriately assess the 

nonbanking financial institutions, such as insurance companies? 

Mr. BARR. I do. It certainly has the expertise and the authority 

to act in these areas based on not only its own staff, but the staff 

of its member agencies. As with any organization, I think that it 

is going to continue to want to build the expertise, the in-house capacity, the data analytics, the data collection that is necessary to 

be effective, but I think they are doing a good job so far. 

Mr. HINOJOSA. I yield back, Mr. Chairman. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from West Virginia, Mrs. Capito, the chairwoman of our Financial 

Institutions Subcommittee, for 5 minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman. And I apologize for having to step out of the hearing during your statement. I just have 

a couple of questions. 

One question I wanted to ask was alluded to in my opening 

statement, and that is the $50 billion threshold for automatic SIFI 

designation for banks. As you know, there has been a lot of discussion as to whether that is an arbitrary deadline—arbitrary designation threshold. And I guess I would like to ask each of you to answer the question. 

There have been a lot of folks who have said that we need a 

more nuanced approach where we are looking more at the risk profiles and deeper into each institution’s business models as opposed 

to just using a specific $50 billion as a threshold. So I am just 

going to go down the line and ask each of you if you have an opinion on that, and I will start with Mr. Atkins. 

Mr. ATKINS. Thank you. 

I think that to have an arbitrary type of threshold like that does 

not make a lot of sense. But I think, to what is being discussed 

here, if you look at what even President Obama’s designee on the 

FSOC said about the whole process with respect to Prudential, he 

criticized and said it was not reasonable, not supportable, no data 

was run. So even the President’s own insurance designee had that 

to say about the flow of process. 

Mrs. CAPITO. Okay. Mr. McNabb? 

32 

Mr. MCNABB. Again, the asset level makes no sense to me either, 

neither for banks nor for investment companies. 

I would say any focus that the FSOC should have should be on 

activities as opposed to institutions or asset levels. 

Mrs. CAPITO. Is there a feeling that the threshold is too low? It 

should go to $100 billion, or just an arbitrary threshold is— 

Mr. MCNABB. I think just arbitrary. 

Mrs. CAPITO. Okay. Mr. Scalia? 

Mr. SCALIA. My principal concern with the threshold is that 

there is no evidence that there is anything beyond that threshold 

that is being considered and resulting in designation. It appears to 

be the case, for example, when you read the Prudential decision 

that once you hit the threshold, the agency will simply engage in 

a series of speculative hypotheses and designate you. 

Mr. Wallison has pointed out that the sort of undefined word 

‘‘significant’’ appears 47 times. There is actually a word that appears almost twice as much. In this 12-page decision, the word 

‘‘could’’ is used 87 times. The words ‘‘would’’ or ‘‘will,’’ which constitute findings, scarcely appear at all. So there is this very speculative approach once you hit that threshold. 

Mrs. CAPITO. Mr. Barr? 

Mr. BARR. I think the key question is, the key point is to make 

sure that the approach that is taken to firms is a graduated approach and a nuanced approach that is consistent with not just 

their size, but their risk profiles. So I don’t think there is an on/ 

off switch. If you are a $50 billion plain vanilla bank, you need a 

much lighter touch form of oversight than if you are a complicated 

institution. And I think having nuance and graduated approaches 

that are tailored to the risks that firms do or don’t pose is the essential thing. 

Mrs. CAPITO. Right. But that doesn’t exist presently. It is just a 

threshold and on type of approach, correct? 

Mr. BARR. In the current structure, it is not just an on/off switch; 

there is a graduated approach to regulation. I think that the—the 

point would be making sure that it is graduated enough and 

nuanced enough. It is not an on/off switch now. There are higher, 

more intrusive forms of regulation, of supervision, of capital requirements, of stress testing, of resolution planning that are more 

stringent at much higher levels of asset size— 

Mrs. CAPITO. Right. 

Mr. BARR. —than they are for a smaller firm. I think that is good 

and appropriate. And the question is, I think, can you just make 

that even more of a graduated nuanced approach? I think there is 

room to do that. 

Mrs. CAPITO. Okay. Mr. Smithy? 

Mr. SMITHY. Thank you. 

So as we stated in our written testimony, we do believe an arbitrary asset size threshold is inappropriate, as we stated. Our business models are very straightforward. We are simple. We take deposits and make loans. We are not engaged in the range of activities that would lead to a situation where it threatens the U.S. financial system, and so we do believe the arbitrary nature of that 

threshold is inappropriate. We think a more activity-based apVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
33 

proach would give regulators the flexibility to tailor regulation to 

the risks inherent in each firm. 

Mrs. CAPITO. Thank you. 

Mr. Wallison? 

Mr. WALLISON. If regulators on the FSOC are able to designate 

nonbank financial institutions as SIFIs, then they ought to be able 

to do exactly the same thing for banks, and that is not what they 

are told to do. They have been told to choose an arbitrary number. 

I might mention that the International Association of Insurance 

Supervisors made up a methodology for how you judge the riskiness of an insurance company, and they provided that to the FSB, 

which apparently was never used. But, in any event, what it said 

is that size is about 5 percent of the question. There are other, 

much more important questions that don’t have anything to do 

with size. 

Mrs. CAPITO. Thank you. I think my time just expired. Excuse 

me. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch, for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

Mr. Chairman, I just have a couple of procedural things. I have 

here a letter from Damon Silvers, he is the policy director and special counsel for the AFL-CIO; a letter from the Americans for Financial Reform; and a white paper by Douglas J. Elliott, a fellow 

at the Brookings Institution, assisted by William Becker. The title 

of it is, ‘‘Systemic Risk and the Asset Management Industry.’’ I 

would like to have those entered into the record. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. LYNCH. This piece by Douglas Elliott is particularly good. I 

don’t necessarily agree with all of it, but I think it serves the purposes of what we are talking about here today. 

I think it is an easy question. I want to thank the witnesses. It 

has been a very helpful discussion. 

The easy case, I think, is the case of a garden-variety mutual 

fund. I think there are a lot of aspects that you have all pointed 

out that acquit the idea of SIFI designation for mutual funds. The 

revenue stream is fairly stable, they get their money from fees, 

very low use of leverage, much smaller balance sheets than what 

we are generally concerned about, very little debt. The share price 

is published and recalculated each day, and shareholders are free 

to redeem their shares every day. 

And, best of all, mutual funds have really allowed average families, average working families, to assemble wealth. It has been an 

enormous benefit to a lot of American families, and it would be— 

as Mr. Elliott points out in his paper—a shame if we were to regulate these funds in such a way that destroyed that opportunity for 

a lot of hard-working families. 

The tougher question really, and I think, Mr. Barr, you have 

tried to address this on a couple of occasions, is the question of 

hedge funds that operate more like banks and that, quite differently, have no limits on leverage. They are not subject to any of 

the regulations that registered funds are subject to. They can impose very onerous redemption restrictions on investors, and they 

34 

are exempt from many of the oversight and reporting requirements 

we have on other funds. 

In the other case is money market funds that operate in the repo 

market, and you started to talk about that earlier with the gentleman from Alabama. And those are the tougher questions, because those are examples of the problems that we are trying to get 

at, but they are ‘‘asset managers.’’ 

So, Mr. Barr, how would you get at the risks that these—look, 

some hedge funds don’t operate high leverage, but a lot of them do, 

and there is no limit on the investment strategies that they adopt. 

They are sort of out there, and we don’t know a heck of a lot about 

them until something goes wrong. 

How would you address the situation with these hedge funds and 

with the money market funds that operate in the repo market that 

we saw runs on previously? 

Mr. BARR. With respect to money market mutual funds, I am in 

favor of the SEC using its existing authority to remove the regulatory provisions that permit funds to carry a stable net asset value 

unless they have capital that deals with the run risk from such a 

fund. I think that having that option is the preferred policy approach. 

With respect to hedge funds, the Dodd-Frank Act gave the SEC 

the authority to collect information with respect to hedge funds, 

and obviously the FSOC and the OFR also have such authority. 

And I think having that information on such funds is the primary 

way of understanding what is going on in that marketplace. 

If a hedge fund was sufficiently systemically important, the 

FSOC also has the ability to designate such a firm and to subject 

such a firm to supervision and capital requirements. In the absence 

of such a finding, most hedge funds, even highly leveraged ones, 

can operate and disappear without anyone worrying about it. 

Mr. LYNCH. Yes. What about the money market operating in the 

repo market where we have had runs before? 

Mr. BARR. I think that repo market reform directly is probably 

the most efficient way of getting at that. I think there is much 

work that can still be done to reduce risk in the triparty market 

in particular, and the Fed has existing authority to do that. 

Mr. LYNCH. Thank you. I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from North Carolina, Mr. McHenry, chairman of our Oversight and 

Investigations Subcommittee, for 5 minutes. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Mr. Barr, you said the OFR’s asset management report is not 

something you would hang your hat on—I think that is what you 

said a little bit earlier. And I think that is interesting, because the 

FSOC directed the Office of Financial Research to issue the report, 

to undertake this. So, this was a directive of the FSOC. And it is 

interesting because OFR has functioned, as you well know, as basically, a vassal of the Treasury Department, or contained within it 

and the reporting structure. 

So, do you think that the research would be better done by independent agencies? 

Mr. BARR. The OFR can and does have independent authority 

within the Treasury Department, akin to the kind of independence 

35 

that the OCC has within the Treasury Department. And I think 

that it, from at least all intents and purposes, was working with 

that independence in mind. 

Do I also think that it would be good for other agencies to look 

at the sector? Yes, I do. I think there is expertise in other member 

agencies and the FSOC staff at the SEC and otherwise, and that 

is healthy for the system. 

Mr. MCHENRY. To that end, at the SEC, they put up this report 

for notice and comment. Do you think that was positive? 

Mr. BARR. I do. I think that was a very healthy move by the 

SEC, as they have done with the money market mutual fund report 

and other efforts. 

Mr. MCHENRY. Sure. 

But the notice-and-comment part of this is not a requirement of 

the FSOC; is that correct? 

Mr. BARR. There is a formal process with respect to designation. 

The issuance of a report— 

Mr. MCHENRY. But they have to follow the Administrative Procedures Act. 

Mr. BARR. The issuance of a report by any government agency 

does not usually require, just for the issuance of the report, a notice-and-comment process. I think it is a healthy and useful thing 

for agencies to do, to put out draft reports and to get comments on 

it. 

Mr. MCHENRY. Do you think FSOC should be under the Administrative Procedures Act? 

Mr. BARR. It is governed by the Administrative Procedures Act 

with respect to its work. 

Mr. MCHENRY. Should the OFR? 

Mr. BARR. It is already under the Administrative Procedures Act, 

but, again, normally the issuance of a report is not the kind of regulatory step that would require a formal process. I think it is 

healthy and good for regulators for all government agencies when 

they are issuing a report do so. 

Mr. MCHENRY. I appreciate it. Thanks. 

Mr. McNabb, when the Financial Stability Board has already decided that asset managers are systemically important, so it seems 

like the FSOC’s designation, because we just assume they are 

going to go forward with this designation of asset managers, it is 

sort of mindlessly following the FSB on this. 

So what I don’t understand is asset managers being not—they 

are not leveraged, so how do higher capital standards actually— 

how does that actually make sense? Higher capital standards 

would have absolutely no impact on an asset manager’s ability to 

run its funds. 

Mr. MCHENRY. So to actually put bank-like regulations, capital 

requirements is completely unfitting with what asset managers do. 

Is that right? 

Mr. MCNABB. That is correct, sir. 

Mr. MCHENRY. Okay. 

Mr. Wallison, you wrote that the designation process will result 

in one of two things, and let me quote you: ‘‘Either we will have 

large, successful, government-backed firms that swallow up smaller 

competitors or we will have large, unprofitable, heavily-regulated 

36 

giants that are gradually driven to failure by their more nimble 

and less-regulated competitors. In the former case, small firms are 

the victims and in the latter case taxpayers will pay for the bailouts.’’ 

So, designation must be the proverbial ill wind that blows no 

good. Would you concur? 

Mr. WALLISON. It looks that way to me because I was talking 

there about the question of too-big-to-fail, and many people have 

said, including the former chairman of this committee, that, well, 

why is everyone opposing becoming an SIFI if, in fact, it is a benefit if you are too-big-to-fail? And the answer is that nobody really 

knows what the consequences will be. There may be benefits in the 

financing that you get, but there may be detriments in the cost of 

the regulation you have to suffer. 

And the point I was trying to make in the paragraph that you 

read is either way, as a public policy matter, it is a bad idea, because either we have firms that are benefited and outcompete those 

that are not designated as SIFIs or, in the other way, they are hurt 

by excessive regulation, and as a result they fail and the taxpayers 

have to come in and bail them out. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott, for 5 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

First, Mr. William McNabb, let me welcome you to the committee. You are a graduate of the Wharton School of Finance at the 

University of Pennsylvania, the absolute greatest school of finance 

and business in the world. Of course, I am graduated from there, 

and I got my MBA there as well. And we both spent a lot of tough 

times in Lippincott Library and Dietrich Hall. Welcome. 

Mr. MCNABB. Thank you. 

Mr. SCOTT. Let me just ask you this: How do you rank the basic 

general risk in the market now? 

Mr. MCNABB. Could you be a little bit more specific? Equity markets or the bond markets or— 

Mr. SCOTT. As we look at this, in either market, what do you see 

as our greatest challenges as far as risk in the market today, 

whether it is the bond market—maybe the bond market. I will wait 

for you to assume which of the markets has the greatest risk. But 

I think it would be helpful to this committee if you could tell us 

what you see as the top three threats, risks to the market. 

Mr. MCNABB. The largest threat I see to the markets is one that 

actually hasn’t been talked about in any of the discussions, and it 

is the cyber risk that exists out there. And it is more than just a 

financial institution risk, it is really a risk to all businesses. When 

you look at what has happened in the last 18 months where nationstates are getting way more involved in this, that trumps almost 

anything I have seen in my career. 

Mr. SCOTT. Good. 

While I have the time, I also want to go to you, Mr. Smithy. You 

referenced Governor Tarullo’s speech on prudential regulation in 

your comments. Why do you think that he seems willing to reconsider some of the existing asset thresholds from regulatory supervision? 

37 

Mr. SMITHY. Thank you. Based on my read of his speech, I think 

he thinks an arbitrary asset threshold is imprecise in its nature, 

and he is in favor of more tailored solutions reflecting the differences among firms, and he is in favor of regulation that is commensurate with the risk of each of these firms. And in his comments, I think he believes that an asset-only threshold only subjects firms that do not engage in risky activities to the added burden of regulation. 

Mr. SCOTT. Now, correct me if I am wrong, but is it not true that 

regional banks hold one-fourth of the Nation’s total bank deposits? 

Is that an accurate statement? 

Mr. SMITHY. The 18 banks in the Regional Bank Coalition do 

hold one-fourth of the Nation’s deposits, yes. 

Mr. SCOTT. And let me ask you what your greatest concerns are, 

given the status of the regional banks, as opposed to our much 

larger banks in relationship to this asset threshold supervision. 

Mr. SMITHY. The cost burden is both direct and indirect. For Regions Bank, which I can speak to specifically, the cost of compliance and regulation has more than doubled over the last 5 years. 

It is the largest single increasing cost in our operating structure. 

There are many elements to it that seem unnecessary, given the 

activities that we are engaged in. A point I would give you is we 

now have more folks in compliance activities than we do in commercial lending, than commercial lenders at our bank. So, again, 

I think that speaks to the direct costs of compliance. 

There are also indirect costs, which are management and board’s 

time and attention focusing on compliance matters and away from 

serving the needs of our communities and our customers. 

Mr. SCOTT. And if I am also clear, regional banks, unlike other 

size banks, probably do more of asset building and lending to small 

businesses as a percentage of what you do. Is that correct? 

Mr. SMITHY. That is correct. We serve a lot of smaller and medium-sized markets, much like the community banks. The larger 

banks, the more internationally active banks tend to focus on larger organizations. So we are an important source of credit for small 

and medium-sized firms in smaller and medium-sized markets. 

Mr. SCOTT. So this asset threshold regulatory supervision issue 

that you are talking about would have a negative impact on your 

ability to assist small businesses? 

It looks like my time is up on that, and the chairman has done 

it twice. So I take the message. 

Mr. LUETKEMEYER [presiding]. Thank you. 

With that, the gentleman from California, Mr. Royce, the chairman of the House Foreign Affairs Committee, is recognized for 5 

minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

I have a question for Mr. Wallison and Mr. McNabb, and I have 

a question about the now infamous OFR asset management report, 

a report that even Michael Masters’ Better Markets shop called 

inexplicably and indefensibly poor quality, and today a report that 

Professor Barr said he would not hang his hat on. And so, as has 

been referenced, the SEC opened the OFR’s report for comment, 

which gave the public the opportunity to directly point out the 

flaws and poor analysis in the report. I think this simple but imVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
38 

portant step by the SEC has raised some serious questions about 

whether the OFR should be required to follow the same notice-andcomment procedures as financial regulatory agencies. 

As it relates to reports, is there any good public policy reason to 

exempt the OFR from providing public notice and comment as the 

American people expect from other regulators in a system that we 

are trying to run here that is transparent and open? And is there 

any good public policy reason to exempt the OFR from consulting 

with and incorporating changes proposed by prudential regulators, 

proposed by the safety and soundness regulators? And would you 

support congressional action to mandate this openness and inclusion of outside expertise? 

Mr. Wallison? 

Mr. WALLISON. Yes, I think it makes all kinds of sense for these 

organizations like OFR to make their reports public. The public is 

paying for those reports, and the other agencies are relying on 

those reports. It is essential that people know what is in the reports that institutions, agencies are relying on, and the quality of 

those reports. If the SEC had not put out this report for comment, 

no one would have realized what a poor quality piece of work it 

was. The likelihood is the FSOC would have relied on it, might 

have even stated they were relying on it, and no one would have 

known that it provided no substantial guidance. So I certainly 

agree that, with your legislation, that is what should be required. 

Mr. ROYCE. Thank you, Mr. Wallison. 

Mr. McNabb? 

Mr. MCNABB. I would agree with Mr. Wallison. When you look 

at the consequences of a report like this and the amount of activity 

that has been created since its release, I think it goes without saying that it should be available to the public and should be available 

for comment. I think the SEC comment period offered an opportunity for many people who really understand these issues pretty 

deeply to point out some of the data inaccuracies and the flaws in 

the report. 

Mr. ROYCE. The other aspect of my question was, in terms of the 

functional regulators, what about the concept of having the OFR, 

currently exempted from consulting with, what about a mandate 

for a consultation there where you allow an incorporation of the 

changes of those who have the responsibility to look at such issues 

as prudential regulation and so forth? 

Mr. MCNABB. That would make sense to me in that it would lead 

to a better outcome, a better, more accurate report. 

Mr. ROYCE. Thank you. 

And I was going to ask Mr. Atkins, this issue was raised previously, but not to you directly. So when we are talking about SIFI 

designation, or as you have termed it ‘‘sci-fi’’ designation, and we 

look at that designation of asset managers, what we are really talking about is something here that lends to the destruction of wealth 

because of the costs involved. Because of the regulatory burden, the 

compliance costs that come with it, it is a destruction of wealth, 

but it is not Wall Street’s wealth here. If you think it through, it 

is wealth held by average Americans, those saving for retirement, 

those saving for a downpayment, those saving for college tuition. 

39 

They are going to have a lower return on their investment because 

of the higher costs. 

And it is not really justified by a risk in the market, given that 

the asset managers themselves are controlling or are handling accounts by individuals. Can you explain more clearly why designating asset managers as SIFIs would harm average investors? Do 

you want to walk through that argument? 

Mr. ATKINS. Thanks for that question. Like you are saying, being 

designated as an SIFI is not just joining a club or some exclusive 

club. There are consequences to it, and that is the imposition potentially of a bank capital type of regulatory structure. And like we 

were saying with asset managers, it is ultimately the investors who 

bear the burden because, as Mr. McNabb was saying, it is investors’ capital, it is 100 percent capital in most cases in mutual 

funds, it is either on them or on the asset manager. And so it is 

all inapposite. 

Mr. ROYCE. Thank you, Mr. Atkins. 

Thank you. 

Mr. LUETKEMEYER. Thank you. 

With that, we will go to Mr. Meeks for 5 minutes, the gentleman 

from New York. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Let me just say this first because sometimes I think we forget 

how we got here in the first place. We created FSOC because it was 

quite evident that we needed an interagency process to better understand the very complex multisector and multimarket nature of 

systemically important financial institutions and companies, and to 

adopt a stronger microprudential approach to financial supervision. 

And the Financial Stability Board was created to address the lack 

of coordination of these issues at the global level, as these very 

large institutions and companies act on a global scale, with global 

interconnectedness and risk exposures. 

Furthermore, FSB was meant to deal with harmonization of financial regulations across the global financial markets, and I have 

often talked about how vital harmonization of rules to ensuring 

that American banks and companies can compete on a level playing 

field. This is vital to our economic interests and job creation here 

in America. 

And I know that sometimes I have raised concerns also about 

heightened supervision of insurance companies by the Federal Reserve and the risk of applying banking standards to an industry 

that operates a completely different business model. But that is not 

a valid reason to undermine the FSOC designation process, and 

designation is separate and different from supervision and rulemaking. 

So my question goes first to Mr. Wallison. Do you think it is 

wrong for domestic authorities to come together on an international 

level and cooperate with one another as the FSB and G-20 are 

demonstrating currently? 

Mr. WALLISON. I don’t think it is wrong at all. I think those 

kinds of consultations should occur all the time, it is very important. It is important here in this country and it is important internationally. The only question is whether these international bodies 

should take positions that have an effect on our domestic economy, 

40 

and I am afraid that the positions that they are talking about will 

have very adverse effects on our economy. 

Mr. MEEKS. Then, would you not say that FSB and the G-20 are 

playing significant and important roles in terms of seeking the 

global cooperation and harmonization on financial markets and 

international banking rules? 

Mr. WALLISON. That isn’t my understanding of what the G-20 

told the FSB to do. It wasn’t just harmonization. They told them 

to develop reforms to the international system to avoid the next financial crisis. And the FSB has taken that baton and run with it 

to attempt to designate individual companies that ought to be regulated specially in order to achieve that goal. 

That isn’t the only way to achieve that particular goal. It is the 

regulators’ way of achieving that goal, and that is to get hold of 

companies and tighten the regulations on them. That isn’t necessarily the way that you would ordinarily do it if you were asked 

to attempt to prevent the next financial crisis. That is, however, 

how the FSB interpreted the G-20’s instructions. 

Mr. MEEKS. Mr. Barr, let me ask you the same two questions. 

How would you respond? 

Mr. BARR. I think the role of the G-20 and the Financial Stability 

Board are absolutely critical in not only harmonizing, but also raising standards internationally, and that is helping to make the U.S. 

financial system and the global financial system safer. I think that 

there are probably initiatives that the FSB could take to make its 

own process more transparent and more regularized that would be 

helpful. 

And I should just point out, as I did in my testimony, that the 

actions that are taken by the G-20 and the FSB are not binding 

on the United States. The United States makes independent judgments about how to and whether to adopt or adapt international 

rules, international standards, international designations in the domestic context. And you have seen already lots of examples where 

the United States has chosen to take a somewhat different course 

from the international standard-setting bodies, and you see other 

countries around the world doing that, too, the U.K., Switzerland, 

and the like. 

So there is flexibility to approach the domestic regulatory questions independently and in light of our own domestic judgments 

about risk. 

Mr. MEEKS. I would ask another question, but I only have 15 seconds, and the chairman has a quick hand with that hammer, so I 

guess I will just yield back the balance of my time. 

Mr. LUETKEMEYER. I thank the gentleman. I don’t think it is that 

quick. We had a little leeway here with a couple of them. But, 

thank you. 

With that, the chairman grants himself 5 minutes for questions. 

My first comment is to Mr. Atkins. 

I understand your concern with ‘‘sci-fi’’ and SIFI, Mr. Atkins. I 

come from ‘‘Missouree’’ or ‘‘Missouruh,’’ nobody knows for sure, so 

I understand your concern. 

But thank you all for being here today. It is an interesting discussion. As Mr. Smithy indicated, I have a bill that tries to address 

some of this, as far as the banking institutions anyway. 

41 

And with that, Mr. Smithy, I have a couple of questions for you. 

I have here in front of me a chart that actually lists one bank, 

JPMorgan, and then the next 14, the largest 14 regional banks in 

size, they only make up as much as what JPMorgan is. And I think 

this gives you an idea of the relationship and size with regards to 

the different entities we are talking about. It puts things in perspective. 

When you are looking at derivative contracts, the top 4 bank 

holding companies have 76 percent trading assets, 84 percent of 

the total market, credit default exposure 94 percent, whenever 

these regional banks have less than 1 or 2 percent of all that. So 

I think we are looking not only at size, but you are also looking 

at the size of the risk, the risky activities they are engaged in, and 

it would seem to me that it would flow that FSOC would take a 

rather positive view of this. 

However, that being said, it seems that they have a different 

idea. And I would just like your comment with regards to that, Mr. 

Smithy, with regards to how you view, after seeing these statistics 

and your position on this, where we are at with FSOC. 

Mr. SMITHY. Sir, obviously we do not go through that process currently. We are deemed an SIFI based on asset size alone, which is 

at the heart of the issue for us. As you point out in that chart, we 

are traditional lenders. Our sizes in aggregate only rank as large 

as the largest U.S. bank. But I think more than that, it is the 

range of activities within which we are engaged. We don’t have the 

complex legal structures that are difficult to resolve in a crisis, we 

do not engage in securities market making, we are not in trading 

activities. We are simply traditional lenders. 

We are simply asking for due process similar to what the 

nonbanks would go through in determining whether or not the 

range of activities within which we are engaged would deem us 

systemic, and that is what we would expect, that the FSOC would 

put us through a similar process as they do the nonbanks. 

Mr. LUETKEMEYER. Mr. Wallison, I have been in a meeting where 

you were engaged in discussing this subject as well, and you seem 

to have a similar opinion to what Mr. Smithy does of institutions. 

You base it on risk, connectivity, not just asset size. 

Mr. WALLISON. Yes, especially for banks, as I said before. If the 

FSOC is really able to designate nonbanks as SIFIs, then certainly 

for banks, they could do the same thing. And so we shouldn’t actually set any kind of arbitrary size for these institutions but rather 

look at their activities and determine whether they could cause an 

instability in the financial markets if they ran into some sort of financial difficulty. 

Mr. LUETKEMEYER. It is kind of interesting—the gentlelady from 

New York made a comment a while ago about all the experts on 

FSOC, yet whenever FSOC made its SIFI designation to Prudential, it disregarded all the insurance experts on the committee. I 

wonder why? Interesting. It would seem to me that maybe they are 

trying to justify their existence by doing something rather than allowing the actual existence of facts and data to drive their decisions versus trying to justify their existence. 

Mr. Scalia, you had made some interesting comments during the 

course of your commentary. I jotted down in my notes that you 

42 

made some comments with regards to how most of the decisions of 

FSOC couldn’t pass legal muster from the standpoint that they 

don’t justify what they are doing, there is no transparency, and if 

you ask them how they could come up with this decision, there isn’t 

a logical or reasoned way to do it that could actually, if this was 

taken to court, pass muster. Would you agree with that comment 

of mine or my assessment of your comments? 

Mr. SCALIA. That is accurate. Actually, it was the ranking member who said that what we should expect from an SIFI designation 

is a strong analytical basis, and I think we all agree, and that is 

what is so sorely absent. The Prudential decision, for example, it 

is meant to be a risk assessment, right? We are doing a risk assessment. Well, a risk assessment considers the probability of the event 

and the magnitude, and neither of those things is determined or 

even estimated in the decisions that have been issued so far by 

FSOC. 

Mr. LUETKEMEYER. Okay. Thank you. 

With that, I will turn next to the gentleman from Texas, Mr. 

Green. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the ranking 

member as well, and I thank the witnesses for appearing. 

If you are of the opinion that there should not be an FSOC, 

would you kindly extend a hand so that I may identify you. I think 

the record should reflect that Mr. William—is that correct? 

Mr. WALLISON. Wallison. 

Mr. GREEN. Wallison, excuse me, my vision is poor, and the distance is quite a ways from me. And who is the other person? Would 

you speak your name again? 

Mr. ATKINS. Paul Atkins. 

Mr. GREEN. Mr. Atkins. The two of you are of the opinion there 

should be no FSOC at all? 

Mr. ATKINS. As currently constituted, right. 

Mr. GREEN. Thank you. And let’s go into some other areas now. Do you agree that Prudential was a $1 trillion company in terms 

of assets, above a trillion? Or is? 

Mr. WALLISON. If you are asking me, I don’t know the exact number, but I will accept a trillion. 

Mr. GREEN. It wouldn’t surprise you to know that it was a trillion? 

Mr. WALLISON. No. 

Mr. GREEN. Okay. 

And let’s go to Mr. Barr. Mr. Barr, this company, Prudential, had 

the right to appeal. Is this correct? 

Mr. BARR. Yes. 

Mr. GREEN. And this is in a Federal court. Is this correct? 

Mr. BARR. Yes. 

Mr. GREEN. And would you just briefly outline the process that 

allows a Prudential or any company similarly situated to appeal? 

Mr. BARR. There is a process that is set out by the statute and 

by the FSOC internal rules and guidance that describes three 

stages of review—a first stage review, a second stage review, and 

a third stage review—that ultimately could lead to a provisional 

determination and a final determination. At the conclusion of a 

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43 

view in Federal court of that final determination to assess whether 

that determination meets the legal requirements for a designation. 

Mr. GREEN. Is it fair to say that Prudential, a $1 trillion corporation, has some pretty good lawyers? Is that a fair guess? 

Mr. BARR. I actually don’t know their legal counsel at all. 

Mr. GREEN. Would you just guess that a $1 trillion corporation 

has some pretty good lawyers? 

Mr. BARR. I have seen terrific lawyering and bad lawyering at all 

levels of our economy. 

Mr. GREEN. I will speak for you. With a trillion dollars, my suspicion is that they can afford some pretty good lawyers. 

Mr. BARR. I would agree with that statement. 

Mr. GREEN. All right, they can afford pretty good lawyers. Is it 

true that they did not appeal? 

Mr. BARR. It is true. 

Mr. GREEN. Is it true that they had the right to appeal? 

Mr. BARR. Yes. 

Mr. GREEN. If they did not appeal, is it also correct that perhaps 

they concluded that there was good reason to stay within the system and to abide by the rules and regulations imposed upon it? 

Mr. BARR. I am not privy to their internal deliberations, and 

often firms have a complex range of reasons for taking or not taking legal action. So I would rather not opine on what they were 

thinking. 

Mr. GREEN. Is it true that some of your colleagues have opined 

and concluded that they were not treated fairly? 

Mr. BARR. I’m sorry, I don’t— 

Mr. GREEN. Some of your colleagues on the panel— 

Mr. BARR. Oh. 

Mr. GREEN. —have concluded that they have not been treated 

fairly? 

Mr. BARR. I should maybe let them speak for themselves about 

that. I understood them to be critical of the FSOC process. 

Mr. GREEN. The process. If the process is in some way flawed, 

would not appeal be a means by which—or if the decision is one 

that you believe to be inappropriate or unfair, would appeal be an 

appropriate remedy for you? 

Mr. BARR. I think that a Federal district court is, generally 

speaking, a pretty tough and good place to go seek redress if legal 

procedures have not been followed. My experience is that the Federal courts are quite attentive to failures by regulatory agencies to 

follow the rules that are set out for them. 

Mr. GREEN. And in that process would a Prudential or any entity 

have an opportunity to have some degree of discovery? 

Mr. BARR. I haven’t looked carefully at what materials were already provided and what would be protected material and not protected material in that context. They would certainly be able to 

gather and present information about whether the procedures were 

followed and whether the standards set forth in the statute were 

met in their case. 

Mr. GREEN. Let me just close with this comment. Assuming that 

Prudential disagreed, and a lot has been said about Prudential, 

there was the ability and the right to appeal. A $1 trillion corporaVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
44 

tion which had the ability to hire good lawyers, could have appealed, and did not do so. 

Mr. BARR. Correct. 

Mr. GREEN. I trust the judicial system in this country. I don’t always agree with it. And I think that in and of itself gives FSOC 

some credibility, as well as OFR, because the appeal process is 

readily available to any company that believes it has a grievance 

as a result of a decision made by FSOC. 

Thank you, Mr. Chairman. 

Mr. LUETKEMEYER. With that, we will turn next to the gentleman from New Mexico, Mr. Pearce. 

Mr. PEARCE. Thank you, Mr. Chairman. 

And I thank each one of you for your presentations here today. 

Mr. Barr, Mr. Scalia was very precise in his descriptions of the 

Prudential decision. He says it presupposes severe financial distress with no consideration at all to whether there is any indication 

that such distress is likely to occur, then relies on a broad unsubstantiated assertion to conclude that material financial distress 

could pose a threat. Do you have an opinion about that same case 

that would differ from the observations by Mr. Scalia? Because to 

me, sitting up here, I find those accusations to be intensely interesting in the process. And so, do you find that not so concerning 

as he does? 

Mr. BARR. I have not reviewed in detail the Prudential case to 

judge item by item what my views of the substantive merits are. 

Mr. PEARCE. Okay, that is fair. 

Mr. BARR. I would say that the process that the FSOC followed 

with respect to that decision was an engaging and searching process, at least as it appeared from the outside. I am just judging 

based on the extensive review process that they engage in, the provisional determination, and then final determination. 

Mr. PEARCE. In your testimony, you indicate that Dodd-Frank 

was created to create a system of supervision which ensured that 

if an institution poses risk to the financial system, it would be regulated, supervised, blah, blah, blah. So you lay out the requirements. Are Fannie and Freddie supervised under Dodd-Frank? 

Mr. BARR. Fannie and Freddie are currently supervised by the 

FHFA under the authority granted through HERA. 

Mr. PEARCE. Do they come under FSOC? 

Mr. BARR. I think that one could make a case that they are subject to the same rules as anyone else and that the FSOC should 

review them. 

Mr. PEARCE. I am taking from your answer that, no, they don’t, 

they are not currently included in the scope of work of the FSOC. 

Mr. BARR. No, I wasn’t saying that, sir. I was saying that I think 

that under the provisions of the Dodd-Frank Act, the Dodd-Frank 

Act could provide authorization for FSOC review of those entities. 

I have no idea whether or not they are separately under FSOC review. Obviously, the FHFA is their current regulator and sits on 

the FSOC. 

Mr. PEARCE. If I could take the time back, there are many people 

who think they don’t come under the, that they are limited from 

discussion of those two entities, and definitely they do have the poVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
45 

tential, they are big enough size to where they might ought to be 

considered. 

Mr. Scalia, you had mentioned in one of your comments that the 

access to FSOC data is closely guarded. And so my question is, 

what are the risks if—is that data fairly important in a competitive 

sense, fairly important to other firms, the data that is being collected? 

Mr. SCALIA. I’m sorry, the question is whether designation is important? 

Mr. PEARCE. No, no, no, whether the access to the data, that data 

that is collected, is that fairly important data in a competitive 

sense? 

Mr. SCALIA. Some of the data can be competitive. However, much 

of the data that FSOC compiles and presumably relies upon in its 

designation decisions is about markets generally. And there has 

been discussion about the appeal process, for example. Ordinarily 

in, say, an appeal process where a record is created before the 

agency, the parties who are going to be affected get the chance to 

see that and to provide their views so that they are heard by the 

decision-maker. But that kind of opportunities is not being provided. 

Mr. PEARCE. But there is not any data that would be critical if 

it is released? That is my question then. 

Mr. SCALIA. There can be some sensitive data about the individual companies being considered. Of course, there is no reason 

those companies themselves can’t see the data about themselves. 

But if there were public disclosure of FSOC proceedings, you would 

want care about that, but there is market economic data that is not 

sensitive and should be available. 

Mr. PEARCE. Okay. I just wondered if you had a Snowden-type 

release, somebody goes in and takes everything and releases everything, that is fairly more plausible today than we might have 

thought it was a couple of years ago. So, it is just this accumulation of financial data I always worry about. 

Mr. Barr, should the FSOC consider the pension funds? The estimates are that they are trillions overdrawn. They pull money in, 

distribute money out, so they are kind of a bank in the system. 

Should the FSOC be looking at pensions? 

Mr. BARR. I think the FSOC should look at risks throughout the 

financial system. Whether or not that is in furtherance of some regulatory goal or just to understand risks in the system I think is not 

the issue, but having the ability of the FSOC to look broadly across 

the financial sector and to see where risks are arising, I think is 

important. 

Mr. PEARCE. Thank you. I yield back, Mr. Chairman. 

Mr. ROSS [presiding]. Thank you. The gentleman’s time has expired. 

The gentleman from Delaware, Mr. Carney, is recognized for 5 

minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. 

And thank you to all the panelists today. It has been a very interesting discussion. I would like to return to the discussion we had 

led by the gentleman from Alabama, Mr. Bachus, around whether 

mutual funds present a systemic risk. During that conversation, 

46 

Mr. McNabb described the way mutual funds were structured, at 

least Vanguard was structured and kind of walled off, if you will. 

And it seemed like there was considerable disagreement among the 

panelists about whether mutual funds do pose those kinds of systemic risks. 

And, Mr. Barr, I was wondering what your reaction was to Mr. 

McNabb’s description? I got the impression that you believe that 

mutual funds oppose those systemic risks. Could you explain to us 

why you think that is the case? 

Mr. BARR. I think that asset managers and banks have fundamentally different business models and fundamentally different 

balance sheets and fundamentally different risks that they face. 

Mr. CARNEY. So you agree with me? 

Mr. BARR. The particular issue that I was addressing was risk 

to the system from a particular form of mutual fund, money market mutual funds that are able to maintain and promise, in essence, a stable net asset value. And that could— 

Mr. CARNEY. If I may interrupt, because we only have a limited 

amount of time, so the SEC is dealing with that issue in terms of 

the floating NAV and they have a whole series of regulations. And 

I don’t know, there has been some discussion and some disagreement on the committee and in the industry about that, but that is 

moving in a separate way. So do you believe, then, that because 

those money market funds pose systemic risk that the other mutual funds should be swept in as SIFIs as well or the larger entities 

that have those mutual funds? 

Mr. BARR. I think that the presence of risks in the system may 

or may not be appropriately dealt with by designation. There are 

lots of other regulatory tools. In the case of money market mutual 

funds, I think having the ability to either impose capital requirements on stable funds or to float the NAV is an appropriate response that is aside from designation. And similarly, in the asset 

management field as a whole, there are operational risks that if 

they are of sufficient concern can be addressed in existing frameworks with or without designation. So I don’t think that everything, the risks in the systems hinge on designation or not designation. They are about appropriately tailoring a regulatory response 

to the risk that you see. 

Mr. CARNEY. Fair enough. 

I would like to move on to the bank designations of SIFI. There 

are Members on both sides of the aisle here who have been looking 

at how to differentiate those designations beyond the $50 billion 

threshold, if you will. In fact, Governor Tarullo, I think last week 

at a speech at the Chicago Fed, said that he believed that we 

should take another look at that and maybe firms under $100 billion shouldn’t be subject to designation as an SIFI. 

Mr. Smithy, I assume you would agree with that? There is legislation here many of my colleagues have put forward to differentiate 

among banks differently than just a $50 billion or a $100 billion 

threshold. Do you have any thoughts on that? 

Mr. SMITHY. So, again, we would agree that an arbitrary asset- only threshold would not be appropriate. Simply raising it to $100 

billion, though, I don’t think solves the issue. We would favor a 

multifaceted approach, which is activity-based, to determine who is 

47 

indeed an SIFI based on the range of practices within the organization and the risks they pose. 

Mr. CARNEY. So the kinds of activities like, for instance, what 

would it be? There is a bill I think Mr. Luetkemeyer is the lead 

sponsor on, I am looking at my colleague Ms. Sewell, I believe she 

is a cosponsor of that bill, that would differentiate based on activities, how risky they might be. Is that what you are talking about? 

Mr. SMITHY. Absolutely. We would expect they would review 

whether or not you are engaged in significant international activities, trading activities, whether or not your institution is substitutable, and the complexity of your overall organizational structure. 

Mr. CARNEY. I have 29 seconds left. Does anybody else have any 

thoughts on Mr. Tarullo’s comment about the $100 billion threshold? Mr. Atkins? 

Mr. ATKINS. Yes, I think that I agree with the panelists here that 

all of these thresholds are very arbitrary. And so, I think they are 

actually counterproductive. 

Mr. CARNEY. So it is not really the thresholds, it is the activity, 

in your view? 

Mr. ATKINS. Right. 

Mr. CARNEY. Everybody seems to be shaking their head. 

Mr. Barr, would you agree with that? I think you did. 

Mr. BARR. I think that within the existing framework you can 

tailor and graduate the extent of regulatory compliance. I don’t 

think it needs a legislative fix, but I agree that much more nuance 

could be in the system than is there now. 

Mr. CARNEY. Thank you very much, each and every one of you. 

Mr. ROSS. Thank you. 

The Chair now recognizes himself for 5 minutes. 

Mr. Wallison, it was interesting to read your opening testimony, 

and in it you state that FSOC uses the word ‘‘significant’’ 47 times 

in their 12-page statement designating Prudential as an SIFI. And 

being a litigator for 25 years, I know that when we have ambiguities we try to look at the plain meaning of either the statute or 

the word to determine what was intended. Based on your extensive 

legal background, do you have any definition for the word ‘‘significant’’ that is being used? 

Mr. WALLISON. No, sir, I have no definition for that. 

Mr. ROSS. I guess my question is, how can these organizations 

that are under review for SIFIs anticipate whether they are going 

to be designated as such when we really can’t get our hands 

around what ‘‘significant’’ means? As you point out, it is very arbitrary. 

Mr. WALLISON. It is arbitrary, it is not a standard, it is not something that anyone can use to adjust, no firm can use to adjust its 

activities. There is really no information that is conveyed by that 

term. 

Mr. ROSS. So not only in the assessment of the organization, but 

then after the assessment or designation, if you will, other organizations—once Prudential is designated, then how can another insurance company, if you will, act accordingly to make sure that 

they are not so designated? There is no road map, in other words? 

Mr. WALLISON. There is no road map. I mentioned before that 

the IAIS, which is an international insurance group, had set up a 

48 

methodology for making this kind of determination, and they actually put percentage weights on things. That was a very valid way 

to proceed. That doesn’t necessarily mean I agree with it, but it is 

a valid way to proceed. That was ignored by the FSB. 

Mr. ROSS. So organizations, a company today has no real road 

map to avoid being designated as an SIFI until it is too late? 

Mr. WALLISON. That is right. 

Mr. ROSS. When we look at the McCarran-Ferguson Act, which 

I think has been very good for this country for consumers’ purposes 

and regulating insurance based on a State-by-State assessment, 

don’t you foresee that there is going to be some serious conflicts 

there once an insurance company may be designated as an SIFI in 

trying to maintain certain capital requirements, either as riskbased capital versus GAAP accounting? How does that help the 

consumer? 

Mr. WALLISON. This is pretty radical, what we are talking about 

here, and this is something that has never happened before, and 

that is that an entire industry will be bifurcated between those 

that are regulated at the Federal level by the Fed differently. 

Mr. ROSS. Do they keep a separate set of books? 

Mr. WALLISON. In many ways, of course. But differently by the 

Fed, with different capital requirements from the other similar although smaller institutions that are regulated at the State level. 

This will be a very difficult thing for— 

Mr. ROSS. And a very expensive thing. 

Mr. WALLISON. And very expensive. 

Mr. ROSS. Mr. McNabb, just briefly, with regard to the Baseltype approach of capital requirements and applying it to asset 

managers, aren’t we really just not only saying to asset managers 

what capital they can or cannot reserve, most likely they must reserve, but aren’t we also just basically telling them what they can 

and cannot invest in? 

Mr. MCNABB. I think that is one of the potential consequences 

of prudential regulation of asset managers, is that we as asset 

managers could be put in a position of conflict where we are told 

for ‘‘safety and soundness reasons’’ to either invest in something or 

not invest in something when it is not in the best interests of the 

shareholders or in the prospectus that we have delivered to the 

shareholders. 

Mr. ROSS. And don’t you foresee that leading to a new cause of 

action? If your fiduciary responsibility is to your clients, and now 

we have this regulatory arm telling you what you can and cannot 

do, and basically who is your obligation to? I guess what I foresee 

here is, is that once asset managers are brought under this tent, 

I foresee in some of the creative ways a new cause of action being 

created that would lead to litigation, and then greatly increase that 

$108,000 assessment that now is going to be placed over the life 

of the investment, according to Mr. Eakin. 

Mr. MCNABB. It is a very large concern. 

Mr. ROSS. One last thing, I understand that there is a genuine 

relationship between risk and return, and they are directly related. 

The higher the risk, the greater the return. But aren’t we, what we 

are trying to do now is to eliminate any and all risk and as a result 

lower the return? If we are going to lower the return, how do we 

49 

anticipate for retirement purposes and, more importantly, addressed for student loans, which is right now the largest liability 

that this country has? 

Mr. MCNABB. Mr. Chairman, I think you make a good point in 

that there is a lot of confusion between what I would call idiosyncratic risk, which is the individual risk of a single fund or a single 

entity, versus systemic risk, and I think to other panelists’ points 

earlier, there has not been a clear definition of what systemic really means versus what we all know is idiosyncratic today. 

Mr. ROSS. Thank you. I see my time has expired. 

I now recognize the young lady from Alabama, Ms. Sewell, for 5 

minutes. 

Ms. SEWELL. Thank you, Mr. Chairman. 

I want to thank all of our panelists for a very interesting discussion today. 

I wanted to address my questions to Mr. Smithy. Can you talk 

to me a little bit about the difference between—in your testimony 

you talked about a business model of regional banks versus your 

larger peers, and really making the case that regional banks should 

be treated differently. Could you elaborate a little bit on that 

model? 

Mr. SMITHY. Absolutely. So as I stated, we are traditional lenders. We focus primarily on smaller to medium-sized markets, 

whereas some of our larger bank competitors are in the larger 

metro markets, would focus on larger companies. We are focusing 

on small businesses and medium-sized businesses, traditional lending products, and traditional deposit products as well. We are not 

engaged in complex trading activities, we don’t make markets and 

securities, and we don’t have meaningful interconnections with 

other financial firms, which I think is a key differentiator between 

us and the larger banks. 

Ms. SEWELL. What about the supervision that you currently 

have? If you are not designated as systemic, don’t you feel that the 

current supervision model that you are operating under would prevent regional banks from being sort of swept into the same systemic risks? 

Mr. SMITHY. Assuming we would go through an evaluative process such as what is presented in the Luetkemeyer bill, even if we 

were deemed not systemic, the regulators still have a suite of processes that they put us through, annual stress test, required capital 

plans, as well as on-site reviews, along with the Basel 3 capital and 

liquidity rules, that we think would be sufficient for regulation of 

regional banks in the range of practices in which we are engaged. 

Ms. SEWELL. How do you think the regulators would deal with 

a regional bank failure in such that compared to sort of what DoddFrank would make you do if you were a systemic institution? 

Mr. SMITHY. As you know, the regional banks have recently submitted, at the end of last year, a resolution plan which we think 

will lay out or will suggest that regional banks are resolvable 

under the traditional bankruptcy framework, either in whole or in 

part. I think clearly there is a range of sizes we are talking about 

here within the coalition. We think that all of the banks’ business 

models within the coalition are fairly homogenous, and so therefore 

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50 

tion or in part and absorbed into competitors across their footprints. 

Ms. SEWELL. Great. 

Mr. McNabb, I wanted to ask you how you thought the asset 

managers being designated as SIFIs would affect investors? We 

have talked a lot about your business model and how it affects 

asset managers, but what about investors? 

Mr. MCNABB. I think, again, we don’t know the exact remedies 

being designated, but if you look at what has been suggested, costs 

for investors for those in designated firms or designated funds 

would go up. And so, again, our estimate was a quadrupling of fees 

in a couple of our most basic funds. That is going to vary, obviously, firm to firm. 

I think you are also going to see a situation, though, where the 

competitive landscape is altered. So if you were to look at the 

FSB’s designation process or at least what they suggested, they 

named 14 U.S. funds, which comprise roughly 1 percent of the 

world’s market, as being systemically important. And if you are an 

investor you might ask yourselves, why would I invest in one of 

those funds when there is a like product where I am not going to 

be designated and I am not going to have to pay these additional 

fees and possible resolution costs and so forth? 

Ms. SEWELL. I know that mutual funds are currently subject to 

comprehensive regulations that serve both to protect the shareholders as well as to reduce the potential for systemic risks. For 

example, funds have strict limits on your leverage and diversification requirements. Can you discuss how these regulations distinguish mutual funds from other financial institutions and the impact their potential would have on posed systemic risks. 

Mr. MCNABB. Yes. So I think you hit on actually some of the 

most important points. Transparency is very important and funds 

are valued every day, so an investor knows what his or her value 

of the portfolio is. There is little to no leverage in all funds. There 

are extremely clear reporting requirements and transparency to the 

end investor. So when you add that up, you have a very heavily 

regulated product that is really very low risk from a systemic 

standpoint, not to say that there aren’t idiosyncratic risks within 

each individual fund. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, for 5 minutes. 

Mr. BARR OF KENTUCKY. Thank you, Mr. Chairman. 

Mr. Scalia, in your written testimony, and in your verbal testimony, you made the point that FSOC’s regulations and interpretive 

guidance have done little to give potentially regulated parties adequate notice of the legal standards that will be applied to them and 

whether, in view of those standards, they are likely to be designated systemically important, and what changes that they could 

make in their structure operations so that they are not so designated. Short of abolishing FSOC, what policy recommendations 

would you offer to Congress to either more clearly define FSOC’s 

standards that they use or what changes could we make to FSOC 

to provide regulated parties more notice, more concrete notice? 

51 

Mr. SCALIA. I think that deliberations such as this are a valuable 

step forward. One hopes that FSOC’s members are paying attention to the discussion today and will take account of those things. 

The Dodd-Frank Act itself requires FSOC to consider other riskrelated factors beyond those that are enumerated in the statute, 

and one of those factors plainly is the risk to the company and its 

customers and shareholders of designation. FSOC hasn’t thought 

about that yet. So I think that much of what would be helpful is 

in the statute. 

I did want to briefly talk about the Prudential decision, and 

there were questions asked earlier of Mr. Barr regarding 

Prudential’s decision not to appeal. There are, as actually Professor 

Barr I think quite fairly said, a number of different reasons that 

a company would decide not to take the government to court. That 

is a big step. But the question shouldn’t merely be, well, what opportunity do you have to go to court when the government has 

made a serious mistake and violated your rights? The mere fact 

that the government has made a serious mistake and violated your 

rights is troubling enough. Even when you decide not to seek government recourse, we have this body, as well as the courts, to oversee what agencies are doing, and I think that is an important dynamic regardless of the decision of an individual company not to 

take the government to court. 

Mr. BARR OF KENTUCKY. As an administrative law practitioner, 

what would be helpful in terms of additional direction from Congress in terms of how FSOC operates? 

Mr. SCALIA. I think that the statute as written should be one 

that FSOC could administer to give much greater respect to participating companies’ rights than it gives currently. But that said, 

I think a significant improvement would be if FSOC considered 

companies on a broader sort of industry-wide type basis rather 

than singling them out one by one. Now, I don’t think that the statute has to be read to require singling them out one by one, but that 

is what it is doing, and I think one change to be considered is that. 

There is proposed legislation to increase transparency. That 

could be valuable. Perhaps most important, when you look, for example, at both insurance companies and mutual funds, is the problem of FSOC designation resulting in the imposition of bank-based 

capital standards, which is what Fed Members have indicated necessarily follows. There is legislation pending that would make it 

clear that is not required, and I think that would be an important 

change, too. 

Mr. BARR OF KENTUCKY. I think the fact that former Congressman Frank, for whom the Act was named, said that it was not his 

intent that asset managers be designated as SIFIs says a lot about 

the designation process. 

And as a segue, just a final question to Mr. McNabb. Obviously 

it is your position that the application of bank-like regulation of 

mutual funds would not limit systemic risk, but would obviously 

disrupt capital markets and increase costs for your investors. What 

is your amplified opinion about what this would do not only to your 

investors, but to the capital markets and capital formation and the 

ability of retail investors to provide liquidity to our commercial system? 

52 

Mr. MCNABB. That is a very hard question to completely speculate on, but higher costs, if the cost of capital goes up dramatically—and the mutual funds are roughly 25 percent of the U.S. equity market, so it is a very important source of funding—if that 

cost of capital goes up dramatically, then by definition, you are 

going to have slower growth. And if we have slower growth, it is 

going to create less jobs and so forth. 

Mr. BARR OF KENTUCKY. Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. Foster, for 5 minutes. 

Mr. FOSTER. Thank you, Mr. Chairman. 

And thank you to all the witnesses. 

It seems to me that the SIFI designation process in principle has 

the opportunity to take risk out of our system by negotiating the 

business model for a firm that is under consideration for SIFI designation. So my question, I guess to Mr. Scalia, if you could discuss 

the actual process that the analytical staff at the FSOC play in the 

review and designation process, and specifically with respect to the 

reports that the staff at each agency produces for the voting member and how important the meetings are, and is there a to and fro 

between the analytical staff from each Council member and the 

companies under review? 

Mr. SCALIA. I will do my best to describe that process, although 

part of the challenge is that it is opaque. But the essential process 

is that a company is told that it is under consideration after a 

point, is required to submit information, and may submit additional information, and then has opportunities to meet with the 

staff to make presentations and answer their questions. However, 

what is not known is what additional information and reports the 

staff and the members may have access to. Those aren’t shared 

with the company that is under consideration until at earliest 

when there is what is called a proposed designation decision. 

Now, once there is a proposed designation decision, a written explanation of some sort is provided to the company which can take 

an appeal which has been described. But here is what is really unusual. The FSOC members make the proposed designation, and 

then internally at FSOC, who do you appeal to? The same people. 

I am not familiar with another legal process like that where a 

group of people makes a decision against you, and you get to appeal to them to try to persuade them to change their minds. That 

is not really an appeal. I think at that stage, too, there is a real 

question of the extent to which the company has access to the data 

in the reports that FSOC is relying upon. Ordinarily, that would 

be provided. 

Mr. FOSTER. So you wouldn’t really characterize it as being a negotiation where the business model could be adjusted. And what I 

am fishing for is whether potentially some future AIG, they could 

have said, look, if you stay away from securities lending, stay away 

from credit default swaps, you are going to maintain a lower level 

of SIFI designation. But that sort of negotiation, to your knowledge, doesn’t really happen here? 

Mr. SCALIA. I am not aware that it has occurred. And this relates 

in part to the question about clear standards that has been disVerDate Nov 24 2008 16:15 Nov 07, 2014 Jkt 088541 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\88541.TXT TERRI
53 

cussed earlier. If there were clear standards, then companies would 

be able to look at how they are currently doing business and saying, oh, if I change these couple of things, then I wouldn’t be supervised by the Fed and have all the added costs for my customers 

and shareholders. But that opportunity is not present now. 

Mr. FOSTER. Now, I sense a lot of enthusiasm from the panel for 

gradations in oversight and SIFI designation, that having it be an 

approximately binary thing makes it uncomfortable in a number of 

ways. And I accept Professor Barr’s point that there, in fact, are 

different levels of oversight depending on the exact nature of the 

company. 

But my question is, is there a problem with—there is a bailout 

mechanism for assessing industry fees to other SIFIs if one of them 

has to be bailed out, and so is this adequately transparent? I think, 

when was it, Long-Term Capital had to be bailed out, there was 

an assessment after the fact of I think 14 different financial services companies chosen somehow, which I think was probably not a 

very transparent operation, but I was wondering is there a view 

that there is a lack of transparency for a future assessment when 

that mechanism is called into play? Anyone? 

Mr. BARR. Let me just take a first stab. The FDIC is authorized 

under the statute, required under the statute to provide for the assessment schedule, and so there is a process under which people 

can comment, provide notice and comment, provide input into that. 

And so the basic rules of the game I think are able to be reasonably 

established in advance. The caveat to that is, of course, you don’t 

know in advance whether a particular firm will be subject to resolution, whether that firm will be resolved with the assets that are 

available to the firm or the FDIC would be required to borrow, and 

if it borrowed, what that amount would be. 

Mr. ATKINS. I think that is the problem of Section 210(o) of 

Dodd-Frank where it gives the FDIC huge discretion in this, in the 

future. And so folks, if they go down the line to designate asset 

managers, you will have real investors, if they have to pony up capital, then subsidizing the too-big-to-fail banks or whichever institutions fail. 

Mr. FOSTER. Which is one of the reasons that companies are 

kicking and screaming to not be designated because it makes an 

unknown potential burden on them. 

Mr. ATKINS. And investors are kicking and screaming. 

Mr. FOSTER. Right, right. Whereas, a multitiered designation 

might avoid some of that. 

Mr. ATKINS. And, in fact, one of the problems is, I think, the 

FSOC has flouted Congress, because Congress in Title I of DoddFrank told the FSOC to come up with parameters for this designation process. FSOC basically regurgitated the statute in its rule. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And I thank you gentlemen for being here today. You have discussed, I know, the heightened prudential standards that we have 

on insurance companies, but what do you think will happen 5 or 

10 years down the road? Give me your perspective of applying 

54 

these bank-like risk capital requirements to insurance companies. 

Could we start with Mr. Wallison? 

Mr. WALLISON. One of the problems here, of course, is that we 

don’t have any idea what kinds of standards are going to be imposed eventually by the Fed. The Fed will do the imposing and 

they have not indicated yet, first of all, whether they are actually 

bound to do that. They say they are, but we don’t know what they 

mean by that. And then, secondly, after a period of 5 or 10 years, 

what we might find, and this would be the most troubling thing, 

is that the ones that are subject to these bank-like capital standards are failing as a result of the fact that they are subject to 

standards that don’t fit with the way an insurance company works. 

And so, we then have these very large financial institutions that 

are being driven out of business by their regulatory process. That 

should be unacceptable. And one of the reasons we should stop this 

SIFI process is to make sure that the FSOC itself knows what the 

Fed is going to do when it gets hold of an insurance company or 

an asset manager, for example. 

Mr. PITTENGER. Mr. Scalia, would you like to comment on that? 

Mr. SCALIA. Just to add to that, that is a central question, and 

it is one FSOC itself has never asked, much less answered during 

the designation process, what will result once we designate this 

company as a consequence of the new regulatory requirements. 

They haven’t been determined, but the Fed has indicated they will 

be bank standards. 

The concerns I think are a couplefold. One is the competitive 

burden, which Mr. Wallison has talked about. It is so extraordinary 

to take as broad an industry as, say, insurance or mutual funds 

and pick three or four or five companies in this enormous industry 

and only treat them to a different regulatory set of requirements. 

I have not seen that done elsewhere. I believe there is also risk 

that bank-based standards will just inaccurately reflect the real 

risk on the books of an insurance company or mutual fund, overstating that risk sometimes, potentially understating sometimes, 

not providing accurate read back to investors and regulators the 

way that standards designed for insurance companies already do. 

Mr. PITTENGER. Thank you. 

We have a diverse economy that I think we all agree is better 

served by a very diverse financial set of institutions. Are you concerned with the shrinking number of financial institutions? I know 

we have lost, I think, 1,700 banks in the last couple of years. Do 

you think that our policies are driving this trend? What would you 

do to mitigate that? Do you think it makes sense to regulate large 

internationally active money centers the same way that you are 

going to regulate smaller banks? 

Mr. Smithy from Regions? 

Mr. SMITHY. Thank you. So, no, as we have stated, we think it 

is inappropriate to have the same regulatory framework and the 

same standards for banks of all sizes, and in fact just establishing 

an asset-only threshold does not get at the heart of the inherent 

risk of the banks. We are more in favor of having regulation that 

is tailored to the specific risks of the banks. So we would not think 

that is appropriate. 

Mr. PITTENGER. Mr. Atkins? 

55 

Mr. ATKINS. Yes. I think part of the problem that we have with 

respect to the banks in particular is the huge power of bank examiners and the bank regulators in a very arbitrary and capricious 

way to deal with banks in their regulatory realm. So I think that 

is what a lot of us—I was a Commissioner at the Securities and 

Exchange Commission where things tend to be more transparent, 

or hopefully so, than as compared to the banking side—I think that 

is what we are concerned about with respect to this potential designation process. 

Mr. PITTENGER. Mr. Wallison? 

Mr. WALLISON. In my prepared testimony, Congressman, I have 

a chart which shows that the capital markets and securities business has far outcompeted the banks in financing business. And one 

of the reasons they are doing that is that the banks are heavily 

regulated and very expensively regulated so that, as we just heard, 

more people are involved in the business of compliance than are actually making loans. That is a very troublesome thing and one of 

the reasons why the banks cannot provide the kind of financing 

that is much more efficiently provided by the capital markets. 

Mr. PITTENGER. It is troubling when the only jobs you create are 

compliance officers. 

Thank you. I yield back my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Illinois, Mr. Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman, and I am banking on 

the concept that the last shall be first one day. 

First, I want to address this to Professor Barr. Earlier, I know 

you said to Mr. Bachus that you think congressional oversight of 

FSOC would jeopardize its ‘‘independence’’ and therefore— 

Mr. BARR. Could I just correct that? 

Mr. HULTGREN. First of all, I disagree with that concept. I wondered if you would extend that rationale to other financial regulators. Should we stop all oversight of the Fed, the SEC, the OCC? 

Why should FSOC be beyond accountability to my constituents? 

Mr. BARR. Oh, I completely agree that it should be subject to full 

and complete congressional oversight. My response to Mr. Bachus 

was to his suggestion about whether a Member of Congress should 

participate in FSOC meetings. And my comment was that participation by Members of Congress in FSOC meetings would undermine Congress’ independence in exercising exactly the kind of oversight that you are doing today and that I think is absolutely critical to a functioning democracy. So I am 100 percent in favor of the 

oversight you are exercising on the FSOC and on the other financial regulatory agencies. 

Mr. HULTGREN. I appreciate you clearing that up. So you do support accountability and transparency and oversight there. 

Let me get on to some other things because I have some other 

questions I want to ask here quickly. I know throughout the hearing today we have discussed FSOC’s SIFI designation authority, 

which lets the FSOC impose a costly regulatory regime upon certain financial institutions. Unfortunately, I see that this largely unchecked authority will end up hurting Main Street instead of protecting it because it imposes unnecessary regulatory costs upon institutions that really pose no systemic risk to our financial system. 

56 

I want to ask about the structure of the FSOC itself and if it requires regulators to rule on topics in which they really have no expertise. One of the reasons that Congress delegates the task of regulation to independent regulatory agencies is that we expect the 

agencies to use their expertise and experience to tailor regulations 

that are effective and appropriate to meet specific needs without 

being unduly burdensome. I wonder, is the FSOC structure consistent with this expectation and does the FSOC structure give appropriate deference to experience and expertise? 

Maybe I will just start with Mr. Wallison, if you have a thought 

on that? 

Mr. WALLISON. I think that the Prudential case shows precisely 

the question you are asking is a problem. The two members of the 

FSOC who were insurance specialists and experts and are not employees of the Treasury Department dissented from the decision in 

the Prudential case, but it was voted overwhelmingly to designate 

Prudential. And who voted for that? It was bank regulators and it 

was regulators of other kinds of financial institutions, none of 

whom knew anything about what regulation of an insurance company would entail. In addition, they dissented because they 

thought that the standards that were imposed for the designation 

were also wrong. And, again, nobody paid any attention to them. 

So if we are going to have regulators, we want them to be specialists, we want them to understand the industries they are regulating fully, and here we have a set of regulators who can’t possibly 

understand all of the nuances of the individual industries that 

come before them. 

Mr. HULTGREN. I want to try and ask one last question in my 

minute left. As everyone knows, last September the Office of Financial Research released a study on the risks associated with the 

asset management industry. This study achieved instant notoriety 

here in Washington as it was criticized by almost everyone. Better 

Markets, which is not normally thought of as a bastion of deregulatory zeal, pointed out the inexplicably and indefensibly poor quality 

of the work presented in the report. In particular, most observers 

believed it largely ignored the extensive regulation of mutual funds 

that exist already and focused on dozens of hypotheticals about remote risks that are extremely unlikely ever to happen. 

My question is, what happens if the FSOC implements the logic 

of this flawed study and designates certain asset managers as 

SIFIs? Mr. McNabb, I know that this hearing has focused on how 

asset managers help everyday Americans. The problem is that people look at a company like BlackRock, which has around $4 trillion 

assets under management, and don’t think that it provides a Main 

Street service. I wonder if you could explain why it does? 

Mr. MCNABB. Far be it from me to talk about one of our largest 

competitors, but I will attempt to do the best I can. 

Mr. HULTGREN. Sorry about that. 

Mr. MCNABB. BlackRock manages nearly $2 trillion in mutual 

funds of that $4 trillion, and those mutual funds, much like ours 

or Fidelity’s or T. Rowe Price’s or any of the other big firms that 

you are familiar with, serve Main Street. Collectively, the mutual 

fund industry serves 95 million investors, roughly one out of every 

57 

two households. BlackRock also manages very large amounts of 

pension funds, which benefit everyday workers. 

Mr. HULTGREN. My time is pretty much up. And you would say 

other companies are in that similar situation of providing that 

service to Main Street? 

Mr. MCNABB. Totally. 

Mr. HULTGREN. With that, I yield back, Mr. Chairman. Thank 

you. 

Chairman HENSARLING. The time of the gentleman has expired. 

There are no other Members present in the queue, so I would like 

to thank our witnesses for their testimony today. 

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. 

This hearing stands adjourned. 

[Whereupon, at 1:08 p.m., the hearing was adjourned.] 

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