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S. HRG. 114–113 

OVERSIGHT OF THE FINANCIAL STABILITY 

OVERSIGHT COUNCIL DESIGNATION PROCESS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITIES, INSURANCE, AND INVESTMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE FINANCIAL STABILITY OVERSIGHT COUNCIL DESIGNATION PROCESS FOR NONBANK FINANCIAL COMPANIES THAT COULD 

POSE A THREAT TO THE FINANCIAL STABILITY OF THE UNITED 

STATES 

JULY 22, 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 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT

MIKE CRAPO, Idaho, Chairman 

MARK R. WARNER, Virginia, Ranking Democratic Member 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

JERRY MORAN, Kansas 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

ELIZABETH WARREN, Massachusetts 

JOE DONNELLY, Indiana 

GREGG RICHARD, Subcommittee Staff Director 

MILAN DALAL, Senior Economic Advisor 

(II)

C O N T E N T S 

WEDNESDAY, JULY 22, 2015 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

WITNESS 

Patrick Pinschmidt, Deputy Assistant Secretary, Financial Stability Oversight 

Council, Department of the Treasury ................................................................. 2 

Prepared statement .......................................................................................... 24 

(III)

(1) 

OVERSIGHT OF THE FINANCIAL STABILITY 

OVERSIGHT COUNCIL DESIGNATION PROCESS 

WEDNESDAY, JULY 22, 2015 

U.S. SENATE, 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND

INVESTMENT, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Subcommittee met at 10:17 a.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Mike Crapo, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. This hearing will come to order. 

Today’s hearing will focus on the Financial Stability Oversight 

Council’s designation process for nonbank financial companies that 

could pose a threat to the financial stability of the United States. 

Last year, I requested that the Government Accountability Office 

initiate a study to examine the process that FSOC uses when designating nonbank financial institutions. The report concluded that 

FSOC’s process lacks transparency and accountability, insufficiently tracks data, and does not have a consistent methodology for 

determinations. 

In February, FSOC approved supplementary procedures designed 

to improve the SIFI designation process. I am interested in learning how this improved the process and what other changes are 

being considered by FSOC to improve transparency, accountability, 

and communications. 

One of the criticisms that I hear is that while lots of information 

is being requested and reviewed by FSOC, there is not a lot of 

meaningful opportunity for companies to correct or contextualize 

information being evaluated and to contest specific allegations of 

the threat that a company poses to the financial stability. 

In previous hearings, it has been suggested by some witnesses 

that FSOC needs to pinpoint specific activities that contribute to 

the company’s systemic risk profile and provide a process for a 

company to eliminate the identified risks before being designated 

by FSOC. 

In the April hearing that Senator Warner and I held, the witnesses agreed that FSOC needed to have an off ramp to allow designated SIFIs to de-risk and shed their designation level. The goal 

of such reforms is to ensure that FSOC is more transparent during 

the designation process about which activities, together or sepaVerDate Nov 24 2008 10:20 Jan 27, 2016 Jkt 046629 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\07-22 OVERSIGHT OF THE FINANCIAL STABILITY OVERSIGHT COU
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rately, pose the greatest threat to financial stability so a company 

has the opportunity to address them. 

Understanding that a process that involves nine regulatory 

heads, an independent member, and five nonvoting members is 

never simple, it is important to understand the timeline and the 

details of the designation process and how we can ensure there is 

sufficient transparency, accountability, and clarity. I look forward 

to hearing from our witnesses on these issues today. 

With that, we have with us today Mr. Patrick Pinschmidt. Mr. 

Pinschmidt will—excuse me. I am looking for your official title 

here. He is Deputy Assistant Secretary of the Financial Stability 

Oversight Council, and he will testify today from the Department 

of the Treasury, and we appreciate your being here, Mr. 

Pinschmidt. I know there is a lot of business going on this morning, 

and so I expect you will see Senators floating in and out. But we 

appreciate your taking the time here with us, and you may have 

5 minutes now to make your presentation. Your entire written 

presentation will be made a part of the record, and we ask you to 

try to summarize your comments in 5 minutes so we will have 

plenty of time for questions. Please proceed. 

STATEMENT OF PATRICK PINSCHMIDT, DEPUTY ASSISTANT 

SECRETARY, FINANCIAL STABILITY OVERSIGHT COUNCIL, 

DEPARTMENT OF THE TREASURY 

Mr. PINSCHMIDT. Thank you very much, Mr. Chairman. 

Chairman Crapo, Ranking Member Warner, and Members of the 

Subcommittee, thank you for inviting me here today to discuss the 

Financial Stability Oversight Council’s nonbank designations process. 

The financial crisis taught us that we need a clear accountability 

for the overall stability of the financial system. Congress created 

the Council to bring together for the first time the entire financial 

regulatory community to identify and respond to potential threats 

to financial stability. 

Today the Council convenes regularly to monitor market developments and to take action when needed to protect the American people from potential threats to the financial system. 

Our approach from day one has been data-driven and deliberative, while providing the public with considerable information regarding the Council’s actions and views. As Secretary Lew has 

made clear, Council members recognize that the Council should be 

open to adapting its procedures and engaging broadly with stakeholders. Just since last year, the Council has demonstrated this 

commitment by enhancing its transparency policy, strengthening 

its internal governance, approving supplemental procedures to its 

nonbank financial company designations process, and soliciting 

public comment on potential risks from asset management products 

and activities. 

You asked me here today to discuss the Council’s responsibility 

to designate nonbank financial companies for enhanced prudential 

standards and supervision by the Federal Reserve. The Council 

takes such action if it determines that a company’s material financial distress or activities could pose a threat to U.S. financial stability. 

3 

This authority addresses a key weakness brought to light by the 

financial crisis: that the failure of large, complex, and interconnected companies without appropriate supervision could pose 

risks to financial stability. 

Designating a firm is not a decision the Council takes lightly. Before making a final decision, the Council goes through a lengthy, 

multistage, in-depth analysis. The review covers every aspect of a 

company, including financial statements, business activities, market dynamics, and existing regulation. 

The Council works with the company and its regulators to understand how the firm’s financial distress could affect the broader financial system. Most of the companies the Council has considered 

so far have not met the standard for designation, but in four cases, 

after considerable and thoughtful deliberation, the Council has 

found that a firm needs to be held to a higher standard to protect 

the U.S. financial system. 

The Council recently adopted supplemental procedures for its 

designations process. These changes were informed by extensive 

outreach with more than 20 stakeholders, including trade groups, 

companies, and public interest organizations. We also solicited 

input from each of the three companies then subject to a designation. 

Under the new procedures, companies will now know early in the 

process where they stand, and they will have earlier opportunities 

to engage with and provide input to the Council. For example, the 

Council will notify a company when it first comes under active review and provide it with the opportunity to meet with staff, review 

the Council’s primary sources of public information, and provide information relevant to the Council’s review. 

The Council is also providing companies with a clearer and more 

robust annual review process. Company representatives are now 

provided an opportunity to discuss the scope and process for the review, and they can present information regarding any change that 

may be relevant, including restructurings, regulatory developments, market developments, or other factors. 

In addition, the Council will provide each designated company an 

opportunity for an oral hearing to contest its designation every 5 

years. These changes open the door to more engagement with the 

Council following a designation to make sure there is ample opportunity to discuss and address any issues that a company wants to 

put before the Council. 

Altogether, these and other changes strengthen the Council’s 

process while also addressing many of the suggestions made by 

stakeholders. 

As Congress contemplates additional changes to the designations 

process, it is important that such changes do not compromise the 

Council’s fundamental ability to conduct its work. We are particularly concerned with legislative proposals that would dramatically 

lengthen an already long and deliberative designation process, impose insurmountable practical hurdles on the Council’s work, and 

prevent the Council from taking action to address potential threats 

to financial stability. 

As the President and Secretary Lew have both made clear, we 

will not support legislation that weakens important taxpayer, inVerDate Nov 24 2008 10:20 Jan 27, 2016 Jkt 046629 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\07-22 OVERSIGHT OF THE FINANCIAL STABILITY OVERSIGHT COU
4 

vestor, and consumer protections by impeding the ability of regulators to identify and respond to threats to financial stability. U.S. 

markets and financial institutions are constantly evolving, and we 

must remain alert and responsive to new challenges in order to 

maintain the safety, soundness, and resiliency of our financial system. 

I thank the Subcommittee for the opportunity to discuss the 

Council’s nonbank designations process, and I look forward to answering your questions. 

Chairman CRAPO. Thank you very much, Mr. Pinschmidt. 

Senator Warner, did you want to make an opening statement? 

Senator WARNER. I will defer. 

Chairman CRAPO. All right. Thank you. Then we will go right 

into questions. 

Mr. Pinschmidt, the February supplemental procedures appear to 

be a positive step toward increasing communication between FSOC 

staff and firms under review. However, while lots of information is 

being requested and reviewed, the process does not seem to provide 

clarity to the companies about which activities together or separately pose the greatest threat to financial stability. So a company 

basically does not have an effective opportunity to address these 

issues before and after designation. 

Can you please explain when in the designation process companies are informed of the risks that FSOC believes they pose? 

Mr. PINSCHMIDT. Certainly. So you noted the supplemental procedures that the Council approved in February. Essentially, that 

opened up the process. Previously, it was a three-stage process. It 

is still a three-stage process. Stage 1 was purely mechanical based 

on certain mechanical thresholds. If you trip one of those thresholds, you go into Stage 2. 

Previously, Stage 2 was a preliminary internally facing review by 

the Council internal facing. If it was a public company, the Council 

would download the 10-K and 10-Q, do a very preliminary analysis 

to determine if a company should be considered in Stage 3. And 

Stage 3 was the more robust back-and-forth period with the Council. 

As a result of the supplemental procedures approved in February, companies under consideration by the Council will now be 

informed at the beginning of Stage 2 once an active review commences on that company. So they will have an opportunity on day 

one, once an active review is commenced, to come in, meet with a 

Council analytical team, present information to Council member 

staff, ask questions if they want to ask questions, and also as part 

of Stage 2, get a sense for the type of materials that the Council 

is reviewing during Stage 2 as it looks at the company. 

So that was an important facet of the supplemental procedures 

allowing companies to engage earlier in the process, raise questions, and review the type of materials that the Council—— 

Chairman CRAPO. But in that process as it begins, is there a 

point at which the FSOC staff inform the company of which factors 

and which concerns they are having, if they are having any? 

Mr. PINSCHMIDT. So, yeah, that is a very important point. I think 

one thing to keep in mind is this is the beginning of the process. 

This is the first time the Council member staff are engaging with 

5 

a company, so, you know, it is probably not practical to assume 

that firm views and positions on the risk will be developed in that 

process. The threshold consideration in Stage 2 is: Are there 

enough questions here? Is there a there there to advance the company to Stage 3 to do a deeper dive and a drilldown with the company? 

But that being said, as part of the new supplemental procedures, 

to the extent that through Stage 2, through that engagement, 

through that preliminary review that is conducted by the Council, 

again, just relying on publicly available information and information from regulators, there is no provision to get nonpublic information from the company in Stage 2. But based on that preliminary 

information available to the Council, should the Council decide to 

advance a company to Stage 3 for additional review, the Council 

will inform the company at the beginning of Stage 3: Hey, this is 

what we learned in Stage 2; these are the factors we are looking 

at; this is what we expect to explore in Stage 3; we are going to 

send you a list of questions asking very detailed questions; these 

foot to these key concerns. 

Chairman CRAPO. So if I understand you right, the point at 

which you are transitioning from Stage 2 to Stage 3 is the point 

at which FSOC will tell the company that we have identified these 

risks, and these risks, taken either together or separately, are what 

is potentially going to cause a designation? 

Mr. PINSCHMIDT. I just want to be careful on that because it is— 

you know, Stage 2 is preliminary. It does not benefit from the robust back-and-forth that happens during Stage 3. It does not benefit from nonpublic information that the company provides to the 

Council. So any view at that stage of the process at the end of that 

preliminary review is a high-level sense of like, well, these are the 

potential risk areas we want to drill down deeper on. It is not a 

firm view as to like these are three things we are going after, we 

are worried about; you know, these are the three threats to financial stability. 

Chairman CRAPO. So even at Stage 3, the company is not going 

to be informed as to what the specific risks are. 

Mr. PINSCHMIDT. Well, I guess what I would say, at the beginning of Stage 3, if the company is advanced to Stage 3, there is a 

rationale for that decision. The Council comes together, evaluates 

the record in Stage 2. To the extent that there are potential areas 

that have been highlighted and Council members are concerned 

about these areas and want to explore them more in Stage 3, those 

areas will be highlighted to the company at the beginning of Stage 

3. 

You know, Stage 3 is a lengthy process. It lasts over a year. It 

will probably last up to a year and a half going forward. So, you 

know, that gives a company a sense of the areas that the Council 

is interested in pursuing with the company, and certainly there 

will be an opportunity for significant engagement throughout Stage 

3. 

For example, one recent company had over a dozen meetings 

with the Council staff. They submitted over 20,000 pages of information. There are a lot of conversations. So as the company goes 

6 

through Stage 3 those preliminary areas of inquiry will become 

much more crystallized for the company. 

Chairman CRAPO. All right. Thank you. 

Just quickly, how many companies to date that have been moved 

into Stage 3 have gone through Stage 3 without ultimately being 

designated? 

Mr. PINSCHMIDT. The Council has considered nine companies in 

total. Of those nine companies, five were considered in Stage 2, and 

the decision was made not to advance them to Stage 3. Of the four 

companies that advanced to Stage 3, the four companies were designated. 

Chairman CRAPO. All right. Thank you. 

Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. I wonder if I could 

get an extra minute since I skipped my opening statement. I just 

want to cite for the record that here we are 5 years later, there are 

some very good things that have happened in Dodd-Frank. There 

are things, I think, that still need improvement. But I think if the 

record was ever written about how this provision came about, let 

me just assure you that there was robust discussion about whether 

nonbanks should be SIFI designated. 

I think one of the concerns that Senator Crapo, Senator Corker, 

Senator Warren, and I have all had is that this designation of SIFI 

should not be a Hotel California where you can never de-designate. 

And I am going to ask some questions about that. I just want to 

make a couple of comments. 

So, first, I share a lot of my colleagues’ concerns about the transparency of the process and how we have moved. I think there has 

not been enough transparency. I think Secretary Lew’s change last 

year made improvements. I think some of the discussions about 

how firms are brought in, how much information is shared now are 

moving in the right direction. 

I also think we have seen in the case of—Senator Toomey and 

I may disagree on this one, but on the money market issues, what 

happened with the SEC moving and saying that size alone should 

not be a factor was an interesting process. And one of the things 

that I continue to believe is that size is not necessarily the guiding 

factor on a SIFI designation. It should be the underlying activities, 

not simply the size itself. 

Now, we have got an example how this should work out with GE. 

I would point out we saw the Fed’s capital requirements I think on 

Monday of this week. GE has made the business decision to spin 

off a number of its GE Capital assets. As a matter of fact, CEO Jeff 

Immelt said, when he announced that move, ‘‘This is exactly what 

was envisioned by the FSOC process.’’ So you got one of America’s 

leading CEOs saying, you know, by making this choice to bring 

down the size of his firm rather than falling into the full SIFI designation, you know, he is making a business decision that I think 

is both appropriate and will lessen the amount of risk in the overall system. 

As we look at GE, though, I would like to go through—let me just 

read off a couple of questions, and then you can respond. What risk 

would the failure of GE Capital pose today in its current status? 

As GE Capital spins off some of its assets, how does FSOC plan 

7 

to monitor the transfer of those assets throughout the financial system to ensure that they do not end up at another firm that would 

inadvertently trigger other systemic concerns? To what extent are 

GE’s excessively risky assets moving into any kind of shadow banking system? And if they are in that shadow banking system, how 

would the FSOC monitor? And do you believe that the FSOC and 

Federal Reserve have the tools and authority necessary to address 

any existing concerns that may arise with GE’s de-risking process? 

Mr. PINSCHMIDT. Thank you very much, Senator. 

In terms of GE Capital, as I am sure you can appreciate, it is 

probably not appropriate for me to get into too much of the details 

of the company’s ongoing restructuring. 

Senator WARNER. Well, any particular firm, as you take assets 

that may be risky, if they could go into the shadow banking, or if 

they simply moved to other firms, how do you monitor that process? 

Mr. PINSCHMIDT. Yeah, I think as a general matter, you know, 

this has been an area, again, speaking generally in terms of the 

migration of activities or assets from one space to another space, 

that the Council is very well positioned to monitor, because the 

Council brings together regulators from across the regulatory community, looking at different types of institutions, looking at different types of markets, and is in a very good position to understand what is driving this. Are there business issues? Are there 

competitive issues? Are there regulatory issues? And what are the 

potential consequences in terms of financial stability? 

So, more broadly, this is an issue that the Council continues to 

monitor. It has highlighted this issue in its Annual Report and this 

will obviously remain a focus going forward. 

I think in terms of GE Capital, I mean, clearly there is a process 

in place. The company alluded to that in terms of them pursuing 

their de-designation strategy with the Council. This process was 

elaborated on in the February supplemental procedures. It is very 

clear, to the extent a company wants to pursue this strategy, there 

is an off ramp available, and there is a process that they can engage with at the Council. They can ask questions. They can get responses to those questions and the purpose is to be as transparent 

as possible to give companies the right information to make decisions. 

Senator WARNER. Let me just in my last remaining moments say 

that another area of great concern has been the whole question 

around insurance designations—obviously AIG, one of the firms 

that caused the crisis in 2008. What have you learned from the 

designation of AIG that helped guide you when you went through 

the same process with Prudential and MetLife? Obviously, I believe 

Roy Woodall offered a dissenting opinion on that issue. Could you 

explain why you disagree with Mr. Woodall’s dissent? And just on 

a more general basis, under what circumstances do you believe an 

insurance firm could pose systemic risk? And can you see any kind 

of hypotheticals going forward since this is going to be an area that 

I know a number of my colleagues have concerns about as well? 

Mr. PINSCHMIDT. So I think generally, in terms of the Council’s 

approach to the three insurance companies designated, these were 

company-specific analyses, you know, that took over a year on each 

8 

of them, sometimes as much as 2 years. So, you know, I think each 

company is different, and each company poses a different set of potential risks, not in their standard operations but should they encounter financial distress in terms of what that impact would be 

on broader market functioning. That was, of course, the threshold 

decision by the Council. 

I think generally speaking, across the three firms, the Council’s 

analysis—which is outlined on the public bases on the Council’s 

Web site, providing a summary of the rationale for each of the designations. But I think speaking generally, the focus of the Council 

was on the exposure of broader financial markets directly and indirectly to each company and also the asset liquidation channel in 

the sense that if the company got into trouble, had to liquidate assets, what would be the consequences of that liquidation on broader 

market functioning? So I think, you know, generally speaking, because of these companies’ size, interconnectedness, not necessarily 

their vanilla or straightforward insurance operations, but, you 

know, other operations that are not really in that category, the decision was made to designate them. 

Senator WARNER. Thank you, Mr. Chairman. I would just simply 

close by saying that I know there is great reluctance from the administration about codifying any changes with the process. I understand some of your concerns, but I do think there have been some 

movements in the right direction on transparency and ensuring 

that those transparency requirements are going to last into future 

administrations. I look forward to—if it is not legally codified, how 

can we ensure that? So that might be for a future round of questions. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. I thank you and the 

Ranking Member for having this hearing, and you, sir, for your testimony. 

Look, with FSOC, my sense is we have a number of people in the 

Senate that would like for FSOC not to designate anybody as a 

SIFI. There are probably some people, on the other hand, that 

think FSOC is working just fine the way that it is. 

But my guess is there is a pretty large group of folks that would 

like to see the process be improved, and my guess is even you 

would like to see the process get better as it moves along. 

So I want to ask one long question for you to respond. There are 

three areas where I think there could be a lot of consensus around 

improvement. One would be the disclosure prior to designation—I 

know that you talked a little bit about that in answering Senator 

Crapo’s question—but really being more transparent about the 

analysis that is given, and give people the opportunity on the front 

end to more fully understand. 

Second, as they are moving into the upper stages, as you alluded 

to in your comments, giving them a predesignation off ramp so that 

before they are designated, they can off-ramp, they can just go 

ahead and share with you, and you can work with them toward 

that end to make sure in advance of being designated they have 

the opportunity to off-ramp. My sense is—you alluded to GE just 

9 

a minute ago. Maybe there was not that opportunity for them even 

though it appears that they have certainly done a lot to make sure 

they are not a SIFI. You can decide whether they have or not. 

And then after that, especially Section 113 of Dodd-Frank says 

that the FSOC will reevaluate each determination at least once a 

year. It seems to me that if we could work more fully to understand 

how you could have a post designation off ramp, there would be a 

lot of consensus on this Committee toward supporting that. And I 

wonder if you might just lay out whether you agree that some of 

those types of things would be helpful, and if so, what those things 

might be that we could come around legislatively. 

Mr. PINSCHMIDT. Yes, and, certainly, I think you raise some good 

questions, and I would like to sort of tick through them, and please 

interrupt me if I am not addressing it the way you wanted me to 

address it. 

So in terms of disclosure throughout the process and getting companies as much information so they know where they stand as they 

are going from Stage 2 to Stage 3 and within Stage 3, I would reiterate that this is a very lengthy process. There is a lot of engagement. There is a lot of paper going back and forth. There are a lot 

of meetings. And that being said, as part of the supplemental procedures we put out in February, we recognize that to the extent the 

Council has formed views or has questions, that information will 

be shared with companies sooner in the process. For example, in 

Stage 2, allowing the company to come in and meet with Council 

member staff, allowing the company to present anything it wants 

to present, and basically allowing the company to ask the Council 

member staff what information are you using in your analysis 

today. So I think—— 

Senator CORKER. If I could, just on that point, so when they do 

that, if Company X says, ‘‘Look, I will just unload my entire financial arm. I am a manufacturing operation, an industrial operation. 

I will just unload my entire financial arm,’’ which a particular company has done, would you all then say, ‘‘OK, well, if you will do 

that, then forget it, we will not designate you’’? Does that kind of 

process occur? 

Mr. PINSCHMIDT. So what I would say is that the Council will always consider any information or requests brought to it by companies under consideration. So of the four companies that the Council 

has designated, there was never one specific issue that triggered 

the designation. So there was—— 

Senator CORKER. But if you are not in the financial business, I 

would think that would be a pretty big clue that maybe they are 

not a threat to the financial system. Would that be the case in one 

particular—and I do not want to drive home one company, but if 

you are an industrial company, you say I am going to be out of the 

financial business, would that keep you from being designated as 

systemically risky to the financial system? I just think it would. 

Mr. PINSCHMIDT. I was referring—it was not the industrial company that was designated. It was the sub. And if you look at the 

basis that was posted publicly for that decision, it was a confluence 

of different factors that drove that decision. I guess what I am referring to is hypothetically, let us say it is Company X and they 

have this business that is doing something that is very scary, and 

10 

that is the reason they are going to be designated. So if that company wanted to come to the Council and say, look, we have a proposal to deal with this, that is certainly a conversation that can 

happen within the current process. It just has not happened with 

the four companies that were previously designated because there 

was no one factor that triggered it. 

Senator CORKER. But there is a clear opportunity for them, 

though, to present and say, look, if this is of concern to you, it is 

not worth it to us to be identified in this way, it hurts our investors, so we will do away with this. There is a clear process laid out 

where they can do that and be off-ramped. 

Mr. PINSCHMIDT. Yeah. Certainly, we are talking about a 2-year 

process from beginning to end for a designation. So that is a lot of 

time, and there are certainly a lot of opportunities for the company 

to bring information, the primary regulator to bring information 

that would be considered by the Council. 

Senator CORKER. And the other two issues—I realize I have run 

over my time, but we will send you a question so you can give us 

some information about the post-designation off ramp and what 

you are doing to make sure that companies have a route to be undesignated. And I guess that process exists somewhat today. Yes 

or no? 

Mr. PINSCHMIDT. Yes. I would be happy to discuss it quickly if 

you wanted me to. 

Senator CORKER. Well, I do not know if the Chairman is that lenient today, but thank you. 

Chairman CRAPO. Thank you. 

Senator Donnelly. 

Senator DONNELLY. Mr. Chairman, in the interest of my colleagues’ questions, are you in that mood today, sir? Just kidding. 

Thank you very much for being here, sir. One of the questions 

I wanted to ask is: Based on your participation at recent FSOC 

meetings, one of the other things that you have responsibility for 

is what are some of the emerging threats that you see in the economies, whether here or overseas, that are most concerning? Obviously, first and foremost I wonder about here. One of the things I 

have always tried to do is say, OK, what might be out there that 

might lead toward a similar situation that we had in 2008 and how 

do we prevent it? 

Mr. PINSCHMIDT. Thank you. So that goes to the core of what the 

Council does. I know a lot of focus is always on—— 

Senator DONNELLY. I know it goes to the core. I am just asking 

what are the things you are looking at right now that have you 

most concerned. 

Mr. PINSCHMIDT. So the Council’s Annual Report highlights the 

key risks that the Council believes are in the current financial system and the best recommendations to address those. I think this 

year’s Annual Report, consistent with prior years, highlighted cybersecurity. I think that one remains at the top of everybody’s list 

in terms of fostering greater information sharing between Government and the private sector, making sure that technological capabilities are in place, and just understanding the threat and how it 

would potentially play out in terms of responding to that threat 

11 

and recovering from that threat. So that is a key area of focus for 

the Council. 

I think given the current economic backdrop, one recurring 

theme throughout the report is the reach for yield dynamic. You 

know, we have had interest rates low for a long time, and it is only 

natural that some investors and some market participants will 

reach for yield, whether it is on a looser credit quality, whether it 

is taking on much more risk for incremental gain, and that is an 

area for market participants and regulators to be very focused on 

going forward. 

I think two areas that were highlighted in this year’s Annual Report that were not highlighted in previous reports. I think central 

clearinghouses as Dodd-Frank is implemented—and certainly 

Dodd-Frank anticipated this—clearinghouses are playing a much 

bigger role in terms of providing transparency and stability to the 

system. But because of that rule and the more transactions that 

are going through them, it is important that regulators continue to 

remain vigilant as to how these entities are being run, how they 

are being risk-managed. There is certainly a lot going on. There 

continues to be a lot going on on that front. But it is a very strong 

focus. 

And I think, finally, another new area that was highlighted in 

the Annual Report was—and this is something we are hearing a 

lot about lately—emerging market structures across different asset 

classes. You have seen an increase in electronification. You have 

seen structural changes in how markets operate and understanding 

how those changes are impacting market functioning and to the extent that they could pose any potential risks. 

Senator DONNELLY. Let me ask you a question I have been asked 

by folks back home, as well as in other places, and that is, for mutual funds, which many of us have used for 401(k) or for other purposes. So you have a mutual fund that gets in $1,000 and invests 

$1,000 into the market or into bonds or wherever for you, that they 

are not running margins, that they do not—you know, you give 

them 10 bucks, they invest 10 bucks, period. Where is the systemic 

risk in that? 

Mr. PINSCHMIDT. So, yeah, I think you are absolutely right when 

you think about traditional mutual funds. They are a different animal in terms of how they invest and how they operate. They do not 

have the balance sheet. They do not have the leverage. It is an 

agency model. They are not investing their own money. 

But I think, broadly speaking—and this is why the Council is 

doing some work on this front. There has been incredible change 

in that space, and there are certain activities across the industry 

that there are a lot of legitimate questions on in terms of certain 

products, for example, ETFs and certain liquidity features of certain products. 

The Council right now is not focused on individual companies. 

The Council is prioritizing a review of industry activities and products, and issued a Federal Register notice last December with a series of questions, just trying to get more information from the industry and other stakeholders, including information on some of 

the issues you are raising. 

12 

Senator DONNELLY. So if you have not—and I apologize if you already did make a list of—you mentioned ETFs. If you have put out 

a list of here are the things we are concerned about so that companies have an idea of what to avoid if they want to avoid being systemically designated. 

Mr. PINSCHMIDT. So let me just clarify that. I think it is premature to say the Council is concerned about any one thing right 

now. What the Council did in December was issue a Federal Register notice highlighting four key areas for exploration. 

Senator DONNELLY. What I think is important is: How do you 

know what to avoid if you are not being told here are the things 

we want you to avoid? 

Mr. PINSCHMIDT. So what I would say is the Council has not 

really—has not finished its process in terms of understanding if 

there are even legitimate risks there. It is an ongoing process. It 

is engaging with the industry. The Council is focusing on four 

areas: liquidity and redemption risk, leverage, operational risk, and 

resolution. And within each of those four areas, the Federal Register notice asked a series of questions, probably eight questions in 

each section, and points out potential areas of concern to explore. 

And we are trying to get information, understand the nature of potential risks. And to the extent there are risks, then, there will be 

a dialogue about those risks. But I think it is premature to point 

out to any one single feature rising to a certain level at this juncture. 

Senator DONNELLY. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. Good morning, Mr. 

Pinschmidt. 

Mr. PINSCHMIDT. Good morning. 

Senator SCOTT. I personally think it is highly unlikely that asset 

managers pose a systemic risk, honestly. But Federal Reserve Governor Tarullo recently suggested that activities-based designation 

in the asset management industry would be preferred to entitybased designation. Can you please commit that if the FSOC goes 

down this path with asset management activities, it will revisit the 

entity-based designation of the insurance SIFIs and consider an activities-based designation for them as well? 

Mr. PINSCHMIDT. Thank you for your question. So you are right 

that for asset management the Council is currently taking an activities-based approach. The Council made a decision back in July 

of last year, asking staff to prioritize an industry review focused on 

asset management products and activities. But I think in terms of 

the larger question here, in terms of entity review versus industrywide review, it is really not an either/or question. 

I think where there are risks at individual firms based on their 

size, interconnectedness, and the consequences of their failure to 

the financial system, the Council has taken action. Where there are 

broad-ranging questions regarding certain activities or products, 

the Council has also sought to get answers to those. 

Neither approach precludes the other option. So to the extent 

that you are looking at industry activities, it does not mean you 

cannot look at individual companies. And to the extent you are 

13 

looking at individual companies, it does not mean you cannot look 

at industry activities. 

I think, in the case of insurance, certainly in the Annual Report, 

the Annual Report has talked about areas whether it is captive reinsurance, whether it is the ‘‘reach for yield’’ dynamic I referred to 

earlier, that there are certainly ongoing questions on an industrywide basis that the Council needs to explore. 

Senator SCOTT. Dodd-Frank turned 5 years old yesterday, and in 

an interview with the Wall Street Journal with the bill’s author, 

former House Financial Social Security Committee Chairman Barney Frank said, ‘‘I do think there is a tendency for an overreach 

by the FSOC. I do not think straightforward insurance companies 

or money managers should be covered and regulated as SIFIs.’’ Do 

you agree or do you disagree with Chairman Frank? 

Mr. PINSCHMIDT. So I certainly have the utmost respect for 

Chairman Frank. I guess what I would say is the Council was created 5 years ago to bring together regulators from across the regulatory system with a common responsibility to identify and respond 

to threats to financial stability. The rationale for that was a recognition that threats evolve over time. Financial institutions and 

markets are not static and, thus, risks evolve over time. 

So to the extent 5 years ago there were certain risks folks were 

worried about, those risks have changed over the past 5 years, and 

they will change again over the next 5 to 10 years. 

I will say in the case of the Council’s review of insurance companies, it has not been the straightforward dynamics or the vanilla 

dynamics of the insurance companies that triggered the designation. These were large, highly interconnected companies whose failure could potentially pose a threat to financial stability. 

I think his comments also referenced mutual funds. As I just alluded to earlier, the Council has not designated any mutual funds. 

The Council is focused on products and activities across the industry—engaging with the industry to better understand the nature of 

potential risks, which are albeit very different from other risks in 

the financial system. 

Senator SCOTT. Thank you. 

Senator WARNER. [Presiding]. Senator Toomey. 

Senator TOOMEY. Thanks, Mr. Chairman. 

[Laughter.] 

Senator WARNER. You get used to that. 

Senator TOOMEY. Yes, never mind. 

[Laughter.] 

Senator TOOMEY. I want to pursue this discussion that, well, almost everybody has been talking about. You have acknowledged 

that there is a focus in the asset management space on activities 

and products, but you also seem to suggest that that is not to be 

understood to be an alternative to entity designation. So I just 

want to be—first of all, let me be clear. Let me ask you, are you 

telling us today that entity-based designations are still on the table 

and that it is still entirely possible that individual asset management firms will be designated as SIFIs as such? 

Mr. PINSCHMIDT. So I was responding generally to the question 

on terms of activities versus entity-based reviews. 

Senator TOOMEY. Right. 

14 

Mr. PINSCHMIDT. I think the Council has been very clear. The 

Council has been evaluating risks in the asset management space 

for some time. And after about a year of work in multiple different 

work streams on that front, across different areas, the Council directed staff to prioritize a review of asset management products 

and activities. So that certainly is the focus of the Council. 

Senator TOOMEY. I understand. That did not even come close to 

answering my question. My question is: Has the FSOC taken off 

the table entity-based designations? Or is it still entirely possible 

that the FSOC will decide to designate asset managers as SIFIs 

per se? 

Mr. PINSCHMIDT. I cannot speak to the Council in terms of what 

it may decide down the road—— 

Senator TOOMEY. Wait a minute. You cannot answer the question 

of whether or not you have taken off the table entity-based designations and substituted exclusively activity-based designation? 

You cannot tell us whether that is your criteria? 

Mr. PINSCHMIDT. What I can say is the Council is firmly focused 

on products and activities across the industry, and a broad review 

informed that focus by the Council. So I think the Council is very 

committed to this. They issued a Federal Register notice for comment. They are engaged in a back and forth with the industry and 

other stakeholders, designed at understanding the risks. And I 

think what triggered that is a recognition that asset management 

firms are different. You know, they—— 

Senator TOOMEY. Yeah, we know that. But I got to tell you, 

this—you know, the opacity with which the FSOC has been operating is extremely disturbing, and when you come here today and 

you continue to obfuscate about a very fundamental and basic 

question, that is extremely problematic. 

Senator Donnelly raised the question: How can a firm choose not 

to be systemically risky if it does not know what activities you consider to be systemically risky? I do not understand how it is defensible not to have a clear, objective, public description of the activities that you think give rise to systemic risk so that a firm could 

decide to note engage in them and know in advance that thereby 

it will avoid this designation. How can that be unreasonable? 

Mr. PINSCHMIDT. Senator, I think that is completely reasonable. 

I mean, I—— 

Senator TOOMEY. Except you do not do it. 

Mr. PINSCHMIDT. I guess my point is the Council is in its risk 

identification phase. It really has not, you know, come to conclusions on risks in the asset management—— 

Senator TOOMEY. It seems to be pretty far down the path of designating individual firms. 

Mr. PINSCHMIDT. Again, I think the Council was very clear a 

year ago that it is focusing on products and activities rather than 

individual firms, and to the extent the Council arrives at some decisions in terms of potential risks, those decisions will obviously be 

shared with the public. 

Senator TOOMEY. So can we be assured that no firm will be designated until the Council has reached the decision about what activities give rise to systemic risk? 

15 

Mr. PINSCHMIDT. I mean, certainly, the process now is not looking at individual firms. It is looking at activities and products 

across the industry. And to the extent there are specific activities 

and products that concern the Council that pose risks, the Council 

will then obviously engage further in terms of the specific concerns—— 

Senator TOOMEY. Well, here is another problem we have. If you 

guys decide a particular activity deserves to be designated, one of 

the things that is still entirely unclear is how the Fed will choose 

to regulate a nonbank that gets drawn into this web. 

It seems to me that the only way that a firm can make an informed decision about whether or not it wants to exit an activity 

that is the source of its designation would be to know how that activity is going to be treated. So can we be assured that we will not 

have any designations until the Fed also comes out and publicly 

discloses how it intends to regulate these activities? 

Mr. PINSCHMIDT. So the role of the Council and the Fed is clearly 

different here. The Council is responsible for risk identification. 

The Fed is responsible for addressing that risk with enhanced prudential standards. 

What I would say—and, again, I am sort of speaking for the Fed 

on this. What they have said previously and certainly how they 

have approached it with some of the prior designations is they recognize each industry is different and the players within industries 

are different. So their view and their approach has been to tailor 

the enhanced prudential standards for the risks posed by individual firms. And I think that in order to tailor, you need to understand what the nature of the risk is first, so, therefore, there is 

kind of a sequencing there. 

Senator TOOMEY. Well, and the sequence should include that all 

of that should be very well known and understood and publicly debated before anyone is subject to this regulation that they had no 

way to avoid but might well have chosen to avoid. 

Thanks, Mr. Chairman. 

Chairman CRAPO. [Presiding]. Thank you, Senator Toomey. 

Senator Heller. 

Senator HELLER. Mr. Chairman, thank you, and to the Ranking 

Member also. I am not a Member of this Subcommittee, but this 

is a fascinating discussion, and probably in my home State one of 

the—probably one of the biggest issues that I get questioned on 

constantly. This financial downturn did not help the State of Nevada by any means, and most people are very aware of the amount 

of unemployment. We lost a lot of banking entities in the State. We 

probably lost more than half of our local banks, community banks, 

over the last 5 or 6 years, and it has been pretty devastating to 

the economy. So that is why I am here today, and I want to thank 

our witness today also for taking time and answering our questions. I know sometimes it is a little uncomfortable, but it does help 

this process move forward. So thank you for being here today. 

I do have a few questions, and, again, it is along the line of everybody else, but I think this is important to the banking industry 

and the nonbanking industry to get clarification on some of these 

questions. 

16 

I guess my first question is: Is it your belief that no firm should 

ever be undesignated as a SIFI? 

Mr. PINSCHMIDT. Oh, certainly not, no. There is a clear process 

in place. If a company decides to pursue a de-designation strategy, 

that is available to that company. 

Senator HELLER. See, that is the argument. The argument is 

that there is not a clear process, and so that is why I asked you 

that question. This is what these entities are coming to me saying, 

OK, if there is a designation, how can we avoid it? Again, this is 

the same question everybody else is asking, but I guess we are 

really trying to get down to the basic answers on this. 

You are saying that there is a clear path—a clear path—that a 

company can come to you and be told specifically what it takes or 

an off ramp if, in fact, a SIFI designation were to occur? 

Mr. PINSCHMIDT. Yes. So, look, I will walk you through that. So 

after a designation is made, the Council subjects every company to 

an annual review process, and the basic—the process there is to 

evaluate what has changed at that company since the designation, 

and to the extent there have been changes, are those material that 

would warrant a potential rescission of the designation? 

As part of the supplemental procedures we put out in February, 

we put some more meat on the bone on this in terms of kind of 

letting companies know what their rights are and how we would 

expect to conduct the process, because bear in mind we have not 

really gone through this process a lot because we just had the first 

round of designations just 2 years ago. 

But the way it is set up now at the beginning of the process we 

will send a letter out to the company inviting them to come in, 

meet with Council member staff, and that is their opportunity to 

raise any questions they have, to highlight any changes in their 

business. Our view is that each company that has been designated, 

they receive a 200-, 300-page document from the Council outlining 

the key factors as to why they are designated. So our view is companies know why they are designated and what risks the Council 

is concerned with. 

But to the extent that they have questions on that, to the extent 

they have—well, you cited these factors, if we did this to that, what 

would that mean? This is a forum to allow that sort of dialogue. 

Senator HELLER. Help me understand—I am sorry to interrupt 

because I do not have a lot of time, but help me understand what 

it means when you say that you are still going through the risk 

identification phase. Does that impact a company’s ability to exit 

a SIFI designation? 

Mr. PINSCHMIDT. So I think the risk identification phase, what 

you are referring to, is in Stage 2, and that is kind of at the preliminary—the beginning of the process—— 

Senator HELLER. But you are still saying you are going through 

this process? 

Mr. PINSCHMIDT. Not in terms of the annual reevaluation. So the 

annual reevaluation reflects—comes after the designation. It comes 

after the company receives a lengthy 200-, 300-page document from 

the Council outlining the key risks and the concerns of the Council. 

So the company, in that position, comes into that meeting post 

their designation with a long document outlining the risks, and 

17 

this is an opportunity for the company to talk to Council staff and 

say, look, this is what we are thinking, this is what we have been 

doing, these are potential other ideas. What were you thinking 

when you said this? What were you thinking about this? And just 

have that dialogue, because we feel it is important, to the extent 

a company wants to pursue an off ramp, there are many different 

ways to go about doing it. And the company is in the best position, 

the management team is in the best position to assess the relative 

pros and cons of those options, and we want to provide as much 

information. 

Senator HELLER. Let me add one thing. I guess the confusion and 

the comments that I am receiving—there is a lot of dialogue. There 

is a lot of dialogue. But what they do fear is that there is not 

enough action. In other words, they talk and talk and talk, and 

very rarely are there instances where decisions are actually made. 

I do not know how you change that, but that is a concern and a 

reflection right now of what the Council is doing. 

Mr. PINSCHMIDT. So what I would say is, again, we have not been 

through this process a lot yet because just for the timeline in terms 

of when companies were designated. But, I think dialogue is a precursor to action, and to the extent a company is motivated to pursue a de-designation strategy, there is a pathway forward to do 

that. There is a mechanism and a process to allow it. And to the 

extent a company wants to contest their designation, if the Council 

votes not to rescind that designation, the Council will respond in 

writing, giving a rationale and reasons. And that is very valuable 

information to the company, and ultimately if a company—again, 

this is part of our supplemental procedures. If a company feels that 

they are still not being heard, there is an opportunity for an oral 

hearing with the entire Council regarding that designation. 

Senator HELLER. Mr. Pinschmidt, thank you. 

Mr. Chairman, thank you for allowing me to be here today. 

Chairman CRAPO. You are welcome. Thank you. 

We will do one more round for those who want to ask questions. 

We are going to try to wrap up here by half past the hour. I think 

we can do that. 

Mr. Pinschmidt, as you can see, there is some frustration up 

here, and the frustration, the way I would describe it is that we 

consistently hear that there just does not seem to be a way to get 

specifics from the FSOC process when a company is being evaluated so that the company can know what specific activities is it or 

are they that are creating the risk concern that could result in a 

designation. And as you give your answers, I do not seem to see 

the answer to that question. 

There is obviously a lot of document production. There are opportunities to get together and sit down between the FSOC staff and 

the staff of the company that is being evaluated. But in that process, is there ever a time at which the FSOC says these are the activities that this company is engaging in that we believe present 

potential risk to the system? 

Mr. PINSCHMIDT. Yes, I would say there is, and I think obviously 

it is an analytical process. The information and the Council’s understanding and views of the risks evolve over time as there is 

more information, particularly in Stage 3 when you are dealing 

18 

with nonpublic information and you are actually having meetings 

with the management team on a regular basis. 

But what I would say is that the new process, when we did the 

supplemental procedures in February, we talked to a lot of people. 

We talked to the companies that were previously designated. We 

talked to industry groups. We talked to the GAO. We talked to congressional staff. And we heard a lot of different things, and it made 

sense for us to assess what improvements we can make in the process that allow for that engagement, allow for that back and forth. 

And that is what precipitated the 17 changes in February. One of 

those areas, again, to your point in terms of knowing earlier in the 

process where they stand, Stage 2 is no longer an internal FSOC 

process. It is open to the company. The company is notified. They 

have the opportunity to come and present. They have the opportunity to ask what information the Council is considering. And at 

the end of that process, should the company—and, again, this is 

just based on preliminary information, publicly available information. At the end of Stage 2, if the Council should decide to move 

a company to Stage 3, the Council will let that company know, 

well, hey, these are the factors we are kind of looking in on, you 

can expect questions on this, questions on that, this is what we 

want to explore and drill down with you in the next year as we do 

a Stage 3 evaluation. And then as we move through Stage 3, if 

there is a decision to make a proposed designation to a company, 

so before a final vote by the Council, the company under consideration—again, before a final vote on designation—they are given a 

200-, 300-page basis for a proposed determination which outlines in 

very specific detail the Council’s view, the Council’s concerns, and 

the rationale for a proposed decision on designation. 

Chairman CRAPO. And at that point, do you agree that there 

should be an opportunity for an off ramp? In other words, if at that 

point when the decision apparently has been made and the risks 

have been identified, the activities have been identified, should not 

the company at that point have an opportunity to evaluate its business model and structure and determine whether to adjust it? 

Mr. PINSCHMIDT. Well, what I would say is if there was one specific area that the Council was focusing on, they would know long 

before that proposed designation document was given to the company. So, I mean, there would be an opportunity for dialogue. But, 

again, there has not ever been in the cases of the four companies 

designated where there was one specific thing that could be addressed in sort of an expedited manner. 

Chairman CRAPO. Well, let us take a case of one of the four companies or a hypothetical fifth company that does get designated. So 

the process is finished. The company is designated. Should there be 

an off ramp? 

Mr. PINSCHMIDT. Absolutely, absolutely. And that is why the supplemental procedures made it very clear that, to the extent companies have questions, to the extent a company is determined to pursue an off-ramp strategy, there is a path there. And it is, you know, 

not a simple endeavor, because as I noted before, there is never 

really one or two things or there has not been in the past—— 

Chairman CRAPO. But in that case—and I am interrupting because we are running a long time, but in that case, should not the 

19 

FSOC have a responsibility to work with the company to help them 

identify what the proper elements of an off ramp should be? 

Mr. PINSCHMIDT. Absolutely. I think it is very important that 

companies—I mean, this is a big decision for a company. They need 

to have the best information. There are pros and cons to weigh. 

The key point here is there is an off ramp; there are multiple different lanes. The company should be able to choose which lane they 

want to pursue based on the best available information. We have 

a process in place to allow companies to do that. 

Chairman CRAPO. All right. Thank you. 

Senator Warner. 

Senator WARNER. Well, thank you, Mr. Chairman, and I want to, 

frankly, continue this line of questioning. 

The Chairman and I work very closely together. We may not 

come at this from exactly the same direction. I actually think 

FSOC has improved its performance. I think there clearly are cases 

of nonbank financials who are systemically important. But I really 

urge, Mr. Pinschmidt, that you kind of be more collaborative with 

us because there does still seem to be this transparency issue. 

One of the things just this week with the Fed setting some of 

these new capital rules, having a company being able to more fully 

evaluate the cost of designation is important. So that is a step in 

the right direction as well. And I think all of us will be watching 

very closely GE’s process to see whether the off ramp works. 

But what I do not hear is a disagreement that predesignation, 

at some point along the way, there ought to be enough clarity for 

a company to make the decision to spin off whatever component of 

its business that causes the systemic risk. 

Senator Corker and I worked deeply on Title 5 years ago, and we 

always envisioned that there would be this off ramp. And I guess 

what my question is, we need your help working through this, or 

I think you are going to end up seeing Congress without the full 

amount of information and experience that you have gone through, 

learning this process in 5 years, potentially take action, and that 

might not be the right—this would be much better done collaboratively. I do not think there is a difference of opinion that there 

ought to be an off ramp predesignation and there ought to be even 

after designation, then the ability on the annual review to have an 

off ramp. If we want to send the signal that for those on the Committee on both sides who think we have not ended too big to fail 

in whatever connotation, bank or nonbank, I think we would like 

nothing more than the ability to show, now, look, this is the way 

out. 

Can you just speak to that a little bit? And why can’t we get to 

a common place here that either is codified in law or codified in 

rules? Because who can predict what the next Secretary—I think 

Secretary Lew has moved appropriately and aggressively to try to 

work through this, and I think the process has improved. But if it 

is all left with this lack of clarity, a future Secretary from either 

party could veer dramatically off the course that has been set. 

Mr. PINSCHMIDT. Thank you. I guess what I would say is I think 

it is important to allow the supplemental process changes that the 

Council approved in February to work through. I mean, we are just 

20 

now beginning the first round of annual reevaluations post the supplemental procedures. 

But that being said, in terms of kind of the predesignation off 

ramp that you were referring to, the Council will consider any proposal from any company at any stage of the process. So while it is 

not formally in the current process for designations before a decision is made on designations, that is not to preclude down the road 

a company presenting a proposal, a regulator presenting a proposal, and having a mechanism to discuss that within the Council. 

So what I would say in terms of, I think, the legislation before 

this Committee, what it creates is it effectively creates a situation 

that would essentially double the length of a designation. 

Senator WARNER. I do not support that component. 

Mr. PINSCHMIDT. OK. So we go from 2 years to 4 years, and I 

think when you are thinking about a 4-year analysis, that essentially becomes unworkable, and it would just basically hamper the 

Council’s ability to identify and respond to risks. But I think, certainly to the extent that there are other proposals out there that 

work within our current process, if we can do a better job sort of 

making clear how this will work, we are certainly happy to do that 

and work with you. 

Senator WARNER. Let me just interrupt you for 1 second because, 

again, I want to be sensitive and let Senator Donnelly get his question in. I simply want to say it has gotten better since some of the 

changes, but when we hear company after company say we are not 

being told how to get off, what to do, and you understand when we 

say we have to continue to protect the confidentiality of the process, we are only getting one side of the story. And that is troubling. 

Mr. PINSCHMIDT. If I could just answer that question real quickly, I think one thing to keep in mind here is that these—the supplemental procedures were approved in February. We have not 

really entered in the post-supplemental procedures annual reevaluation phase yet. So I think some of what you may be hearing is 

based on the view of the process previously. We have made some 

changes. I think they are very good changes, and they are going to 

dramatically improve the level of engagement and I think get the 

information to companies that they need to make decisions regarding a potential off ramp. And I think we need time to let that work 

out, and then to the extent that there are concerns or things to address, we are very happy to do that. 

Chairman CRAPO. Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman. 

I used to serve in the House. I served on the House Financial 

Services Committee, and Barney Frank was my Chairman. I was 

there during the time that Dodd-Frank passed, and Chairman 

Frank helped write the bill. And, I do not want to put words in 

Barney’s mouth. I am just following what he was quoted as saying. 

His quote was—Frank did not believe that asset managers or insurance companies that just sell insurance are systemically important and should not be labeled as systemically important financial 

institutions. And when Mr. Scott asked you about that, you said, 

well, that was 5 years ago, and so we have to determine what 

threats have evolved over time in that space. 

21 

So if you could tell me what threats have evolved in insurance 

companies who just sell insurance or something like a mutual fund 

that just gets in a dollar and sends out a dollar, I would like to 

know what those additional threats are. 

Mr. PINSCHMIDT. Yeah, so let me clarify my comment. I was 

not—the Council has not designated any companies based on—any 

insurance companies based on straightforward insurance products. 

Senator DONNELLY. Barney was the Chairman of the Committee 

that helped write the legislation. 

Mr. PINSCHMIDT. Yeah, but what I would say, you know, pointing 

to the three designations for insurance companies, none of those 

designations were made based on straightforward insurance activities. 

Senator DONNELLY. OK. I am just saying when you look at this, 

the hard part to understand is: How can you avoid a systemically 

important designation, how can you make sure you do not wind up 

with that if they do not know what the rules are, if you do not 

know what the judgment is going to be of how these are determined? And so if you are running a business, you cannot make decisions unless you know what the rules of the road are. And for the 

FSOC not to let them know, it just makes no sense to me. 

Mr. PINSCHMIDT. Look, I agree with you that it is very important 

to let companies and let industries know how they are being evaluated. And I think certainly the nonbank designations rulemaking 

that was done in 2012 reflected three rounds of public comment, 

including comments by industry folks about the standards the 

Council is looking at in Stage 1, Stage 2, and Stage 3. And that 

process worked for the companies the Council designated, but it 

was only natural to sort of step back and say, well, look, we have 

gone through this process with a few companies, there are areas 

to improve it, to improve the information flow from the Council to 

companies, and that is why the Council—— 

Senator DONNELLY. I just want to make two other points. This 

is not just about mutual fund companies or insurance companies. 

What happens is so you run a small business, and you set up a 

401(k), and you send your money to the mutual fund company, and 

you hope that you get a decent return so you can retire and you 

can have a nice little condo, have a chance to go fishing on the 

dock, and enjoy life and see your grandkids. Your annual return is 

going to be less each year if a portion of the money you send in 

to that mutual fund company has to be set aside because they have 

been designated as systemically important, and all of a sudden 

there is less money. This is about the ultimate family at the end 

of the day. It is not so much just about the mutual fund company. 

It is about their customers, the millions and millions and millions 

of Americans that our job is not make it so that their return winds 

up to be lower at the end of the day. If it is just as safe and they 

can get a higher return, what are we doing? 

Mr. PINSCHMIDT. So I think two things on that point. The Council is not focused on individual mutual funds in terms of the designation, and I think there is also—I do not think anybody would 

want to see, if there was an issue with a designation, that banklike standards would be imposed on certain nonbank companies 

that do not have bank characteristics. So I think some of the studVerDate Nov 24 2008 10:20 Jan 27, 2016 Jkt 046629 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\07-22 OVERSIGHT OF THE FINANCIAL STABILITY OVERSIGHT COU
22 

ies out there that sort of hypothesize as to what the consequences 

of designation would be are based on faulty data and I think, 

frankly, just do not reflect the record in terms of where the Council 

is focusing. They are focusing on products and activities, not individual entities within the mutual fund space. 

Senator DONNELLY. And then the last question I will ask is this: 

If you are company and you do not know what the rules are, and 

then the rules finally come out and you get told, OK, you are now 

going to be designated as systemically important, do they have a 

grace period to try and get a fix so that the areas that you do not 

want them in they can get out of? 

Mr. PINSCHMIDT. So I think—— 

Senator DONNELLY. Because if you do not know the rules and 

then you are told, well, this part is what does not work for us, if 

I was running a business, I would say, OK, give me a month or 

two, let me get that squared away so I will not be in it anymore. 

Mr. PINSCHMIDT. Look, the Council endeavors to be very transparent regarding the factors that it is looking at. I mean, a lot of 

it is spelled out in terms of the nonbanks process, and it has been 

improved upon by the supplemental procedures in February. 

To the extent companies are not aware of what they are being 

looked at, there is an opportunity for them to engage in a dialogue 

and answer questions. 

Senator DONNELLY. But wouldn’t it also be incumbent on you to 

let them know these are the areas we are looking at, to make it 

public to everybody? 

Mr. PINSCHMIDT. There should be no surprises in terms of what 

the factors are and how the Council is looking at individual industries or more generally specific companies. But the framework for 

that—a lot of that is public. 

Senator DONNELLY. OK. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator Donnelly, and thank you 

for being here with us, Mr. Pinschmidt. As you can see, there is 

a lot of interest on the Committee about getting this right, and I 

know you have given us a lot of assurances that the process needs 

to be given a chance to play out and see how it works, that we will 

be focusing on it very carefully. 

It just seems to me that at Stage 2, which is now open and publicly engaged in, we ought to be able to very quickly see the companies and the FSOC be able to come to an understanding of what 

the issues and activities and risks are that are being evaluated and 

be able to engage in analysis and discussion about how to deal— 

first of all, how to analyze those risks and those activities to determine whether there is a systemic risk; and, B, understand what 

the FSOC’s conclusions are as they move along so that options for 

addressing it can be engaged in. It seems to me that would be a 

much more positive outcome for the economy, for the ultimate consumer, and, frankly, for the country and the individual companies. 

So I encourage you to take these concerns back to the FSOC folks 

and let them know that there really is a high level of concern here 

about whether we have got it right. And most importantly, we 

want to get to the transparency and to the right outcomes. And if 

it takes more legislation to do that, then we want to know how to 

get it right. 

23 

In any event, we appreciate you taking the time to be here with 

us today. I am sure there will be follow-up from Members of the 

Committee. I would appreciate it if you and your office would respond promptly if there are follow-up questions. 

Mr. PINSCHMIDT. Absolutely. Thank you. 

Chairman CRAPO. Thank you. This hearing is adjourned. 

[Whereupon, at 11:28 a.m., the hearing was adjourned.] 

[Prepared statement supplied for the record follows:] 

24 

PREPARED STATEMENT OF PATRICK PINSCHMIDT 

DEPUTY ASSISTANT SECRETARY, FINANCIAL STABILITY OVERSIGHT COUNCIL, 

DEPARTMENT OF THE TREASURY

JULY 22, 2015 

Chairman Crapo, Ranking Member Warner, and Members of the Subcommittee, 

thank you for inviting me here today to discuss the Financial Stability Oversight 

Council’s (Council) process for nonbank financial company designations. 

The financial crisis taught us that we need clear accountability for the overall stability of the financial system. Five years ago this month, Congress responded with 

the Dodd-Frank Wall Street Reform and Consumer Protection Act (Wall Street Reform), which established the Council. The creation of the Council brought together, 

for the first time, the entire financial regulatory community with a collective responsibility to work together to identify and respond to potential threats to financial stability. This new mission required regulators to break out of their silos to strengthen 

the stability of the U.S. financial system. 

Over the past 5 years, the Council has demonstrated a sustained commitment to 

working collaboratively to fulfill its statutory mission in a transparent and accountable manner. We built a new organization and developed strong working relationships among Council members and their staffs to provide a forum for candid conversations; share confidential, market-sensitive information; and ask tough questions that will help make our financial system safer. 

Today, the Council 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 considerable information regarding the Council’s actions 

and views. The Council fosters interagency engagement on a daily basis, including 

through staff-level committees that discuss financial market developments, regulatory policy developments, and emerging risk topics. The Council has published five 

annual reports that describe its past work and future priorities in great detail; regularly opened its meetings to the public; published minutes of all of its meetings that 

include a record of every vote the Council has ever taken; and solicited public input 

both on areas of potential risk and on its procedures for evaluating potential risks. 

As Secretary Lew has made clear, Council members recognize that the Council 

should be open to adapting its procedures when stakeholders raise good ideas. Just 

since last year, the Council has demonstrated this commitment by enhancing its 

transparency policy, strengthening its internal governance, adopting supplemental 

procedures to its nonbank financial company designations process, and soliciting 

public comment on potential risks from asset management products and activities. 

One of the duties Wall Street Reform gave to the Council is to designate a 

nonbank financial company for enhanced prudential standards and supervision by 

the Board of Governors of the Federal Reserve System (Federal Reserve), if the 

Council determines that the company’s material financial distress or activities could 

pose a threat to U.S. financial stability. The Council’s nonbank designations address 

a key weakness brought to light by the financial crisis: that large, complex, and 

interconnected nonbank financial companies, without appropriate supervision, could 

contribute to bringing our financial system to a halt. 

Since Wall Street Reform was enacted, the Council has designated four nonbank 

financial companies following a thorough, rigorous, and fact-based process with extensive engagement directly with each company and its regulators. Before considering any company for designation, the Council voluntarily adopted a rule and interpretive guidance in 2012, after soliciting three separate rounds of public comment, 

to provide as much transparency as possible regarding how the Council would evaluate companies. That guidance explains both the process that the Council follows for 

designations and the substantive framework for how it assesses risks. 

As a result of these efforts, each designated company had extensive opportunities 

to engage with the Council and its staff during the process and the opportunity to 

understand and respond to the factors underpinning the Council’s analysis before 

the Council’s vote on a final designation. These designated companies are now subject to consolidated supervision by the Federal Reserve, which is currently working 

to develop enhanced prudential standards for these companies, taking into account 

their specific businesses, risks, and existing regulation. 

Designating a firm is not a decision the Council takes lightly. Before making a 

final decision about any designation, the Council goes through a lengthy, multistage, 

in-depth analysis, during which it reviews every aspect of a company—including a 

company’s financial statements, business activities, market dynamics, and existing 

25 

regulation—and works with the company and its regulators to understand how the 

firm’s financial distress could affect the broader financial system. The most recent 

designation followed a year and a half of engagement with the company. Most of 

the companies the Council has considered so far have not met the standard for designation. But in four cases, after considerable and thoughtful deliberation, the Council has found that a firm needs to be held to a higher standard to protect the U.S. 

financial system. Of the four firms the Council has designated, none were designated for a single reason—they are all large, interconnected, and complex firms. 

The Council’s recent adoption of changes to the nonbank financial company designations process is a prime example of the way the Council should go about 

supplementing its processes without compromising its fundamental ability to conduct its work. Last year, before making any changes, the Council conducted extensive outreach with a wide range of stakeholders. The Council’s Deputies Committee—senior staff who coordinate the Council’s activities—hosted a series of meetings in November with more than 20 trade groups, companies, consumer advocates, 

and public interest organizations. The Council also solicited input from each of the 

three companies then subject to a designation. The Council discussed the findings 

from this outreach and proposed changes during a public meeting in January before 

subsequently adopting the procedures in February. Having the administrative flexibility for the Council to adapt its own procedures allowed us to respond quickly to 

stakeholder feedback. 

The supplemental procedures address the areas that stakeholders were most interested in and formalize a number of existing Council practices regarding engagement with companies. Under the new procedures, companies will now know early 

in the process where they stand, and they will have earlier opportunities to engage 

with and provide input to the Council. For example, the Council will notify a company when it first comes under active review and provide it with the opportunity 

to meet with staff, review the Council’s primary sources of public information regarding the company, and provide information relevant to the Council’s review. If 

a company advances to the next stage of review, staff will meet with the company 

to explain the evaluation process and the framework for the Council’s analysis, as 

well as any specific issues identified. 

Regarding transparency, the changes will provide the public with more information about the process, while still allowing the Council to meet its obligation to protect sensitive, nonpublic company information. First, if a company publicly announces that it is under review by the Council, the Council intends, upon the request of a third party, to confirm the status of the company’s review. Second, the 

Council will continue its recent practice of including more information in its public 

bases for designations, to provide the public with a deeper understanding of the 

Council’s analysis. Third, the Council has started to publish more information in its 

annual reports about its designations work, including the numbers of companies in 

each stage of the review process. And fourth, the Council last month published further details explaining how staff calculate the quantitative thresholds that the 

Council applies as a screening mechanism to identify companies for consideration. 

The Council is also providing companies with a clearer and more robust annual 

review process. Company representatives are now provided an opportunity to discuss the scope and process for the review, and they can present information regarding any change that may be relevant, including a company restructuring, regulatory 

developments, market changes, or other factors. 

If a company contests its designation in an annual review, the Council will vote 

and provide the company with a written explanation of any decision not to rescind 

the designation. In addition, the Council will provide each designated company an 

opportunity for an oral hearing to contest its designation every 5 years. These 

changes open the door to more engagement with the Council following a designation 

to make sure there is ample opportunity to discuss and address any issues that a 

company wants to put before the Council. 

Altogether, the changes that the Council has made strengthen the Council while 

also addressing many of the suggestions made by stakeholders. 

As Congress contemplates additional changes to the designations process, it is important that such changes do not compromise the Council’s fundamental ability to 

conduct its work. We are particularly concerned with legislative proposals that 

would dramatically lengthen an already long and deliberative designation process, 

impose insurmountable practical hurdles on the Council’s work, and prevent the 

Council from taking action to address potential threats to financial stability that it 

has identified. Such proposals ignore the lessons of the financial crisis and would 

impede the Council’s ability to fulfill the duties Congress gave it. As the President 

and Secretary Lew have made clear, we will not support legislation that weakens 

the important taxpayer, investor, and consumer protections by impeding the ability 

26 

of regulators to identify and respond to threats to financial stability. U.S. markets 

and financial institutions are constantly evolving, and we must remain alert and responsive to new challenges in our dynamic system, toward the ultimate goal of 

maintaining the safety, soundness, and resiliency of our financial system. 

I thank the Subcommittee for the opportunity to discuss the Council’s process for 

nonbank financial company designations and look forward to answering your questions. 

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