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S. HRG. 114–58 

FSOC ACCOUNTABILITY: NONBANK DESIGNATIONS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE TRANSPARENCY AND ACCOUNTABILITY OF THE 

FSOC’S SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS DESIGNATION PROCESS FOR NONBANK FINANCIAL COMPANIES 

MARCH 25, 2015 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

MICHAEL CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director 

JELENA MCWILLIAMS, Chief Counsel 

ELAD ROISMAN, Senior Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

WEDNESDAY, MARCH 25, 2015 

Page 

Opening statement of Chairman Shelby ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

Jacob J. Lew, Secretary, Department of the Treasury ......................................... 3 

Prepared statement .......................................................................................... 43 

Responses to written questions of: 

Senator Vitter ............................................................................................ 84 

Senator Toomey ......................................................................................... 84 

Paul Schott Stevens, President and Chief Executive Officer, Investment Company Institute ....................................................................................................... 26 

Prepared statement .......................................................................................... 45 

Responses to written questions of: 

Chairman Shelby ....................................................................................... 87 

Douglas Holtz-Eakin, President, American Action Forum ................................... 28 

Prepared statement .......................................................................................... 55 

Responses to written questions of: 

Chairman Shelby ....................................................................................... 87 

Senator Vitter ............................................................................................ 89 

Dennis M. Kelleher, President and Chief Executive Officer, Better Markets, 

Inc. ......................................................................................................................... 29 

Prepared statement .......................................................................................... 61 

Responses to written questions of: 

Chairman Shelby ....................................................................................... 89 

Gary E. Hughes, Executive Vice President and General Counsel, American 

Council of Life Insurers ....................................................................................... 31 

Prepared statement .......................................................................................... 78 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by the National Association of Insurance Commissioners ...... 91 

Statement submitted by Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute ................................. 94 

Statement submitted by Aaron Klein, Director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative ..................................................... 100 

Report submitted by the Bipartisan Policy Center ............................................... 106 

Letter of dissent submitted by Benjamin M. Lawsky, Superintendent of Financial Services, New York State Department of Financial Services ............. 122 

Roy Woodall and John Huff dissents on Prudential ............................................. 127 

Roy Woodall and Adam Hamm dissents on MetLife ............................................ 140 

Statement of the National Association of Mutual Insurance Companies ........... 153 

Statement submitted by Stephen D. Steinour, Chairman, President, and CEO, 

Huntington Bancshares, Inc. ............................................................................... 159 

(III)

(1) 

FSOC ACCOUNTABILITY: NONBANK 

DESIGNATIONS 

WEDNESDAY, MARCH 25, 2015 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 2:01 p.m., in room SD–538, Dirksen Senate Office Building, Hon. Richard Shelby, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The Committee will come to order. 

Today, the Committee will examine how the Financial Stability 

Oversight Council, or FSOC, designates certain nonbank companies 

as ‘‘systemically important.’’ First we will hear testimony from 

Treasury Secretary Jack Lew, who chairs the FSOC. We will then 

turn to a panel of experts. 

Dodd-Frank established FSOC to identify and mitigate risk to 

the financial stability of the United States that may arise from the 

material financial distress of bank holding companies or nonbank 

financial companies. There is no precedent in our regulatory regime 

for a Council like this. Further, when you give such a body extraordinary powers, those powers must be exercised with requisite care. 

The Council has the authority to designate a nonbank institution 

as ‘‘systemically important’’ and subject it to enhanced prudential 

standards and regulation by the Federal Reserve. This new layer 

of regulation does not come without a cost to our economy. Enhanced prudential requirements impose significant costs on banks 

and nonbank entities. 

Because much rests on an institution’s designation, I believe that 

FSOC has a heightened duty to be as transparent and judicious as 

possible. However, FSOC’s previous designations have been criticized for lacking transparency, failing to produce clear indicators to 

guide others, and merely following the international regulatory 

bodies. If such criticism has merit, Congress should be concerned 

because this is not how a regulatory regime ought to function. 

Our regulators should be transparent, issue clear guidance, and 

be free from the undue influence of international bodies. The Financial Stability Board, or FSB, is one such international body that 

monitors and makes recommendations about the global financial 

system. The FSB, however, is not a U.S. regulator, and it is not accountable to Congress or to the American people. 

Nonetheless, two out of the three insurance companies that 

FSOC has designated as ‘‘systemically important’’ were first desVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
2 

ignated by the FSB. I believe this creates a regulatory conflict because 3 of the 10 FSOC voting members—Treasury, the Fed, and 

the SEC—first engage at the FSB level to determine if a U.S. company is systemically important. 

When they return to the U.S. and supposedly engage with the 

rest of the Council to consider whether a company is systemically 

important, they have for all intents and purposes already, I believe, 

made up their minds. I think we must ask if the influence that the 

FSB seems to exert over the FSOC’s process is real and whether 

it is appropriate. FSOC designation process has little merit if it is 

merely used to justify an international organization’s determination, rather than engage in an independent analysis. 

Moreover, given that the designation is a determination of risk 

to the U.S. financial system, I think it should ensure that the steps 

to mitigate that risk are identified and articulated before a company is designated. 

While it has announced a series of steps aimed at increasing 

transparency, most critics do not believe that such efforts sufficiently address the concerns that have been raised. We must, 

therefore, ask the following questions: 

First, has FSOC clearly disclosed what factors make a company 

systemically important and the relative weight it has assigned to 

those factors? 

Second, is it clear what needs to occur to reduce the systemic 

risk of such a company? In other words, does a company know how 

to avoid designation to know how to be undesignated? 

Third, is the designation process sufficiently open, objective, 

data-driven, and free from the influence of outside organizations? 

Today’s panels will hopefully shed some light on these questions as 

the Committee considers whether changes to this process need to 

be made. 

At this point, without objection, I would like to enter into the 

record statements from the National Association of Insurance Commissioners; Mr. Peter Wallison; the Bipartisan Policy Center, including its report entitled ‘‘FSOC Reform: An Overview of Recent 

Proposals’’; Mr. Benjamin Lawsky, Superintendent of New York 

State Department of Financial Services, regarding the MetLife designation; dissents of Mr. Roy Woodall, independent member having 

insurance expertise on that; Mr. John Huff and Mr. Adam Hamm, 

State Insurance Commissioners representatives regarding the 

MetLife and Prudential designations. 

Today’s hearing will be compromised of two panels. The first 

panel will be the Treasury Secretary, Jack Lew, who also chairs 

the FSOC. 

Mr. Secretary, at this point we want to welcome you to the Committee. You are no stranger here. Your written testimony will be 

made part of the record, and we look forward to having a chance 

to talk with you. 

Senator Brown has joined us. Any statement you want to make? 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. I am sorry, Mr. Chairman. I did not hear your 

opening statement, but it is good to be here. Thank you so much. 

3 

Secretary Lew, welcome, and to the second panel, thank you also 

for joining us. 

As one of our witnesses on Tuesday pointed out, regulators did 

not exactly cover themselves in glory leading up to the 2008 financial crisis. Congress certainly played a role as well. We had a 

patchwork financial framework that allowed financial institutions 

to evade oversight and often pitted regulators in a race to the bottom. Nonbanks like AIG and Bear Stearns built up risks by moving 

activities to unregulated space. American taxpayers paid the price 

in lost homes and jobs and billions of bailout dollars. My wife and 

live in a zip code in Cleveland, Ohio, that had the highest rate of 

foreclosures of any zip code in the country several years ago. 

Secretary Lew’s predecessor, Secretary Geithner, proposed the 

FSOC to fill gaps in the regulatory framework and create a forum 

for agencies to resolve issues. The idea had the support of appointees of President Bush and of President Obama. 

FSOC is working. If anything, it is working too slowly. Since 

FSOC’s creation 5 years ago, it has only designated four nonbanks 

as ‘‘systemically important.’’ By my math, that is less than one a 

year. They have designated eight systemically important financial 

market utilities without any objections that I am aware of. 

This is a critical responsibility given the increased importance of 

clearinghouses under the derivatives clearing mandates in DoddFrank. FSOC provided a forum to force reforms to the structure of 

some money market mutual funds. It has been responsive to consumer and industry groups in their concerns about transparency. 

We hear a lot about transparency and accountability because they 

are concepts that no one should oppose. 

But I am concerned by proposals that would tie the FSOC’s 

hands, making it too burdensome for FSOC to designate any institutions, and taking us back to a time when no entity was responsible for watching over the entire financial system. That is why we 

welcome Secretary Lew to discuss that. I would look forward to 

hearing about FSOC’s work identifying and addressing risks, and 

I appreciate the Chair calling this hearing. 

Thank you. 

Chairman SHELBY. Mr. Secretary, welcome again to the Committee. 

STATEMENT OF JACOB J. LEW, SECRETARY, DEPARTMENT OF 

THE TREASURY 

Secretary LEW. Thank you very much, Chairman Shelby, Ranking Member Brown, Members of the Committee. I appreciate being 

here and look forward to my testimony today. 

As everyone here today remembers well, the financial crisis 

caused enormous hardship for millions of individuals and families 

and communities throughout the country, and it revealed a number 

of central shortcomings in our financial regulatory framework. We 

saw the consequences of lax regulation and supervision at financial 

firms like Lehman Brothers and AIG, names that are now written 

into history as companies whose failure or near failure contributed 

to the near collapse of our financial system. 

At the time, the regulatory structure was ill equipped to oversee 

these large, complex, and interconnected financial companies. This 

4 

outdated structure also meant that regulators had limited tools to 

protect the financial system from the failure of these companies. 

As a result, the American taxpayer had to step in with unprecedented actions to stop the financial system from collapsing. Congress responded with a historic and comprehensive set of financial 

reforms: the Dodd-Frank Wall Street Reform and Consumer Protection Act, which put in place critical new consumer protections. 

Equally important, this reform guarded against future crises 

while establishing as a matter of law that taxpayers never again 

be put at risk for the failure of a financial institution. 

To lead the effort to better protect taxpayers, Wall Street reform 

created the Financial Stability Oversight Council, for the first time 

bringing together in one body the entire financial regulatory community to identify risks in the financial system and work collaboratively to respond to potential threats to financial stability. Over 

the past 5 years, FSOC has demonstrated sustained commitment 

to fulfilling this critical statutory mission in a transparent and accountable way. 

The work has not been easy. We built a new organization and 

developed strong working relationships among FSOC members and 

their staffs to foster candid discussions, the exchange of confidential, market-sensitive information, and to encourage tough questions that must be addressed to make our financial system safer. 

FSOC now convenes regularly to monitor market developments, 

to consider a wide range of potential risks to financial stability, 

and, when necessary, to take action to protect the American people 

against potential threats to the financial system. 

Our approach from day one has been data-driven and deliberative, while providing the public with as much transparency as possible regarding our actions and views. We have published four annual reports that describe our past work and future priorities. Regularly we have opened FSOC meetings to the public. We have published minutes of all of our meetings that include a record of every 

vote the FSOC has ever taken, and solicited public input on both 

our processes and areas of potential risk. 

I and the other members nonetheless recognize that FSOC is a 

young organization that should be open to changes in its procedures when good ideas are raised by stakeholders. Just over the 

last year alone, FSOC has enhanced its transparency policy, 

strengthened its internal governance, solicited public comment on 

potential risks from asset management products and activities, and 

adopted refinements to its nonbank financial company designation 

process. 

I believe that our adoption of these changes to the nonbank financial company designation process represents the right way for 

FSOC to refine its processes without compromising its fundamental 

ability to conduct its work. 

After extensive stakeholder engagement, FSOC adopted supplemental procedures last month under which companies will know 

early in the process where they stand, with earlier opportunities to 

provide input. The changes will also provide the public with additional information about the process while still allowing FSOC to 

meet its obligation to protect sensitive, nonpublic materials. 

5 

And, finally, FSOC will provide companies with a clearer and 

more robust annual review process. This will open the door to more 

engagement with FSOC following a designation to make sure there 

is ample opportunity to discuss and address any specific issues that 

a company wants to put before the Council. These changes 

strengthen the FSOC process while also addressing many of the 

suggestions made from stakeholders. 

On a related note, I am pleased to report to this Committee that 

the vast majority of key reforms contained in Wall Street reform 

are now in place due to the hard work and diligence of the independent regulatory agencies. Today, because of the passage of Wall 

Street reform nearly 5 years ago, the financial system is more robust and resilient than it was before the crisis. We have reduced 

overall leverage in the banking system. Banks have added over 

$500 billion of capital since the crisis to serve as a buffer for absorbing unexpected losses. And the recently completed annual 

stress tests cover a wide swath of institutions, illustrating that our 

largest banks have sufficient capital to withstand adverse shock 

scenarios and continue to lend to businesses. 

The true test of reform should not be whether it prevents firms 

from taking risk or making mistakes, but whether it shapes a financial system strong and resilient enough to support long-term 

economic growth while remaining innovation and dynamic. In 

working toward this end, Treasury and the independent regulators 

continue to carefully monitor the effects of new reforms. Both the 

law and the implementing regulations make clear that there is no 

one-size-fits-all approach and that requirements must be calibrated 

to the different size, complexity, and risk profile of institutions. 

Just as the business environment is constantly evolving, the regulatory community must be flexible enough to keep up with the 

new challenges, including making adjustments where necessary 

and remaining vigilant to new emerging threats. 

Promoting financial stability and protecting the American public 

from the next financial crisis should be an objective shared by the 

Administration, regulators, the financial sector, and Members of 

Congress regardless of party or point of view. 

I look forward to working with you to make certain our financial 

system becomes even more resilient and stable, and I look forward 

to answering your questions. 

Chairman SHELBY. Thank you, Mr. Secretary. 

Mr. Secretary, in Stage 2 of the designation process, FSOC applies a six-category framework in its analysis of a nonbank financial company. Commentators have noted that the public has no 

clear understanding of the relative value or weight of these factors. 

What is FSOC doing to provide both the public and the designated companies with a better understanding of the relative 

weight of each factor? And what makes a designation more likely? 

Secretary LEW. Mr. Chairman, as you know, the process that 

FSOC uses is a very transparent one. It has been published. The 

criteria are out there. And each one is a separate review. 

I think it is a mistake to think about a one-size-fits-all approach 

because no two large, complex financial institutions will be exactly 

the same. So the relative weight of factors will be different dependVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
6 

ing on what the composition of a firm and the nature of the risk 

is. 

In each case, we apply the same review, which is a deliberative 

review. It involves details analysis, much back-and-forth between 

the firm and FSOC, and in the end hundreds of pages of analysis 

published and shared with the company. And we analyze basically 

three transmission channels for risk in each case, and we go 

through each of those, and if there is a determination that there 

is systemic risk, as the statute requires, we make a designation. 

But—— 

Chairman SHELBY. Do you go through those risks with who you 

are thinking about designating? Or do you just do this internally? 

Secretary LEW. Well, there is a lot of back-and-forth between the 

firm and the FSOC, and based on the new procedures we have put 

in place, it will be somewhat more formal. But I want to be clear: 

Even before the rules change, there was a lot of back-and-forth between the firms and FSOC already. So it is not that there was not 

thousands of pages of data and analysis provided. 

Chairman SHELBY. It is my understanding that multiple members of FSOC have submitted additional recommendations for improving transparency, which you mentioned, and accountability. 

What additional recommendations were submitted by members but 

not incorporated, in other words, you considered and did not incorporate? And what additional recommendations will FSOC adopt 

next and when? 

Secretary LEW. Well, Senator—— 

Chairman SHELBY. Is that too soon to tell? 

Secretary LEW. I was going to say, over the past year we have 

made two rounds of changes, which I think represent a consensus 

of the changes that we needed to make and actually reflect the 

views expressed by many Members of Congress and parties, stakeholders as well. 

We are going to continue to look at ideas that come forward and 

have not in any way ruled out taking further action. But I think 

that we ought to let the changes that we have made settle in so 

that the parties can deal with the system as it now stands. But we 

welcome an ongoing discussion, and as I think the actions show, we 

have made changes when they seem appropriate. 

Chairman SHELBY. Mr. Secretary, it would seem to me that in 

order to properly assess if FSOC’s designations are, in fact, reducing threats to our financial system, the FSOC would need to know 

what regulations and standards the Federal Reserve will impose on 

the designated companies. In other words, how can FSOC designate a company if the Fed has yet to promulgate rules to regulate 

such a company? Do you follow me? 

Secretary LEW. I do follow you, but, Mr. Chairman, as the statute requires, FSOC has to make a determination as to whether or 

not there is systemic risk. The task of supervisory responsibility 

goes to the Fed. The Fed is in the process of implementing those 

rules, and obviously Congress has now enacted some legislation 

that gives them greater flexibility to adopt rules that distinguish 

between, say, insurance companies and traditional financial institutions. 

7 

So I think that the process is moving sequentially, and as the 

firms have to comply, that process will unfold in an orderly way. 

But it is the Fed’s responsibility going forward. 

Chairman SHELBY. My follow-up question here would be: How 

can FSOC determine that it is reducing systemic risk when it has, 

one, neither identified the specific activities that create systemic 

risk or, two, has the knowledge of what regulatory steps would be 

taken to mitigate such risk? 

Secretary LEW. Well, the task of going through the analysis to 

determine whether there is a systemic risk is the responsibility of 

FSOC. By designating the firm, the firm then is subject to supervision under the statute by the Fed. I think that process is one that 

makes our system safer. I have confidence that the Fed will take 

that responsibility very seriously. 

Chairman SHELBY. But has the Fed done that yet? 

Secretary LEW. They are in the process of working it through. 

Chairman SHELBY. So they have not done it yet. 

Secretary LEW. No firm has had to go through the process of actually submitting all of the documentation through the process. 

They have been designated, and now there is a time where the Fed 

will put in place the rules that they comply with, and they will 

then comply. 

So I think some of this is a bit—it is a young organization. We 

have just designated the firms, and it is happening in proper order 

and due course. 

Chairman SHELBY. Are you building the cart before you buy a 

horse here? 

Secretary LEW. No, I do not think so, Senator. I think that the 

task that was given to FSOC, which no entity in the Federal Government had prior to the creation of FSOC, was to look across the 

spectrum: Where is the risk of the future possibly going to come 

from? The designation process was given to FSOC. The actual regulatory supervision is not—FSOC does not do that directly. So I 

think it is working in the right order, and I am not sure how to 

take the cart and the horse metaphor, but you need a cart and you 

need a horse, and—— 

Chairman SHELBY. Well, what do you need first? 

Secretary LEW. You need both. 

Chairman SHELBY. Yeah, but a cart without the horse is not 

going very far, is it? 

Secretary LEW. I think I have a lot of confidence that the Fed 

has a lot of experience with supervisory matters, and they are 

going through this in an orderly way to make sure that it is done 

in an appropriate way. 

Chairman SHELBY. Senator Brown. 

Senator BROWN. Thanks, Mr. Chairman. 

Mr. Secretary, you know this Committee has been discussing and 

improving regulation for credit unions and community banks. I 

have said that we on this side will support ideas that have broad 

bipartisan consensus. One issue as an example is the written privacy notice requirement if a policy has been changed. 

Today the House Financial Services Committee is marking up a 

set of proposals. Tell us what you think about the proposals they 

8 

are marking up, particularly those that would roll back some of 

Dodd-Frank’s consumer protections. 

Secretary LEW. You know, Senator, I think that if you look at the 

financial crisis and where the kind of root cause of the financial crisis was, a lot of it started with individuals entering into mortgages 

that were being sold to them on terms that could not be understood 

by a normal human being getting a mortgage. And then the financial crisis hit, and all these mortgages were exploding. 

We have created a set of protections for consumers now which I 

think will make it almost impossible for that to happen again. We 

have much clearer documentation. We have much simpler documentation. We have more disclosure. We have prohibitions on some 

of the most dangerous practices, you know, things that—the lowdoc, no-doc loans and, you know, balloon payments that you could 

not really see that were in the documents. 

And I think if you take away those kinds of consumer protections, you are exposing individuals to a great deal of risk, which 

is one problem. You are also reopening the possibility of a broader 

set of systemic risks. 

So I think that these are important things that we have accomplished through Dodd-Frank and the implementation of DoddFrank, and, you know, the Consumer Financial Protection agency 

has done, I think, a tremendous job taking these issues and putting 

them in place in a way where actually, as you talk to people in the 

industry as well as consumer advocates, there is a lot of respect for 

the way a lot of that was done. And I think, you know, rolling that 

back would be a mistake. 

We have made clear that any amendments to Dodd-Frank that 

undermine the core provisions of Dodd-Frank are just not going to 

be acceptable, and I certainly hope that as the Congress proceeds, 

it is with a spirit for strengthening financial protection, not weakening it. 

Senator BROWN. Thank you, and that is why I am hopeful in discussions on this Committee that we come together in a way that 

there really is bipartisan consensus not to score political points but 

to really fix some of the more minor parts of Dodd-Frank on which 

we have agreement. So thank you for coming today. 

Let me talk about yesterday and some other discussions we have had. The Committee has talked about the $50 billion threshold for 

the Fed’s enhanced prudential standards for bank holding companies. What have you heard from industry? Do you believe the agencies can tailor these regulations to address these concerns? Do you 

believe that we should? 

Secretary LEW. Senator, I believe that the law was written with 

a great deal of flexibility, and it has been implemented with a great 

deal of flexibility. It is not a one-size-fits-all approach. I think that 

$200 million financial institutions are different than $50 billion institutions, which are different from $2 trillion institutions. 

You know, I think if you look at the work that the regulators are 

doing, they are open to the ideas of using that flexibility to provide 

the kind of nuanced approach that the law envisioned. 

I think it is premature to legislate in this area because I think 

there still is regulatory flexibility, and the regulators have shown 

a desire and an interest in using that flexibility. 

9 

I would also say that we have to be careful to assume that there 

is only risk above a certain size. We have seen financial crises come 

from large institutions, and we have seen them come from smaller 

institutions. And we should not be overregulating small institutions that do not present risk. But if there are issues of risk, we 

ought to not just say that because an institution is X dollars that 

risk is not there. 

Senator BROWN. Thank you. One final issue. Last year, we discussed concerns that I and a number on this Committee had about 

financial deregulation and disarmament, if you will, through international agreements. I am especially worried that including financial services in the TTIP, the Transatlantic Trade and Investment 

Partnership, could undermine U.S. financial regulations. Last year 

and in your testimony before the House Committee last week, you 

stood firm in not including financial services in TTIP. I urge you 

to continue that advocacy in international negotiations to preserve 

our regulators’ authority to do whatever is necessary to make sure 

that this financial system, which you have worked so hard to make 

safer and sounder, will—you will be consistent in that. 

Secretary LEW. Senator, I can assure you that I have reiterated 

that view with the new leadership in Europe. They have changed 

over who is responsible for this. I met with Lord Hill recently. So 

I have reiterated our very strong view that prudential regulation 

ought not to be subject to review in a trade context. 

Chairman SHELBY. Senator Corker. 

Secretary LEW. On the other hand, we do believe market access 

is an appropriate issue to be addressed in the trade context. 

Chairman SHELBY. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. I appreciate it. Mr. 

Secretary, thank you for being here and for your service. 

Let me ask you, would you consider Freddie and Fannie or GSEs 

to be systemically important? 

Secretary LEW. Senator, I think that there is no doubt but that 

when you look at the financial crisis in 2007–08, they were—— 

Senator CORKER. A ‘‘yes’’ will work. 

Secretary LEW. The question of using a label until it has been 

reviewed is one I am going to avoid. 

Senator CORKER. I do not mean definitionally, but it is certainly 

systemically very important. Is that correct? 

Secretary LEW. I think there is no doubt that the GSEs were at 

the heart of the last financial crisis. 

Senator CORKER. And at present, we are in essence controlling 

100 percent of them. We are guaranteeing every single security, 

our Federal Government is, that they offer. Is that correct? 

Secretary LEW. Well, as long as they are in conservatorship, yes. 

Senator CORKER. And as I understand it, the administration has 

no plans whatsoever to sell off our preferred shares and IPO them. 

You are waiting for Congress to act. Is that—— 

Secretary LEW. Well, Senator, as you know, we worked closely, 

as you and others were developing legislative proposals in this 

area. We believe it is important for there to be legislation, and GSE 

reform can only really happen properly through legislation. We are 

using the tools we have to manage effectively in the interim, but 

I think taxpayers are exposed to the risk still. 

10 

Senator CORKER. A hundred percent. 

Secretary LEW. And GSE reform is the answer to it. 

Senator CORKER. And every single security they issue, the taxpayer is on the line for, right? Because we are standing behind 

what they are doing. They could not sell a security without the 

eagle stamp. Is that correct? 

Secretary LEW. Now, I will say that they are under heightened 

supervision compared to before the financial crisis, so the practices 

are different, and a lot of the laws that we have put in place and 

the FHFA oversight is meaningful. But fundamentally, as long as 

they are in conservatorship, there is a guarantee. 

Senator CORKER. So we certainly have an explicit, explicit, explicit guarantee because we as taxpayers are guaranteeing everything they are doing. 

Secretary LEW. And I know that I do not need to tell you this 

because you put so much time and effort into the issue of housing 

finance reform, but the process of defining what exposure the taxpayer has would limit and contain that risk in a way that it is not 

without legislation. 

Senator CORKER. So, in essence—you sure are taking a lot of my 

time with your answers. In essence—— 

Secretary LEW. I was trying to compliment you. 

Senator CORKER. Thank you. I do not need it. 

[Laughter.] 

Senator CORKER. So, you know, in essence, while we do not act, 

we continue to have a huge liability. And for those who are worried 

about guarantees, we have the maximum guarantee we could possibly have right now because we are guaranteeing every single 

thing that they do. And we need to move ahead to deal with that, 

or we keep this liability on our books. So I appreciate that. 

Let me ask you another question. Forget yourself. The FSOC— 

I know we all debated this FSOC being set up, and I know that 

you are getting some questions from the Chairman and others, 

questions that I have also about de-designation and all of those 

kind of things. 

Do you think it would be better, as you sit where you are—you 

are part of an administration, have not been exactly high levels of 

cooperation between the branches. Would it be better if we had 

someone who was not a political appointee as head of FSOC, somebody that truly was more independent, and when that calls it over 

time—forget yourself. I am sure you believe you are 100 percent 

independent. But in the future, would it make any sense for us to 

consider someone other than the Treasury Secretary being the 

head of FSOC? And keep it fairly short, if you will. 

Secretary LEW. If you look back before FSOC, there was no 

mechanism to have the kind of conversations we have now. You 

look at how much progress we have made in a fairly short period 

of time, and you look how central the players are, including the 

Treasury Secretary, to this process, I think bringing somebody 

independent in to do it is not necessarily going to lead to a better, 

more cohesive result. 

Coordinating independent regulators is going to be a challenge 

for whoever chairs the Commission because they each have an 

independent charter and they each have independent responsibilVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
11 

ities. And, you know, I may bring my own unique perspective to 

this, having been in a coordinating role in other jobs. I think it behooves whoever is Chair, whatever their position is, to be respectful 

of that independence, but also driving toward a common understanding of where risks are and what actions need to be taken. And 

I am actually pretty proud of the work that FSOC has done in a 

short period of time. So I would not be in a rush to make a change 

like that. 

Senator CORKER. If I could just say one last thing, Mr. Chairman, I believe that America should honor its commitments, and I 

think when we do not do that, we undermine ourselves. And as you 

know, I have supported us carrying out the IMF reforms that actually began under George Bush that you all have followed through 

with—or actually have not, and that is the point I want to make. 

I support those. We have tried to work with the administration to 

make those happen and just have found it difficult to get the administration to make one phone call in some cases to work out 

something where Republicans and Democrats could agree with IMF 

reforms. 

I got a letter from you in the last couple days where you said— 

insinuated that we could do away with the NAB, the line of credit, 

if we could actually put our quota in place, and I think that would 

be very helpful if you all would proffer that as a real proposal. But 

I just have to tell you, as I watched the Asian—the AIIB being 

formed—I know they have been looking at it for a decade. I got it. 

But I just think this administration’s inability—inability—to competently move ahead and put the Senate and the House in a position to put those reforms in place, because you do not really pursue 

it aggressively, you do not do the things that you need to do to sell 

it, I think it damages our country. And I think we are seeing it 

play out right now, and I could not be more disappointed. And even 

though I agree with you on the reforms, I just do not think you all 

are carrying out your responsibilities appropriately. 

Secretary LEW. Mr. Chairman, may I just respond briefly? 

Chairman SHELBY. Go ahead. 

Secretary LEW. Senator, I know that you and I agree on the critical importance of the IMF reforms being approved. I obviously do 

not agree with your characterization of the administration’s efforts. 

I think we have been pursuing this zealously. It should have happened a long time ago. It should never have been tied to unrelated 

extraneous political issues. And I think there is a growing understanding now with the Asian Infrastructure Bank’s formation of 

how much it weakens the United States that we have been unable 

to ratify the IMF reforms, which do not actually commit new resources; it just shifts resources from the New Arrangement to Borrow into the capital fund. 

I remain optimistic that we can get it done. We are continuing 

to press forward. We will continue to press forward. And I think 

I have made every phone call anyone has even thought about, 

much less suggested. You know, it has not been for lack of contact. 

It has not happened yet. It needs to happen, and it needs to happen in a bipartisan way because it is in our country’s interest. It 

hurts the United States every day that it is not ratified. 

Chairman SHELBY. Senator Warren. 

12 

Senator WARREN. Thank you, Mr. Chairman. Thank you for 

being here, Mr. Secretary. 

You know, a company does not need to be a bank to pose a serious threat to the financial system and to the economy. AIG, Lehman Brothers, Bear Stearns—we learned that lesson the hard way 

during the financial crisis. And that is why Dodd-Frank gives the 

Financial Stability Oversight Council the authority to designate 

nonbanks as ‘‘systemically important’’ and subject them to extra 

scrutiny by the Federal Reserve. 

Now, the whole point of the FSOC designation process is to make 

the financial system safer, and one way it does that is by imposing 

higher capital standards and greater oversight on systemically important companies. 

But the other way it can make the system safer is by providing 

an incentive for designated companies to change their structure or 

their operations so they can reduce the risks that they pose and 

change their designation and the amount of oversight that they require. 

In many ways, the second outcome is even more desirable than 

the first because it would allow businesses to find the most efficient 

way of reducing the risks that they pose to the economy. 

Secretary Lew, do you think the FSOC designation process currently provides companies with the information and the opportunities they need to make changes in their business activities and potentially reverse the designation as systemically important? 

Secretary LEW. Senator, I do. I think if you look at the designation process, there is a huge amount of information that goes backand-forth between the companies and FSOC, and then there are 

several hundred pages of analysis which shows where the risk 

transmission is and what it is related to. 

For most of these firms—let us leave the market utilities to the 

side; they are kind of a special case. But for the complex financial 

firms that have been subject to designation, they have inherently 

complex business structures. So it is not necessarily an easy thing 

to unpack what it would take for them to become—to de-list. But 

they know—they know what it is that creates the basis for the designation, and—— 

Senator WARREN. Good. And—— 

Secretary LEW. ——every year they are reviewed, so it is not like 

you are designated and we never look again. It is an annual review. 

Senator WARREN. Well, let me just ask then about how collaborative the process is. Can companies meet periodically with FSOC 

staff? Can they appear before the full Council to discuss possible 

approaches to deleveraging their risk? 

Secretary LEW. Well, to date, the appearances before the Council 

have been at an appeals stage after the designation was initially 

put before the Council. So it is not an ongoing contact. There is ongoing contact between the firms and the FSOC staff, which I think 

is appropriate. 

Senator WARREN. All right. And I just want to be clear on this, 

because I want to make sure nobody has any doubts about how this 

works. Is FSOC willing to reverse the designation of a company if 

it finds that the company no longer poses systemic risk? 

13 

Secretary LEW. That is what the annual review process is all 

about. Every year you have to make the determination again. 

Senator WARREN. So use the magic word here: Yes? 

Secretary LEW. Yes. 

Senator WARREN. Yes. Good, good. I know that Dodd-Frank also 

permits FSOC to designate specific activities that companies engage in rather than specific companies as posing significant risks. 

Is FSOC open to the possibility of reversing designation of a company as high risk and instead designating only certain activities 

within the company that the company engages in as risky? 

Secretary LEW. Well, I am going to have to say that I am not 

sure I understand what the process that you are describing is. The 

designation authority applies to the firm. When we are doing an 

activity review—— 

Senator WARREN. Well, let me just make sure that we are on the 

same wavelength on the question. Dodd-Frank also permits not 

just the designation of a whole firm, but not designating the firm 

and focusing on a specific portion, a specific activity that the firm 

engages in. 

Secretary LEW. So in our review, for example, of asset managers, 

we put out a public notice where we ask for comment on our inquiry into an activity review of those firms. We have not yet completed that, so I do not know what form an action would take, if 

there were any action required. I am also not sure it would be 

FSOC as opposed to regulatory agency action that would flow from 

that. 

So I think it is hard to answer the question in a simple yes-orno way. We have gone through the designation process for firms. 

We have never designated an activity that I am familiar with. 

Senator WARREN. All right. It is simply a reminder. Dodd-Frank 

gives you a lot of flexibility in these circumstances. And if you need 

it, I just want to be sure that you are there to use it when appropriate. 

Secretary LEW. And we think it is very necessary to be looking 

at activities, which is why we have opened up in the asset manager 

area the activity review, because, frankly, starting by looking at 

firms, it seemed like we might miss where the real risk was if we 

did not look at the activities. 

Senator WARREN. So the FSOC designation process is critically 

important to ensuring the safety of our financial system and guarding against another crisis. I think it is important to recognize that 

designation can achieve that out by encouraging companies to 

change their structure or the operations. I am glad FSOC is committed to working with companies to make sure that they can accomplish that alternative results. Thank you, Mr. Secretary. 

Chairman SHELBY. Senator Cotton. 

Senator COTTON. Thank you, Mr. Secretary, for your time today. 

I want to follow up on Senator Warren’s line of questioning about 

the FSOC designation process. You said that FSOC can reverse a 

decision at its—I think you said the annual review. 

Secretary LEW. Each of the designations is subject to an annual 

review after designation, so we have to officially act on that annual 

review. 

Senator COTTON. And you have not done that yet, have you? 

14 

Secretary LEW. Well, we have on a number, but it is obviously 

very early in the process to be going—we have only had the first 

annual review. 

Senator COTTON. So rather than the FSOC changing, modifying, 

or reversing a decision, what if the designated institution simply 

disagrees? What recourse does it have? 

Secretary LEW. Well, institutions have multiple points of recourse. At the point of designation, they can appeal to the Council 

itself, and they have recourse to the courts if they continue to want 

to pursue their appeals. 

Senator COTTON. So as with any traditional agency decision, an 

institution designated as systemically important could just use the 

Administrative Procedures Act to appeal to a Federal court? 

Secretary LEW. They can go to court to challenge the determination, yes. 

Senator COTTON. Has that happened yet? 

Secretary LEW. There is one pending appeal. 

Senator COTTON. OK. Thank you. 

The Financial Stability Board, are its decisions binding on the 

United States? 

Secretary LEW. The Financial Stability Board is a deliberative 

body that sets goals that countries aspire to, but it does not make 

policy for any of the constituent countries. Each of us has our national authorities that make decisions for the companies that we 

are responsible for in the economy that we are in. 

So we make at FSOC the decision to designate a firm. The FSB 

cannot designate a firm for us. 

Senator COTTON. Is there an instance in which FSOC has deviated from the FSB’s statements or policy—— 

Secretary LEW. I would have to go back and check. Obviously, 

there is a limited amount of history here because both are relatively new organizations. But I would be happy to get back to you. 

Senator COTTON. OK. So the FSOC has issued a notice asking for 

comments about whether asset management activities can pose 

systemic risk. I believe that closes out today. 

Secretary LEW. I believe today is the deadline. 

Senator COTTON. The FSB has moved forward, though, with a 

proposal that seems to make a number of assumptions that SIFI 

designation of asset managers or funds is a virtual foregone conclusion. Would you explain, you know, the FSB’s announcement and, 

given the tendency of the FSOC to follow FSB, whether or not this 

is already a foregone conclusion? 

Secretary LEW. No. I mean, I can tell you that there is no foregone conclusion of what the action at FSOC will be. I think if you 

look at the course that we have taken as we have looked into asset 

management, it has reflected what I think is the right approach, 

which is to be data-driven and analytically driven. As we went 

through the process of thinking about doing it on a firm-by-firm 

basis, we came to the conclusion that we thought an activities review was the better way to put most of our current energy. We 

have reserved the right to go to firms. We have not said we are 

going to go one way or the other. But we indicated that we are putting additional resources into the activity review. The notice that 

you are describing was the outgrowth of that discussion. We have 

15 

not yet even gotten all the comments. So I would never prejudge 

what our action is until we have done a complete analytic review. 

Senator COTTON. OK. While I have you here, I want to ask you 

a question about Iran and specifically Iran sanctions. Ayatollah 

Khamenei over the weekend said that all sanctions must be lifted 

immediately for there to be any agreement with the P5 plus 1. 

Could you explain to us the administration’s position relative to 

that statement? 

Secretary LEW. I think that we have been clear that our sanctions will remain in place until we reach an agreement and will not 

be removed unless we reach an agreement that assures us that 

Iran will not be able to get nuclear weapons. Obviously, there is 

a negotiation going on, so there is not yet an agreement to describe, 

and I cannot tell you whether it will reach a positive outcome. But 

I can tell you that there will not be any lifting of sanctions if we 

do not get an agreement that assures us that Iran will not get nuclear weapons. 

Senator COTTON. Well, he had said that for there to be an agreement, sanctions must be lifted. In fact, I think his exact words 

were, ‘‘The lifting of sanctions is part of the agreement, not the outcome of the agreement.’’ 

Secretary LEW. Sanctions have always been a means to an end. 

The goal is to stop Iran from getting nuclear weapons. The time at 

which sanctions will either be suspended or terminated is subject 

to negotiation, but it is conditional on reaching a successful end, 

which means that Iran cannot have nuclear weapons. And that is 

what they are in place for, and they will not be removed if we do 

not get that assurance. 

Senator COTTON. Subject to negotiations is also subject to congressional action since this Congress created the sanctions in the 

first place? 

Secretary LEW. I think the termination could only be done by 

congressional action. Obviously, they are implemented pursuant to 

Executive authority, and there could be a suspension without congressional action but not a termination. 

Senator COTTON. How long do you think the President has the 

authority to suspend those sanctions? 

Secretary LEW. I am not aware of its conditions based on a time 

basis, as best I understand. 

Senator COTTON. All right. Thank you. I am over my time. 

Chairman SHELBY. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. I am tempted almost to follow on that line of questioning, but I am not. 

As we saw in the financial crisis, risk can build anywhere in the 

financial system regardless of the types of entities involved or the 

jurisdictional boundaries of regulators. And the Wall Street Reform 

Act established the Financial Stability Oversight Council to identify financial stability risk that may be building in the shadows 

and bring them to the light to improve coordination and fill in any 

gaps in supervision. And its most important tool is its power to 

designate nonbank financial companies for enhanced supervision 

and regulation. And that is a tool that is both powerful but also 

one that needs to be appropriately used. So let me ask you some 

16 

questions in this regard. I want to follow up Senator Warren’s just 

to make sure I understood your answer. 

Earlier this year, FSOC announced an updated procedure for 

considering possible nonbank SIFI designations, including more engagement earlier in the process when a company is under consideration. So the question is: When FSOC is considering a company for 

possible designation, to what extent does the updated process allow 

for a discussion of steps the company can take if it wants to avoid 

a designation, for example, by reducing its size or modifying its activities? 

Secretary LEW. Senator, there is enormous back-and-forth between the firms and FSOC as we go through the analytic process. 

I think that the revised procedures formalize some things in a way 

that is helpful, but it was the case before we changed the rules and 

it is certainly the case going forward. 

In the exchange, the analysis of where the risk transmission 

channels are is discussed. There are very different views presented 

sometimes by the firms in terms of ways to analyze it. As you analyze where the risks come from, it also shows you, you know, what 

it is about the structure of the firm that is giving rise to the designation. 

It is often in the case of a complex financial firm, the inherent 

business model, you know, that is the issue. So while there is a 

path for understanding it, it may or may not be attractive to 

change some of the basic structure. 

Senator MENENDEZ. But if it is not just the entirety of a business 

model that has to be changed, but if, in fact, a particular size is 

the trigger that FSOC is looking at, or if it is particularly an individual or series of activities, is there an opportunity for the company, if it chooses to do so—it may not. It may choose to refute 

your assertion of them being systemically risky. But is there an opportunity for them to modify their activities or size based on its engagement with FSOC where the Council would take into account 

those steps—— 

Secretary LEW. Sure. 

Senator MENENDEZ. ——if the company sought to do so? 

Secretary LEW. Yeah, I mean, it is not—as I said to Senator Warren, it is true not just in the initial review process, but each year 

there is an annual review of a designated firm, and if a firm 

changed its business model, its structure so that the risk issues 

had changed, that could give rise to a de-listing, having the designation removed. 

Senator MENENDEZ. Is it possible before—let us say you have not 

designated a company yet, and you identify that, in fact, here is 

why we are looking to—we may be listing you, can the company 

before you get to that point say, ‘‘Well, wait a minute. If you think 

X, Y, or Z activity is what is going to create systemic risk, then I 

want to be able to change the course’’? 

Secretary LEW. I think it would theoretically be possible. Obviously, as a theoretical matter, it is different than in the real world. 

Senator MENENDEZ. I am not looking for theory. I am looking to 

know if, in fact, there is—what is the use of engaging with a company if it is not to both come to a conclusion as to whether it is 

systemically risky, what activities are systemically risky, and if it 

17 

wishes to avoid the designation because of the consequences that 

flow from that, give it the opportunity to do so? To me, that is not 

theoretical. It just makes common sense. 

Secretary LEW. So if I can just take one step back, the designation is rarely related to one specific marginal activity. I am not 

aware of any designation that turns on one marginal activity. It is 

looking at the entirety of a complex financial institution’s actions 

and the risks created. 

In the course of that discussion, the firms understand what it is 

that is being looked upon as the source of risk. They have the opportunity to offer evidence, A, to contradict that view and to challenge it and give rise to us reaching a different conclusion. And 

they would also have the ability to change the nature of their business to eliminate the source of risk. And the thing that I am trying 

to be clear about is that it is not that there is—it would be a mistake, I think, to have kind of a notion of this being a mechanical, 

mathematical process where there is a number that determines 

where the risk is. It is a much more complicated review process in 

there. That is why there is a several-hundred-page analysis that 

supports the designation. It is not just a mechanical, arithmetic exercise. 

Senator MENENDEZ. I get it. I think there is a—one final question, if I may. To the extent that FSOC is considering designating 

an entity as a nonbank SIFI, a company from a different industry 

or with a different structure from previous designees or companies 

historically regulated by the Federal Reserve, what step is the 

Council taking with the Fed to refine what the consequences of 

designation would be? And how is the FSOC working with the Fed 

to make sure its rules and supervision are properly calibrated to 

the risks identified by FSOC and appropriately tailored to the type 

of firm that is being proposed to be covered? 

Secretary LEW. Senator, I think that the Fed has a fair amount— 

some flexibility within its existing authorities and with the enactment of legislation, the Collins amendment, they now have additional authority to come up with capital standards that are appropriate for insurance companies, say. And I think it is important 

that they have the flexibility to do it in a way that is sensible in 

supervising institutions that have different characters. I do not believe that there are—or one-size-fits-all solutions and the flexibility 

to treat companies of different size and of different characters differently is a good thing. 

Senator BROWN. [Presiding.] Senator Heller. 

Senator HELLER. Thank you very much to the Ranking Member. 

I am just pleased that there is not a nonsourced inaccurate chart 

here today. 

Senator BROWN. Your jokes are better all the time, Senator Heller. 

[Laughter.] 

Senator HELLER. Mr. Secretary, thank you for being here, and 

thank you for your time. 

Secretary LEW. Nice to be here, Senator. 

Senator HELLER. And thanks for your expertise and for everything that you do. 

18 

Some of the changes that FSOC made recently for these institutions, obviously like everybody here in this room, they are certainly 

hearing a lot from their small banks, their medium-sized, the regional size, and obviously the big banks out there. And some of the 

changes that you did make there, I think it is moving in the right 

direction. 

Secretary LEW. Thank you. 

Senator HELLER. And I think others are saying the same thing, 

that these are good movements, going the right direction. Can I ask 

you just a series of questions to ask you a little bit more about 

some of these changes so that when I get these phone calls, I can 

answer certain questions? 

Secretary LEW. Sure. 

Senator HELLER. The first one has to do with Stage 2 designation. The changes that you made with FSOC, will it now provide 

a financial institution under consideration access to all that information before the Stage 2 review? In other words, will they know 

what the criteria is for Stage 2 review? 

Secretary LEW. Senator, I think that the general criteria are 

clear to all the firms. They are laid out in the rules that were 

adopted by FSOC. They are not kind of simple, quantitative lines 

where you are above or below, it is on or off. And I do not think 

that would be appropriate because there are no two firms that 

present with exactly the same risk profile. So there are different 

kinds of firms, and these are complex financial institutions. So it 

is an iterative process. It is a conversation. 

What is consistent is that the analysis is done to look at the different risk transmission channel mechanisms, and the firms very 

much understand the analysis that we are doing and what factors 

influence that analysis. 

Senator HELLER. Did the recent changes change any of the criteria for Stage 2? 

Secretary LEW. It changed the process, not the substantive criteria. 

Senator HELLER. Can you say the same thing is true at Stage 3? 

Secretary LEW. Well, these were just process—these were not 

meant to be substantive changes in the sense of what the standards for review are. It was meant to open—it was to address the 

concerns that firms had, that they wanted to have more interaction 

in a more formal way earlier in the process. 

Senator HELLER. Did any of these changes say that FSOC would 

provide the primary regulator of any financial institution its full 

nonpublic basis for designation before FSOC actually voted on it? 

Secretary LEW. FSOC has its own independent responsibilities. It 

consults broadly. It hears from primary regulators. It hears from 

interested parties. And in the end of the process, it issues a public 

statement that is rather lengthy. It is like 30, 40 pages of what the 

basis is. And the party gets hundreds of pages which they are obviously—— 

Senator HELLER. Is that before or after the designation, though? 

Before or after the designation? 

Secretary LEW. Well, they see the review in its final form after, 

but they are very much aware of the analysis during the process. 

19 

Senator HELLER. Some of these changes that you made recently 

with the FSOC, are they nonbinding? In other words, can this 

change in the future? 

Secretary LEW. Obviously, rules that are made can be changed. 

We changed them, I think as you indicated, to respond in what I 

think is an appropriate way to comments that we received. I think 

that the effort to make the process more transparent is a good one. 

I do not think there is going to be—— 

Senator HELLER. I do, too, by the way. 

Secretary LEW. And I do not think that there is going to be any 

meaningful pressure to go the other way. So while as a technical 

matter, you know, just like Congress can change the law, the Council can change its procedures. But there is no intention here to be 

going back and forth. 

It is a young organization, 5 years old. It was a good process 

from the beginning. It has been made stronger. And, you know, I 

would say that the only changes that I would anticipate are ones 

that were further refinements and improvements. I just do not 

hear any debate about kind of going back. 

Senator HELLER. I am running out of time, but just real basically, what I am hearing and what the concerns of these financial 

institutions are is that they do not know if there is an off ramp. 

In other words, once you are designated, is there a way to get out? 

They are not certain that there are criteria out there today that 

they can look at—actually, they do not know what the criteria are 

to getting designated, let alone how to get out once they are designated and if they are designated. Do you believe you are closer 

to answering that question with these new changes? 

Secretary LEW. Well, Senator, I have tried this afternoon to answer. I think there is an—there is an annual review process. That 

annual review process is one that is serious and gives rise to the 

possibility of removing a designation. Obviously, a firm would have 

to change the character of the risk it presents in order for that 

change to be made. They have a very clear analysis, hundreds of 

pages of detail, and if they choose to change their business to address those issues, that would be something the Council would review and could lead to a removal of the designation. 

Senator HELLER. Mr. Secretary, thank you. 

Thank you, Mr. Chairman. 

Senator BROWN. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. I would like to 

thank Senator Tester for letting me jump line. 

I want to stay in this same vein, and I want to just for the record 

note as well that the original draft of Title 1 and 2—nothing to do 

with you, Mr. Secretary; I think you have done a fine job—did have 

an independent Chair, because the notion of an independent Chair 

that had sole focus of trying to bring this level of collaboration I 

think would be important. 

I do feel what Senator Heller has mentioned, Senator Menendez 

has mentioned, Senator Warren has mentioned, and I want to mention is I do not—I think many of the firms, particularly the 

nonbank financials, you know, those of us who were very involved 

in Dodd-Frank, there was no intent to create a Hotel California 

provision. You know, there was always this ability, I think as SenVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
20 

ator Warren said, to de-designate. And I personally believe that, 

again, new organization, new entity that in these original designations, there was not that lack of—there was a lack of clarity and 

information sharing that would have allowed a firm to make a determination to sever one type of activity, because as we said earlier, it is not just size. It is activity. And I think your improvements 

in the process potentially take us a step further down that path. 

My hope is that we will have some evidence of some firm with this 

new collaborative process, you know, being able to make the 

choices and exit out early. 

But I would ask—what I would say—what I would wonder is you 

are saying they have this chance at the end of each annual review. 

Has any firm started down—perhaps you do not want to designate 

a specific firm, but has any firm said, ‘‘Hey, on the annual review 

we want out, and we are going to go about the following items’’ or 

indicated that intention? 

Secretary LEW. Senator, we are so early in the process, firms 

have not even yet really been subject to the Fed supervision. So we 

are in the first innings of this process. 

I think that the test will come over time as firms think through 

what the supervisory process means and make the business judgments as to whether or not they want to change their business in 

order to have the annual review reach the conclusion that they 

should be de-designated. It was never meant to be, you know, a 

process that only could go one way. And I think even the early designations give the kind of analysis that firms understand the basis 

of what they would have to change in order for the annual review—— 

Senator WARNER. But I think what we, at least this Senator will 

be watching, because I do think there are firms who have indicated 

that they would like to find a way out, certain firms have been taking certain actions to appropriately deleverage and shrink in size. 

Secretary LEW. It certainly is possible if they do that, yes. 

Senator WARNER. Well, again—— 

Secretary LEW. And I do not mean to be skeptical about it. I 

just—— 

Senator WARNER. I know. There are firms that I think are affirmatively saying they are going—would like to go through that 

process, and hopefully we will see an example of it. 

Let me hit a couple of other points since Senator Tester has been 

patient. I want to go back again as well to Senator Corker’s point 

on GSE reform, and I appreciate the administration’s support. I 

wish we could—— 

Secretary LEW. I would offer the same compliment, but I got 

criticized for taking time when I did it before. 

Senator WARNER. No, no. I will take it. 

[Laughter.] 

Senator WARNER. But I do think about the fact of the $5 billion 

a year that would have been committed, close to $5 billion for lowincome, first-time, minority homebuyers that would have been extraordinarily valuable, and the fact that we would have dramatically removed this risk to the taxpayer. Do you have any comment 

about the Inspector General’s recent report about the health of 

Fannie and Freddie? 

21 

Secretary LEW. Look, I think that the potential risk remains 

there until we have real GSE reform. I think that we are much better off now, in a better position now than we were before, the different kinds of mortgages, different kind of oversight. But it is not 

a good permanent situation. 

Senator WARNER. It is not a good permanent situation, nor—— 

Secretary LEW. And we need legislation to really fix it, as you 

know. 

Senator WARNER. Neither would recapitalization of the existing 

entities—— 

Secretary LEW. You need to recapitalize, you need to define what 

the Federal exposure is narrowly, and you need to deal with—— 

Senator WARNER. I am saying I do not think recapitalization 

would make the right—let me go—because I have been—Senator—— 

Secretary LEW. No, I do not think recapitalization of these firms, 

but you need to have firms that are capitalized. 

Senator WARNER. Right. You need private capital in. 

Secretary LEW. That is right. 

Senator WARNER. The last question I would have is as much a 

comment as a question. My hope was going to be that FSOC was 

going to not only be something that added additional regulatory 

structure but in many cases would be that court of last appeal for 

regulations when you have conflicts between regulatory agencies. 

So far we have not seen much of that. I hope that would be in its 

future. 

Secretary LEW. You know, I would say this: FSOC does not have 

the power to tell independent regulators what to do in most of their 

areas of independent authority. But where it has been given authority to coordinate them, I think we have done it quite effectively. The Volcker rule came out identical from five agencies. 

There were a lot of people who did not believe that could ever happen. I am not sure it has ever happened before that five independent regulators passed an identical rule out. 

There are issues that we do not have the power to write a rule, 

but you look at something like money market funds, FSOC intervened, and the regulator with authority has taken action, and we 

are in a better place than we were. 

I think there are a lot of issues where we have the ability—half 

of it is power of persuasion, and we have to be clear that it is not 

a power of compulsion. And I think that if you think about that 

kind of—the character of independent regulatory bodies and look at 

the amount of collaboration and coordination that is going on now 

compared to 5 years ago, it is a world of difference. And that does 

not mean everything is exactly where it should be and there is not 

more work to do. But I think you should be proud of the FSOC actually doing the job that you intended for it to day. 

Senator WARNER. Thank you, and thank you to Senator Tester 

as well. 

Chairman SHELBY. [Presiding.] Thank you. 

Senator Tester, you have been patient. 

Senator TESTER. Thank you, Mr. Chairman. And thank you for 

being here, Jack. I appreciate the work you do. And just for the 

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22 

ciate the administration’s willingness to engage on what I think 

may be the most important issue facing the world today. 

Secretary LEW. Thank you. 

Senator TESTER. And so please pass that along. 

Look, I and others have been concerned about FSOC’s transparency in the designation process, so most of my questions will— 

well, I will not say that. Some of them will. 

On the businesses that have been designated so far, do they 

know why? 

Secretary LEW. Yes, Senator, they do know why. I mean, they 

have engaged in lots of back-and-forth at a staff level, and in the 

end there is a several-hundred-page analysis that describes where 

the risk is and the transmission mechanisms or the basis for the 

determination. 

Senator TESTER. So you feel confident that when you designate 

a business, they know pretty darn—— 

Secretary LEW. They may not agree, but they—— 

Senator TESTER. They may not agree, but they—— 

Secretary LEW. They know why. 

Senator TESTER. They know why. So by your answer to Senator 

Warner’s question, we have not been to a point where the reevaluation has taken place. Correct me if I am wrong. 

Secretary LEW. We have only been at the earliest stages. Firms 

go to their first anniversary, but it is before they were even subject 

to full Fed supervision. So I think we have to kind of just be cognizant of it being very early in the game. 

Senator TESTER. I have got that. And from some of—and I am 

sorry I was not here the whole time, but some of the previous questions dealt with numerical metrics. Let me approach the numerical 

metrics from a little different way, because I do not—and correct 

me if—I do not believe you believe in numerical metrics as far as 

designation goes. Is that correct? 

Secretary LEW. Well, I do not think numerical metrics would capture what is unique about each individual firm’s complex structure. 

Senator TESTER. And then plus, it is my understanding that you 

did not think that they could change with the markets either. Is 

that correct? If you had numerical metrics, you would not—and the 

markets changed, they are very fluid, you would not be able to 

keep up with that change. 

Secretary LEW. I am not so sure if—since I—I do not think that 

we could just draw a hard line and say the number is the difference between risk or nonrisk, so I do not even get to the change. 

Senator TESTER. That is OK. So let me get back to where I was 

originally going. On the reevaluation—and so you have got a business that has been designated. I am not sure the designation is a 

plus thing for them. It may be a necessary thing, but it may not 

be something that they really like. And so do they have the ability, 

when it comes to redesignation, to—or should I say do you have the 

ability—if we are not involved with metrics, what do you use to reevaluate? 

Secretary LEW. Well, first, something has to have changed. I 

mean, so a firm would have to come in and show what has 

changed, and if those changes would have an impact on the analysis that led to the original designation, we would have to go 

23 

through the analysis again and make a fresh determination that 

the risk was still worthy of designation. 

Senator TESTER. OK. So it is your belief that the companies 

know why they were designated, and that when the reevaluation 

comes around, they would have the ability to change some things 

if they wanted to lose that designation? 

Secretary LEW. Yes. And what I said, Senator, prior to your asking the questions, was that it is not the case that it is just one marginal activity that is the basis for designation. It is—— 

Senator TESTER. It is multiple—— 

Secretary LEW. It is the entire complex business structure. So it 

would really mean making some—in each of the designations we 

have made, some pretty dramatic decisions about business structure. 

Senator TESTER. OK. So now we will go back to the original designations. My staff member told me, I think, that Senator Warren 

talked about this, and that was whether companies were allowed 

to meet with voting members individually during a Stage 3 designation vote—before that. And I believe you said no. 

Secretary LEW. No, we have left the direct meeting with the 

Council members to be an appeals process at the end. 

Senator TESTER. Right. 

Secretary LEW. But a lot of contact with the staff throughout. 

Senator TESTER. Yes, but they are appealing to the same people 

that made the designation, correct? 

Secretary LEW. But then they can appeal to the courts if they 

disagree. So they have an independent appeals route. 

Senator TESTER. OK. But let me get back to where I was going, 

and I do not have a pre-answer for this, but why not allow them 

to talk? 

Secretary LEW. You know, the practice of having a lot of individual conversations that are different conversations while you are 

going through the process I think would not improve the clarity of 

the review. I mean, there is an orderliness to the way the information is brought in and analyzed and exchanged. There is an opportunity for the company to come in. And each of us on the Council 

ultimately makes a judgment based on the shared information that 

we have. 

I do not think that it is common practice in a lot of regulatory 

agencies for there to be a lot of individual meetings of the decision 

makers with the parties throughout the process. 

Senator TESTER. Yeah, I am not sure—and look, Jack, you are 

a lot smarter guy than I am. And I am not sure—— 

Secretary LEW. I would not say that. 

Senator TESTER. ——that I am advocating for a lot of individual 

meetings. But it seems to me communication is really important. 

Look at what an anvil Congress is. Why? It is because people are 

talking and nobody is listening. And I think that there is an opportunity not to have a lot of meetings but at least give them the 

input before—the opportunity for input before the designation. 

Secretary LEW. So I totally agree with you about the importance 

of communication, and the reason we made the changes was to 

open the process up so that the companies that were under review 

would feel—would have actual knowledge of what is going on—— 

24 

Senator TESTER. Right. 

Secretary LEW. ——and notice and the ability to engage. Before 

we made the rules changes, we were doing much of that informally. 

We formalized and made it more clear. I think that is a good thing. 

The line between what we do now and the kind of conversations 

you are talking about is something we should keep looking at. I am 

not saying that it is something you could never think about. I just 

think it would be an unusual process for regulators to do. 

Senator TESTER. I got you. I think it could be overblown. But, 

anyway, I will end where I started. Thank you very much for your 

work. I very much appreciate it and look forward to working with 

you, whether it is through this Committee or individually, on making things work right. 

Secretary LEW. Thank you, Senator. 

Chairman SHELBY. Thank you, Senator Tester. 

I have a couple of quick questions, and then I hope in a few minutes we can go to our second panel. 

Secretary Lew, I have two quick questions that I would hope you 

would answer with a simple yes or no. I do not know if you would, 

but I wish you would. 

Secretary LEW. Those are usually the hardest questions, Senator. 

Chairman SHELBY. Maybe not for you. Do you agree that the 

FSOC’s designation process should be transparent—you talked 

about that—objective, driven by rigorous data, and not influenced 

by outside organizations? 

Secretary LEW. I believe that a transparent process is good. I 

think we should be driven always by data and analysis, and we 

should be open to information that is appropriate—— 

Chairman SHELBY. What about influenced by outside stuff that 

you do not really find in your analysis? 

Secretary LEW. I do not think that any of our process is subject 

to influence other than by facts and analysis. 

Chairman SHELBY. OK. 

Secretary LEW. The sources of it obviously come from, you know, 

work that is done inside and coming from the parties. 

Chairman SHELBY. Is the U.S., the United States of America, 

under any obligation to implement decisions or determinations 

made by the FSB? 

Secretary LEW. National authorities retain their authority to 

make their own decisions. The FSB is an organization that I think 

helps us to bring global standards up to the high standards the 

United States has set. But we make our own policy. 

Chairman SHELBY. Sure. That is good. 

Mr. Secretary, as a matter of policy, which you make, the Government, do you believe that fewer systemically important financial 

institutions is a good thing? 

Let me ask it again. As a matter of policy, do you believe that 

fewer, rather than more, systemically significant financial institutions is a good thing? In other words, if you did not have so many 

systemically risky, wouldn’t the economy be better? 

Secretary LEW. I think that we have the deepest and most liquid 

financial markets in the world. We have the widest variety of financial institutions, and I think we have to make sure that, regardless of size, our institutions are safe and sound. 

25 

Chairman SHELBY. And we want to keep them that way, don’t 

we? 

Secretary LEW. Yeah, and we—so I do not have a predisposition 

of the number of firms we need. 

Chairman SHELBY. OK. 

Secretary LEW. But whether you are big or you are small, you 

ought to be safe. 

Chairman SHELBY. Under the current law, it is my understanding that a firm has the opportunity ‘‘to contest the proposed 

designation.’’ I think you have indicated that. If they are unsuccessful contesting the Council’s decision, would you oppose a statutory process to allow a firm, working with the Council, to avoid the 

designation before the designation is made final? In other words, 

give them a chance to work their problems out. 

Secretary LEW. I think that in its wisdom Congress created a 

process for these matters to be decided and resolved and adjudicated, and that process should stand. 

Chairman SHELBY. My last question: The designation decisions 

have, as we all know, a large impact on the subject company and 

the economy. I believe—and I think you would agree—that such decisions should be justified and supported by empirical evidence and 

based on rigorous economic analysis. 

Does FSOC conduct any economic or cost-benefit analysis prior 

to making a decision? 

Secretary LEW. We do rigorous analysis and only designate firms 

if the risk determination is made. And I think if you look at the 

benefits that come from having systemic soundness, it is—you just 

need to look back to 2000 and 2008 to see what it costs the economy, what it costs taxpayers, working families, when the system 

collapses. That is hard to take into account on a case-by-case basis, 

but that is the reason that Dodd-Frank was enacted. It is the reason FSOC was created. 

Chairman SHELBY. Is there any reason that you can think of that 

FSOC could not share all this information with the public, subject 

to confidentiality concerns of the company? 

Secretary LEW. Well, we share quite a lot of information—— 

Chairman SHELBY. I know that. 

Secretary LEW. ——with the public, and I think we have made 

great efforts to share as much as we can without shutting down a 

process that requires that we deal with confidential supervisory information. I think transparency is an important goal, but I think 

in supervisory matters, confidentiality has always been respected 

and needs to be in this process as well. 

Chairman SHELBY. Thank you, Mr. Secretary, very much. 

Secretary LEW. Thank you, Mr. Chairman. 

Chairman SHELBY. If we can, I would like to go to the next 

panel. First, we will hear the testimony of Mr. Paul Schott Stevens. 

He is the president and CEO of the Investment Company Institute. 

Mr. Stevens is a well-known lawyer and previously served in senior 

Government positions at the White House and the Defense Department. 

Second, we will hear from Mr. Douglas Holtz-Eakin, president of 

the American Action Forum, no stranger to the Congress. He is an 

economist, a professor, a former Director of the Congressional 

26 

Budget Office, and former Chief Economist of the President’s Council of Economic Advisers. 

Next we will hear from Mr. Dennis Kelleher, president and CEO 

of Better Markets. Mr. Kelleher has held several senior positions 

in the U.S. Senate, most recently as the Chief Counsel and Senior 

Leadership Adviser to the Chairman of the Senate Democratic Policy Committee. 

Finally, we will hear from Mr. Gary Hughes, executive vice president and general counsel of the American Council of Life Insurers. 

Mr. Hughes has been at ACLI since 1977 and has served as general counsel since 1998. 

Gentlemen, we welcome you to the Committee. Your written testimony will be made part of the hearing record, without objection, 

and we will start with you, Mr. Stevens, to sum up your testimony. 

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, INVESTMENT COMPANY INSTITUTE 

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

Brown, and Members of the Committee. I am grateful for the opportunity to appear here today to discuss the transparency and accountability of the FSOC. 

ICI and its members do understand the importance of appropriate regulation, and we support U.S. and global efforts to enhance stability in the financial system. To this end, however, the 

FSOC process must and should be understandable to the public, 

based on empirical analysis that takes into account all the factors 

specified in the Dodd-Frank Act, and well grounded in the historical record. Such a process would allay any concerns that U.S. stock 

and bond funds or their managers pose risks to the financial system that require SIFI designation. 

Indeed, throughout the 75-year history of the modern fund industry, these funds have exhibited extraordinary stability in comparison to other parts of the financial system, and certainly they did 

so throughout the recent financial crisis. 

Now, is such an open, analytical review in the offing? Unfortunately, the FSOC’s current designation process raises several serious concerns in that regard. 

First, like other observers, we are concerned that the FSOC is ignoring the range of tools given to it by the Dodd-Frank Act and instead is seeking to use its designation authority broadly. Congress 

envisioned SIFI designation as a measure designed for rare cases 

in which an institution poses outsize risk that cannot be remedied 

through any other regulatory action. The Council’s record to date 

raises serious questions in our mind about its adherence to this 

statutory construct. 

Second, in none of its nonbank SIFI designations has the FSOC 

explained the basis of its decisions with any particularity. The 

opacity of the Council’s processes and reasoning really means that 

no one—not the designated firm, other financial institutions, other 

regulators, the Council, or the public—can understand what activities the FSOC believes are especially risky. This is an odd result 

as the very object of the exercise is to identify and eliminate or 

minimize major risks to the financial system. 

27 

Third, instead of the rigorous analysis one would expect in connection with significant regulatory action, the FSOC’s approach to 

SIFI designation is predicated on what one member of the FSOC 

itself has called ‘‘implausible, contrived scenarios.’’ Together, the 

opacity of the process and this conjectural approach to identifying 

risks have made SIFI designation appear to be a result-oriented exercise in which a single metric—the firm’s size—dwarfs all other 

statutory factors, and mere hypotheses are used to compel a predetermined outcome, i.e., that designation is required. 

Presumably, systemic risk must consist of more than just a series 

of speculative scenarios designed to justify expanding the jurisdiction of the Federal Reserve over large nonbank institutions. 

Fourth, the consequences of inappropriate designation would be 

quite severe, particularly for regulated funds and their investors. 

The bank-like regulatory remedies set forth in Dodd-Frank would 

penalize fund shareholders, distort the fund marketplace, and compromise funds’ important role in financing a growing economy. It 

also would institute a conflicted form of regulation. A designated 

fund or manager would have to serve two masters, with the Fed’s 

focus on preserving banks and the banking system trumping the 

interests of fund investors who are saving for retirement or other 

long-term goals. 

The Fed’s reach actually could be extremely broad. The Financial 

Stability Board recently proposed thresholds for identifying funds 

and asset managers that it expects automatically would be considered for SIFI designation. Under these thresholds, more than 

half—and let me emphasize, Mr. Chairman, more than half—of the 

assets of U.S.-regulated funds, almost $10 trillion, could be subject 

to ‘‘prudential market regulation’’ by the Federal Reserve. Similarly, more than half of the assets in 401(k)s and other defined contribution plans could be designated for Fed supervision. We do not 

believe that any Member of Congress anticipated that the DoddFrank Act could give the Fed this extraordinary authority. 

Now, how can Congress address these concerns? What we recommend is quite straightforward. 

First, the FSOC’s recent informal changes to its designation process are a good first step, but more is required. To assure greater 

predictability and certainty in that process, Congress should codify 

these changes in statute. 

Second, Congress should require the FSOC to allow the primary 

regulator of a targeted firm an opportunity to address the identified risks prior to final designation. Primary regulators have the 

necessary authority and greater expertise and flexibility to address 

these tasks. 

Third, a firm targeted for SIFI designation also should have the 

opportunity to de-risk its business structure or its practices. Such 

an off-ramp from designation may be the most effective way to address and reduce identified systemic risks. 

And, finally, Congress should revisit the remedies proposed for 

designated nonbank firms, particularly regulated funds and their 

managers. Let me emphasize we do not believe that funds or fund 

managers merit SIFI designation, but if the FSOC chooses to designate them nonetheless, then Congress should look to the SEC 

28 

and not to the Federal Reserve to conduct enhanced supervision 

and oversight. 

Mr. Chairman, thank you. I look forward to your questions. 

Chairman SHELBY. Dr. Holtz-Eakin. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, 

AMERICAN ACTION FORUM 

Mr. HOLTZ-EAKIN. Thank you, Mr. Chairman, Ranking Member 

Brown. It is a privilege to be here today. 

Let me make comments in basically three areas: process improvements, many of which will be familiar from the discussion 

that has preceded; the desire for greater analysis and metrics infused into this process; and, third, the possibility that if the FSOC 

is unable to make satisfactory progress in those two areas, it may 

be useful for the Committee to scrutinize the basic mission of the 

FSOC once again. 

The FSOC was created as a macroprudential regulator. Such a 

regulator’s job is to identify systemic risks, measure them appropriately, implement regulation and other steps that will reduce 

those risks without excessive costs to the economy, and, thus, undertake the basic cost-benefit analysis embedded in regulation. 

The process that the FSOC is using right now does not seemingly 

convey to the participants that information. Firms do not know 

how they became systemically risky, how much systemic risk they 

pose, and what factors in their operations contributed to that systemic risk. They accordingly have no way, as was just mentioned, 

to change their activities and de-risk prior to designation. They are 

fated, once the examination begins, to be in or out one way or the 

other. 

I think that the steps that have been taken so far in February 

were good steps, but additional transparency is really needed so 

there is an understanding about what is going on, that there has 

to be an ability to de-risk. I think that in assessing risks, it would 

be useful for the FSOC to incorporate more of the information provided by the primary regulator and defer to their expertise, where 

appropriate, and it seems not to be done in this case. We have seen 

the insurance company examples. And I think there has to be a 

meaningful exit from designation as a SIFI. The annual review is 

thus far on paper. It has not yet been implemented in a way that 

we know there is a meaningful exit ramp, and that should be in 

there. 

The second major thing is to actually bring some quantification 

to the risks posed by institutions and their activities. The first step 

in that would be to focus on activities as opposed to simply institutions and their size so that we know what activities translate into 

systemic risks, have them quantify those based on the historical 

record of risk in marketplaces and liquidity and the other factors 

that will be important, and that risk analysis should be presented 

to all participants in a meaningful way so that we have some sense 

of magnitudes and know when things are more and less risky. 

Now, my final point is that if the FSOC, a systemic risk regulator, cannot identify to participants in the process what is a systemic risk and where did it come from, cannot measure it in a 

meaningful fashion and convey what is a large and small systemic 

29 

risk, we cannot possibly know if it is really reducing systemic risk 

in an efficient fashion, and that is its job. And if we have a regulator that increasingly has command over large pieces of our capital markets that may or may not be fulfilling the basic mission of 

Congress, I would encourage this Committee to come back in future 

years and consider whether it is worth having such a thing. 

I am deeply concerned that the combination of an ineffective 

FSOC and the use of the Federal Reserve as the primary regulator 

by the FSOC will endanger the Fed itself. It has been the finest 

monetary authority on the planet. Bringing it into this new role 

where it has not the expertise and not the experience may lead it 

to come under just increasing external scrutiny and interference, 

and damaging the independence of the Fed is not something that 

we think would be the right outcome of an attempt to make the financial markets safer. 

Thank you for the chance to be here today, and I look forward 

to your questions. 

Chairman SHELBY. Mr. Kelleher. 

STATEMENT OF DENNIS M. KELLEHER, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, BETTER MARKETS, INC. 

Mr. KELLEHER. Good afternoon, Chairman Shelby, Ranking 

Member Brown, and Members of the Committee. Thank you for the 

invitation to testify today. It is a privilege and honor to appear before the Committee. 

Too often when talking about financial reform, too many focus on 

the trees—a particular regulation or industry or firm—and ignore 

the forest—why we have the law, the regulation in the first place. 

That context is essential to understand where we are and what, if 

anything, we need to do. 

Here we have a Stability Council to prevent destabilizing surprises and massive bailouts. When we talk about surprises, everybody thinks of AIG, which I will get to in a minute. But what about 

Goldman Sachs and Morgan Stanley, almost collapsing and bankrupt within days? That was totally an unexpected surprise, but 

that is what happened in 2008. 

On Friday night, September 19, Morgan Stanley called the President of the New York Fed, Tim Geithner, and indicated they would 

not open on Monday, September 22, 2008. Adding to that shocking 

surprise, Morgan Stanley told Mr. Geithner that Goldman Sachs 

was ‘‘panicked’’ because it felt that if Morgan Stanley does not 

open, ‘‘then Goldman Sachs is toast.’’ 

The possibility of Morgan Stanley and Goldman Sachs being 

bankrupt and collapsing into failure on Monday, September 22, 

2008, was a very big surprise, and the result to prevent that were 

massive bailouts by the U.S. Government and taxpayers. 

But that was not the only surprise. Also in early September 

2008, AIG came to the Federal Government asking for a huge, indeed unlimited bailout. To everyone’s surprise, AIG had gambled 

with hundreds of billions of dollars of derivatives and lost big, and 

was bankrupt because it did not have the money to cover its gambling losses. So it came to the Federal Government and the U.S. 

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gest banks on Wall Street, including Goldman Sachs, said, ‘‘You 

have to bail out AIG or the entire financial system will collapse.’’ 

No one knew it, but AIG was so interconnected with the system 

that its failure could bring down everything and potentially cause 

a second Great Depression. So the U.S. Government repeatedly 

bailed out AIG, ultimately amounting to almost $185 billion. 

There were other, even bigger surprises. The $3.7 trillion money 

market industry was also on the verge of collapse at about the 

same time as AIG, Morgan Stanley, and Goldman Sachs. That, too, 

surprised everyone. The result was the same. The United States 

Treasury bailed out the money market fund industry by putting 

the full faith and credit of the United States behind the $3.7 trillion industry. 

Those are only three examples of many, many surprises and too 

many bailouts in 2008 and 2009 that no one anticipated. 

The Stability Council was created to prevent similar future surprises and bailouts, and that is incredibly important. Why? Because the crash and the bailouts that started with Lehman Brothers, AIG, and money market funds that led to Morgan Stanley and 

Goldman Sachs and all the other too-big-to-fail firms exploding into 

the worst financial collapse since the Great Crash of 1929, caused 

the worst economy since the Great Depression of the 1930s. Indeed, 

only massive taxpayer and Government bailouts prevented a second Great Depression. Ultimately, that crash and the economic 

wreckage are going to cost the United States more than $10 trillion, as detailed in a study Better Markets did on the cost of the 

crisis. 

The tens of trillions of dollars reflect massive suffering across our 

country. Just one example. In late 2009, unemployment and underemployment reached 17 percent. That means that almost 27 million Americans were either out of work or working part-time because they could not find full-time work. And then, of course, there 

were the lost savings, homes, retirements, small businesses, and so 

much more. 

Preventing that from ever happening again is why there is a 

Dodd-Frank financial reform law, why there are regulations, why 

there is a Stability Council, and why its mission is so very important. 

In closing, that is why, when we think about FSOC and accountability, we think about accountability to the American people, accountability to those 27 million Americans thrown out of work, accountability to the tens of millions who lost their savings, their retirements, their homes, and so much more. We ask: Is FSOC doing 

enough fast enough to protect the American people from known 

and potential threats to the financial stability of the United States? 

Yes. Deliberatively, thoroughly, carefully, pursuant to as open and 

transparent a process that has real accountability built in, but the 

focus has to be on identifying those threats, responding to them, 

eliminating them, or minimizing them to the greatest extent possible, and protecting the American people. 

Thank you, and I look forward to your questions. 

Chairman SHELBY. Mr. Hughes. 

31 

STATEMENT OF GARY E. HUGHES, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, AMERICAN COUNCIL OF 

LIFE INSURERS 

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

Brown. We appreciate the opportunity to comment on the FSOC 

process. 

ACLI is the principal trade association for the U.S. life insurance 

companies, and we include among our members the three insurers 

that have been designated as systemically important. 

We have heard today that FSOC has already made improvements to its process, but we do believe that additional reforms are 

necessary to assure that the process is really transparent and fair 

and that it fills the overarching purpose of the Dodd-Frank Act. 

Questions that we heard today I think hit the right note here. 

We should all be striving for a financial marketplace where there 

are no institutions that pose systemic risk. And to that end, FSOC 

should embrace a process that employs the correct metrics to assess a companies potential risks and outlines clearly and concisely 

the factors that will result in designation. 

If systemic risks are identified, the company should be given full 

access to the information upon which FSOC’s conclusions are 

based, and then given the opportunity to challenge any assumptions it believes are in error and, if it wishes, restructure its activities so as to fall on the nonsystemic side of the line. Only then 

should FSOC make a final designation and trigger Fed oversight, 

and companies should always be given the necessary information 

and the ability to exit designated status if changed circumstances 

warrant. 

Unfortunately, the current FSOC process seems more focused on 

designating companies as systemic than on working constructively 

with potential designees to avoid having to make such designations 

in the first instance. And with all due respect to Secretary Lew, I 

think there was nothing that I heard from him that would change 

our view that the bias tilts in that direction. 

With that in mind, let me summarize our suggestions for improving the FSOC process. 

First, FSOC should institute additional procedural safeguards on 

the front end of the process, and we offer six suggestions in this 

regard. 

One, afford companies that receive a notice of proposed determination full access to the record upon which FSOC’s determination are based, and, importantly, that record must provide a sufficient level of detail to enable the company to fairly understand and 

react to FSOC’s analysis and conclusions. 

Two, required that FSOC staff initially recommending a company 

for designation is not the very same staff adjudicating the company’s administrative challenge to a potential designation. 

Three, in the case of an insurance company, afford greater 

weight to the views of the FSOC voting member with insurance expertise and accord deference to the insurer’s primary State insurance regulator. 

Four, providing a company with more than 30 days to initiate a 

judicial review of a final determination. 

Five, staying Federal oversight pending such a judicial review. 

32 

And, six, ensuring that FSOC determinations are made independent of international regulatory actions. 

Our second overall point: Once a company has been designated 

as systemic, there should be a more robust and transparent process 

for potential de-designation. FSOC should provide the company 

with a clear indication of the factors that would lead to de-designation, enabling the company to understand precisely what changes 

to its risk profile would be necessary to be deemed nonsystemic. 

Third, as is the case with asset managers, we believe FSOC 

should be required to pursue an activities-based approach with respect to insurance, focusing on the specific activities and practices 

that may pose systemic risk. 

Fourth, FSOC should be required to appropriately apply the material financial distress standard, as set forth in Dodd-Frank. The 

authorizing statute enumerates 11 factors that could have a bearing on the company’s vulnerability to material financial distress. 

Yet in the case of the insurance designations, FSOC simply made 

a going-in assumption of material financial distress and then concluded that such distress could be communicated to the broader financial system. 

And, finally, FSOC should promulgate the regulations required 

by Section 170 of Dodd-Frank. These regulations, done in conjunction with the Federal Reserve, could shed additional light on what 

metrics, standards, or criteria you would operate to categorize a 

company as nonsystemic. 

Mr. Chairman, we believe the best interests of the U.S. financial 

system will be served by an FSOC designation process that is more 

transparent and fair than at present, and the reforms we suggest 

are intended to achieve these objectives. We pledge to work with 

this Committee and others for that end. Thank you. 

Chairman SHELBY. Thank you, Mr. Hughes. 

I will ask the following question of all of you. The goal of the 

FSOC’s process I believe should be not to merely expand the regulatory jurisdiction of the Federal Reserve, but to actually reduce 

systemic risks to our economy. As the Bipartisan Policy Center 

pointed out in its statement for the record, it would be troubling 

if no real process emerges to realistically allow a company to become undesignated. 

I will start with you, Mr. Stevens—well, I will ask all of you. Do 

all of you agree, yes or no? 

Mr. STEVENS. Yes, I do agree, Mr. Chairman. 

Chairman SHELBY. Mr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I 100 percent agree. 

Mr. KELLEHER. I agree with the headline, not the details. 

Chairman SHELBY. Mr. Hughes. 

Mr. HUGHES. I agree completely. 

Chairman SHELBY. Do you believe that FSOC has provided a 

clear road map for what a designated company should do to reduce 

its systemic risk and no longer be designated? 

Mr. STEVENS. It would probably be best to ask the companies 

themselves, but I would be very surprised if their answers were 

‘‘yes.’’ 

Chairman SHELBY. Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I do not believe that it has. 

33 

Chairman SHELBY. Mr. Kelleher. 

Mr. KELLEHER. It cannot. 

Mr. HUGHES. Well, that is a good question, and we have had the 

opportunity to talk to some of the companies that have been designated, and I think they would explain that, no—you know, somebody mentioned—I think it was the Secretary—that there are hundreds of pages of documents floating around. There are. But in 

reading those hundreds of pages of documents going back and forth 

between FSOC and the individual companies, there is not clarity 

on the specifics of why a company got designated. And I think you 

would find a very high degree of frustration among the companies 

that have been designated that they are not sure of the exact reasons why they have been designated; they are not sure of the exact 

steps they could take if they wished to become de-designated. 

So, with all due respect to the Secretary, this is not just a situation where companies disagree with conclusions. They do not have 

enough information to challenge the conclusions that have been 

drawn. 

Chairman SHELBY. Don’t the bank regulators at times, when 

they are evaluating the safety and soundness of a banking institution, kind of give them a warning of what they need to do to their 

capital standards and everything, Dr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. Absolutely. There is a regular interchange, 

and it is often quite quantitative in nature, so there is no ambiguity—— 

Chairman SHELBY. And a lot of them, because of that, work off 

their problems and become strong again, do they not? 

Mr. HOLTZ-EAKIN. Yes, they do. 

Chairman SHELBY. Is that fair? 

Mr. KELLEHER. Well, of course, those regulators, the banking regulators, have supervisors and hundreds and hundreds of people in 

those banks on a regular basis to provide that advice and feedback 

long before something like an FSOC process happens. 

Chairman SHELBY. Well, some of these—I am just the using the 

analogy of the bank regulators letting the bank work off problems 

and get strong. And I guess should the FSOC provide a better explanation to the public when it disregards such expertise? I am 

speaking of—the MetLife designation received a scathing dissent 

by its primary regulator. The Prudential designation was adopted 

despite the strong dissent by FSOC’s resident insurance experts. 

That is troubling to me. Mr. Hughes? 

Mr. HUGHES. Yeah, I think your comment sort of begs the question of to what extent, if at all, is FSOC looking to the primary regulators of these firms for input and advice. 

Chairman SHELBY. Or totally ignoring them. 

Mr. HUGHES. Yeah, and insurance is an interesting case, and it 

is the only segment of financial services that does not have a voting 

seat on FSOC as a regulator. I mean, there is an individual that 

has insurance expertise. None of the primary regulators that the 

three companies designated were at the table when the FSOC decisions were made. 

Chairman SHELBY. Dr. Holtz-Eakin, if we create a regulatory regime to address systemic risk without identifying what creates systemic risk, we force companies to guess what might trigger addiVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
34 

tional regulatory concern. In other words, they are kind of in the 

dark. I believe companies must then manage their business models 

to the worst-case scenario rather than ordinary business. Generally, such uncertainty creates additional cost for them and for 

our economy, causing companies not to invest in new business opportunities or infrastructure. 

My question is this: Should we be concerned that such uncertainty is stifling our economic growth? You are an economist. Are 

there real costs associated with our regulatory framework and specifically with uncertainty in FSOC’s designation? 

Mr. HOLTZ-EAKIN. There is increasing evidence that you can 

trace a straight line between policy uncertainty and economic performance. There has been excellent work done by, for example, 

Steve Davis at the University of Chicago on this topic. The FSOC 

is an example of this. It is a large, powerful regulator that people 

have very little understanding about how it makes its decisions, 

uses what criteria, and as a result—and where it will show up 

next, in what part of the financial landscape. And that cannot be 

in and of itself a good thing for growth. 

Chairman SHELBY. Mr. Hughes, insurance products—you know 

this well—especially long-term insurance contracts such as life insurance, face a much different probability for runs and, thus, failure than one would typically fear with banks. We have heard concerns that FSOC’s designation process treats these insurance contracts similar to bank assets, but they are different. 

Would you discuss the likelihood of a so-called run on insurance 

products such as life insurance and what such a run would have 

to look like in order to cause systemic risk? 

Mr. HUGHES. Well, I think you are absolutely correct that the dynamics of a insurance company are much different than those of a 

commercial bank, certainly in terms of the types of products and 

the likelihood of money going out the door. I know one of the dissents to one of the designations pointed out, quite correctly, that 

insurance regulators have the absolute authority to prevent people 

from turning in their policies, if that is warranted. But I think the 

experience of the recent economic crisis is very telling in this respect. In fact, it was just the opposite of a run. The products were 

so desirable in terms of the guarantees they made that, notwithstanding the crisis, people were holding onto those products no 

matter what. 

Chairman SHELBY. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. I do not think the 

FSOC designation is quite the black box and mysterious process 

that some have made it out to be. You know, we start off with 

metrics, Step 1 and Step 2, six categories, and while we do not necessarily—I think the companies give this information. I assume it 

is proprietary. We have not seen it, but it is perhaps a little more 

specific, and companies are a little more aware than maybe we like 

to think they are. 

Let me start with Mr. Kelleher, if I could. We hear from industry 

that new rules for banks, Basel III, for example, will force some activities into the ‘‘unregulated’’ shadow banking sector. The industry 

made similar arguments before the crisis, sort of the time period 

35 

you were laying out for us, when they used charter shopping to engage regulators in a race to the bottom. 

Talk about, if you would, Mr. Kelleher, the role that FSOC plays 

in ensuring that there are strong standards across the board, that 

there is a level playing field even for institutions that attempt to 

operate more in the shadows. 

Mr. KELLEHER. There are two key roles that FSOC plays in connection with the shadow banking system and the other problems 

you have identified. Number one, and most importantly, FSOC 

was, in fact, created to ensure that we did not have another shadow banking system grow up. In the past, as you both know well, 

we had banking regulation, and then what everybody did is they 

moved their activities or their forum in a way so that they did not 

fall narrowly within banking regulation. And that was the shadow 

banking system, also known as the unregulated finance system. 

So we have a banking regulatory system that identifies banks 

and bank holding companies for heightened prudential standards 

and otherwise, as you have heard over the last week in your hearings. And the other arena, which used to be called ‘‘the shadow 

banking system,’’ we have FSOC, which is supposed to be able to 

identify known and emerging risks as well as designate nonbank 

financial firms that pose a threat to the financial stability of the 

country. That is aimed directly at the shadow banking system. 

The second piece of your question about charter shopping and the 

problems one has with siloed regulators is by having a council of 

regulators, you force them to look at the broader landscape and 

also to be less captured, not in the pejorative sense of the revolving 

door but cognitively captured about where you sit is where you 

stand. And I actually think it is an example of how the FSOC is 

working well to see that the insurance regulators actually laid out 

their dissents and dissented, but nonetheless the collective wisdom 

of FSOC saw and understood the threat that came out of that 

arena and designated insurance firms nonetheless having gone 

through the process. And, by the way, they did get roughly 400 

pages detailing the designation. 

Senator BROWN. Thank you. Mr. Kelleher, your testimony discussed some of the so-called reform proposals. Talk about some of 

those coming from the House these days or that the House is looking at now. 

Mr. KELLEHER. Well, you know, most of the reform proposals at 

the end of the day are burden delay and future litigation. What we 

ought to be doing is building up a robust designation process, an 

FSOC council that really does its job, and I am a little surprised 

that Doug and others have not taken credit for the dramatic steps 

forward that FSOC has taken most recently on the transparency 

and process side, because about half of your recommendations are 

now incorporated in FSOC’s procedures. 

Now, everybody does not get everything they want in this town. 

I think 50 percent is pretty good. But most of these things, whether 

it is cures, off ramps, kind of a formalistic, one-size-fits-all, quantitative formula, relying on a primary regulator, almost every single one of those so-called reforms are really a step back to procedures that were in place prior to the crisis, and in many respects 

enabled the crisis. 

36 

Senator BROWN. All right. Thank you. 

Mr. Kelleher, in your experience with financial regulators, have 

you ever encountered a regulator that was willing to receive input 

and criticism from stakeholders and then modified its policies in response to that criticism, as FSOC did in February? 

Mr. KELLEHER. You know, I think it is unprecedented. We have 

gone around and tried to look at this to find an agency that has 

been criticized, constructively or otherwise, and then gone through 

an elaborate process to bring the critics in, listen to them, get detailed inputs, and then actually change their process in very meaningful ways in part by, as I said, adopting many of the recommendations of those who had the input. Not only is it unprecedented, I think it shows that this Committee is actually working 

the way exactly as it is designed. It is not even 5 years old. It is 

not exactly running around designating everybody who walks by 

Treasury. In 5 years, we have got four companies. Two of them 

were no-brainers—AIG and GE. OK. The others, frankly, I think 

we are going to find out, when the MetLife litigation is done, that 

they were no-brainers, too. 

So what we have is a Council that is doing its job. It is listening 

to people. It is incorporating changes and making meaningful 

changes. I think we ought to let them do their job, let the changes 

set in, and let us see where we are in a year or two, complemented 

by robust congressional oversight, which you all have been doing. 

They are doing well. They are trying to do better. And Doug and 

others who are making some good suggestions are having a meaningful impact. 

Senator BROWN. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. Thank you all for 

being here today. 

Seven years ago, giant financial institutions like AIG and Lehman Brothers—institutions that were not banks—were at the center of the financial crisis. Congress recognized that while there 

were regulatory agencies responsible for overseeing specific banks 

or specific parts of banks, we did not have a single group that was 

responsible for looking out across the entire system, including the 

nonbanks, and spotting the risks that they presented. That is why 

Congress created FSOC and why Congress gave FSOC the power 

to designate nonbanks as systemically important if they met certain basic criteria. 

Now, there has been a lot of discussion today about potential 

flaws in the designation process, and I just want to focus on a few 

of those. I have heard people who represent the insurance industry 

claim that certain kinds of companies, like insurance companies, 

simply cannot pose the kinds of systemic risks that banks do. 

Mr. Kelleher, do you think that large insurance companies can 

pose systemic risk? 

Mr. KELLEHER. Well, I do not think there is any question that 

large insurance companies can pose systemic risk. I mean, we only 

have to look at AIG and see what happened there, which was, after 

all, an insurance company. And let us remember, MetLife, before 

it sold off its deposits a couple years ago, it was one of the largest 

37 

bank holding companies in the United States at the time. So insurance companies, the big, large, complex, global insurance companies, certainly can be, and they should be, if appropriate, according 

to the criteria, subject to the designation process and designation 

if, after that process, they are deemed to meet the criteria. 

Senator WARREN. Thank you. 

Now, another argument I have heard today is that the designation process is flawed because it does not weigh the costs and benefits of designating a company. Mr. Kelleher, do you think that imposing some kind of cost-benefit analysis is a workable approach 

here? 

Mr. KELLEHER. The so-called cost-benefit analysis is almost always translated into an industry-cost-only analysis, and we have 

seen that at the other agencies and other places where the industry 

has tried to impose what they call ‘‘cost-benefit analysis.’’ 

It really takes into account too often, and as designed, industry’s 

quantifiable costs where, you know, they exaggerate them and they 

pile them up a mile high with virtually no basis and say the sky 

is going to fall, it is going to cost us $62 billion, or some fabulous 

number. What they never do is to take into account the often 

unquantifiable, sometimes quantifiable benefit to the public. 

For example, what is the benefit and how do you quantify the 

benefit of avoiding a second Great Depression or, for example, 27 

million Americans out of work in October of 2009? And we could 

go through the list—and it is a long list—of the economic wreckage 

inflicted on the American people by the last financial collapse. That 

is FSOC’s duty to prevent that happening again. 

How you quantify it and how you quantify it, as Secretary Lew 

said, on a case-by-case basis is virtually impossible, and that is 

why it is so grossly inappropriate to be trying to apply industrycost-only analysis on financial regulation and protecting the American people. 

Senator WARREN. Thank you, very much. I agree with this. I 

have often wondered how the regulators would calculate the benefits of avoiding another financial crisis—a financial crisis that 

sucked, what is it, $14 trillion out of the U.S. economy? 

Mr. KELLEHER. Probably more. 

Senator WARREN. Probably more. All right. Let us do the third 

one then. I have heard that the designation process is not transparent, and I am all for increased transparency, but I assume the 

Council must balance transparency against disclosing confidential 

or potentially market-moving information. 

Mr. Kelleher, do you think FSOC has struck roughly the right 

balance with recent changes to the designation process? 

Mr. KELLEHER. I should start by saying Better Markets stands 

for transparency, accountability, and oversight. There are few 

things that we prioritize more than transparency, and we have actually been very critical of FSOC over time for their lack of transparency. But I will say that they have made tremendous strides recently. I think that they actually did a good job before, and they 

were not transparent about it; and, therefore, that is what raised 

a lot of the questions. They are now moving to a much more transparent process and a more involved process that I think is only 

going to strengthen those processes. 

38 

Reasonable people can disagree where on the line you have 

transparency from total public transparency to protecting confidential information and deliberative ability of the Council. But it looks 

to me that they are both at the right place and moving in the right 

direction. And as I say, adopting many of the criticisms as part of 

their procedures now to open it up I think is a pretty clear signal 

and an unprecedented signal, as I said to Senator Brown, that we 

have a Council that is really committed to getting this right and 

being maximally open. 

Senator WARREN. And I take it, Dr. Holtz-Eakin, that you would 

agree that they have at least moved in the right direction. 

Mr. HOLTZ-EAKIN. Certainly. In both my written and oral statements, I said so. 

Senator WARREN. Good. Thank you. 

The FSOC designation process is obviously a work in progress. 

I think the Council has generally gotten it right and has demonstrated a willingness to work with members of the industry and 

others to improve aspects of the process, and I trust that that will 

continue. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Dr. Holtz-Eakin, would you like an opportunity to respond to Senator Warren’s question on cost-benefit 

analysis—I have been bringing that up a long time—since you are 

an economist? 

Mr. HOLTZ-EAKIN. Well, certainly. I mean, we require benefitcost analysis in lots of other regulatory settings because it is information that should be imbued in the process. That does not mean 

that measuring benefits and costs is easy. In many cases it is not. 

Measuring environmental benefits is a notoriously difficult task. 

Measuring increased human safety in the workplace is a notoriously difficult task. None of this has stopped the agencies from undergoing the discipline of having to write down the things that 

might be benefits, the things that might be costs, and making a 

good-faith effort to add them up. The FSOC should do the same. 

Chairman SHELBY. Thank you, gentlemen. 

You have a question? 

Senator BROWN. Could I follow up on that? Dr. Holtz-Eakin, do 

you think we could have quantified—or how would we have quantified in 2006 and 2007 or even the earlier years in that decade on 

some of the things that some of the regulators did? Could we have 

quantified the cost to society of what happened in 2008 and 2009? 

Do you think as we did some of those deregulation activities or 

some of the regulation activities that you could have really figured 

out—you could have figured out the cost to the companies, to be 

sure, but could you have figured out the cost to society which I 

guess would be on the benefit side of the equation very accurately? 

Mr. HOLTZ-EAKIN. Recessions avoided are benefits. There is no 

question about that. But in any circumstance you can certainly do 

a disciplined job of adding up the costs, economic costs, not just industry costs. And I would suggest to Dr. Kelleher that if the FSOC 

is going to have good processes and everything else, and he has 

great faith in that, they can get a good process on calculating economic costs. 

39 

So let us suppose they do that. Well, then, we will know how big 

the benefits have to be at a minimum in order to for something to 

be worthwhile, and getting that order of magnitude right is important to know, I think. And then you can in formal ways do analysis 

of what economic performance looks like with and without access 

to intermediation and credit, which is exactly what happened in 

2008 and 2009. We had an enormous liquidity crunch, and it dried 

up the ability for people to get financing. You can translate that 

into declines in investment and employment. You can look at the 

costs. 

Senator BROWN. Yes, it is just hard for me to think that, without 

being laughed at, if any public interest lawyers or the agencies 

would have said here is what potentially could happen if we weakened or deregulated some of the things OCC did or the Fed, that 

we possibly could have predicted that, and that is why I am a little 

bit jittery about this whole structured cost-benefit, even though I 

think we should do cost-benefit in a whole lot of ways. I just do not 

think that—there needs to be some caution and the other side 

needs to be weighed perhaps a little better than it has been. 

Mr. HOLTZ-EAKIN. I take your point. I would just point out that 

there are a lot of things that presumably FSOC is supposed to do 

that my experience on the Financial Crisis Inquiry Commission 

suggests it is just not going to work. So take the AIG example. The 

fundamental problem with AIG is that the CFO testified under 

oath that he as the chief risk officer and the chief liquidity risk officer was unaware that their contracts required them to post collateral if the underlying securities declined in value. There is no way 

the FSOC is going to be able to identify in advance utter managerial incompetence. That is joke to run a major company and not understand your own contracts and you are unable to comply with 

them. There is nothing about the FSOC that is going to stop that. 

And so for big structural things that you can quantify, do benefitcost, you should do it, but do not—I am just far less sanguine that 

somehow this entity is going to be so nimble that it is going to find 

all these things. It just will not. 

Mr. KELLEHER. Well, of course, its job is not to find those things. 

What the real analysis is—— 

Mr. HOLTZ-EAKIN. Well, in your testimony you suggested exactly 

that, but it will not. 

Mr. KELLEHER. But the real question is—let us say that in 2005 

AIG was then subject to cost-benefit analysis and a designation 

process. First of all, we know no one anticipated AIG happening, 

the money market fund failure happening, anticipating any of that. 

So the ability to anticipate the cost and benefit associated with designating any one of those firms before the last crisis we know for 

a fact is actually impossible. 

So AIG would not have been designated because you would not— 

it would never have been designated if you had a cost-benefit analysis requirement in 2005. It has got nothing to do with managerial 

competence or incompetence. And one person did testify as to that, 

Doug, but you well know that there is much other testimony as to 

why it is AIG failed, and it was not merely missing the collateral 

calls. 

40 

Chairman SHELBY. Earlier, some of you were here, I believe, 

when Secretary of the Treasury Lew—I asked him if he would oppose a statutory process to allow a firm working with the Council 

to avoid the designation before the designation was made final. 

Surprisingly, he said he would oppose such a process. That was my 

understanding. 

Assuming that is what he said—and I think it was—why would 

the administration not support a process whereby we would have 

fewer systemically risky firms? Do you have any idea? 

Mr. STEVENS. Well, as you know, Mr. Chairman, our testimony 

indicates that allowing a firm at that point to de-risk, that is, to 

address those circumstances, activities, aspects of its business 

model that are raising outsize risk to the financial system will 

probably be the quickest and most effective way of dealing with the 

risk that the Council perceives rather than supervising it through 

the Fed and admiring the problem any further. We absolutely believe that is a reasonable additional—— 

Chairman SHELBY. I do, too. 

Mr. STEVENS. ——requirement or authority under the statute. 

Chairman SHELBY. Doctor, do you agree with that? 

Mr. HOLTZ-EAKIN. I agree with that, and there is an additional 

benefit in that other firms watching the process can now have visible demonstrations of what it takes to avoid designation, modify 

their activities in advance, and generate a safer system. 

Chairman SHELBY. Mr. Kelleher. 

Mr. KELLEHER. Two thoughts. First of all, I think that the companies being looked at have a much better, deeper, and actually 

nuanced understanding of why they are raising the risks, what 

those risks are, and why they are getting designated. 

What these requests really are getting to is they would like a 

road map that is basically a one-size-fits-all check-the-box so that 

they can try and get out of the designation. What we need, though, 

is what we have, which is a process that allows us to evolve as 

risks evolve, business activities and markets evolve. And I am surprised that some of the entities and people actually suggesting that 

a Government agency should work with a private company almost 

in a consulting capacity to suggest how they could modify their 

business practices to reduce their risk. 

The company knows what the risks are. If they choose to make 

those business decisions and de-risk, then they can ask to be dedesignated, and there is a full process for de-designation. 

Chairman SHELBY. But banks, they do it all the time. 

Mr. KELLEHER. With all due respect, Mr. Chairman—and you 

know better than I know the process for supervision of banks, and 

the way the Fed and the FDIC supervise banks literally on a daily 

process and an ongoing process, that with thousands and thousands of employees, they are in a position to look at the loan book 

and how the loan book is working and how to give advice as to 

where the risks are coming under the CAMEL reports. That is not 

the role of FSOC, and that is not the role of FSOC as decided by 

the Congress and executive branch when they passed the law. To 

put the FSOC in the business of working with private companies 

to help de-risk them strikes me as a rather dramatic change and 

maybe unprecedented for a Government agency. 

41 

So I am often surprised when I see my friends who are often accused to be of a different political persuasion than I am suggesting 

such involvement in the private sector. 

Mr. STEVENS. Mr. Chairman, I have tried to be brief, but could 

I add one further thing? 

Chairman SHELBY. Absolutely. 

Mr. STEVENS. I was struck by Secretary Lew’s comment, and 

what I conclude from it is that the resistance to the idea of de-risking, either by the primary regulator or by the firm, is that the 

FSOC would not know exactly what to tell them as to how to go 

about that. And that is the reason for the lack of specificity in their 

determinations, and it is, frankly, the reason that—what this really 

boils down to is size is the single metric. That is the metric that 

is coming out of the Financial Stability Board with respect to funds 

of the sort that our members offer: $100 billion, you are systemically important; $1 trillion by a manager, you are systemically important. The analysis will end and begin there. 

Chairman SHELBY. Mr. Hughes, I did not give you a chance on 

that. 

Mr. HUGHES. Yeah, I heard the same thing when the Secretary 

testified, and I guess I am sitting here scratching my head a little 

bit as to why a goal of this entire process should not be to have 

a system where there are not systemically important institutions. 

And if an organization like FSOC can put itself in a position to 

work with those institutions to de-risk further—I mean, you gave 

the example of MetLife de-banking. Obviously that was not enough 

from the perspective of FSOC. And I do not understand the problem with if the goal is to have no institutions that are systemically 

important, which I think it should be, why wouldn’t FSOC work 

with these institutions? And I think that the answer is, well, these 

are nonbanks, they are very complex, so, gee, we will just assume 

that they have material financial risks and then we will take it 

from there. That is not the right approach. 

Chairman SHELBY. Is it lack of knowledge on their part of insurance companies? 

Mr. HUGHES. Well, you know, you mentioned that FSOC voted 

with its collective wisdom. With all due respect to the members of 

FSOC, there is not a whole lot of deep insurance expertise on the 

Council. And we have been working with the Federal Reserve on 

capital standards. To their credit, they are on a steep learning 

curve, but there is still a long way to go. 

So the frustration is that people with insurance expertise said, 

‘‘We do not agree with the decision,’’ and then the collective wisdom—— 

Chairman SHELBY. That is why they dissented, did they not? 

Mr. HUGHES. Correct. And then the people that do not have the 

depth of knowledge said, well, let us just say they are systemic 

and—— 

Chairman SHELBY. Well, I think we all want strong insurance 

companies, strong banks. We want all of that. 

Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I do not think it is fair to call this a consulting 

exercise. You know, firms are aware of their risks. They know their 

portfolio risk, their liquidity risk, their counterparty risk. They 

42 

know their leverage. It is in their business interest to have a full 

command of those risk management tools. 

Chairman SHELBY. Absolutely. 

Mr. HOLTZ-EAKIN. What they do not know is the magic potion 

where you mix those up and deliver one ounce of systemic risk. 

And all they are asking is for some guidance on that so that they 

can reduce the risk the FSOC is tasked with controlling. That could 

be qualitative. It could say out of those six categories, this is the 

most important, this is second, this is third. It could be quantitative. But it cannot be zero. 

Chairman SHELBY. Well, I think they should not be able to game 

the evaluation, you know, of designation, but they should know 

what the criteria is to where they can operate a sound and safe institution. Do you all agree with that? 

[Witnesses nodding.] 

Chairman SHELBY. Gentlemen, thank you very much for your 

testimony and your patience here today. The Committee is adjourned. 

[Whereupon, at 4:07 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

43 

PREPARED STATEMENT OF JACOB J. LEW 

SECRETARY, DEPARTMENT OF THE TREASURY

MARCH 25, 2015 

Chairman Shelby, Ranking Member Brown, and Members of the Committee, 

thank you for inviting me here today to discuss the Financial Stability Oversight 

Council’s nonbank financial company designations process. 

As no one here needs reminding, the financial crisis caused great hardship for 

millions of individuals and families in communities throughout the country, and revealed some central shortcomings of our financial regulatory framework. We witnessed the effects of lax regulation and supervision for financial firms like Lehman 

Brothers and AIG. These names have already been written into history as companies whose failure, or near failure, helped contribute to the near-collapse of the financial system. At the time, the regulatory structure was ill-equipped to oversee 

these large, complex, interconnected financial companies. This outdated structure 

also meant that regulators had limited tools to protect the financial system from the 

failure of these companies. As a result, the American taxpayer had to step in with 

unprecedented actions to stop the financial system from collapsing. 

Congress responded with an historic and comprehensive set of financial reforms— 

the Dodd-Frank Wall Street Reform and Consumer Protection Act—to put in place 

critical reforms for taxpayers, investors, and consumers. The aim of this reform is 

to guard against future crises while making sure taxpayers are never again put at 

risk for the failure of a financial institution. 

To lead the effort to better protect taxpayers, Wall Street Reform created FSOC. 

FSOC is the first forum for the entire financial regulatory community to come together, identify risks in the financial system, and work collaboratively to respond 

to potential threats to financial stability. Over the past 5 years, FSOC has demonstrated a sustained commitment to working collaboratively to fulfill its statutory 

mission in a transparent and accountable manner. This work has not been easy; we 

built a new organization and developed strong working relationships among FSOC 

members and their staffs to allow the types of candid conversations, exchange of 

confidential, market sensitive information, and tough questions that will make our 

financial system safer. 

Today, FSOC convenes regularly to monitor market developments, to consider a 

wide range of potential risks to financial stability, and, when necessary, to take action to protect the American people against potential threats to the financial system. 

Our approach from day one has been data-driven and deliberative, while providing 

the public with as much transparency as possible regarding our actions and views. 

We have published four annual reports that describe our past work and future priorities; regularly opened FSOC meetings to the public; published minutes of all of 

our meetings that include a record of every vote the FSOC has ever taken; and solicited public input on both our processes and areas of potential risk. 

I and the other members nonetheless recognize that FSOC is a young organization that should be open to changes to its procedures when good ideas are raised 

by stakeholders. Just over the last year alone, FSOC has enhanced its transparency 

policy, strengthened its internal governance, solicited public comment on potential 

risks from asset management products and activities, and adopted refinements to 

its nonbank financial company designations process. 

I believe that our adoption of these changes to the nonbank financial company 

designations process represents a prime example of the way FSOC should go about 

refining its processes without compromising its fundamental ability to conduct its 

work. Last year, prior to making any changes, FSOC conducted extensive outreach 

with a wide range of stakeholders. The FSOC Deputies Committee—senior staff who 

coordinate FSOC activities—hosted a series of meetings in November with more 

than 20 trade groups, companies, consumer advocates, and public interest organizations. We also solicited input from each of the three companies then subject to a 

designation. FSOC discussed the findings from this outreach and proposed changes 

during a public meeting in January. 

FSOC adopted a set of supplemental procedures last month. These changes address the areas that stakeholders were most interested in and formalized a number 

of existing FSOC practices regarding engagement with companies. Under the new 

procedures, companies will know early in the process where they stand, and they 

will have earlier opportunities to provide input. Additionally, the changes will provide the public with additional information about the process, while still allowing 

FSOC to meet its obligation to protect sensitive, nonpublic materials. And finally, 

FSOC will provide companies with a clearer and more robust annual review process. 

This will open the door to more engagement with FSOC following a designation to 

44 

make sure there is ample opportunity to discuss and address any specific issues that 

a company wants to put before the FSOC. These changes strengthen the FSOC’s 

process while also addressing many of the suggestions made from stakeholders. 

Despite our responsiveness and willingness to engage with stakeholders in this 

case and others—but perhaps due in part to our successful pursuit of our mission— 

some opponents of reform have been trying to undermine the FSOC, its members 

and its ability to respond to potential threats to financial stability. Many of the arguments levied at FSOC are not based on the actual record, and opponents object 

to our efforts to bring regulators together to work collaboratively to monitor risks 

and protect the U.S. financial system. But Congress gave FSOC a clear mission to 

address the kinds of risks and regulatory gaps that resulted in the financial crisis, 

and we are doing what Congress asked us to do, using the tools Congress gave us. 

I am pleased to report to this Committee that the vast majority of key reforms 

contained in Wall Street Reform are now in place, due to the hard work and diligence of the independent regulatory agencies. We have made substantial progress 

since the law’s enactment almost 5 years ago toward shaping a financial system 

that is safer, more resilient, and supportive of long-term economic growth. I would 

like to take a moment to briefly highlight some key milestones that illustrate the 

scope and significance of Wall Street Reform. 

• Regulators now have tools to address the riskiness of the largest, most complex 

firms—whether banks or nonbanks—in a manner that is commensurate with 

their systemic footprint. 

• In addition, resolution planning and the orderly liquidation authority—a tool 

that Members on both sides of the aisle in this Committee helped craft—give 

us the ability to allow any financial firm to fail without putting the rest of the 

financial system at risk, and—just as importantly—without imposing costs on 

U.S. taxpayers. 

• The previously unregulated swaps market, notionally valued at around $600 

trillion dollars, has been fundamentally transformed through the introduction 

of a comprehensive regulatory regime that is making these markets safer and 

more transparent. 

• The Volcker Rule, which was adopted in late 2013 and is scheduled to take effect this summer, prohibits banks from speculative short-term trading and fund 

investing for their own accounts. This important rule will reduce both the incentive and ability of banks to take excessive risks, and limit conflicts of interest. 

• And with creation of the CFPB, we now have a financial regulator dedicated 

to looking out for consumers and protecting them from deceptive, unfair, and 

abusive practices by mortgage originators, payday lenders, and debt collectors, 

to name a few. To date, CFPB enforcement actions have resulted more than $5 

billion in relief to 15 million consumers who have been harmed by illegal practices. 

• Other recently completed reforms include: implementing enhanced prudential 

standards for the largest U.S. bank holding companies and for foreign banking 

organizations operating in the United States; new rules requiring banking organizations to hold sufficient liquidity buffers; establishing financial sector concentration limits, which set a cap on growth by acquisition for the largest financial companies; risk retention requirements for asset-backed securitizations; and 

enhanced leverage requirements to strengthen and backstop firms’ risk-based 

capital standards. 

• Finally, enhanced prudential standards continue to be applied in a manner that 

focuses the most stringent requirements on those few firms that pose the greatest risks to financial stability, including a proposed capital surcharge that is 

proportional to the risks posed by the largest and most complex banks. Also, 

there is a proposal for a new minimum standard for total loss-absorbing capacity (TLAC). This proposed standard would strengthen the capital framework to 

help ensure that the largest and most complex banks have sufficient capital to 

absorb losses, and would help facilitate an orderly resolution in a manner that 

minimizes any impact on financial stability if the bank fails. 

Today, because of Wall Street Reform, the financial system is in a more robust 

and resilient position than it was prior to the crisis. We have reduced overall leverage in the banking system. Banks have added over $500 billion of capital since the 

crisis to serve as a buffer for absorbing unexpected losses. The recently completed 

annual stress tests cover a wider swath of institutions, and illustrate that our largest banks have sufficient capital to withstand adverse shock scenarios and continue 

to lend to businesses. 

45 

In fact, despite suggestions by some that Wall Street Reform would impair our 

economic growth, the exact opposite has been true. While banks have adjusted to 

more prudent rules, they continue to increase lending to small businesses and families, helping to fuel the creation of 12 million jobs over 60 straight months of job 

growth—a record that our economy, with a safer financial system, continues to build 

on. This progress is both real and consequential. 

The true test of reform should not be whether it prevents firms from taking risk 

or making mistakes, but whether it shapes a financial system strong and resilient 

enough to support long-term economic growth while remaining innovative and dynamic. In working toward this end, Treasury and the independent regulators continue to monitor carefully the effects of new reforms and to ensure that they are 

properly calibrated to the size, complexity, and risk profiles of individual institutions. Just as the business environment is constantly evolving, the regulatory community must be flexible enough to keep up with new challenges—including making 

adjustments where necessary and remaining vigilant to new emerging threats. 

No law is perfect. But let me be clear: we will vigilantly defend Wall Street Reform against any change that increases risk within the financial system, weakens 

consumer, investor, or taxpayer protections, or impedes the ability of regulators to 

carry out their mission. Amid these discussions of technical fixes and tweaks to Wall 

Street Reform, we must not forget what we learned from the financial crisis: our 

financial firms are constantly evolving, and we must remain alert and responsive 

to new challenges in a dynamic system, toward the ultimate goal of maintaining the 

safety, soundness, and resiliency of our financial system. 

We must also not forget who will pay a steep price if Congress rolls back critical 

safeguards, weakens oversight, and waters down appropriate rules of the road. It 

will be companies that play by the rules and serve their customers well. It will be 

small businesses who need access to credit to grow their businesses and create jobs. 

It will be working men and women trying to save for their children’s education, a 

downpayment on a home, and their own retirement. 

Promoting financial stability and protecting the American public from the next financial crisis should be an objective shared by the Administration, regulators, the 

financial sector, and Members of Congress, regardless of party. I look forward to 

working with this Committee, and with Congress as a whole, to continue to make 

progress in creating a more resilient and stable financial system. 

PREPARED STATEMENT OF PAUL SCHOTT STEVENS 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, INVESTMENT COMPANY INSTITUTE

MARCH 25, 2015 

Executive Summary 

• Designation of systemically important nonbank financial companies is only one 

of several regulatory tools given the FSOC by the Dodd-Frank Act. Designation 

of a nonbank financial company as systemically important is intended to and 

should be used only as a last resort, when the FSOC has found, after thorough 

analysis based on all the criteria specified in the Act, that a firm poses significant, articulable risks to the stability of the financial system that cannot be 

remedied through other means. 

• ICI supports U.S. and global efforts to address abuses and excessive risk in the 

financial system, but we are concerned that the FSOC is seeking to exercise its 

designation authority quite broadly and to the exclusion of other mandates. The 

opacity of the designation process only exacerbates this problem. 

• The FSOC’s recent informal changes to its designation process are welcome but 

fall well short. These changes should be codified in statute to provide greater 

certainty and predictability to the process. In addition, Congress must act to require the FSOC to give both primary regulators and companies under consideration for designation an opportunity to address identified systemic risks prior 

to designation. Such steps would support the FSOC’s mission both by reducing 

risks in the financial system and by reserving SIFI designations and the exceptional remedies that flow therefrom only to those circumstances in which they 

are clearly necessary. 

• In none of its nonbank designations thus far has the FSOC chosen to explain 

the basis for its decision with any particularity. Instead, it appears to have relied on a single metric (a firm’s size) to the exclusion of the other factors cited 

in the Dodd-Frank Act. It also has theorized about risks instead of conducting 

the kind of thorough, objective, empirical analysis that should underlie its deciVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00049 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
46 

1 12 U.S.C. §5322(a)(2). 

sions. The FSOC should be explicit about the systemic risks it identifies arising 

from a firm’s structure or activities, and the results of any analysis that might 

lead to designation should be made public. This would be beneficial on all 

sides—it would help market regulators and firms address such risks, and it 

would promote public understanding of and confidence in what the FSOC regards to be systemically risky and why. 

• We support the FSOC’s review of the asset management sector as the Council 

fulfills its mandate under the Dodd-Frank Act. We are hopeful it will conclude, 

as we believe it must, that SIFI designation is unnecessary and inappropriate 

in the case of funds and their managers. The history of the recent financial crisis demonstrates that, compared to other parts of the financial system, U.S. 

stock and bond funds exhibited extraordinary stability. Unlike banks, fund 

managers act solely as agents. This means that fund investors—not fund managers—bear the risks and rewards of the fund. Funds use little or no leverage. 

Their structure, the way they are regulated and managed, and their overwhelmingly retail investor base—these and other factors all help explain why, in the 

75-year history of the modern fund business, stock and bond funds have never 

posed risks to the financial system at large. 

• We also support the role of the SEC as the regulatory body best equipped to 

address any concerns about financial stability with respect to funds and fund 

managers. While we believe there is no basis for designating them, recent proposals out of the FSB point to the prospect that the FSOC may soon consider 

designation for many large U.S. funds and their managers. If any of these entities was designated, the consequences would be highly adverse to investors and 

the capital markets. Application of the bank regulatory remedies set forth in 

the Dodd-Frank Act to designated stock and bond funds or their managers 

would raise costs on and jeopardize the interests of fund shareholders, greatly 

distort the fund marketplace, introduce a highly conflicted model of regulation, 

and compromise the important role that funds play as a source of financing in 

the economy. 

I. Introduction 

My name is Paul Schott Stevens. I am President and CEO of the Investment 

Company Institute (ICI or Institute), and I am pleased to appear before the Committee today to discuss the transparency and accountability of the Financial Stability Oversight Council (FSOC or Council) and particularly its processes for designating nonbank financial companies as systemically important financial institutions 

(SIFls). 

ICI is the national association of U.S. registered investment companies, including 

U.S. mutual funds, closed-end funds, exchange-traded funds (ETFs) and unit investment trusts. ICI seeks to encourage adherence to high ethical standards, promote 

public understanding and otherwise advance the interests of funds, their investors, 

directors and managers. ICI members today manage approximately $17.5 trillion in 

assets and serve more than 90 million investors. These investors rely on stock and 

bond funds to help achieve their most important financial goals, such as saving for 

college, purchasing a home, or providing for a secure retirement. 

The Institute traces its origin back to 1940 and passage of the landmark Investment Company Act and Investment Advisers Act, statutes that the Securities and 

Exchange Commission (SEC) has administered to great effect and that have provided a comprehensive framework of regulation for our industry. ICI members are 

both investors in the capital markets and issuers of securities. We understand the 

important role of appropriate regulation in protecting our investors, promoting confidence in our markets, and ensuring the resiliency and vibrancy of the financial 

system overall. For these reasons, ICI has been an active supporter of U.S. and global efforts to address issues highlighted by the global financial crisis. We also have 

been a strong proponent of improving the U.S. Government’s capability to monitor 

and mitigate risks across our Nation’s financial markets. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the DoddFrank Act), by design, provides an array of tools, in addition to SIFI designation 

authority, to the FSOC and other regulators. For example, the FSOC has a risk 

monitoring role and has the authority to identify gaps in regulation and make recommendations to financial regulators. 1 The broad scope of these other authorities 

should allow the FSOC to reserve SIFI designation for those circumstances— 

47 

2See Testimony of Chairman Ben S. Bernanke, before the Committee on Financial Services, 

U.S. House of Representatives, July 24, 2009, available at http://www.federalreserve.gov/ 

newsevents/testimony/bernanke20090724a.htm (stating that the ‘‘initial number of newly regulated firms [SIFIs] would probably be relatively limited’’). 

thought to be quite rare when the Dodd-Frank Act was enacted 2—in which the 

risks to the financial system as a whole are both large and quite plain, and nothing 

less than designation will suffice to address them. 

The record of the Council’s activities to date, however, suggests that the FSOC 

may be ignoring this statutory construct and, instead, seeking to exercise its designation authority quite broadly. The highly opaque process of the FSOC leading to 

designation has only exacerbated the problem, raising serious concerns about 

whether its determinations have adequate factual bases, take public comment into 

sufficient account, and can be subject to appropriate oversight. Without engaging 

more meaningfully with the public and with entities under review, the FSOC has 

appeared to be in headlong pursuit of designations based on foreordained conclusions rather than on rigorous and objective empirical analysis. 

To truly advance financial stability, the FSOC’s process must be open to the public, analytically based and grounded in the historical record. The history of the recent crisis demonstrates that America’s stock and bond funds exhibited extraordinary stability. In particular, it is important for the FSOC to consider carefully 

how different stock and bond funds and their managers are from banks. Unlike 

banks, fund managers act solely as agents, which means fund investors—not fund 

managers—bear the risk of any loss, or the benefit of any gain, in a portfolio. Moreover, registered funds use little to no leverage. The structure of these funds, the 

ways in which they are comprehensively regulated and managed, and their overwhelmingly retail investor base—these and other factors all help explain why, in the 

75-year history of the modern fund industry, stock and bond funds have never experienced a ‘‘run’’ of the sort to which banks are subject. 

As discussed below, we hope the FSOC’s recently announced changes to its SIFI 

designation process will increase communications and interaction with firms that 

are under review. More, however, needs to be done. These recent procedural changes 

were instituted informally and should be codified in statute. In addition, Congress 

should amend the Dodd-Frank Act to ensure that an institution targeted for designation and that institution’s primary regulator have the opportunity to address 

and mitigate any ‘‘systemic risks’’ the institution may pose prior to final SIFI designation. Bipartisan legislation introduced in the 113th Congress by Reps. Dennis 

Ross (R-FL) and John Delaney (D-MD), and four cosponsors, the ‘‘FSOC Improvement Act of 2014’’, would codify these and other good Government reforms to the 

SIFI designation process. Ultimately, this reasonable, bipartisan approach would enhance the ability of the FSOC to ameliorate systemic risk. 

In addition, we believe it is imperative for Congress to revisit the remedies that 

follow upon SIFI designation in the asset management sector, and certainly so in 

the case of registered funds or their managers. The remedies currently provided for 

in the Dodd-Frank Act—i.e., imposition of bank-style capital requirements and prudential supervision by the Federal Reserve—not only are unnecessary but are altogether inappropriate in the case of registered funds and their managers. They would 

inflict substantial harm on fund investors and retirement savers, distort the fund 

marketplace, and impede the important role that funds play as a vital source of 

funding in our capital markets. As noted, we do not believe that funds or fund managers merit SIFI designation. But, if a fund or fund manager were deemed to be 

systemically important, Congress should look to the SEC, and not the Federal Reserve, to conduct appropriately enhanced oversight of its activities. 

In Section II below, we outline our concerns about the FSOC’s SIFI designation 

process, explain the limitations of the recent changes to the process that have been 

adopted by the FSOC, analytically why further action is necessary. In Section III, 

we explain why the lack of specifics in the FSOC’s designations undermines the utility and fairness of the process. In Section IV, we set forth the basis for our concerns 

that the FSOC determinations be grounded in empirical data and historical experience, rather than the theory and conjecture as seems to be the Council’s approach 

to stock and bond funds and their managers. In Section V, we discuss the ongoing 

FSOC process with regard to asset managers. Finally, in Section VI, we conclude 

with an explanation of the many worrisome consequences of inappropriately designating funds and asset managers, which would harm investors and financial markets. 

48 

3See ‘‘Letter to The Honorable Jacob J. Lew, Secretary, U.S. Department of the Treasury, 

Chairman of the FSOC, from Sen. Mark Kirk (R-IL), Sen. Thomas Carper (D-DE), Sen. Patrick 

Toomey (R-PA), Sen. Claire McCaskill (D-MO), Sen. Jerry Moran (R-KS)’’, dated Jan. 23, 2014, 

(stating that ‘‘we strongly urge the FSOC and other governing bodies not to base any policy or 

regulation actions grounded on the information in the OFR study . . . . The OFR study 

mischaracterizes the asset management industry and the risks asset managers pose, makes 

speculative assertions with little or no empirical evidence, and, in some places, predicates claims 

on misused or faulty information’’). Senator Mark Warner has also noted that SIFI designation 

analysis ‘‘should follow a rigorous and transparent process, using reliable data, so that regulators and the marketplace can be armed with the best information possible.’’ ‘‘Letter to The 

Honorable Jacob J. Lew, Secretary, U.S. Department of the Treasury, Chairman of the FSOC, 

from Sen. Mark Warner (D-VA)’’, dated May 9, 2014. House Financial Services Chairman Jeb 

Hensarling also noted that, with the exception of the national security agencies dealing in classified information, the ‘‘FSOC may very well be the Nation’s least transparent Federal entity.’’ 

‘‘Statement of Chairman Jeb Hensarling before House Financial Services Committee, Hearing 

on ‘The Annual Report of the Financial Stability Oversight Council’ (June 24, 2014). See also 

‘‘Letter to The Honorable Jacob J. Lew, Secretary, U.S. Department of the Treasury, Chairman 

of the FSOC, from Rep. Carolyn B. Maloney (D-NY), Ranking Member, Subcommittee on Capital 

Markers and Government Sponsored Enterprises’’, dated July 29, 2014. In a letter to Federal 

regulators, Chairman Hensarling and others also commented that the ‘‘lack of transparency and 

due process injects needless uncertainty and instability into our financial markets.’’ ‘‘Letter to 

The Honorable Jacob J. Lew, Secretary, U.S. Department of the Treasury, Chairman of the 

FSOC; The Honorable Janet Yellen, Chair, The Federal Reserve System; and The Honorable 

Mary Jo White, Chair, SEC, from Rep. Jeb Hensarling (R-TX), Chairman, House Financial Services Committee, and the respective Subcommittee Chairmen’’, dated May 9, 2014. 4See GAO, New Council and Research Office Should Strengthen the Accountability and Transparency of Their Decisions (Sept. 2012), available at http://www.gao.gov/assets/650/ 

648064.pdf; GAO, Continued Actions Needed To Strengthen New Council and Research Office 

(Mar. 14, 2013), available at http://www.gao.gov/products/GAO-13-467T; GAO, Further Actions 

Could Improve the Nonbank Designation Process (Nov. 2014), available at http://www.gao.gov/ 

assets/670/667096pdf. 5The American Council of Life Insurers, the American Financial Services Association, the Association of Institutional Investors, the Financial Services Roundtable, and the Asset Management Group of the Securities Industry and Financial Markets Association, ‘‘Petition for FSOC 

Rulemaking Regarding the Authority To Require Supervision and Regulation of Certain 

Nonbank Financial Companies’’, (Aug. 19, 2014), available at http://fsroundtable.org/rulemaking-petition-fsoc/. 6FSOC, ‘‘Supplemental Procedures Relating to Nonbank Financial Company Determinations’’ 

(Feb. 4, 2015), available at http://www.treasury.gov/initiatives/fsoc/designations/Documents/ 

Supplemental-Procedures-Related-to-Nonbank-Financial-Company-Determinations-February2015.pdf. 

II. The FSOC’s SIFI Designation Process Should Be More Transparent and 

Accountable 

The FSOC’s SIFI designation process has been the subject of widespread criticism. 

Members of Congress from both parties have submitted numerous letters and statements expressing their own concerns. In 2014, for example, a bipartisan group of 

five Senators stated that one of the greatest problems with the SIFI designation 

process ‘‘is a lack of transparency and accountability.’’ 3 The Government Accountability Office (GAO) likewise has urged the FSOC to make changes to its process, 

including ‘‘improv[ing] communications with the public.’’ 4 Last year, several trade 

associations formally petitioned the FSOC to make changes to the SIFI designation 

process, including allowing entities undergoing review to receive more information 

and interact more extensively with the Council and its staff. 5

In response to these repeated calls for change, the FSOC in November 2014 convened meetings with interested parties to discuss potential procedural reforms and 

thereafter, in February 2015, issued ‘‘supplemental procedures’’ to revise its SIFI 

designation process. The changes include, among other things, earlier notice to and 

opportunity to submit information by companies and their primary regulators under 

Stage 2 active review; meetings with the FSOC’s Deputies Committee to allow companies in Stage 3 to present relevant information or arguments; a commitment to 

grant requests for oral hearings from companies in Stage 3; notices explaining a decision not to rescind a designation; and oral hearings for designated companies once 

every 5 years. 6

ICI welcomes these changes, which were overdue, as an initial positive step towards providing greater fairness and clarity in the designation process. Nonetheless, 

more needs to be done to improve the FSOC’s designation process. As it stands, the 

FSOC retain the absolute discretion to eliminate or change the new ‘‘supplemental 

procedures’’ at any time and without prior notice. Instead, the recent changes 

should be codified in law. This would provide a highly desirable predictability and 

certainty about FSOC’s designation process. 

49 

7 As noted, bipartisan legislation introduced in the 113th Congress by Reps. Dennis Ross (RFL) and John Delaney (D-MD), and four cosponsors, H.R. 5180, the FSOC Improvement Act, 

would codify these and other good Government reforms to the SlFI designation process. Additional provisions in the hill include important annual and 5-year reviews of prior SIFI designations in order to provide important information to firms and to the public about as to how previously designated SIFIs can take measures to ameliorate risks. 8 ‘‘Remarks at the New York Times DealBook Opportunities for Tomorrow Conference’’, Mary 

Jo White, Chair, SEC (Dec. 11, 2014), available at http://www.sec.gov/News/Speech/Detail/ 

Speech/1370543677722#.VJMKZ14AKB. 9 12 U.S.C. §5371. An unresolved inconsistency between two provisions in the Dodd-Frank Act 

calls into serious question just how much flexibility the Federal Reserve would have to limit 

the application of capital requirements to any U.S. mutual fund designated as a SlFI or G–SIFI. 

Although one provision of the Dodd-Frank Act gives the Federal Reserve discretion in applying 

capital standards to nonbank SIFIs (Section 165(b)(1)(A)(i) of the Dodd-Frank Act (providing the 

Federal Reserve authority to determine that capital standards are inappropriate for a particular 

SIFI and to substitute ‘‘other similarly stringent risk controls.’’)), another provision—known as 

the ‘‘Collins Amendment’’—may not (see Section 171 of the Dodd-Frank Act, which requires the 

imposition of minimum-leverage capital and risk-based capital standards on any SIFI). 10 12 U.S.C. §5365. 11 12 U.S.C. §539(o)(1)(D)(ii)(l). 12 12 U.S.C. §5323(a)(1). 

In addition, we believe Congress must act to reform the FSOC’s designation proc- ess 7 in ways that will advance the Dodd-Frank Act’s dual goals of reducing systemic 

risk while reserving SIFI designation as a tool to be used only in truly exceptional 

cases: 

• First, the FSOC should allow a targeted firm’s primary financial regulator an 

opportunity, prior to designation, to address any systemic risks identified by the 

FSOC. A company’s primary regulator generally will have greater expertise and 

regulatory flexibility than the FSOC to address identified risks. By way of example, the SEC already has the necessary authority—and is taking steps—to 

strengthen oversight of asset managers and funds, including by expanding oversight of risk management in key areas and enhancing its collection of mutual 

fund data. 8

• Second, an entity being reviewed for SIFI designation should have an opportunity to make changes to its structure or business practices to address identified systemic risks prior to designation. Allowing a firm the opportunity to 

change its business model or practices often may be the most effective way to 

address the identified risks. 

These reforms would further the objectives of promoting market discipline and reducing systemic risk, all while reserving designation for the exceptional circumstances for which it was intended. It also would avoid undue imposition of the 

remedies outlined in the Dodd-Frank Act on nonbank institutions for which they are 

clearly inappropriate. As specified in the Act, those remedies include the following: 

a risk based capital requirement potentially as high as 8 percent; 9 ‘‘enhanced prudential supervision’’ by the Federal Reserve; 10 and susceptibility to paying into a 

resolution fund in the event of the failure of a bank SIFI. 11 We discuss the consequences of these statutory remedies for funds and their managers in Section VI 

below. 

Ill. The Absence of Particularity in SIFI Determinations Impedes Interested 

Parties From Understanding and Benefiting From the FSOC’s Analyses 

Providing a company and its primary financial regulator an opportunity to mitigate identified systemic risks prior to designation would have the added benefit of 

requiring the FSOC to explain the bases for its designation decisions with some particularity. As discussed below, this is not something the FSOC has done in any of 

its nonbank SIFI designations thus far. Requiring an appropriate degree of specificity would enable the firm under consideration, the firm’s principal regulator, 

other market participants, Congress and the public at large to understand the specific reasons for the FSOC’s actions, thus enhancing both the transparency and accountability of the Council and its actions. 

The Dodd-Frank Act permits the FSOC to designate a nonbank financial institution as ‘‘systemically important’’ in one of two situations. The FSOC may designate 

a firm if either (1) the company’s material financial distress (the First Determination Standard) or (2) the nature, scope, size, scale, concentration, interconnectedness, or mix of the company’s activities (the Second Determination Standard), could 

pose a threat to the financial stability of the United States. 12 To date, the FSOC 

has predicated all of its nonbank SIFI determinations on the basis of the First Determination Standard and has not addressed whether the activities of the company 

50 

13See GAO, ‘‘Further Actions Could Improve the Nonbank Designation Process’’ (Nov. 2014), 

available at http://www.gao.gov/assets/670/667096.pdf. 14The Financial Stability Board (FSB) has proposed to take a similarly flawed approach, focusing in its second consultation on the size of firms to the exclusion of other factors. See FSB, 

‘‘Second Consultative Document: Assessment Methodologies for Identifying Nonbank Non-Insurer Global Systemically Important Financial Institutions’’ (Mar. 4, 2015), available at http:// 

www.financialstabilityboard.org/wp-content/uploads/2nd-Con-Doc-on-NBNI-G-SIFI-methodologies.pdf. 15 Adam Hamm, ‘‘View of the State Insurance Commissioner Representative’’ (Dec. 2014), 

available at http://www.treasury.gov/initiatives/fsoc/designations/Documents/ 

Dissenting%20and%20Minority%20Views.pdf. 16See 12 U.S.C. §5323(a)(2). The two considerations are 12 U.S.C. §§5323(a)(2)(I) and (J), 

which require the FSOC to consider ‘‘the amount and nature of the financial assets of the company’’ and ‘‘the amount and types of the liabilities of the company, including the degree of reliance on short-term funding,’’ respectively. 17See GAO, ‘‘Further Actions Could Improve the Nonbank Designation Process’’, at 35 (Nov. 

2014), available at http://www.gao.gov/assets/670/667096.pdf (stating that the FSOC’s nonpublic documentation ‘‘could have benefited from inclusion of additional detail about some aspects of its designation decisions’’). 18S. Roy Woodall, ‘‘Views of the Council’s Independent Member Having Insurance Expertise’’ 

(Dec. 2014), available at http://www.treasury.gov/initiatives/fsoc/designations/Documents/ 

Dissenting%20and%20Minority%20Views.pdf. 

could pose a threat to the financial stability of the United States. In its 2014 report 

on improving the FSOC designation process, the GAO noted the FSOC’s exclusive 

reliance on the First Determination Standard, and expressed concern that the approach was flawed and would lead the FSOC to ignore certain risks. 13

In effect, the approach taken by the FSOC has led to designations that appear 

to be based on a firm’s size, rather than on the basis of the more complete and detailed analysis of a firm’s activities and the risks they present, as the Dodd-Frank 

Act envisioned. 14 The FSOC’s State insurance commissioner representative stated, 

in response to the MetLife, Inc. (MetLife) designation, that ‘‘the [FSOC] has failed 

to address the criticism that it did not conduct a robust analysis of characteristics 

of MetLife beyond its size,’’ and that without more specific details on the bases for 

determination, ‘‘any large company could meet the statutory standard applied by the 

[FSOC].’’ 15 In fact, Congress expressly required in the Dodd-Frank Act that the 

FSOC consider at least 10 statutory factors, only 2 of which directly relate to an 

institution’s size. 16 By avoiding any discussion of the particular aspects or activities 

of an institution that are thought to pose systemic risks, the FSOC not only forecloses the prospect of any meaningful, reasoned justification for its decisions, but 

also frustrates congressional intent. 

In addition, and equally troubling, the FSOC’s exclusive reliance on the First Determination Standard does nothing to inform a designated nonbank firm, other market participants, Congress or the general public about the primary drivers (if any, 

other than size) of the Council’s designation decision. It therefore offers the firm no 

insight into how it might ‘‘de-risk’’ and thereby no longer merit SIFI designation or 

require application of the exceptional remedies specified in the Dodd-Frank Act. 

This is an odd result indeed if the object of the exercise is to eliminate or minimize 

what are thought to be outsized risks to the financial system at large. 

The GAO’s 2014 study makes a similar point. The GAO found that even nonpublic 

documentation of Stage 3 evaluations—the final stage of the FSOC’s multistaged 

analytic process—did not include sufficient detail on the bases for the FSOC’s determinations. 17 In dissenting from MetLife’s SIFI designation, S. Roy Woodall, the 

presidentially appointed independent member of the FSOC with insurance expertise, noted that basing determinations solely on the First Designation Standard 

‘‘does little else to promote real financial system reform’’ because it does not provide 

‘‘constructive guidance for the primary financial regulatory authorities, the [Federal 

Reserve] Board of Governors, international supervisors, other insurance market participants and, of course, MetLife itself, to address any [systemic] threats posed by 

the company.’’ 18

The FSOC should be explicit about the systemic risks it identifies arising from 

a firm’s structure or activities. It should provide enough detail to enable both a company and its primary regulator to respond substantively with proposals to mitigate 

the risk. This is beneficial on all sides—systemic risk would be curbed, the public 

and market might gain insight on what activities or structures the FSOC considers 

to be systemically risky and why, and the firm could avoid unnecessary and potentially inappropriate regulation and supervision. 

51 

19 Id. 20S. Roy Woodall, ‘‘Views of the Council’s Independent Member Having Insurance Expertise’’ 

(Sept. 19, 2013), available at www.treasury.gov/initiatives/fsoc/councilmeetings/Documents/ 

September%2019%202013%20Notational%20Vote.pdf. 21 John Huff, ‘‘View of Director John Huff, the State Insurance Commissioner Representative’’ 

(Sep. 2013), available at http://www.treasury.gov/initiatives/fsoc/council-meetings/Documents/ 

September%2019%202013%20Notational%20Vote.pdf. 22FSB, supra note 14. 23 Id. at 10, emphasis in the original. 24The FSOC has warned that it may use other methods to assess the asset management industry, but, as a bipartisan group of Congressmen has pointed out, ‘‘the FSOC: should . . . publicly disclose the economic models, data, and analysis that support its approach before taking 

any steps to identify particular asset management entities for SIFI designation.’’ Letter to The 

Honorable Jacob J. Lew, Secretary, U.S. Department of the Treasury, Chairman of the FSOC, 

from Reps. Dennis Ross (R-FL) and John Delaney (DMD) and 39 other members of the House 

Financial Services Committee (May 9, 2014). Publicizing the metrics will ensure the FSOC is 

Continued 

IV. The FSOC’s Approach to Designation Is Predicated on Conjecture, as 

Opposed to Empirical Data 

If the FSOC were required to provide greater specificity about the bases for its 

designation decisions, as the Dodd-Frank Act anticipates, it would be more likely 

to engage in the kind of robust, empirically based, data-driven, ‘‘bottom up’’ analysis 

that one would reasonably expect in connection with such a significant regulatory 

determination. Such an approach would take fully into account all of the factors 

that Congress enumerated in Section 113 of the Dodd-Frank Act, including the degree to which a firm already is regulated and the prospects of using that preexisting 

regulatory structure to address perceived risks. It would help ensure that designations are not made on the basis of prejudgment or conjecture or on ‘‘implausible, 

contrived scenarios’’; it also would make the FSOC far less susceptible to criticism, 

from within its own ranks, for ‘‘failures to appreciate fundamental aspects’’ of a potential designee’s business, products, and services. 19 Remarkably, in dissenting to 

Prudential Financial, Inc.’s (Prudential) designation as a SIFI, Mr. Woodall observed the following: 

Key aspects of [the FSOC’s] analysis are not supported by the record or actual experience; and, therefore, are not persuasive. The underlying analysis 

utilizes scenarios that are antithetical to a fundamental and seasoned understanding of the business of insurance, the insurance regulatory environment, and the State insurance company resolution and guaranty fund systems . . . . [T]he grounds for the Final Determination are simply not reasonable or defensible, and provide no basis for me to concur. 20

The State insurance representative on the FSOC, John Huff, agreed; he found the 

FSOC’s analysis of Prudential to be ‘‘flawed, insufficient, and unsupportable.’’ 21

Moreover, this highly theoretical approach is not unique to the FSOC. The Financial Stability Board (FSB) recently issued a second consultation on evaluation criteria for nonbank, noninsurer global SIFIs (NBNI G–SIFls). 22 In this second consultation, the FSB frankly states that ‘‘the NBNI G–SIFI assessment methodologies 

aim to measure the impact that an NBNI financial entity’s failure can have on the 

global financial system and the wider economy, rather than the probability that a 

failure could occur.’’ 23 Apparently, if bank regulators meeting in Switzerland can 

conjure up some ‘‘systemic’’ concern, then their conjecture can serve as a basis for 

global policymaking—even if it has no historical, factual or even rational predicate. 

When we have argued for a process informed by facts, we often have been invited 

to prove a negative—that is, to demonstrate that the hypothetical risks so articulated cannot arise. 

In sum, the way in which the FSOC has approached the question of nonbank SIFI 

designation has every feel of a result-oriented exercise as opposed to an objective 

analysis—where a single blunt metric (size) dwarfs the other statutory factors and 

mere hypotheses are used to compel a seemingly predetermined outcome—i.e., that 

designation is required. 

We believe Congress expected, and it should demand, something more of the 

FSOC. SIFI designation should be predicated on a thorough, objective analysis of 

a specific institution, its structure and activities, its historical experience, the ways 

in which it is regulated currently and ocher empirical information, including all the 

factors set out in the Dodd-Frank Act—and the results of this analysis should be 

made available to the public. Relatedly, if it determines to consider asset managers 

and their funds for SIFI designation, the FSOC should subject the metrics and 

thresholds used to evaluate such entities to notice and comment. 24 With such a 

52 

not relying on inaccurate data and false assumptions, such as those in the Office of Financial 

Research’s Asset Management Study. 25 Exec. Order No. 13,563, 76 Fed. Reg. 3821 (Jan. 21, 2011) (requiring certain agencies to 

engage in cost-benefit analysis before rulemaking); Exec. Order 13,579, 76 Fed. Reg. 41585 (July 

14, 2011) (encouraging independent regulatory agencies to engage in cost-benefit analysis before 

rulemaking). 26See, e.g., ‘‘Letter to the Honorable J. Lew, Secretary, U.S. Department of the Treasury, 

Chairman of the FSOC, from Sen. Mark Kirk (R-IL), Sen. Thomas Carper (D-DE), Sen. Patrick 

Toomey (R-PA), Sen. Claire McCaskill (D-MO), Sen. Jerry Moran (R-KS)’’, dated Jan. 23, 2014, 

(stating that the report ‘‘mischaracterizes the asset management industry and the risks asset 

managers pose, makes speculative assertions with little or no empirical evidence, and in some 

places, predicates claims on misused or faulty information’’); ‘‘Letter to The Honorable Jacob J. 

Lew, Secretary, U.S. Department of the Treasury, Chairman of the FSOC, from Sen. Mike 

Crapo (R-lD)’’, dated Jan. 27, 2014 (stating that ‘‘OFR’s failures to take into account the perspectives of and data from market participants will result in flawed evaluation of the asset management industry by FSOC and, worse, a move towards designation of asset management firms as 

SIFIs without an accurate understanding of the rule they play in the financial system’’); Daniel 

M. Gallagher, Commissioner, SEC, ‘‘Public Feedback on OFR Study on Asset Management 

Issues’’ (May 14, 2014), available at http://www.sec.gov/comments/am-1/am1-52.pdf. (citing 

multiple critics of the asset management report and calling the report ‘‘a botched analysis that 

grossly overstates—indeed, in many cases simply invents without supporting data—the potential 

risks to the stability of our financial markets posed by asset management firms’’). 27 80 Fed. Reg. 7595 (Feb. 5, 2015), available at http://www.gpo.gov/fdsys/pkg/FR-2015-02- 

11/pdf/2015-02813.pdf. 

focus on facts, the FSOC also would do well to consider whether using one of the 

other tools that the Dodd-Frank Act makes available to it would be more appropriate than SIFI designation. Indeed, requiring a consideration of the costs and benefits of designation would put the FSOC’s decision making on par with the Administrative Procedure Ace’s requirements for significant rulemakings and the Obama administration’s executive orders regarding rulemaking processes. 25

V. The FSOC’s Review of Asset Management Appears Similarly Flawed 

A 2013 report on asset management written by the Office of Financial Research 

(OFR), the research arm of the FSOC, heightened our concerns with the FSOC’s 

SIFI review process and demonstrated the need for increased public input. The report was the subject of withering criticism—for reflecting a deeply inaccurate understanding of the asset management industry, for rendering sweeping conclusions unsupported by data or analysis and for lacking clarity, precision, and consistency in 

its scope, focus, and use of data. 26

Regrettably, the FSOC appears to be persisting in this pattern of reliance on conjecture and hypothesis in its consideration of liquidity and redemption risks associated with investment vehicles that are offered by asset managers. Its recent Notice 

Seeking Comment on Asset Management Products and Activities (the Notice) 27 simply assumes a variety of potential threats to the financial system arising from asset 

management, much as the OFR report did in 2013. For example, the Notice hypothesizes that shared trading costs for stock and bond funds create a unique and powerful incentive for fund investors to redeem en masse in the face of a market decline, potentially leading to severe additional downward pressure on markets. The 

Notice points to no historical experience nor any empirical data to support this hypothesis. In fact, there is none: the hypothesis is based on a series of assumptions 

that simply do not reflect how stock and bond funds and their managers operate 

nor how their investors behave, as the Institute discusses in detail in its comment 

letter to the FSOC to be filed on March 25, 2015. Even if this hypothesis were at 

all plausible, there is nothing to suggest it would in fact pose a risk to financial stability. 

While we are concerned with the highly theoretical nature of some of the questions presented in the Notice, ICI commends the FSOC for seeking public comment 

on this occasion. We hope and expect that Council members will thoroughly review 

and give due consideration to all the public comments they receive, including the 

extensive research and commentary submitted by ICI and its members. A transparent, fact-based and fair FSOC process with respect to funds and their managers—one that takes full account of the structure and characteristics of these entities, the ways in which they operate, the 75-year history of the industry, and the 

highly effective framework of regulation under which it currently operates—will, we 

believe, allay any concerns that funds or their managers pose risks to the financial 

system meriting SIFI designation. 

VI. The Consequences of Inappropriate Designations Would Be Severe 

Ensuring that the FSOC meets high standards of transparency and accountability 

as it exercises its authority under the Dodd-Frank Act is vitally important: its desVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00056 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
53 

28 ‘‘Remarks at the Federal Reserve Bank of New York Workshop on Fire Sales as a Driver 

of Systemic Risk in Triparty Repo and Other Secured Funding Markets’’, Jeremy C. Stein, Member, Board of Governors of the Federal Reserve System (Oct. 4, 2013), available at http:// 

www.federalreserve.gov/newsevents/speech/stein20131004a.htm; ‘‘Remarks at the Global Research Forum on International Macroeconomics and Finance on Dollar Funding and Global 

Banks’’, Jeremy C. Stein, Member, Board of Governors of the Federal Reserve System (Dec. 17, 

2012), available at http://www.bis.org/review/r121218c.pdf. 29 ‘‘Remarks at the Office of Financial Research and Financial Stability Oversight Council’s 

4th Annual Conference on Evaluating Macroprudential Tools: Complementarities and Conflicts’’, 

Daniel K. Tarullo, Member of the Federal Reserve System (Jan. 30, 2015 ), available at http:// 

www.federalreserve.gov/newsevents/speech/tarullo20150130a.pdf. 

ignations carry with them exceptional consequences. In the case of funds and their 

managers, we submit that there is no basis for designation—and, if they were designated, the consequences would be highly adverse to investors and the capital markets. 

As noted above, if a fund or its manager were to be designated a SIFI, the DoddFrank Act could require it to meet bank-level capital requirements. The fund or 

manager would have to cover the costs of its ‘‘enhanced prudential supervision’’ by 

the Federal Reserve. It would bear a share of the costs of the FSOC and OFR annually. It would even be subject to assessments to cover the cost of bailing out another 

SIFI if one were to fail, thus exposing fund investors (likely retirement savers) to 

having to foot the bill. 

All of these costs would be unique to the designated fund or manager, and thus 

uniquely borne by that fund complex. The fund marketplace in the U.S. is highly 

competitive. There are many substitutable funds and providers from which to 

choose, and our investors and their financial advisers are properly focused on the 

impact of fees and expenses on long-term investment results. It is not apparent that 

a stock and bond fund or manager saddled with the additional costs of being a SIFI 

can remain fully competitive under these circumstances. Its shareholders may have 

very strong incentives to invest elsewhere. SIFI designation for some funds or fund 

managers thus stands to greatly distort the fund marketplace. 

Of still more fundamental concern are the implications of ‘‘enhanced prudential 

supervision’’ of a stock or bond fund or its manager by the Federal Reserve. The 

bank model of regulation seeks first and foremost to preserve the safety and soundness of banks and the banking system. It contrasts strongly with the model of regulation enshrined in the Investment Company Act and Investment Advisers Act as 

administered by the SEC. Under that model, the adviser to a fund owes the fund’s 

shareholders an exclusive duty of loyalty and care—and one of the SEC’s primary 

missions is to protect the fund investors’ interests. 

An overlay of bank regulation thus would introduce a new and troubling dynamic 

of conflicted regulation. For example, a SIFI-designated stock and bond fund or its 

manager would be expected to comply with the Federal Reserve’s directions about 

how to manage its investment portfolio, irrespective of the fund adviser’s or independent directors’ fiduciary duties or the best interests of the fund’s shareholders. 

This is not a theoretical concern. In the aftermath of the financial crisis, some bank 

regulators vocally criticized fund managers for acting to protect their investors from 

financial losses by not maintaining short-term investments with banking institutions that were at risk of failure. 28 The priority of the bank regulators, of course, 

was not protecting the interests of the fund investors, but propping up failing banks 

and thereby the banking system. 

Just this kind of approach to regulating asset managers is something that Federal 

Reserve Governor Daniel K. Tarullo explicitly called for in a recent speech—terming 

it ‘‘prudential market regulation,’’ something needed to provide a ‘‘systemwide perspective’’ that would trump traditional investor protections and market regulation 

and respond to ‘‘systemwide demands.’’ 29 Presumably, any fund or manager designated a SIFI henceforward would be put to the service of two masters—the Federal Reserve in the interests of the ‘‘system,’’ and secondarily the fund’s shareholders. 

Moreover, a SIFI regime for funds or their managers likely will result in highly 

prescriptive regulations and a common sec of ‘‘approved’’ investments within portfolio structures—just as the Basel standards pushed banks toward a standard portfolio of ‘‘lower-risk’’ assets, and thus helped usher in the financial crisis of 2008. 

This is the model that the Federal Reserve would bring to asset management. With 

it would come decreasing diversification, increasing correlation, great volatility, and 

more—not less—risk. Such requirements would ultimately compromise and diminish the exceptional role that funds play as a source of financing to the economy. 

That the remedies in the Dodd-Frank Act seem altogether inappropriate when applied to stock and bond funds and their managers is perhaps not surprising: during 

54 

30FSB, supra note 14. 31We note that all insurance companies that have been designated as SIFIs were first designed by the FSB as global systemically important insurers (G–SIIs). 

consideration of the Dodd-Frank Act, there was no thought that these remedies 

would be applied to a part of the financial system that had remained comparatively 

so resilient even in the midst of the crisis. 

This underscores the need for Congress to craft, with respect to asset management, a very different set of remedies that would flow from any SIFI designation. 

If the FSOC does identify systemic risks in the asset management sector, we believe 

enhanced oversight by the SEC, and not by the Federal Reserve, is appropriate. 

The figure [below] illustrates just how consequential allowing the FSOC and the 

Federal Reserve to proceed down the current path is likely to be. In connection with 

its ‘‘Workstream on Other Shadow Banking Entities’’, 30 led personally by Governor 

Tarullo, the FSB recently released for public comment proposed thresholds for identifying the pool of asset managers and individual funds that automatically would 

be evaluated for potential designation as G–SIFIs. The FSB proposes alternative 

thresholds for funds and for asset managers. The below chart applies the broader 

FSB threshold for funds—any fund with assets of more than $100 billion in assets. 

For asset managers the below chart applies the FSB’s $1 trillion under management 

threshold. 

The vast majority of the funds and asset managers that automatically would be 

evaluated under these criteria are U.S. firms. Applying these thresholds to our industry—something that seems to be highly likely if the FSB adopts them 31—we estimate that more than half of the $6.3 trillion in assets in defined contribution plans 

would fall either directly or indirectly under the ‘‘enhanced prudential supervision’’ 

and thus the ‘‘prudential market regulation’’ of the Federal Reserve, assuming that 

the funds and managers meeting the thresholds are designated. More broadly, we 

estimate that well over half—nearly $10 trillion—of the $18 trillion in assets that 

U.S. households have invested in mutual funds, ETFs, or other registered investment companies would fall under such supervision by the Federal Reserve. 

We do not believe that any Member of Congress had any conceivable notion of the 

prospect that this extraordinary expansion of Federal Reserve authority could result 

from the Dodd-Frank Act. Surely, however, important participants today in the 

FSOC and FSB are well aware of it. And, ironically, there are voices in the bank 

55 

32See, e.g., Donald Kohn, ‘‘Institutions for Macroprudential Regulation: The U.K. and the 

U.S.’’ (Apr. 17, 2014), available at http://www.brookings.edu/research/speeches/2014/04/17-institutions-macroprudential-regulation-kohn (advocating for a change in the FSOC’s structure ‘‘to 

enhance its independence’’). 

*I thank Marisol Garibay, Sarah Hale, and Andy Winkler for their assistance. The views expressed here are my own and not those of the American Action Forum. 

regulatory community urging that the real problem with the FSOC is not that it 

has too little accountability, but that it has too much—and give due consideration 

to all these extraordinary new regulatory powers with a very high degree of independence from Congress and the executive branch. 32

In conclusion, let me say that ICI and all its members have deep concerns about 

the transparency, accountability, and fairness of the FSOC process. We by no means 

object to the Council’s examination of asset management as it weighs possible outsized risks to the financial system. What we do ask is simple, and nothing more 

than common sense and good governance would seem to require: 

• The FSOC should consider all the tools available to it to mitigate risks, not simply SIFI designation; 

• SIFI designations should have a clear and compelling empirical basis and take 

into account all the factors Congress enumerated in statute; 

• The FSOC should communicate with particularity the bases for its designations; 

• Congress should ensure that there is an opportunity for ‘‘de-risking’’ by a primary regulator and by the institution concerned in advance official SIFI designation; and 

• In the event that the FSOC does not heed the volume of data to the contrary 

and designates a stock or bond fund or asset manager as a SIFI, Congress 

should ensure that the remedies to which the designated fund or manager is 

subject are appropriate ones, for those currently contained in the Dodd-Frank 

Act clearly are not. 

We appreciate the opportunity to share these views with the Committee. ICI looks 

forward to working with Congress on reforming the FSOC’s SIFI designation process to ensure that it works as Congress intended. 

PREPARED STATEMENT OF DOUGLAS HOLTZ-EAKIN 

PRESIDENT, AMERICAN ACTION FORUM

MARCH 25, 2015 

Chairman Shelby, Ranking Member Brown, and Members of the Committee, 

thank you for the opportunity to appear today and share my views on the Financial 

Stability Oversight Council (FSOC or the Council) nonbank designation process.* 

FSOC’s mission is to identify, monitor, and address threats to America’s financial 

stability. Yet without significant changes to the process by which nonbank financial 

companies (NBFCs) are designated as systemically important and regulated, FSOC 

risks losing the confidence of the public and policymakers and burdening the economy without resultant benefits. In my testimony, I wish to make three main points: 

• FSOC’s process thus far has prioritized designation and regulation of institutions over the identification of activities that pose systemic threats, and done 

so in a fundamentally flawed manner. I applaud the Committee for taking a 

critical look at this process and all its implications; 

• Further clarity is needed on the metrics leading to designation. And equally important, companies must be able to address the activities identified as posing 

systemic risk, avoid a designation, and, if unable to do the aforementioned, have 

a path exiting designation; 

• Finally, recently adopted procedures to open up FSOC and improve communication with firms under review should be commended as a good first step. 

Let me provide additional detail on each in turn. 

Current Nonbank Designation Process 

Title I, Subtitle A, of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established FSOC, outlined the Council’s powers, and introduced factors that must be considered when designating NBFCs as systemically 

important financial institutions (SIFIs). Because banking companies with over $50 

56 

1 12 U.S.C. §5323 (a)(1). 2 12 U.S.C. §5323 (a)(2)(K). 3 ‘‘Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies; Final Rule and Interpretive Guidance’’, 77 Federal Register 70 (April 11, 2012) pp. 21637– 

21662; https://federalregister.gov/a/2012-8627. 4FSOC, ‘‘Supplemental Procedures Relating to Nonbank Financial Company Determinations’’, 

(February 4, 2015); http://www.treasury.gov/initiatives/fsoc/designations/Documents/SupplementallProcedureslRelatedltolNonbanklFinanciallCompanylDeterminations-Februaryl2015.pdf. 

billion in assets are automatically considered SIFIs in the Dodd-Frank Act, key 

issues involving designation revolve around nonbanks. 

Specifically, Section 113 of the Dodd-Frank Act gives FSOC the authority by twothirds vote (including the chairperson) to bring a NBFC under increased supervision 

and regulation by the Federal Reserve Board (FRB) if the Council determines that 

‘‘material financial distress at the U.S. nonbank financial company, or the nature, 

scope, size, scale, concentration, interconnectedness, or mix of the activities of the 

U.S. nonbank financial company, could pose a threat to the financial stability of the 

United States.’’ 1 In making that determination, the Dodd-Frank Act lists 10 criteria 

for FSOC to consider along with ‘‘any other risk-related factors that the Council 

deems appropriate.’’ 2 As such, FSOC has broad authority statutorily when evaluating companies for SIFI designation. In April 2012, FSOC released a final rule and 

interpretive guidance on the process it uses to designate SIFIs. 3 The Council recently voted to supplement that process during its February 2015 meeting following 

an internal review and input from the public and stakeholders. 4

The three-stage evaluation process FSOC developed is intended to narrow the pool 

of companies potentially subject to designation by applying specific thresholds based 

on 11 criteria included in Section 113 of the Dodd-Frank Act. The 11 criteria have 

been incorporated into six overarching framework categories that FSOC considers: 

(1) size, (2) interconnectedness, (3) leverage, (4) substitutability, (5) liquidity risk 

and maturity mismatch, and (6) existing regulatory scrutiny. Table 1 highlights how 

thresholds in these categories are applied and how scrutiny increases as a company 

advances through each stage. However, in practice, it is not clear the weight given 

to certain factors over others or what makes a designation more likely. 

57 

5 ‘‘Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies; Final Rule and Interpretative Guidance’’, 77 Federal Register 70 (April 11, 2012) p. 21661; 

https://federalregister.gov/a/2012-8627. 6Satya Thallam, ‘‘Considering an Activity-Based Regulatory Approach to FSOC’’, (September 

12, 2014) http://americanactionforum.org/research/considering-an-activity-based-regulatory-approach-to-fsoc. 7Satya Thallam, ‘‘Reform Principles for FSOC Designation Process’’, (November 11, 2014) 

http://americanactionforum.org/research/reform-principles-for-fsoc-designation-process. 8Satya Thallam, ‘‘Reform Principles for FSOC Designation Process (Cont’d),’’ (January 15, 

2015); http://americanactionforum.org/solutions/reform-principles-for-fsoc-designation-processcontd. 

Table 2 includes a summary of all changes adopted in February, many of which 

attempt to address the need for increased transparency and communication. Items 

shaded in gray are substantially similar to reforms previously highlighted in past 

work by the American Action Forum.5678

Because Dodd-Frank gives FSOC such expansive authority to set the specific determinants of a SIFI designation, FSOC’s operational procedures have largely been 

set internally and through the regulatory rulemaking process. Table 3 outlines the 

actions FSOC and the Federal Reserve Board have taken to date to define their procedures, receive feedback from the public, and exercise their authority to designate 

NBFCs and regulate them. Since its creation, four NBFCs (AIG, GE Capital, Prudential Financial, and MetLife) have already been affirmatively voted as SIFIs. 

FSOC voted unanimously to designate AIG and GE Capital in June 2013 and reaffirmed their status last year. The votes to designate Prudential Financial and 

MetLife, in September 2013 and December 2014, respectively, were not unanimous—both included objections from the voting and nonvoting members of FSOC 

with insurance experience. 

58 

59 

9GAO, ‘‘Financial Stability Oversight Council: Further Actions Could Improve the Nonbank 

Designation Process’’, (November 20, 2014); http://www.gao.gov/products/GAO-15-51. 10 Ibid. 11 Bipartisan Policy Center, Economic Policy Program—Financial Regulatory Reform Initiative, ‘‘Dodd-Frank’s Missed Opportunity: A Road Map for a More Effective Regulatory Architecture’’, (April 2014); http://bipartisanpolicy.org/library/report/dodd-frank’s-missed-opportunityroad-map-more-effective-regulatory-architecture. 12See FSOC’s Meeting Minutes for September 19, 2013 and December 18, 2014: http:// 

www.treasury.gov/initiatives/fsoc/council-meetings/Documents/Septemberl19l2013lNotationallVote.pdf and http://www.treasury.gov/initiatives/fsoc/councilmeetings/Documents/Decemberl18l2014lMeetinglMinutes.pdf. 

Primary Criticisms and Recommended Changes 

Established in Section 113 of the Dodd-Frank Act, FSOC has been given the difficult task of identifying and monitoring threats to U.S. financial stability in realtime. However, there is no single or simple way to measure and mitigate systemic 

risk. In fact, the process FSOC has developed to designate NBFCs as SIFIs can also 

disrupt markets and impose unnecessary regulatory burdens and costs that outweigh its benefits to the economy. So despite recent improvements, FSOC’s process 

needs more rigorous quantitative analysis, respect for other regulators and their expertise, greater concern for market impacts, and a clear path for the removal of a 

designation. Here is further detail on the issues FSOC reforms should address: 

1. FSOC’s lack of transparency and failure to provide meaningful information on 

the determinants leading to designation result in unclear guidance on systemic 

threats. While FSOC is right to worry about the effect of leaks and disclosures of 

proprietary information, room still exists for the release of more information detailing issues in the broadest, macro terms. According to a report issued by the Government Accountability Office (GAO), ‘‘FSOC’s transparency policy states its commitment to operating transparently, but its documentation has not always included certain details.’’ 9 GAO recommended, ‘‘To enhance disclosure and strengthen transparency, the Secretary of the Treasury, in consultation with FSOC members, . . . 

should include additional details in its public basis documentation about why FSOC 

determined that the company met one or both of the statutory determination standards.’’ 10 Designation decisions available to the public should reflect the shared goal 

of minimizing systemic threats; if there is a specific activity or subsidiary of a designated firm that poses an acute threat, the final decision should disclose it. Furthermore, GAO is not alone in suggesting more open communication with the public 

and companies under consideration, the Bipartisan Policy Center and many others 

have echoed such concerns. 11

2. If there is a particular activity or activities that threaten the financial system, 

a company should be able to work with FSOC to remediate the problem. As a company moves through FSOC’s 3-stage evaluation process, FSOC does not inform companies of what changes could be made to either their structure or operations to 

avoid designation. While FSOC has outlined the characteristics it considers in its 

evaluation process, it is still not clear the weight they give to certain factors over 

others or what makes a designation more likely. In the supplemental procedures 

adopted in February, FSOC made some effort toward increasing the amount of communication between firms under consideration and FSOC staff. Yet ultimately, the 

Council does not encourage companies to work with the Office of Financial Research 

and FSOC staff to clearly define a potential systemic threat through data and modeling, explore lower cost alternatives to designation, and then move forward if a 

company cannot remediate the problem. In meeting its aim of financial stability, 

FSOC should consider all the tools available instead of quickly moving to designation. 

3. FSOC should consider the effectiveness of existing primary regulators and defer 

to their expertise when designating nonbanks. While FSOC is comprised of relevant 

financial regulators, each one has different expertise and experience. A firm’s primary regulator should be given an enhanced role in designation proceedings. Thus 

far this has not been the case; insurance company designations proceeded with little 

respect for State regulators and over the objections of FSOC’s voting and nonvoting 

members with insurance expertise. 12

4. FSOC’s institution-by-institution approach engenders disparate treatment and 

misses the key issue, identifying activities and practices that generate systemic risks. 

After designating AIG, Prudential Financial and MetLife, FSOC appeared it would 

move next to asset managers. Yet that institution-by-institution approach misses 

the key issue: what specific activities or practices generate systemic risks? In this 

regard, activity-based regulation is more comprehensive as it will identify all of the 

market participants engaged in an activity that could pose a threat to stability. This 

is substantially better than singling out one or a few large firms or funds for desVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00063 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
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13For a more thorough discussion, see Satya Thallam, ‘‘Considering an Activity-Based Regulatory Approach to FSOC’’, (September 12, 2014) http://americanactionforum.org/research/considering-an-activity-based-regulatory-approach-to-fsoc. 14 Roy Woodall, ‘‘Views of the Council’s Independent Member Having Insurance Expertise’’, 

(Sept. 2013); http://www.treasury.gov/initiatives/fsoc/council-meetings/Documents/Septemberl19l2013lNotationallVote.pdf. 15 John Huff, ‘‘View of Director John Huff, the State Insurance Commissioner Representative’’, 

(Sept. 2013); http://www.treasury.gov/initiatives/fsoc/council-meetings/Documents/ 

September%2019%202013%20Notational%20Vote.pdf. 16Peter Wallison, American Enterprise Institute, ‘‘What the FSOC’s Prudential Decision Tells 

Us About SIFI Designation’’, (March 2014); http://www.aei.org/outlook/economics/financialservices/banking/what-the-fsocs-prudential-decision-tells-us-about-sifi-designation/. 17 ‘‘Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies’’, 77 Fed. Reg. 21640 (April 11, 2012) (Amending 12 CFR 1310); https://federalregister.gov/ 

a/2012-8627. 

ignation, which creates disparities in regulation across firms and sectors that could 

have a very real and unintended economic costs. Positively, FSOC has shown it is 

open to an activity-based approach in assessing the risks posed by asset managers. 

However, FSOC has acted inconsistently thus far in its approach to insurance companies. 13

5. Designation decisions must be supported by evidence, rooted in rigorous economic analysis, and backed by statutory authority. In his dissent from the FSOC’s 

SIFI designation of Prudential Financial, Roy Woodall, appointed by President 

Obama as FSOC’s independent member with insurance expertise, noted his concerns about the analytical rigor of the designation process stating, ‘‘The underlying 

analysis utilizes scenarios that are antithetical to a fundamental and seasoned understanding of the business of insurance.’’ 14 John Huff, the nonvoting member of 

the Council representing State insurance regulators, echoed Woodall’s concerns, 

writing in his dissent, ‘‘The analysis contained in the basis for the final determination in large part relies on nothing more than speculation.’’ 15 Experts have further 

argued that the analytical processes behind designations are generally far too 

opaque and likely insufficient. 16 Additionally, FSOC has stated it does not intend 

to ‘‘conduct cost-benefit analyses in making determinations with respect to individual nonbank financial companies,’’ reflecting how recent designations have failed 

to accurately assess the implications of SIFI designations on the insurance industry. 17

FSOC should attempt to fully assess the economic effect, both costs and benefits, 

of designating only certain nonbanks as SIFIs. This means producing a convincing 

model that a firm’s failure, its financial distress, or its activities could destabilize 

the financial system. In such a way, FSOC can demonstrate what is at stake and 

how a designation will help, and then justify the costs. Preventing the next financial 

crisis may undoubtedly have enormous benefit, but FSOC has not clearly outlined 

how each firm or industry segment it has scrutinized poses an actual threat to stability. Since the economic cost of eliminating systemic risk entirely is prohibitive, 

FSOC’s goal must be to find the ‘‘right’’ amount of risk, a difficult feat since FSOC 

can neither measure its progress nor know its target. Because of the difficulty of 

regulating entities posing only a potential systemic threat, designations should be 

firmly rooted in sound economic analyses that explore all costs and benefits (as well 

as alternatives to designation) and be substantially justified by applicable DoddFrank Act statutes. 

6. Annual reevaluation should not be a check-the-box exercise, but a genuine opportunity for a nonbank SIFI to address Council concerns and exit designation. SIFI 

designation should not be indefinite. FSOC must create a process that permits firms 

to address risks and avoid designation. Once designated, FSOC revisits the designation annually and must vote only to rescind, creating little more than a check-thebox exercise. SIFIs should have a way to ‘‘de-risk,’’ address the concerns or activities 

raised by FSOC that merited a designation, and follow an exit ramp from SIFI status. Whether through sunset provisions or other policy options, the changes announced in February do not go far enough to tackle this issue. 

7. FSOC and its staff must continue to actively engage the public, experts, and 

stakeholders to comprehensively examine potential systemic threats, firm types, and 

changes in the financial economy environment as well as areas for FSOC procedural 

improvement. Last fall FSOC began the process of reviewing and evaluating its SIFI 

designation process for nonbanks, seeking input from stakeholders and assessing potential changes. Ultimately, this process led to the adoption of a number of positive 

steps toward increasing communication between FSOC staff and firms under review 

and adding transparency to the process. If anything, this should encourage FSOC 

to continue to collaborate with stakeholders, seek input from the public, and conVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00064 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
61 

tinue to advance efforts that open up its opaque process. As FSOC considers increasingly different potential threats, firms, and industry changes, engagement with outside experts will be integral and may substantially improve public confidence in its 

efforts. 

8. The Federal Reserve’s role as chief regulator of designated firms will likely endanger and diminish its independence, which should concern lawmakers. The Federal Reserve Board is the chief regulator of all firms designated as SIFIs, whether 

insurance companies, asset managers, or something else. While the Federal Reserve 

is a world-class monetary authority and quality bank regulator, it may struggle to 

tailor regulations for other financial companies outside of its expertise. This will 

also likely lead to greater scrutiny by the Congress and endanger central bank independence. In addition to the designation process, it may behoove policymakers to 

consider primary regulators in an enhanced supervisory role instead of the Federal 

Reserve Board. 

At a minimum, FSOC must conduct its business in a way that is analytically 

sounder and better grounded in the data and regulatory history, with a clear path 

away from SIFI designation for nonbanks. Thank you and I look forward to answering your questions. 

PREPARED STATEMENT OF DENNIS M. KELLEHER 

PRESIDENT AND CEO, BETTER MARKETS, INC. 

MARCH 25, 2015 

Thank you Chairman Shelby, Ranking Member Brown, and Members of the Committee for the opportunity to provide Better Markets’ views about the Financial Stability Oversight Council (the Stability Council). 

Better Markets is a nonprofit, nonpartisan organization that promotes the public 

interest in the domestic and global capital and commodity markets. It advocates for 

transparency, oversight, and accountability with the goal of a stronger, safer financial system that is less prone to crisis and failure, thereby eliminating or minimizing the need for more taxpayer funded bailouts. To do this, Better Markets engages in the rulemaking process, public advocacy, independent research, and litigation. For example, it has filed more than 150 comment letters in the U.S. rulemaking process related to implementing the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act) and has had dozens of meetings with 

regulators. Our Web site, www.bettermarkets.com, includes information on these 

and the many other activities of Better Markets. 

I am the President and CEO of Better Markets. Prior to starting Better Markets 

in October 2010, I held three senior staff positions in the Senate: Chief Counsel and 

Senior Leadership Advisor to the Chairman of the Democratic Policy Committee; 

Legislative Director to the Secretary of the Democratic Conference; and Deputy 

Staff Director and General Counsel to what is now known as the HELP Committee. 

Previously, I was a litigation partner at the law firm of Skadden, Arps, Slate, 

Meagher, & Flom, where I specialized in securities and financial markets in the 

U.S. and Europe. Prior to obtaining degrees at Brandeis University and Harvard 

Law School, I enlisted in the U.S. Air Force while in high school and served 4 years 

active duty as a crash-rescue firefighter. I grew up in central Massachusetts. 

‘‘No More AIGs’’ 

Yesterday, March 24, was the 6 year anniversary of the testimony given by then 

Treasury Secretary Timothy Geithner and then Federal Reserve Chairman Ben 

Bernanke before the House Financial Services Committee on the American International Group (AIG) bonus controversy. The surprise and shock of the U.S. having 

to bailout a private, international insurance conglomerate like AIG with about $185 

billion was compounded by the disgust at AIG for nonetheless paying bonuses to 

some of its employees who were involved in the reckless trading that led to the collapse of the company and the need for it to be bailed out in the first place. 

Triple-A rated AIG’s involvement in hundreds of billions of dollars of complex, 

high risk derivatives gambling was a total surprise in September 2008. No one (outside of the too-big-to-fail Wall Street banks that were its counterparties) had any 

idea that AIG was in that line of business or, more shockingly, had not reserved 

or set aside anything close to sufficient amounts to cover any potential losses. Given 

these facts, and its extensive interconnectedness with the entire U.S. and global 

banking and finance systems, its inability to cover its own derivatives gambling 

losses unexpectedly threatened the collapse of the U.S. and world economies. 

The result was an historic, unlimited bailout where, initially, the U.S. Government effectively threw money into the massive hole AIG created: first, $85 billion, 

62 

1 Better Markets, ‘‘The Cost of the Wall Street-Caused Financial Collapse and Ongoing Economic Crisis Is More Than $12 Trillion’’ (Sept. 15, 2012), available at http://bettermarkets.com/ 

sites/default/files/Cost%20of%20The%20Crisisl2.pdf. 

then a week later another $85 billion, ultimately reaching about $185 billion in cash 

bailouts. It is fitting that we are here 6 years later discussing the Stability Council 

because its very existence and purpose is to prevent a situation like AIG from ever 

happening again. 

‘‘No more AIGs’’ should be the Stability Council’s motto. Never again should a private company appear out of nowhere and threaten to collapse the entire U.S. and 

global financial systems. Never again should the U.S. Treasury or taxpayers have 

to cover the losses of a private company that threaten the stability of our economy 

or the living standards of our citizens. 

And, most importantly, never again should the U.S. have to suffer the consequences of future AIGs: the devastating economic wreckage inflicted on Americans 

from coast to coast who lost their jobs, homes, savings, retirements, educations, and 

so much more. As Better Markets has documented, the 2008 crisis will cost the U.S. 

more than $12 trillion in lost economic output 1 That too is why the Stability Council was created, and is an important part of its mission. 

No More Economic Calamities From Unexpected Collapses of Companies 

That Threaten the Stability of the United States 

While only a few short years ago, too many have forgotten—or choose to ignore— 

that the 2008 crash was the worst financial crash since the Great Crash of 1929 

and caused the worst economy since the Great Depression of the 1930s. Just a few 

highlights of that economic wreckage: 

• Unemployment and under-employment skyrocketed, peaking in late 2009, early 

2010 to a rate of over 17 percent. The one-month peak of what is referred to 

as the ‘‘U6’’ rate was almost 27 million Americans out of work or forced to work 

part time rather than fill time as shown below: 

• Housing prices collapsed to 2001 levels and have remained at persistently low 

levels far beyond the official end of the recession: 

63 

• Americans experienced foreclosure at record rates: 

64 

• Tax revenues plummeted at the Federal, State, and local level, and essential 

spending on social needs skyrocketed as layoffs exploded, causing the deficit 

and debt to dramatically increase: 

65 

This massive economic wreckage resulted from the financial crash of 2008 and the 

near collapse of the U.S. and global financial systems. The Stability Council was 

created to be an early warning system to help detect and prevent this type of financial, economic, and human calamity from ever happening again. 

With that as the essential context for understanding and thinking about the Stability Council, the testimony that follows addresses three main points: 

1. Congress created the Stability Council in response to the catastrophic failure 

of unregulated systemic threats like AIG, and the Stability Council’s success 

is vital to strengthening the financial system and economy while reducing future systemic threats. 

2. The Stability Council’s implementation of Section 113 of the Dodd-Frank Act 

shows that it is using its power deliberatively and judiciously. And, recent significant changes demonstrates it is listening and responding appropriately to 

constructive input from stakeholders. 

3. Additional proposals to change the Stability Council would impair or cripple its 

ability to protect American families, workers, and taxpayers from another financial crash and economic calamity. 

1. Congress Created the Stability Council in Response to the Catastrophic 

Failure of Unregulated Systemic Threats Like AIG and the Stability 

Council’s Success Is Vital To Strengthening the Financial System and 

Economy While Reducing Future Systemic Threats 

The Stability Council was created to close the gigantic gap in the regulatory system that arose from changes in the financial industry and the regulatory rollbacks 

of the late 1990s. In particular, following Congressional passage of the GrammLeach-Bliley Act and the Commodity Futures Modernization Act, banks, investment 

firms, derivatives dealers, and insurance companies became supersized into enormous, complex, global, and interconnected financial companies. While the industry 

changed dramatically, the regulatory system did not, and as a result, on the eve of 

the 2008 financial crisis our financial regulators focused, at most, on their specific 

segment of the financial services industry without looking at broader threats and 

risks. Importantly, none of the regulators were responsible for detecting, addressing, 

or preventing unseen, unknown, and unexpected risks and threats. 

The best known example of this phenomenon was AIG. In 2008 AIG was the 

world’s largest insurance company. However, in addition to selling traditional products like health and life insurance, a division of AIG called AIG Financial Products 

(AIG FP) accumulated hundreds of billions of dollars of liabilities by selling credit 

default swaps, a type of derivative that ‘‘insured’’ the buyer of the swap against certain credit risks. This caused AIG to become deeply interconnected through the entire financial system. While AIG’s traditional insurance business was overseen by 

the States, AIG’s other lines of business were supposed to be overseen by the Office 

of Thrift Supervision, a regulator charged with overseeing small savings and loans 

organizations. Due to competition among regulators, among other reasons, AIG was 

able to shop around for the weakest regulation possible, which the Office of Thrift 

Supervision provided in exchange for collecting the fees AIG paid for its regulation. 

When the mortgage-backed and other securities AIG FP was ‘‘insuring’’ failed, 

AIG lacked the capital necessary to fulfill its obligations. The result is well known: 

the Federal Government was forced to bailout AIG with about $185 billion, take on 

AIG’s obligations, bailout its counterparties including many foreign banks, and enable the payment of $218 million in bonuses to some of AIG FP’s executives who 

were involved in the company’s reckless risk-taking in the first place. 

AIG’s failure, and subsequent bailout, happened in large part because no regulator was responsible for overseeing the systemic risk posed by the firm or, for that 

matter, posed by any firm. AIG’s insurance business was regulated by State insurance commissioners; its thrift was insufficiently regulated by the Office of Thrift Supervision; and its credit default swaps business was largely unregulated due to legal 

prohibitions on the regulation of such swaps, among other reasons. 

That is why, in the immediate aftermath of the crisis, it was very widely agreed 

that fixing this incredibly consequential regulatory gap required the creation of a 

single regulator responsible for overseeing systemic risk across the financial system. 

In fact, following the crisis, politicians and financial industry participants testified 

to the public and Congress that one of the essential ways of preventing such a crisis 

from happening again was to create such a systemic risk regulator. 

A sample of those statements include the following: 

‘‘We must create a systemic risk regulator to monitor the stability of the 

markets and to restrain or end any activity at any financial firm that 

66 

2 ‘‘How To Watch the Banks’’, New York Times OP-ED (Feb. 15, 2010). 3Testimony at House Financial Services Committee (July 17, 2009). 

4Testimony at Senate Banking Committee hearing (July 23, 2009). 

5Testimony at House Financial Services Committee (July 17, 2009). 

6Testimony at House Financial Services Committee (Mar. 17, 2009). 

threatens the broader market.’’—Henry Paulson, former Secretary of the 

Treasury 2

‘‘One of the reasons this crisis could take place is that while many agencies 

and regulators were responsible for overseeing individual financial firms 

and their subsidiaries, no one was responsible for protecting the whole system from the kinds of risks that tied these firms to one another.’’—Robert 

S. Nichols, President and Chief Operating Officer, Financial Services 

Forum 3

‘‘I believe an interagency council with a strong authority in a focused area, 

in this case monitoring and directing the response to risks that threaten 

overall financial stability, could, like the [National Security Council], serve 

the Nation well in addressing complex and multifaceted risks.’’—Paul 

Schott Stevens, President and CEO, Investment Company Institute 4

‘‘A systemic risk regulator that has access to information about any systemically important financial institution—whether a bank, broker-dealer, insurance company, hedge fund or private equity fund—could have the necessary 

perspective to ensure firms are not exploiting the gaps between functional 

regulators, or posing a risk to the larger system.’’—Randolph C. Snook, Executive Vice President, Securities Industry and Financial Markets Association (SIFMA) 5

‘‘The ABA strongly supports the creation of a systemic regulator. In retrospect, it is inexplicable that we have not had a regulator that has the explicit mandate and the needed authority to anticipate, identify, and correct, 

where appropriate, systemic problems. To use a simple analogy, think of 

the systemic regulator as sitting on top of Mount Olympus looking out over 

all the land. From that highest point the regulator is charged with surveying the land, looking for fires. Instead, we have had a number of regulators, each of which sits on top of a smaller mountain and only sees its 

part of the land. Even worse, no one is effectively looking over some areas. 

This needs to be addressed.’’—Edward L. Yingling, then President and 

Chief Executive Officer, American Bankers Association 6

Based in part on this testimony, Congress created the Stability Council as part 

of the Dodd-Frank Act, and tasked the Stability Council with the mission of identifying and responding to risks to the financial stability of the United States. As such, 

the Stability Council is the front line macroprudential regulator that serves as the 

early warning system needed to identify such threats, and address the challenges 

presented by the shadow-banking system to the financial stability of the U.S. 

Congress gave the Stability Council a number of important tools to carry out this 

mission including the ability to: 

• Designate nonbank financial companies as systemically important and subject 

those companies to supervision by the Federal Reserve 

• Make policy and enforcement recommendations to primary financial regulators 

• Collect information through the Office of Financial Research 

• Publish annual reports about systemic risks to the financial system 

In addition, for the first time, the Stability Council enables all of the financial regulators to communicate with each other regularly and gain the benefit of each regulator’s expertise. All of these tools provide the Stability Council with the ability to 

take a holistic view of the financial system, just as the ICI, ABA, SIFMA, and Financial Services Forum, among many others, said was so necessary. 

The ability to designate nonbank financial companies for prudential supervision 

by the Federal Reserve is among the most important tools Congress provided the 

Stability Council. The ability to designate a company for enhanced supervision is 

the primary mechanism to prevent any firm or activity—like the derivatives dealing 

at AIG FP—from slipping through the regulatory cracks. For that reason, ensuring 

that the Stability Council can continue to adequately and appropriately use this authority is critically important to protecting America’s families, workers, savers, communities, taxpayers, financial system, and economy as a whole. 

67 

7Financial Stability Oversight Council, ‘‘Authority To Require Supervision and Regulation of 

Certain Nonbank Financial Companies’’, 77 Fed. Reg. 21637 (Apr. 11, 2012). 8Financial Stability Oversight Council, ‘‘Supplemental Procedures Relating to Nonbank Financial Company Determinations’’ (Feb. 4, 2015), available at http://www.treasury.gov/initiatives/fsoc/designations/Documents/Supplemental-Procedures-Related-to-Nonbank-FinancialCompany-Detenninations-February-2015.pdf. 

2. The Stability Council’s Implementation of Section 113 of the Dodd-Frank 

Act Shows That It Is Using Its Power Deliberatively and Judiciously. 

And, Recent Significant Changes Demonstrates It Is Listening and Responding Appropriately to Constructive Input From Stakeholders 

Under Section 113 of the Dodd-Frank Act, the Stability Council has the authority 

to designate a nonbank financial company for enhanced prudential regulation by the 

Federal Reserve only if it finds that: ‘‘material financial distress at the U.S. 

nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the U.S. nonbank financial company, could 

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

Before making such a designation, the Stability Council is required to consider 10 

specific factors, plus any other risk-related factors the Stability Council finds appropriate. 

To provide a standard method for considering these designations, on April 11, 

2012, the Stability Council released a final rule and interpretive guidance implementing a three-stage process for designating nonbank companies for enhanced regulation, 7 outlined below: 

• In Stage 1, the Stability Council ‘‘narrow[s] the universe of nonbank financial 

companies to a smaller set’’ by evaluating the size, interconnectedness, leverage, 

and liquidity risk and maturity mismatch of nonbanks. 

• If a firm has been identified in Stage 1, in Stage 2 the Stability Council then 

‘‘conduct[s] a robust analysis of the potential threat that each of those nonbank 

financial companies could pose to U.S. financial stability,’’ based on data from 

existing public and regulatory sources. 

• Finally, if a firm makes it to Stage 3, then the Stability Council conducts a 

more detailed review using information obtained directly from the nonbank financial company. At this point, the Stability Council, by a two-thirds vote (including that of the Treasury Secretary who is also the Stability Council Chairman), may make a Proposed Determination with respect to any company. A 

firm subject to a Proposed Determination may request a hearing to contest the 

determination. After the hearing, the Stability Council may vote, again by twothirds, to make a Final Determination. Throughout this stage, firms may provide written comments to or meet with Stability Council staff and discuss their 

potential designation. 

Importantly, on February 4, 2015—not 3 years after finalizing its rule and only 

last month—the Stability Council approved a series of very significant changes to 

the designation process designed to improve transparency and public accountability. 8 (Those changes are attached as Exhibit A hereto.) Those changes include: 

• First, the Stability Council will now engage with companies during the designation process to a greater extent than previously. For example, the Stability 

Council will notify a company when it is under Stage 2 review, and any such 

company may provide data for the Stability Council to review prior to Stage 3. 

The Stability Council will alert companies when they have not been recommended to Stage 3. Finally, the Stability Council will begin communications 

with a company’s primary regulator or supervisor during Stage 2, rather than 

Stage 3. 

• Second, the Stability Council will now more fully engage with designated companies during its annual review of a company’s designation to improve the dedesignation process. Going forward, if a designated company contests its designation during that annual review, and if the Stability Council votes not to rescind the designation, it will provide the company and primary regulators with 

an explanation why. This change, and others to the de-designation process, are 

a significant improvement that will adequately allow a designated company to 

document that it no longer meets the statutory criteria without harming the 

Stability Council’s ability to protect the financial system, the economy, and the 

public. 

• Finally, the Stability Council will provide increased transparency to the public. 

Previously, if a company announced it was under consideration for designation, 

68 

9Financial Stability Oversight Council, ‘‘Basis of the Financial Stability Oversight Council’s 

Final Determination Regarding American International Group, Inc.’’ (July 8, 2013), available at 

http://www.treasury.gov/initiatives/fsoc/designations/Documents/Basis-of-Final-Determination-Regarding-General-Electric-Capital-Corporation,-Inc.pdf. 10Financial Stability Oversight Council, ‘‘Basis of the Financial Stability Oversight Council’s 

Final Determination Regarding General Electric Capital Corporation, Inc.’’ (July 8, 2013), available at http://www.treasury.gov/initiatives/fsoc/designations/Documents/Basis-of-Final-Determination-Regarding-General-Electric-Capital-Corporation,-Inc.pdf. 11Financial Stability Oversight Council, ‘‘Basis of the Financial Stability Oversight Council’s 

Final Determination Regarding Prudential Financial, Inc.’’ (Sept. 19, 2013), available at http:// 

www.treasury.gov/initiatives/fsoc/designations/Documents/Prudential%20Financial%20Inc.pdf. 

the Stability Council would neither confirm nor deny that. Now, if the company 

publicly confirms that is under consideration the Stability Council will confirm 

that upon request to do so by a third party. The Stability Council will also annually publish the number of companies considered for designation along with 

the number of companies considered but not designated. Finally, the Stability 

Council has agreed to publish further details of how its Stage 1 thresholds are 

calculated in the future. 

These changes were very significant and telling for two reasons. First, as a matter 

of process, the Stability Council’s actions demonstrate that it listens carefully to 

those who comment on its activities and responds with meaningful action. Such actions are all too rare and the Stability Council should be applauded for doing so. 

Second, as a matter of policy, the changes make the Stability Council’s designation determinations better, which will ensure better outcomes for the firms under 

review and the public. Increased communications between the Stability Council and 

firms under consideration for designation will enable a more robust, data based decision-making process based on all material information. Additionally, increased 

public disclosure and transparency will build trust and confidence that the Stability 

Council is on watch and fulfilling its important role. 

In its very short life of less than 5 years, the Stability Council has designated just 

four nonbank financial institutions for enhanced supervision. In each instance, the 

Stability Council acted prudently, designating the firm only after conducting a thorough analysis and concluding that each one satisfied the applicable statutory standards. Each fits the requirements for designation by having a systemwide reach and 

being so interconnected with other financial companies that its failure would cause 

damage to the financial system and real economy. 

The clearest example of this is AIG. 9 AIG was so large and interconnected that, 

as the subprime bubble burst, its credit default swap portfolio was so large that it 

became insolvent, unable to pay its counterparties, and had to be bailed out by taxpayers. As the Stability Council said in its public final basis for designating AIG, 

‘‘Individual exposures to AIG may be relatively small, but in the aggregate, the exposures are large enough that material financial distress at AIG, if it were to occur, 

could have a destabilizing effect on the financial markets.’’ 

Furthermore, AIG and its subsidiary are the reference entities ‘‘for a combined 

$70 billion in notional single-name CDS, which is significant and comparable to several of the largest money-center banks, investment banks, bond insurers, and prime 

brokers,’’ meaning that its failure would have a large impact on other, non-AIG companies. 

Like AIG, GE Capital was so deeply affected by the financial crisis that it required a $139 billion bailout for fear that a collapse would greatly affect other financial firms. In its designation, the Stability Council explained that ‘‘there is approximately $77 billion in gross notional credit default swaps outstanding for which 

GECC is the reference entity:’’ even larger that the notional value for AIG. 10 Furthermore, GE Capital’s portfolio of assets, $539 billion as of December 31, 2012, is 

‘‘comparable to those of the largest U.S. BHCs.’’ As such, among other things, any 

rapid liquidation of GE Capital’s assets could lead to a fire sale of the securities of 

other large corporations, including of the largest financial institutions. 

The Stability Council also determined that Prudential met the statutory criteria 

after determining that the financial system is significantly exposed to Prudential 

‘‘through the capital markets, including as derivatives counterparties, creditors, debt 

and equity investors, and securities lending and repurchase agreement counterparties.’’ 11 It also found that the complexity and interconnectedness of Prudential 

would make it difficult for the firm to be resolved, posing a material threat to U.S. 

financial stability. 

69 

12Financial Stability Oversight Council, ‘‘Basis of the Financial Stability Oversight Council’s 

Final Determination Regarding MetLife, Inc.’’ (Dec. 18, 2014), available at http:// 

www.treasury.gov/initiatives/fsoc/designations/Documents/MetLife%20Public%20Basis.pdf. 13See U.S. Gov’t Accountability Office, Rep. No. GA0-11-696, ‘‘Federal Reserve System: Opportunities Exist To Strengthen Policies and Processes for Managing Emergency Assistance’’ 

(July 2011); ProPublica, ‘‘Bailout Recipients’’, available at https://projects.propublica.org/bailout/list/simple. 

The Stability Council made a similar determination in the case of MetLife. 12 In 

this case, the Stability Council found that there would be a severe negative impact 

on the financial system if a situation occurred in which MetLife was forced to liquidate its holdings. The Stability Council’s public final basis for designating the insurance company states that, ‘‘[a] large-scale forced liquidation of MetLife’s large 

portfolio of relatively illiquid assets, including corporate debt and asset-backed securities (ABS), could disrupt trading or funding markets.’’ This is because ‘‘[a]s of September 30, 2014, MetLife held $108 billion of U.S. corporate securities at fair value, 

and $70 billion of asset-backed securities and mortgage-backed securities at fair 

value.’’ The resulting fire sale would depress prices for the assets MetLife holds, 

similar to the fire sale which resulted from the Prime Reserve Fund’s failure in 

2008. 

Whatever one wishes to say about the Stability Council’s designation process or 

the decisions it has reached, the Stability Council can hardly be accused of acting 

hastily or over-broadly. Four designations in less than 5 years is far fewer than 

what could have been done given the number of nonbank financial companies that 

failed, received bailouts, or posed systemic risk during the financial crisis just a few 

short years ago. 13 Furthermore, the three insurance companies designated by the 

Stability Council are also all listed on the Financial Stability Board’s list of Global 

Systemically Important Insurers, suggesting that the Stability Council’s actions are 

not without merit. 

Clearly the Stability Council is acting deliberatively and carefully when considering and making designation determinations. 

3. Additional Proposals To Change the Stability Council Would Impair or 

Cripple Its Ability To Protect American Families, Workers, and Taxpayers From Another Financial Crash and Economic Calamity 

Regarding the consideration of any changes to the Stability Council, it must be 

remembered that it is not even 5 years old. During that time it has had to translate 

legislative text regarding a stability council into a working reality of the Stability 

Council. As if that wasn’t enough, it had to do so with 15 member agencies, organizations, and departments, with, as is well known, all that entails. And it had to do 

it from the still smoldering ashes of the financial crash, in the midst of the ongoing 

economic crisis, and in the face of relentless attacks and criticism. 

Frankly, although not perfect, it is a remarkable achievement. In addition, as it 

did all that, it has listened carefully to those who think it might be able to improve 

its procedures, including criticism from Better Markets. After careful consideration 

and deliberation, the Stability Council, as set forth above, has recently adopted a 

number of very significant changes and those changes should be allowed to be implemented before any additional changes are legislatively imposed on the Stability 

Council. Given its willingness to listen, change, and improve, the Stability Council 

deserves no less. 

Making matters worse, most of the legislative changes proposed would prevent 

the Stability Council from carrying out its mission, and would leave our financial 

system and economy vulnerable to another crisis. Indeed, a number of proposals 

have recently been put forward that would severely weaken the Stability Council 

and, in fact, make future AIGs more likely. An overview of those proposals, including an explanation of how they would prevent the Stability Council from fulfilling 

its critical role follows. 

Proposal: Require the Stability Council to make certain decisions within arbitrary 

time considerations, and force the Stability Council to begin the designation process 

again unless it meets those time constraints. 

Impact: It is in no one’s interest for the Stability Council to act in haste. The Stability Council’s process for designating a nonbank financial institution should be deliberative and not rushed. Requiring a decision to be made within an arbitrary deadline could put the Stability Council in an untenable situation, potentially forcing 

them to designate in haste or forego an otherwise necessary and important designation. These scenarios are simply unacceptable, given the importance of Stability 

Council’s mission and the consequences of designation or a failure to designate when 

appropriate and necessary. 

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14 Better Markets, ‘‘Setting the Record Straight on Cost-Benefit Analysis and Financial Reform at the SEC’’ (July 30, 2012), available at http://www.bettermarkets.com/sites/default/ 

files/Setting%20The%20Record%20Straight.pdf. 

Proposal: Require that the designation of a nonbank financial company be a last 

resort that is taken only after all other regulatory steps are exhausted. 

Impact: This proposal disregards the already very high bar and robust process 

that the Stability Council must go through before designation (as set forth above 

and in the law and regulations). It has no reasonable rationale and it would add 

substantial burdens that would only constrain the Stability Council with no countervailing benefit. 

Importantly, designation authority was designed not only to respond to the last 

crisis, but to be a forward-looking warning system to prevent systemic risks that 

could cause the next crisis. For that reason, the Stability Council needs the flexibility and discretion to identify new and emerging risks and keep abreast with market developments and financial innovations. Furthermore, these proposals would 

add yet more unnecessary layers of work for the Stability Council and primary regulatory agencies, creating risky delays that would undermine the Stability Council’s 

mission. 

Proposal: Reform the designation process by subjecting it to additional process 

constraints like cost-benefit analysis. 

Impact: Imposing such economic analysis obligations on the Stability Council is 

as unwise as it is unwarranted. It will only force the Stability Council to engage 

in an inherently inaccurate yet burdensome process, encumber and delay the Stability Council’s work, and ultimately make any designation a more inviting target 

for legal challenge in court. When applied to financial regulation, cost-benefit analysis is more aptly described as ‘‘industry cost-only analysis,’’ in which industry focuses exclusively on the costs of regulation while ignoring the benefits. 14

The case of designating a firm for enhanced regulation by the Federal Reserve 

lends itself to just this one-sided analysis, as the designated entity will always be 

able to cite a long list of specific (if highly questionable) quantifiable costs that 

would appear to cast designation as unjustifiable. Yet viewed holistically, the benefits of designation are potentially enormous and, in many respects, incalculable, representing the tangible and intangible gains that come from averting another financial crisis, systemic collapse, and untold trillions in bailouts. As traditionally 

framed, however, cost-benefit analysis does not capture these benefits and does not 

yield a balanced and accurate picture. 

In addition, the process is time-consuming and resource intensive. It will inevitably slow down the designation process and sap the Stability Council’s resources, 

which would be far better spent on its core mission of detecting and analyzing potential risk and responding appropriately. 

Finally, a cost-benefit requirement will also make it easier for a designated company to litigate the designation, just as industry groups have relentlessly challenged 

Securities and Exchange Commission and Commodity Futures Trading Commission 

regulations alleging insufficient analysis of costs and benefits relating to mutual 

fund governance, conflict minerals, and position limits. As these cases demonstrate, 

should Congress choose to require the Stability Council to conduct quantitative cost 

benefit analysis it would cause a litigation bonanza, creating yet another opportunity for industry to argue that the costs imposed upon them should be more highly prioritized than the benefit to the public of preventing a future crash. This would 

severely weaken the Stability Council’s ability to protect the public and carry out 

its congressionally directed mandates. 

Proposal: Give the primary regulator heightened deference in the designation 

process. 

Impact: No one questions that a company’s primary regulator may have significant insights into the workings of that industry and that the primary regulator can 

provide much needed assistance in understanding the nuances of a company’s balance sheet, activities, risks and related issues. However, that regulator may not be 

in the best position to decide whether the company poses a systemic risk, since they 

lack the broader perspective that the Stability Council was created to provide. It is 

also undeniable that individual regulators may bring certain biases to bear, stemming from a sense of ‘‘turf’’ or a desire to downplay the systemic risks that may 

have evolved under their ‘‘watch.’’ There is also the well-known problem of regulatory capture. Thus, the primary regulator may oppose actions that would otherwise be necessary to protect the public from systemic risks. In short, the statutory 

framework already requires the Stability Council to consult the primary regulator 

for any entity being considered for designation, and requiring any further deference 

would be unnecessary and counterproductive. 

71 

Proposal: Delay the Stability Council’s ability to designate a firm for enhanced 

regulation until the Federal Reserve explains what enhanced measures it will impose as a result of the designation. 

Impact: Two of the core purposes of the Stability Council are to identify and respond to risks to the financial stability of the United States. By law, the Stability 

Council has the authority to do so by designating companies as systemically important This authority differs significantly from that of the Federal Reserve, which 

must determine how best to regulate a designated company. Because the duties of 

these two agencies are different, the Stability Council should not be required to wait 

for the Federal Reserve before carrying out its legal obligations. The systemic importance of a company, and the Stability Council’s decision to designate it as such, 

should not be dependent upon or influenced by how the company might or might 

not be regulated after designation. 

Proposal: Change the method by which the Stability Council votes. 

Impact: The key decisions made by the Stability Council already require super 

majorities. These decisions are complex and require a great deal of judgment over 

which reasonable minds might disagree. While the Stability Council should—and 

does—strive for consensus, there may come a time when some members oppose an 

action while a super majority of seven believe the risk to financial stability warrants 

action. It would be a serious mistake if the Stability Council were unable to go forward under this scenario, preventing action and putting our financial system to significant risk. 

Proposal: Expand the number of members on the Stability Council, either by increasing membership or by requiring regulatory agencies to vote to determine how 

the agency head will vote during Stability Council proceedings. 

Impact: The Stability Council already consist of 15 members, 10 voting members 

and 5 nonvoting members. Expanding it further risks creating a body that is so 

large it would be ineffective. This would also risk politicizing the decision-making 

process, turning any Stability Council vote into a partisan exercise and an opportunity for scoring political points. This proposal would therefore lead to unnecessary 

delays and weaker actions as a result. 

Conclusion 

Thank you again for the opportunity to appear before you today. I look forward 

to answering your questions. 

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78 

PREPARED STATEMENT OF GARY E. HUGHES 

EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, AMERICAN COUNCIL OF LIFE

INSURERS

MARCH 25, 2015 

Chairman Shelby and Ranking Member Brown, my name is Gary Hughes, and 

I am Executive Vice President and General Counsel of the American Council of Life 

Insurers (ACLI). ACLI is the principal trade association for U.S. life insurance companies with approximately 300 member companies operating in the United States 

and abroad. ACLI member companies offer life insurance, annuities, reinsurance, 

long-term care and disability income insurance, and represent more than 90 percent 

of industry assets and premiums. 

ACLI appreciates the opportunity to address the procedures governing the designation of nonbank financial companies by the Financial Stability Oversight Council (FSOC). ACLI has a particular interest in the subject matter of this hearing; 

three of the four nonbank financial companies that have been designated by FSOC 

for supervision by the Federal Reserve Board are insurance companies, and all of 

those companies, Prudential, MetLife, and AIG, are members of ACLI. Many ACLI 

member companies also are actively engaged in asset management, which is a business under active review by FSOC. 

Last year, ACLI along with several other national trade associations submitted 

a petition to FSOC recommending changes to the procedures for designating 

nonbank financial companies as being subject to supervision by the Federal Reserve 

Board. In response, FSOC made some needed improvements to the process. Nonetheless, additional reforms to the procedures and standards applied by FSOC in its 

designations are necessary to promote transparency and ensure a fair process. 

My testimony addresses five key points: (1) the additional procedural safeguards 

that should be adopted by FSOC in connection with designations; (2) FSOC’s flawed 

application of the ‘‘material financial distress’’ standard for designations; (3) FSOC’s 

failure to give sufficient weight to the views of State insurance authorities in connection with designations; (4) FSOC’s failure to give consideration to the consequences of designation; and (5) FSOC’s failure to consider an ‘‘activities-based’’ approach for insurance. My testimony concludes with recommendations to address 

these matters. 

1. The Designation and De-Designation Processes Lack Sufficient Procedural Safeguards and the Public Explanations Accompanying Designations Give the Public and Other Nonbank Financial Companies Insufficient Insight Into Why Particular Companies Have Been Designated 

FSOC has established a three-stage process for determining whether a nonbank 

financial company should be subject to supervision by the Federal Reserve Board. 

In response to concerns raised by ACLI and other national trade associations, FSOC 

has made some improvements to the process. Nonetheless, additional reforms are 

needed. 

A company should have access to the entire record. 

A company that advances to the third and final stage of review has no way of 

knowing what materials FSOC believes are relevant, whether and in what form the 

materials it submits are provided to voting members of FSOC, or what materials, 

in addition to those submitted by the company, FSOC staff and voting members reviewed and relied upon. In other words, a company is not provided with the evidentiary record upon which the voting members will make a proposed or final determination. A company should have access to the entire record that is the basis for 

an FSOC determination. 

FSOC should have separate staff assigned to enforcement and adjudicative functions. 

Council staff who identify and analyze a company’s suitability for designation and 

author the notice of proposed determination and final determination should not also 

advise Council members in deciding whether to adopt the notice of proposed determination and final determination. Dividing Council staff between enforcement and 

adjudicative functions would protect the independence of both functions. Separation 

of powers principles and basic fairness require no less. In addition, communications 

between Council members and enforcement staff should be memorialized as part of 

the agency record and provided to companies under consideration for designation. 

79 

Special weight should be given to the views of the Council member with insurance 

expertise and to the primary financial regulatory agency for a company. 

FSOC must vote, by two-thirds of the voting members then serving including the 

affirmative vote of the Chairperson, to issue a final determination. The requirement 

for a super majority vote is intended to ensure that designation is reserved for companies that pose the most obvious risk to the financial stability of the United States. 

Yet, the members of FSOC vote as individuals rather than as representatives of 

their agencies. Thus, the vote is based upon their own assessment of risks in the 

financial system rather than the assessment of their respective agencies. Moreover, 

the voting process gives equal weight to views of all members, regardless of a member’s experience in regulating the type of company being considered for designation. 

In the case of an insurance company, special weight should be given to the views 

of the Council member with insurance experience, and to the State insurance regulator for the company. 

The explanation of a designation should provide greater insight into the basis for 

designation, and a designation should be based upon evidence and data. 

When FSOC votes to designate a company, it provides the company with an explanation of the basis for the determination and releases a public version of that document. These documents provide little insight into the basis for a designation, typically offering only conclusory statements unsupported by data or other concrete evidence and analysis. For example, in the documents released by FSOC in connection 

with the Prudential and MetLife determinations, FSOC concluded that material financial distress at Prudential and MetLife would be transmitted to other financial 

firms and harm the financial system. In drawing this conclusion, FSOC relied on 

extensive speculation about the behavior of policyholders and the reactions of competing insurers and assumed that State regulatory responses would be inadequate, 

even though history and empirical evidence were to the contrary. When the only explanation for a designation disregards historical experience, empirical research, and 

fundamental and proven principles of economic behavior and risk analysis, the industry can at best only speculate about the kind of evidence that would satisfy 

FSOC that designation is neither necessary nor appropriate. 

A company should have more than 30 days to seek judicial review of a final decision 

in a Federal court, and during judicial review, the company should not be subject to supervision by the Federal Reserve Board. 

Upon receipt of a final designation, a company may seek judicial review before 

a Federal court. Even this safeguard, however, is subject to limitations. A company 

has only 30 days in which to file a complaint, and loses the right to do so beyond 

that date. Moreover, filing the complaint carries no automatic stay of supervision 

by the Federal Reserve Board. Thus, while a company is challenging the legitimacy 

of a designation, it simultaneously must establish a comprehensive infrastructure 

(e.g., systems, procedures, and controls) to comply with Board supervision. 

Companies should be able to petition for a review of a designation based upon a 

change in operations or regulations, and a company should be provided with an 

analysis of the factors that would permit it to be de-designated. 

FSOC is required to review the designation of a company on an annual basis. A 

company also should have the opportunity to obtain a review based upon a change 

in its operations, such as the divestiture of certain business lines, or a change in 

regulation. Moreover, during a review, FSOC should be required to provide a company with an analysis of the factors that would lead FSOC to de-designate a company. This would lead a company to know precisely what changes in its operations 

or activities are needed to eliminate any potential for the company to pose a threat 

to the financial stability of the United States. 

FSOC’s determinations should be independent of international regulatory actions. 

Finally, the lack of transparency in FSOC’s designation process and the thinlyreasoned explanations in its designation decisions support the concern voiced by 

some that FSOC’s designations have been preordained by actions of an international 

regulatory entity, the Financial Stability Board (FSB). The member of FSOC with 

insurance expertise, Roy Woodall, expressed this concern in his dissent to the Prudential designation. The U.S. Department of Treasury and the Federal Reserve 

Board are both important participants in the FSB, which in 2013, issued an initial 

list of insurance companies that the organization considered to be ‘‘global systemically important insurers.’’ AIG, Prudential, and MetLife were all on the FSB’s list. 

Those companies’ designations as SIFIs should have been based on the statutory requirements of the Dodd-Frank Act, which differ meaningfully from the standards 

FSB has said it applies. Yet, there is ground for concern that leading participants 

80 

1See ‘‘Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies’’, 77 Fed. Reg. 21,637 (Apr. 11, 2012). 

in FSOC were committed to designating as systemic under Dodd-Frank those companies that they had already agreed to designate as systemic through the FSB process. FSOC should not be outsourcing to foreign regulators important decisions about 

which U.S. companies are to be subject to heightened regulation. 

2. FSOC’s Flawed Application of the Material Financial Distress Standard 

for Designation Distorts the Purpose of Designations by Failing To Account for the Vulnerability of Prospective Designees and Departs From 

the Requirements of the Dodd-Frank Act and Its Own Regulatory Guidance 

The Dodd-Frank Act authorizes FSOC to designate a nonbank financial company 

for supervision by the Federal Reserve Board if either (1) material financial distress 

at the company, or (2) the nature, scope, size, scale, concentration, interconnectedness, or mix of activities of the company could threaten the financial stability of the 

United States. Each of the designations made by FSOC has been based on the first 

standard, the material financial distress standard. Moreover, in each case, FSOC assumed the existence of material financial distress at the company, and then concluded that such distress could be transmitted to the broader financial system. 

This interpretation of the material financial distress standard departs from the 

authorizing statute and FSOC’s own regulatory guidance, and distorts the purpose 

of designation. The Dodd-Frank Act expressly directs FSOC, when considering a 

company for designation, to consider 11 factors, a number of which implicate the 

company’s vulnerability to material financial distress. And FSOC’s own interpretive 

guidance recognizes that a company’s vulnerability to financial distress is a critical 

part of the designation inquiry. 1 The statute, FSOC’s guidance, and well-established 

principles of reasoned regulation make clear that FSOC should not evaluate a company’s systemic effects by assuming that the designated company is failing, but instead should separately assess the company’s vulnerability to material financial distress. Making this a part of the designation process also provides guidance and the 

right incentives for companies that may be considered for designation in the future, 

because it incentivizes them to change aspects of their business that FSOC regards 

as vulnerabilities. 

Roy Woodall addressed FSOC’s flawed application of the material financial distress standard in his dissents in both the Prudential and MetLife cases. In the Prudential case, he noted that: 

the Notice’s analysis under the [material financial distress standard] is dependent upon its misplaced assumption of the simultaneous failure of all 

of Prudential’s insurance subsidiaries and a massive and unprecedented, 

lightning, bank-style run by a significant number of its cash value policyholders and separate account holders, which apparently is the only circumstance in which the Basis concludes that Prudential could pose a threat 

to financial stability. I believe that, absent a catastrophic mortality event 

(which would affect the entire sector and also the whole economy), such a 

corporate cataclysm could not and would not occur. 

Similarly, in his dissent in the MetLife case, Mr. Woodall highlighted the lack of 

evidence to support one of FSOC’s principal bases for assuming ‘‘material financial 

distress’’ at MetLife: 

I do not, however, agree with the analysis under the Asset Liquidation 

Transmission Channel of the Notice of Final Determination, which is one 

of the principal bases for the finding under the [material financial distress 

standard]. I do not believe that the analysis’ conclusions are supported by 

substantial evidence in the record, or by logical inferences from the record. 

The analysis relies on implausible, contrived scenarios as well as failures 

to appreciate fundamental aspects of insurance and annuity products, and, 

importantly, State insurance regulation and the framework of the 

McCarran-Ferguson Act. 

One consequence of FSOC’s interpretation of the material financial distress standard is that FSOC focuses too narrowly on a company’s size. When it passed the designation provisions in the Dodd-Frank Act, Congress never intended a unilateral 

focus on size. Rather, size is just one of 11 factors that Congress directed FSOC to 

consider when it designates a company. 

Another consequence of FSOC’s reliance on the material financial distress standard is that it is difficult for a company, or the public, to understand the basis for 

81 

2Letter to Honorable Jacob J. Lew, Secretary of the Treasury, from Benjamin M. Lawsky, 

Superintendent, New York State Department of Financial Services, July 30, 2014. 3 ‘‘SEC Chair: Asset Managers Not Overreacting to FSOC’’, Politico Pro. June 22, 2014. 

https://www.politicopro.com/financialservices/whiteboard/?wbid=33914. 

a designation. The documents accompanying designations address how the company’s failure might impact financial stability, but do not address what hypothetically caused the company to fail in the first place. Thus, a designated company 

has little, if any, insight into what activities are, in FSOC’s view, associated with 

systemic risk. 

Under a material financial distress standard that actually meets the statutory requirements of the Dodd-Frank Act, FSOC would need to employ the 11 statutory 

factors to first determine whether the company is vulnerable to material financial 

distress based upon its company-specific risk profile and, if it is, then determine 

whether the company’s failure could threaten the financial stability of the United 

States. In other words, FSOC should not be able to designate a company on an assumption that it is failing, but instead should only designate a company when a 

company’s specific risk profile—including its leverage, liquidity, risk and maturity 

alignment, and existing regulatory scrutiny—reasonably support the expectations 

that the company is vulnerable to financial distress, and then that its distress could 

threaten the financial stability of the United States. The purpose of designations 

should be to regulate nonbanking firms that are engaged in risky activities that realistically ‘‘could’’ cause the failure of the firm, not to regulate firms that are not 

likely to fail. 

3. FSOC Does Not Give Sufficient Weight to the Views of Primary Financial 

Regulatory Agencies 

In drafting the Dodd-Frank Act, Congress recognized that many nonbank financial companies are subject to supervision and regulation by other financial regulators. Insurance companies, for example, are subject to comprehensive regulation 

and supervision by State insurance authorities. Thus, Congress directed FSOC to 

consult with other primary regulators when making a designation determination, 

and required FSOC to consider ‘‘the degree’’ to which a company is already regulated by another financial regulator. Congress also gave the Federal Reserve Board 

authority to exempt certain classes or categories of nonbank financial companies 

from supervision by the Board, and directed the Board to take actions that avoid 

imposing ‘‘duplicative’’ regulatory requirements on designated nonbank companies. 

FSOC’s designation of insurance companies shows little deference to these requirements. In the case of MetLife, for example, FSOC discounted State insurance 

regulation even after the Superintendent of the New York State Department of Financial Services (NYDFS), Benjamin Lawsky, told FSOC that: (1) MetLife does not 

engage in nontraditional noninsurance activities that create any appreciable systemic risk; (2) MetLife is already closely and carefully regulated by NYDFS and 

other regulators; and (3) in the event that MetLife or one or more of its insurance 

subsidiaries were to fail, NYDFS and other regulators would be able to ensure an 

orderly resolution. 2 Similarly, in his dissent in the Prudential case, the Council 

member with insurance experience noted that the scenarios used in the analysis of 

Prudential were ‘‘antithetical’’ to the insurance regulatory environment and the 

State insurance company resolution and guaranty fund systems. 

This lack of deference to an insurer’s primary financial regulator is particularly 

troubling given the fact that insurance, unlike every other segment of the financial 

service industry, does not have any of its primary regulators as voting members of 

FSOC. Moreover, none of the primary regulators of the three insurers that have 

been designated were ‘‘at the table’’ when FSOC designation decisions were made. 

4. FSOC Has Failed To Consider the Consequences of Designation 

FSOC has an obligation to consider the consequences of its actions. Administrative law requires that an agency consider the effects of its actions, and the failure 

to do so can cause a court to void the action. SEC Chair Mary Jo White acknowledged publicly in June that a principle of good policymaking is to know ‘‘ . . . what 

is on the other side if I make that decision . . .’’ and to understand what a decision 

‘‘ . . . actually accomplish[es] in terms of the issue you’re trying to solve for.’’ 3 In 

its determinations to date, however, FSOC has failed to consider the consequences 

of its designations. 

This failure is particularly relevant to designations involving insurance companies. The insurance industry is highly competitive, and the additional regulation imposed upon a designated company can place that company at a significant competitive disadvantage relative to its nondesignated competitors. Capital standards are 

82 

4 §112(a)(2)(D) of the Dodd-Frank Act. 

the most obvious example. Congress recently clarified that the Board has the ability 

to base capital standards for designated insurance companies on insurance risk, 

rather than banking risk. We appreciate very much this Committee’s role in effecting that important clarification. At this point, we are waiting on a proposal from 

the Federal Reserve Board that makes use of this revised statutory provision. 

Should the Federal Reserve Board impose capital requirements on designated insurers that are materially different from those imposed by the States, designated insurers may find it difficult to compete against nondesignated competitors. 

Additionally, FSOC’s failure to consider the consequences of designations on insurance companies is at odds with FSOC’s ‘‘duty’’ under the Dodd-Frank Act to monitor regulatory developments, including ‘‘insurance issues,’’ and to make recommendations that would enhance the ‘‘integrity, efficiency, competitiveness, and 

stability’’ of U.S. financial markets. 4

5. FSOC Has Failed To Consider an ‘‘Activities-Based’’ Approach to Insurance 

The Dodd-Frank Act gives FSOC two principal powers to address systemic risk. 

One power is the authority to designate nonbank financial companies for supervision by the Federal Reserve Board. The other power is an ‘‘activities-based’’ authority to recommend more stringent regulation of specific financial activities and 

practices that could pose systemic risks. FSOC has not been consistent in its exercise of these powers. In the case of the insurance industry, FSOC has actively used 

its power to designate. In the case of the asset management industry, FSOC has 

undertaken an analysis of the industry so it can consider the application of more 

stringent regulation for certain activities or practices of asset managers, and it has 

not designated any asset management firm to date. 

FSOC held a public conference on the asset management industry in order to hear 

directly from the asset management industry and other stakeholders, including academics and public interest groups, on the industry and its activities. Furthermore, 

following its meeting on July 31, 2014, FSOC issued a ‘‘readout’’ stating that FSOC 

had directed its staff ‘‘to undertake a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management 

industry.’’ 

In contrast, FSOC has not held any public forum at which stakeholders could discuss the insurance industry and its activities. Instead, FSOC has used its power to 

designate three insurance companies for supervision by the Federal Reserve Board. 

ACLI supports the more reasoned approach that FSOC has taken in connection 

with the asset management industry and believes that FSOC should be required to 

use its power to recommend regulation of the specific activities of a potential designee before making a designation decision with respect to that company. 

FSOC’s power to recommend more stringent regulation of specific activities and 

practices has distinctive public policy advantages over its power to designate individual companies for supervision by the Federal Reserve Board. FSOC’s power to 

recommend brings real focus to the specific activities that may involve potential systemic risk and avoids the competitive harm that an individual company may face 

following designation. As noted above, in certain markets, such as insurance, designated companies can be placed at a competitive disadvantage to nondesignated 

companies because of different regulatory requirements. Finally, the power to recommend avoids the ‘‘too-big-to-fail’’ stigma that some have associated with designations. 

FSOC’s recommendations for more stringent regulation of certain activities and 

practices must be made to ‘‘primary financial regulatory agencies.’’ These agencies 

are defined in the Dodd-Frank Act to include the SEC for securities firms, the CFTC 

for commodity firms, and State insurance commissioners for insurance companies. 

A recommendation made by FSOC is not binding on such agencies, but the DoddFrank Act includes a ‘‘name and shame’’ provision that encourages the adoption of 

a recommendation. That provision requires an agency to notify FSOC within 90 

days if it does not intend to follow the recommendation, and FSOC is required to 

report to Congress on the status of each recommendation. 

Recommended Reforms 

To address the concerns highlighted in this statement, ACLI recommends the following reforms: 

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5 §170 of the Dodd-Frank Act. 

Institute additional procedural safeguards during the designation process. 

We recommend the following changes to the designation process: (1) companies 

that receive a notice of proposed determination should be given access to the entire 

record upon which FSOC makes the determination to issue the notice; (2) the same 

FSOC staff should not serve as fact finder, prosecutor and adjudicator; (3) in the 

case of an insurance company, the views of the Council member with insurance expertise and the primary financial regulatory agency for the company should be given 

greater weight; (4) a company should be given more than 30 days to initiative judicial review of a final determination; and (5) supervision of the company by the Federal Reserve Board should be stayed during judicial review. 

Establish additional procedures for de-designation. 

In addition to the mandatory annual review of a determination, FSOC should be 

required to conduct a review upon the request of a designated company if there has 

been a change in the operations of the company or a change in regulation affecting 

the company. In connection with such a review, FSOC should also provide a company with an analysis of the factors that would lead FSOC to de-designate the company. This would permit a company to know precisely what changes in its risk profile are needed to eliminate any potential for the company to pose a risk to the financial stability of the United States. Finally, during the de-designation review, the 

views of the Council member with insurance expertise and the primary financial 

regulatory agency for the company should be given special weight. 

Require FSOC to pursue an ‘‘activities-based’’ approach before using its power to designate a company for supervision by the Federal Reserve Board. 

FSOC should use its authority under the Dodd-Frank Act to recommend specific 

activities and practices for more stringent regulation before designating individual 

nonbank financial companies within an industry for supervision by the Federal Reserve Board. More stringent regulation of the activities or practices of an entire 

class or category of financial firms can have a greater impact on financial stability 

than the designation of an individual firm. 

Require FSOC to consider ‘‘vulnerability’’ in its designation decisions. 

The statute, FSOC’s own regulatory guidance, and common sense dictate that a 

company should not be designated systemic without an evaluation of whether the 

company, as currently structured and operated, is indeed vulnerable to material financial distress. Steps should be taken to ensure that FSOC makes this factor an 

element of its decision-making process in the future. 

Promulgate the regulations required by Section 170 of the Dodd-Frank Act. 

Section 170 of Dodd-Frank directs the Federal Reserve Board, in consultation 

with FSOC, to issue regulations exempting certain classes or categories of companies from supervision by the Federal Reserve Board. 5 However, to date no such regulations have been issued pursuant to this authority. This requirement represents 

yet another tool Congress created to delineate between those entities that pose systemic risk and those that do not. How such regulations might affect insurance companies, if at all, is unknown. But presumably the regulations will shed additional 

light on what metrics, standards or criteria operate to categorize a company as nonsystemic. The primary goal here should be to clearly inform companies of how to 

conduct their business and structure their operations in such a way as to be nonsystemic. Only if that primary goal cannot be met should the focus turn to regulating 

systemic enterprises. 

Conclusion 

Mr. Chairman, we believe the best interests of the U.S. financial system and the 

stated objectives of the Dodd-Frank Act can be realized most effectively by an FSOC 

designation process that operates in a more transparent and fair manner. The overarching purpose of the Dodd-Frank Act is to minimize systemic risk in the U.S. financial markets. Providing companies with the choice and the ability to work constructively with FSOC to structure their activities in such a way as to avoid being 

designated as systemic in the first instance advances that purpose and reflects 

sound regulatory policy—as would affording companies a viable opportunity for dedesignation. The reforms we are recommending are intended to achieve these objectives, and we pledge to work with this Committee and others in Congress toward 

that end. 

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RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM JACOB J. LEW 

Q.1. Secretary Lew, FSOC recently announced changes to its designation procedures, including a new effort to notify companies that 

they are being considered for designation earlier in the process. 

Can you explain what prompted FSOC to amend its procedures? 

Will those amended procedures be used to reevaluate companies 

that have already been designated under the prior FSOC regime? 

A.1. The FSOC is committed to the continued evaluation of its procedures and to engagement with stakeholders. Our adoption of supplemental procedures to the nonbank financial company designations process represents the latest example of the FSOC’s willingness to revisit how it conducts its work, based on ideas raised by 

stakeholders, without compromising the FSOC’s fundamental ability to achieve its mission. Last fall, FSOC conducted extensive outreach with a wide range of stakeholders about potential changes to 

its process. The FSOC Deputies Committee hosted a series of meetings in November with more than 20 trade groups, companies, consumer advocates, and public interest organizations. We also solicited input from each of the three companies then subject to a designation. FSOC discussed the findings from this outreach and potential changes during a public meeting in January, and adopted 

the supplemental procedures in February. 

The supplemental procedures provide greater public transparency regarding the FSOC’s process. Many of these procedures 

reflect practices that were already used in the evaluation of companies that were previously designated by the FSOC. With regards to 

the supplemental procedures applicable to annual reevaluations of 

previously designated companies, the changes will enhance the 

FSOC’s already-robust process for reviewing each previous designation. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM JACOB J. LEW 

Q.1. FSOC’s 2014 annual report notes that the Council is charged 

with promoting market discipline by eliminating the expectation of 

bailouts in the event of a failure of a large financial company. In 

pursuing that mandate, the Council has designated a number of 

nonbank financial companies as SIFIS, which subjects them to additional supervision by the Federal Reserve. While increased supervision may allow regulators to better understand and manage the 

perceived systemic risk these firms present, many market participants may view SIFI designation as a signal that a firm is in fact 

too-big-to-fail and would receive Government assistance in the 

event of its imminent failure. With that in mind, one goal of the 

nonbank designation process might be voluntary de-risking by 

SIFIs and potential SIFIs. 

Does FSOC provide any guidance to companies under review on 

steps that they could take voluntarily in order to reduce their systemic importance and avoid designation? 

In its annual reevaluation of designated companies, does FSOC 

provide those companies with actionable guidance on the steps necessary to remove their SIFI designation? If not, should it? 

85 

During the hearing, Chairman Shelby asked about giving firms 

the opportunity to ‘‘work their problems out.’’ You responded: ‘‘I 

think that in its wisdom Congress created a process for these matters to be decided and resolved and adjudicated, and that process 

should stand.’’ Please expand upon that response to explain why 

the designation process should not include an opportunity for firms 

to work with FSOC to voluntarily reduce risk and avoid designation. 

A.1. When evaluating a nonbank financial company for potential 

designation, the FSOC engages extensively with the company to 

understand and consider any ways in which the firm’s material financial distress could pose a threat to U.S. financial stability. For 

past designations, FSOC has engaged with the company during a 

period ranging from 10 to 17 months. As part of its engagement, 

the FSOC provides the company with a detailed explanation of the 

basis for any proposed designation, which can include hundreds of 

pages of company-specific analysis. Prior to any final designation 

by the FSOC, companies have an opportunity for a hearing before 

the FSOC. Upon a final designation, the FSOC provides the company with a detailed written explanation of the basis for the designation that specifically describes the potential risks identified by 

the FSOC in its evaluation. 

For each of the four nonbank financial companies that the FSOC 

has designated since the enactment of the Dodd-Frank Act, the 

FSOC determined, based on its consideration of the 10 statutory 

factors set forth in the Dodd-Frank Act, that the company’s material financial distress could pose a threat to U.S. financial stability. 

Those statutory factors include, among others, size, assets, leverage, interconnectedness, and existing regulatory scrutiny. The extensive engagement with companies and existing regulators during 

the designation process, and the detailed written explanations provided by the FSOC both before and after a final designation, allow 

companies and their regulators to take steps to address the potential risks identified by the FSOC. 

In addition to the engagement and explanations provided to 

firms in connection with a designation, the FSOC has a robust 

process to reevaluate each previous designation at least annually. 

We take these reviews seriously, and the FSOC will rescind the 

designation of any company if the FSOC determines that it no 

longer meets the statutory standard for designation. Before the 

FSOC’s annual reevaluation of a firm subject to a designation, the 

company has the opportunity to meet with FSOC staff to discuss 

the scope and process for the reevaluation and to present information regarding any relevant changes, including a company restructuring, regulatory developments, market changes, or other factors. 

If a company contests its designation during the FSOC’s annual reevaluation, the FSOC’s supplemental procedures state that it intends to vote on whether to rescind the designation and provide the 

company, its primary financial regulatory agency, and the primary 

financial regulatory agency of its significant subsidiaries with a notice explaining the primary basis for any decision not to rescind the 

designation. The notice will address the material factors raised by 

the company in its submissions to the FSOC contesting the designation during the annual reevaluation. In addition, the FSOC 

86 

provides each designated company an opportunity for an oral hearing to contest its designation every 5 years. 

Q.2. In considering the overall regulatory regime of the financial 

system, what would signal that it is sufficiently regulated, underregulated, or over-regulated? 

Since the passage of Dodd-Frank, de novo bank charters have all 

but ceased, perhaps in part because of the high regulatory hurdles 

facing small institutions. In response, this Committee has spent a 

great deal of time considering how it can right-size regulatory 

touch for smaller firms. Do you support tailoring regulations for 

small firms and is there any legislative action that you would recommend to relieve pressure on small firms without unduly increasing their risk and systemic risk? 

A.2. Policymakers should be attentive to the benefits and burdens 

of financial regulations that are put forward, including as they relate to community banks. In crafting and implementing DoddFrank, Congress and the Federal regulatory agencies understood 

that community and regional banks did not cause the financial crisis. Accordingly, they should not be subject to the same requirements that are appropriate for large institutions. 

Treasury supports the regulators’ efforts to tailor their rules for 

community banks and is committed to implementing the DoddFrank Act in a way that builds a more efficient, transparent, and 

stable financial system that contributes to our country’s economic 

strength, instead of putting it at risk. The Dodd-Frank Act generally authorizes tailored regulation to reflect the size and complexity of banking organizations. The Dodd-Frank Act recognizes 

that community banks did not cause the financial crisis and was 

structured to limit their regulatory burdens. 

Treasury will continue to work with Congress and the regulators 

to help make sure that laws are implemented in a way that preserves the important roles of community and regional banks and 

keeps capital flowing to the customers they serve. 

Q.3. In July of 2013, the Treasury Borrowing Advisory Committee 

reported that new regulations stemming from Basel III and DoddFrank will likely result in constrained liquidity in the market. 

Even well-intentioned rules like the Supplementary Leverage Ratio 

(SLR) may constrain liquidity in markets as deep and understood 

as those for U.S. Treasury securities. 

What has been done specifically to address concerns regarding 

market liquidity in anticipation or as a result of new regulations? 

Given the views and commentary of the TBAC and other market 

participants, which rules are worth revisiting? 

A.3. Our efforts to reform the financial sector have made the system far safer and more resilient than it was in 2008. There is much 

less leverage, and the big banks are better capitalized. Moreover, 

we believe that financial reform will create more effective and better functioning markets throughout business cycles. We know that 

many factors are having significant effects on financial markets, 

some of which pre-date the crisis and reflect the evolution of market structure. All of these factors are affecting market behavior, 

and Treasury is constantly monitoring liquidity in financial marVerDate Nov 24 2008 14:38 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\03-25 FSOC ACCOUNTABILITY - NONBANK DESIGNATIONS\HEARIN
87 

kets—as they continue to evolve—and the degree to which the reforms we put in place are achieving the intended results. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM PAUL SCHOTT STEVENS 

Q.1. What can be done to improve the determination process including with respect to improving transparency and accountability? 

Please clarify which of your recommendations warrant congressional action and which recommendations the FSOC would be able 

to implement on its own pursuant to an existing statutory authority. 

A.1. ICI supports U.S. and global efforts to address abuses and excessive risk in the financial system, but we are concerned that the 

FSOC is seeking to exercise its designation authority quite broadly 

and to the exclusion of other mandates. The opacity of the designation process only exacerbates this problem. 

The FSOC’s supplemental procedures to the SIFI designation 

process, implemented in February, are welcome, but fall well short. 

These changes should be codified in statute to provide greater certainty and predictability to the process. In addition, Congress must 

act to require the FSOC to give both primary regulators and companies under consideration for designation an opportunity to address identified systemic risks prior to designation, as well as require an enhanced post-designation review process. Such steps 

would support the FSOC’s mission both by reducing risks in the financial system and by reserving SIFI designations and the exceptional remedies that flow there from only to those circumstances in 

which they are clearly necessary. 

The Institute believes that Title III of the Financial Regulatory 

Improvement Act of 2015 significantly addresses these concerns. 

The Institute also supports H.R. 1550, the Financial Stability Oversight Council Improvement Act, which includes similar de-risking 

provisions, as well as codifies into statute FSOC’s supplemental 

procedures. 

In none of its nonbank designations thus far has the FSOC chosen to explain the basis for its decision with any particularity. Instead, it appears to have relied on a single metric (a firm’s size) 

to the exclusion of the other factors cited in the Dodd-Frank Act. 

It also has theorized about risks instead of conducting the kind of 

thorough, objective, empirical analysis that should underlie its decisions. The FSOC should be explicit about the systemic risks it 

identifies arising from a firm’s structure or activities, and the results of any analysis that might lead to designation should be made 

public. This would be beneficial on all sides—it would help market 

regulators and firms address such risks, and it would promote public understanding of and confidence in what the FSOC regards to 

be systemically risky and why. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM DOUGLAS HOLTZ-EAKIN 

Q.1. What can be done to improve the determination process including with respect to improving transparency and accountability? 

88 

1These recommendations are part of four previous GAO reports: GAO-15-51, GAO-13-622, 

GAO-12-886, and GAO-12-151. 2See Satya Thallam, ‘‘Considering an Activity-Based Regulatory Approach to FSOC’’, (September 2014); http://americanactionforum.org/research/considering-an-activity-based-regulatory-approach-to-fsoc; Satya Thallam, ‘‘Reform Principles for FSOC Designation Process’’, (November 2014); http://americanactionforum.org/research/reform-principles-for-fsoc-designationprocess; and Satya Thallam, ‘‘Reform Principles for FSOC Designation Process (Cont’d)’’, (January 2015); http://americanactionforum.org/solutions/reform-principles-for-fsoc-designation-process-contd. 

Please clarify which of your recommendations warrant congressional action and which recommendations the FSOC would be able 

to implement on its own pursuant to an existing statutory authority. 

A.1. There are at least 18 GAO recommendations with an open status that mirror some of the concerns raised in my testimony related to the transparency of FSOC’s process. 1 Additionally, past 

work at the American Action Forum has highlighted many potential reform options to improve transparency and accountability including but not limited to: 2

• Regular meetings and communication with experts and stakeholders 

• More detailed minutes 

• Public disclosure of a checklist of findings regarding a firm 

along the criteria codified in Dodd-Frank 

• Final designations decisions available to the public that cite 

specific activities or subsidiaries of designated firms posing 

acute threats to America’s financial stability 

• Comprehensive assessments of the economic costs and benefits 

of designation 

The Dodd-Frank Act granted FSOC broad authority statutorily to 

set the specific determinants of a SIFI designation for nonbanks 

and lay out its operational procedures. FSOC has independently 

shown some willingness to address criticisms related to the processes and procedures it has developed. Specifically, the procedures 

adopted in February to open up FSOC and improve communication 

with firms under review were a good first step. FSOC’s broad statutory authority should allow it continue these improvements and 

make the changes recommended in my testimony. 

Of the eight primary criticisms I outlined, the supplemental procedures adopted in February related to points 1, 6, and 7, though 

none fully addressed the issues raised. If FSOC appears unlikely 

to move forward with further improvements, it may behoove the 

Committee to consider legislation that at a minimum requires 

FSOC to conduct its business with greater analytical rigor, puts 

oversight authority in the hands of existing regulators and not the 

Federal Reserve Board of Governors, encourages the Council to 

consider an activity-based approach ahead of institution-by-institution designation, and more clearly outlines and emphasizes the 

ability to de-risk and exit designation. 

89 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM DOUGLAS HOLTZ-EAKIN 

Q.1. Your testimony recommends that the FSOC share its analysis 

of what makes a company systemic so that the company might 

have an opportunity to address those risks and reduce its systemic 

footprint. 

If our ultimate policy goal is to reduce systemic risk, would it 

make sense for the de-designation process to be more clear, more 

structured, and more robust? 

A.1. Yes, absolutely. As outlined in my testimony, FSOC has not 

given companies the necessary information or opportunity to understand and address the metrics leading to a SIFI label. The internal changes announced in February are additionally not enough 

to ensure that designated nonbanks have a genuine opportunity to 

address Council concerns and exit designation. While FSOC’s primary mission is to identify activities and practices that generate 

systemic risks, in practice it has prioritized designation and regulation of institutions. At a minimum, further clarity and analytical 

rigor are needed to make annual reevaluations of SIFI status more 

than just check-the-box exercises, to provide a clear path for companies away from designation, and to uphold FSOC’s primary mission of identifying and mitigating risks to America’s financial stability. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM DENNIS M. KELLEHER 

Q.1. What can be done to improve the determination process including with respect to improving transparency and accountability? 

Please clarify which of your recommendations warrant congressional action and which recommendations the FSOC would be able 

to implement on its own pursuant to an existing statutory authority. 

A.1. The Financial Stability Oversight Council was created less 

than 5 years ago in the Dodd-Frank Wall Street Reform and Consumer Protection Act. It was tasked with a number of very important responsibilities, including identifying, analyzing, and, if appropriate, designating systemically significant nonbank financial institutions. As AIG, GE, Bear Stearns, Lehman Brothers, and so many 

more nonbank financial risks proved conclusively in the 2008 financial crash, systemically significant nonbank financial institutions can pose grave risks to the American people, the financial 

system and our economy. Moreover, they can be costly to our taxpayers and Government when, as they did in 2008, they line up 

with their hands out for bailouts. 

Thus, identifying, analyzing and, if appropriate, designating systemically significant nonbank financial institutions are a key part 

of protecting the American people and our treasury. A great deal 

of important work has been done in this area by the Stability 

Council, including very significant recent changes to make the 

process work even better. 

First, it has to be recognized that the Stability Council did a remarkable job in standing up the entire Council in very little time 

and acting swiftly to implement the law as directed. While doing 

90 

that, it has also made great strides in increasing the transparency 

and accountability of its designation process. The process was previously too opaque, depriving the public as well as potential designees of important information. For example, the Council did not 

disclose important data such as the number of firms under consideration, which firms were under consideration, and the number of 

firms FSOC declined to designate. In addition, the Council did not 

provide sufficient information about the process it follows for designation. However, to its credit, the Stability Council heard those 

criticisms, including prominently from Better Markets. It engaged 

in extensive outreach to all stakeholders. 

Second, the Stability Council acted on those concerns and recently changed procedures to be more transparent and accountable. 

Referred to as Supplemental Procedures, the Stability Council released this past February a series of very significant changes to 

their processes and procedures, which are designed to improve 

transparency and accountability. Under the new provisions, the 

Council provides information about the number of firms it considers for designation and provides additional information as to 

how it conducts designations. Further, the Council also now interacts with firms under consideration and primary regulators much 

earlier in the process. These changes are indeed significant, showing that the Council is listening carefully to those who comment on 

its activities, and is responding with meaningful, timely, inclusive 

action. 

Thus, we do not believe that this is the appropriate time to impose changes on the Stability Council, especially not changes mandated by Congress that are written in law that would deprive the 

Council of essential flexibility to adapt to unseen, unanticipated, 

new and emerging systemic risks. We believe that now is the time 

to let the Stability Council implement its new Procedures and to 

monitor those changes and the Council to determine if they were 

sufficient and implemented as well as they could be. 

We hold this view knowing that not all of the changes recommended by Better Markets and others were adopted and all criticism, merited or not, has not abated. That, however, should not 

detract from the remarkable and unprecedented way the Stability 

Council has done its work while also adapting to new information 

and circumstances. Given that the Stability Council has shown an 

ability and willingness to listen and change on its own, we believe 

that it has earned the trust and respect of critics to continue to 

work to refine its procedures and policies to balance a number of 

competing interests while fulfilling its incredibly important mission. 

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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF INSURANCE 

COMMISSIONERS 

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STATEMENT SUBMITTED BY PETER J. WALLISON, ARTHUR F. BURNS 

FELLOW IN FINANCIAL POLICY STUDIES AT THE AMERICAN ENTERPRISE INSTITUTE 

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STATEMENT SUBMITTED BY AARON KLEIN, DIRECTOR OF THE BIPARTISAN POLICY CENTER’S FINANCIAL REGULATORY REFORM INITIATIVE 

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REPORT SUBMITTED BY THE BIPARTISAN POLICY CENTER 

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LETTER OF DISSENT SUBMITTED BY BENJAMIN M. LAWSKY, SUPERINTENDENT, NEW YORK DEPARTMENT OF FINANCIAL SERVICES 

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ROY WOODALL AND JOHN HUFF DISSENTS ON PRUDENTIAL 

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ROY WOODALL AND ADAM HAMM DISSENTS ON METLIFE 

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STATEMENT OF THE NATIONAL ASSOCIATION OF MUTUAL 

INSURANCE COMPANIES 

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STATEMENT SUBMITTED BY STEPHEN D. STEINOUR, CHAIRMAN, 

PRESIDENT, AND CEO, HUNTINGTON BANCSHARES, INC. 

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