```

[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

                       OVERSIGHT OF THE FINANCIAL
                      STABILITY OVERSIGHT COUNCIL:
                      DUE PROCESS AND TRANSPARENCY
                     IN NON-BANK SIFI DESIGNATIONS

=======================================================================

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT
                           AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 19, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-63

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                         U.S. GOVERNMENT PUBLISHING OFFICE 

99-794 PDF                     WASHINGTON : 2016 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Publishing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
              Subcommittee on Oversight and Investigations

                   SEAN P. DUFFY, Wisconsin, Chairman

MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
    Pennsylvania, Vice Chairman      MICHAEL E. CAPUANO, Massachusetts
PETER T. KING, New York              EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina   KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina        DENNY HECK, Washington
RANDY HULTGREN, Illinois             KYRSTEN SINEMA, Arizona
ANN WAGNER, Missouri                 JUAN VARGAS, California
SCOTT TIPTON, Colorado
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 19, 2015............................................     1
Appendix:
    November 19, 2015............................................    31

                               WITNESSES
                      Thursday, November 19, 2015

Hockett, Robert, Edward Cornell Professor of Law, Cornell Law 
  School.........................................................     9
Macey, Jonathan R., Sam Harris Professor of Corporate Law, 
  Corporate Finance and Securities Law, Yale Law School..........     5
Scott, Hal S., Professor and Director, Program on International 
  Financial Systems, Harvard Law School..........................     6
White, Adam J., Visiting Fellow, The Hoover Institution..........     8

                                APPENDIX

Prepared statements:
    Hockett, Robert..............................................    32
    Macey, Jonathan R............................................    56
    Scott, Hal S.................................................    71
    White, Adam J................................................    84

              Additional Material Submitted for the Record

Duffy, Hon. Sean:
    Written statement of the American Enterprise Institute for 
      Public Policy Research.....................................   102
Green, Hon. Al:
    ``Basis for the Financial Stability Oversight Council's Final 
      Determination Regarding MetLife, Inc.,'' dated December 18, 
      2014.......................................................   109
    Letter to Representative Waters and Representative Green from 
      Chairman Hensarling, dated August 6, 2014..................   140
    Amici Curiae brief in MetLife, Inc., v. Financial Stability 
      Oversight Council, dated May 22, 2015......................   142
 
                       OVERSIGHT OF THE FINANCIAL
                      STABILITY OVERSIGHT COUNCIL:
                      DUE PROCESS AND TRANSPARENCY
                     IN NON-BANK SIFI DESIGNATIONS

                              ----------                              

                      Thursday, November 19, 2015

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:18 a.m., in 
room 2128, Rayburn House Office Building, Hon. Sean P. Duffy 
[chairman of the subcommittee] presiding.
    Members present: Representatives Duffy, Fitzpatrick, 
Hultgren, Wagner, Tipton, Poliquin, Hill; Green, Cleaver, 
Beatty, and Sinema.
    Chairman Duffy. The Oversight and Investigations 
Subcommittee will come to order. Today's hearing is entitled, 
``Oversight of the Financial Stability Oversight Council: Due 
Process and Transparency in Non-Bank SIFI Designations.''
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    The Chair now recognizes himself for 5 minutes for an 
opening statement.
    Since the passage of the Dodd-Frank Act, this committee has 
spent significant time examining the law and considering how to 
improve its numerous imperfections. Among them, Title I of 
Dodd-Frank creates the Financial Stability Oversight Council, 
better known as FSOC, which is tasked with identifying risk to 
the financial stability of the United States from the distress 
or failure of large, interconnected bank holding companies and 
non-bank financial companies.
    Section 113 of Dodd-Frank vests the FSOC with the authority 
to determine whether non-bank financial companies should be 
subject to heightened prudential standards and supervision by 
the Federal Reserve. Dodd-Frank rewarded the very regulators 
that missed the warning signs leading up to the 2008 financial 
crisis with additional power and responsibility with the 
creation of the FSOC.
    By design, the FSOC was intended to facilitate dialogue 
amongst the Federal financial regulators. While seemingly 
rational in theory, in practice it has enabled the Treasury 
Secretary to override the jurisdiction of Federal financial 
regulators and weaponize the concept of risk management. 
Moreover, the FSOC and its actions are riddled with opacity and 
uncertainty, despite continued requests for information from 
Congress, and specifically from this committee.
    Aside from operational and process concerns, FSOC's SIFI 
designation may be unconstitutional because they violate due 
process requirements and legislative nondelegation principles.
    Companies designated as SIFIs under the FSOC's informal 
adjudication process are denied access to records and given 
little to no guidance about the process and prospects for the 
respective examinations. For non-banks, there are no defined 
designation thresholds, no definitions of how designation 
factors are weighed against each other, and no disclosure by 
the FSOC of prior designation precedents.
    The designation process is wholly subjective and casts data 
history and economic analysis aside. The FSOC bases its 
designations on highly speculative worst-case scenarios to 
justify its expansive regulatory agenda.
    Additionally, the non-bank SIFI designation process 
violates separation of power requirements. FSOC officials who 
investigate a company and propose a designation also conduct 
the evidentiary hearing and issue the final designation. This 
makes the members of the FSOC the judge, the jury, and the 
executioner.
    Once designated, there is no clear path for a company to 
appeal or to seek de-designation.
    Further, the FSOC has highly politicized their regulatory 
process by concentrating authority in the hands of FSOC 
members. FSOC members are all Presidentially-appointed leaders 
of regulatory agencies.
    The closed-door nature of FSOC's operations strips 
authority from the other commissioners of multimember agencies 
who are part of the agency's bipartisan commission structure. 
The individual agencies that constitute FSOC are not properly 
represented on the Council and are limited in their access to 
information.
    Rather than leveraging the expertise of the regulators 
having primary responsibility for particular industries in the 
financial system, the FSOC's voting structure makes it possible 
for FSOC members who know little or nothing about systemic risk 
in these markets to vote on questions affecting an entire 
industry.
    While cross-border regulatory coordination is critical to 
the safety and soundness of our global financial markets, the 
relationship of the FSOC and the Financial Stability Board 
(FSB) still remains unclear. The FSOC has followed the lead of 
the FSB on money market funds, on the designation of AIG, 
MetLife, and Prudential, and asset managers.
    The goal of international coordination has turned into an 
apparent outsourcing of U.S. regulation to the FSB.
    Wholly capitulating to the whims of the FSB is inconsistent 
with congressional intent, puts the U.S. financial system at 
risk, and curbs any competitive advantage of our domestic 
companies.
    So today, I look forward to our witnesses and hearing their 
views and perspectives on the constitutionality of the FSOC's 
actions, lack of due process, and transparency concerns in the 
FSOC's non-bank SIFI designation process.
    With that, I recognize the gentleman from Texas, Mr. Green, 
the ranking member of the subcommittee, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the witnesses for appearing, as well.
    And, Mr. Chairman, I would properly label this hearing, 
``the MetLife Hearing.'' It appears to me that we are going to 
be abundantly fair and make sure that MetLife has a fair 
hearing, but I see a double standard.
    I see a double standard because in 2001, when women brought 
a gender discrimination lawsuit against MetLife, it was not 
litigated in Congress; it was litigated in court. When 
employment discrimination lawsuits have been brought against 
MetLife, they have not been litigated in Congress; they were 
litigated in court. When disabled persons filed lawsuits 
against MetLife, they were not litigated in Congress; they were 
litigated in court.
    And the day before MetLife sued in the current litigation 
that it has in the D.C. court, MetLife was sued for having what 
has been called a shadow insurance practice. That will be 
litigated in court. It will not be litigated in the Congress of 
the United States of America.
    There is a double standard. If you are a hardworking 
American and you have litigation, you will go to court, you 
will have to hire your lawyers, and you will have to defend. 
But if you are a $900 billion company, you can file your case 
in the Congress of the United States of America.
    Some would say, ``But how do you know they asked for 
this?'' If they didn't ask for it and they are getting it, I 
think it makes it even more egregious that we would, of our own 
volition, decide that we are going to make sure MetLife gets a 
fair hearing.
    I thank God that there are Federal courts, and those 
Federal courts are going to hear the case, at least one in 
particular. And you can't intimidate Federal judges. Federal 
judges have lifetime appointments.
    So I just hope that we in the future can be as fair to 
hardworking Americans, people who find themselves in need of 
some assistance, that we can be as fair to them as we will be 
to MetLife.
    Case in point: The ranking member and I sent a letter to 
the Chair of this subcommittee and the Chair of the full 
Financial Services Committee, asking for a hearing concerning 
allegations of discrimination in a major financial institution. 
And when we sent that letter we did it in good faith, assuming 
that since we were having discrimination hearings, we would 
have a discrimination hearing with reference to the allegations 
of discrimination at this major financial institution.
    It turns out that we couldn't do that. We received a letter 
back from my colleagues--whom I love dearly, by the way--Mr. 
Hensarling and Mr. McHenry at the time; not you, Mr. Chairman. 
But it reads in part, ``We trust that the reason you elected 
not to investigate these matters when you controlled the House 
is because you believe, as we do, that Congress should not 
exercise its investigative prerogatives with respect to matters 
of fact and law that are currently being adjudicated in Federal 
court,'' somewhat similar to what we are encountering today.
    MetLife down the street in a D.C. court case that we were 
asking about was in court. MetLife has its case litigated 
before the Congress of the United States of America. 
Hardworking Americans with allegations of discrimination can't 
get such a hearing.
    But, now there is an exception. If you happen to be the 
Consumer Financial Protection Bureau, aka the CFPB, you can 
have your witnesses come over and have allegations of 
discrimination leveled against you because that is the agency 
that is designed to protect the consumer, and there are people 
who want to eliminate that agency. So it is okay to make 
allegations of discrimination with reference to them, but not 
with reference to these major financial institutions.
    Okay, there has been the allegation made that, ``We don't 
regulate these major banking institutions.'' Interesting point, 
given that we have something called a Financial Services 
Committee and a Financial Institutions Subcommittee. It just 
seems to me that it would be something we would look into.
    I will have more to say on these points, and I yield back 
the balance of my time, Mr. Chairman, and I thank you.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Fitzpatrick, for 1 minute for an opening statement.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    Transparency and government accountability is what sets the 
United States of America apart from most other countries in the 
world. It allows democratically elected representatives to 
ensure government entities are acting in the best interest of 
the American people, and also gives us the ability to 
communicate what is happening back home to our constituents.
    Transparency also allows Congress to discover shortcomings 
and make necessary changes when necessary. However, albeit 
slowly, Congress is coming to the same conclusion that my 
constituents back home in Bucks County discovered a long time 
ago: government is too big; government is too opaque; and 
government is increasingly unaccountable to Congress.
    The CFPB and the FSOC are two examples of this type of 
runaway bureaucracy, which has enabled government to regulate 
our financial decisions, limit choices, threaten our capital 
markets, and suppress economic opportunity for many American 
families.
    I look forward to the testimony from our witnesses, and I 
hope that this committee can find honest and legitimate ways to 
bring more transparency to our system, and be more accountable 
to Congress while encouraging growth and innovation in every 
sector of our economy.
    I yield back.
    Chairman Duffy. The gentleman yields back.
    I now want to welcome our distinguished panel.
    By way of a brief introduction, first, we have Professor 
Jonathan Macey, the Sam Harris professor of corporate law, 
corporate finance and securities law at Yale University.
    Second, Professor Hal Scott, the director of the program on 
international financial systems at Harvard Law School.
    Third, Mr. Adam White, a visiting fellow at The Hoover 
Institution, where he researches and writes on the 
administrative state and the courts.
    And finally, we have Professor Robert Hockett, the Edward 
Cornell professor of law at Cornell Law School.
    Thank you all for being here. Each of you will be 
recognized for 5 minutes to give an oral presentation of your 
testimony.
    And without objection, all of your written statements will 
be made a part of the record.
    Once the witnesses have finished their testimony, each 
member of the subcommittee will have 5 minutes within which to 
ask the panel questions.
    Now, please note on your table you have three lights: one 
is green; one is yellow; and one is red. Yellow means that you 
have 1 minute left. Red means your time is up.
    The microphones are very sensitive, so please make sure 
that you are speaking directly into them.
    With that, Professor Macey, you are now recognized for 5 
minutes for a summary of your testimony.

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

    Mr. Macey. Thank you very much. It is an honor to be here.
    Thank you, Chairman Duffy and Ranking Member Green. I 
appreciate the opportunity to speak to you today.
    In evaluating the work of the Financial Stability Oversight 
Council, I think it is very easy to summarize the problem that 
we are facing, which is that the FSOC has been given an 
impossible task and they are performing that task very poorly. 
What I mean by that is they are asked to regulate something, 
which is called ``systemic risk,'' that they are unable to 
define.
    And therefore, it is not a very big surprise that they have 
been unsuccessful in coming up with regulations that provide 
basic protections for regulated entities, such as objective 
regulations, non-idiosyncratic or non-ad hoc regulations.
    The problem is, I think, very significant. It doesn't mean 
that regulation should not be attempted at all. Systemic risk, 
despite our inability to define the term with any precision, is 
still an important risk, and things like asset bubbles and 
cascade effects are, as we saw in the financial crisis that 
began in 2007, a significant source of concern.
    Even with that obstacle, though, the major point that I 
would like to share with you today is that I think we can do 
significantly better than we are doing. There are a couple of 
problems that I think should be focused on, and I think this is 
a very good start in beginning that focus.
    I think it is useful to think about this regulatory problem 
from the perspective of the FSOC. And if you will allow me to 
make the academic assumption that the FSOC is not perfect, then 
I will say that in designating an institution as systemically 
important, there are basically two kinds of errors that the 
FSOC can make.
    One is what statisticians call a type one error, which in 
essence would be to say that a financial institution is not 
systemically important when that financial institution actually 
is systemically important.
    The second kind of mistake that might be made by a 
regulator or bureaucrat is what is called a type two error, 
which is simply saying that a financial institution is 
systemically importantly when the financial institution, in 
fact, is not systemically important.
    And the problem there is that from the standpoint of the 
regulator, there are no consequences to making a type two 
error. There are no consequences to saying, ``You--this 
financial institution, whether it is MetLife or GE Capital or 
AIG--are systemically risky and pose systemic risk, when in 
fact, it is not. The only consequence is less competition, 
higher prices for consumers, and the like.
    On the other hand, a type one error, which is to fail to 
give a systemic designation to an institution that is 
systemically important, would be catastrophic to the career of 
a regulator.
    So it isn't at all surprising--we should expect and we 
should plan our regulatory policy around the fact that the game 
is going to be tilted dramatically in favor of the over-
designation of institutions as systemically important.
    The second point that I want to make in closing is that the 
concerns that we have on the basis of the record thus far, with 
respect to the actions that the FSOC has already taken, is that 
there is a significant danger of increasing, rather than 
decreasing, systemic risk. And the reason for that is because 
the narrow criteria that are used and the fact that the FSOC is 
ignoring certain risk-reduction strategies is going to herd 
entities into particular risk strategies and undermine the 
diversification of risk avoidance strategies that will reduce 
systemic risk, and we are losing that by the one-size-fits-all 
approach that has been taken to designations thus far.
    Thank you.
    [The prepared statement of Mr. Macey can be found on page 
56 of the appendix.]
    Chairman Duffy. Thank you, Mr. Macey.
    The Chair now recognizes Mr. Scott for 5 minutes for a 
summary of his testimony.

 STATEMENT OF HAL S. SCOTT, PROFESSOR AND DIRECTOR, PROGRAM ON 
      INTERNATIONAL FINANCIAL SYSTEMS, HARVARD LAW SCHOOL

    Mr. Scott. Thank you, Chairman Duffy, Ranking Member Green, 
and members of the subcommittee, for permitting me to testify 
before you today. I am testifying in my own capacity and do not 
purport to represent the views of any organizations with which 
I am affiliated, although some of my testimony is consistent 
with the publicly stated views of the Committee on Capital 
Markets Regulation, which I direct.
    I want to focus on three points in my testimony today.
    First, FSOC is an inadequate substitute for real reform of 
the regulatory structure, which is itself badly needed. Second, 
FSOC's principal role to designate non-banks as systemically 
important financial institutions (SIFIs) is ill-advised. And 
third, the non-bank SIFI designation process should be revised 
to provide the public and the potential designee with adequate 
transparency, including a cost-benefit analysis.
    The U.S. financial regulatory structure is highly 
fragmented and ineffective, as multiple agencies have 
responsibilities for the same or closely related entities and 
markets. Following the 2008 crisis, other leading financial 
centers, including the United Kingdom and the European Union, 
reorganized and consolidated their regulatory structure. The 
United States did not.
    The FSOC authority to coordinate this fragmented regulatory 
structure is severely limited.
    First, while FSOC has the authority to mediate 
disagreements between its members, this requires an affirmative 
vote of two thirds of the members of FSOC. Even if FSOC is able 
to make recommendations about what to do about problems, it has 
no mechanism for enforcing them.
    Second, a simple majority of FSOC members can recommend 
that another agency, one of its members, issue a specific 
rulemaking if FSOC determines that such a rulemaking is 
necessary to mitigate risk to the financial system. However, 
FSOC does not have the authority to require agencies to 
actually implement these rulings.
    So its ability to coordinate this fragmented regulatory 
structure is highly limited.
    Let me turn to SIFIs.
    One key point is that there is no evidence for the 
principle underlying SIFI designations: that large financial 
institutions are so interconnected to each other that the 
bankruptcy of one will directly cause the bankruptcy of others.
    In the 2008 financial crisis, no large financial firms 
failed as a direct result of their exposures to Lehman 
Brothers. And analyses show that direct losses due to the 
failure of AIG would also not have caused the bankruptcy of its 
large counterparties. They limited their risk at AIG, as 
prudent counterparties do.
    Instead, in 2008 systemic risk existed due to contagion, 
which is an indiscriminate run by short-term creditors across 
the entire financial system. Thus, designating certain large 
non-banks as systemically important and then subjecting these 
institutions to more stringent regulation does not meaningfully 
reduce systemic risk.
    It also potentially increases moral hazard and could 
introduce competitive distortions into the marketplace if these 
designees enjoy reduced funding cost, a subject of some debate.
    Finally, the non-bank SIFI designation process is also in 
need of reform. Currently, the general public and potential 
future designees, or ones that have been, in fact, designated, 
receive inadequate information regarding the basis for FSOC's 
determination.
    FSOC does not conduct a cost-benefit analysis when making a 
non-bank SIFI designation, and the potential designee does not 
receive an opportunity to present its position to FSOC until 
FSOC is nearly complete with its process. Furthermore, FSOC 
does not provide the designee with the opportunity to review 
the record upon which its decision is based.
    These inadequacies in the process should be corrected by 
the FSOC. And if FSOC does not do so, then Congress should 
revise the Dodd-Frank Act so that FSOC is statutorily obligated 
to provide such transparency.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Scott can be found on page 
71 of the appendix.]
    Chairman Duffy. Thank you, Professor Scott.
    Mr. White, you are now recognized for 5 minutes for a 
summary of your testimony.

    STATEMENT OF ADAM J. WHITE, VISITING FELLOW, THE HOOVER 
                          INSTITUTION

    Mr. White. Thank you.
    Chairman Duffy, Ranking Member Green, and members of the 
subcommittee, thank you for inviting me to testify today.
    As my fellow panelists and others have observed, FSOC 
raises significant concerns in the manner in which it conducts 
its business: its severely narrow view of due process; its 
reliance on secret evidence; its preference for perpetual 
regulation instead of a regulatory off-ramp; and, perhaps most 
disconcertingly, its stretching of the statutory text to 
empower itself to designate SIFIs without any consideration of 
the plausibility of the risk scenarios at issue.
    As the FSOC's independent member with insurance expertise 
said, in dissenting on the MetLife designation, ``FSOC has 
created an impossible burden of proof for companies to meet, as 
it effectively requires companies to prove that there are no 
circumstances under which the material financial distress of a 
company could pose a threat to the financial stability of the 
United States.'' He added, ``It remains to be seen whether this 
approach is legally tenable.''
    These are all serious concerns. But in pursuing reform, it 
is crucial to keep in mind that the problems we are discussing 
today are really symptoms of more fundamental structural 
concerns--namely, the breadth of power that Dodd-Frank gave to 
the FSOC, and the dearth of structural constitutional checks 
and balances that would otherwise limit and guide the FSOC's 
exercise of this power.
    Ultimately, the Constitution and administrative law strike 
a balance between efficiency and procedural rights, between 
powers and protections, between action and deliberation. That 
is why the Administrative Procedure Act's (APA's) original 
sponsor in 1946 called it a regulatory bill of rights, not a 
bill of powers.
    Or, as the Chief Justice wrote for the Court a few years 
ago in striking down a similar part of Sarbanes-Oxley, 
``Convenience and efficiency are not the primary objectives or 
the hallmarks of democratic government.'' What he meant was 
efficiency is important, but checks and balances are 
indispensable.
    With all due respect to the ranking member, I would urge 
against thinking of this hearing as ``the MetLife hearing'' 
because the issues we are discussing today are of importance 
far beyond just the FSOC and the companies that it designates.
    These decisions also affect companies that compete with 
designated SIFIs--companies including community banks and other 
smaller financial institutions. It also affects the public, who 
is injured no less than the companies being designated by the 
FSOC's insistence upon secrecy.
    The FSOC, like other parts of Dodd-Frank, the Affordable 
Care Act, and Sarbanes-Oxley, are not simply new iterations of 
the same old regulatory arrangements we have had since the New 
Deal. They go beyond that old paradigm in terms of the agency's 
powers, their tactics, and their independence from Congress.
    It is crucial that Congress reform these structural 
problems now before these new agency structures become the 
administrative state's new normal, the regulatory paradigm for 
decades to come.
    Thank you.
    [The prepared statement of Mr. White can be found on page 
84 of the appendix.]
    Chairman Duffy. Thank you, Mr. White.
    And Mr. Hockett, you are recognized for 5 minutes for a 
summary of your testimony.

 STATEMENT OF ROBERT HOCKETT, EDWARD CORNELL PROFESSOR OF LAW, 
                       CORNELL LAW SCHOOL

    Mr. Hockett. Thanks so much for inviting me here today. It 
is a pleasure to be here and an honor, as well.
    So, Ranking Member Green issued me a challenge when he 
walked in this morning. He said, ``I would like to see you 
condense that lengthy written testimony of yours into 5 
minutes.''
    My friend Jon Macey said, ``Yes, I would like to see 
that.''
    So watch this.
    Basically, the simple point I want to make is that the 
FSOC, I think, is best regarded as a pragmatic and sort of 
quintessentially American way of dealing with two particular 
dilemmas. One of those dilemmas is very longstanding, and the 
other one is of more recent vintage.
    The longstanding one is how to reconcile efficient 
governance on the one hand with fundamental constitutional 
values and constraints on the other. This is not a new dilemma 
by any means. The United States began to encounter it or began 
to experience it in the late 19th Century as the economy began 
to grow by leaps and bounds, became more complex, more dynamic, 
changing much more rapidly than it had done previously.
    What that meant, of course, is that it was much more 
difficult for Congress alone to sort of handle problems, or for 
the President's sake alone or with a very small Cabinet, to 
handle problems that might emerge.
    If a new form of fraud or a new form of artifice were to 
emerge, let's say, every month or every couple of months, one 
couldn't well expect Congress to come into session to legislate 
some sort of rule against this new form of fraud say every 
week, or every month, or even every year necessarily, because, 
of course, Congress has many fish to fry.
    So the idea then, of course, was that, maybe what we can do 
is delegate some of that authority to Executive Branch agencies 
since the Executive Branch is, after all, there to enforce the 
laws that Congress enacts.
    Now, the sense in which this gave rise to a problem, of 
course, is that that can lead to an agency seeming to be 
engaging not only in enforcing the laws, not only, in other 
words, in discharging Executive Branch functions, but it would 
seem also to be engaging in some form of legislation or quasi 
legislation, for example, if it was enacting rules to sort of 
fill in gaps that statutory language left open.
    By the same token, if an agency decided to deliberate in 
some sort of formal way before deciding to take some form of 
enforcement action against some accused perpetrator of some 
infraction, that could look like a kind of adjudication and 
that would then mean that we were sort of muddying the waters, 
essentially muddling the distinctions between Article One, 
Article Two, and Article Three functions.
    So the big question, then, was how do we reconcile, on the 
one hand, this need for government efficiency, with these 
constitutional constraints on the other hand. And the answer 
that we came up with--it took a while, of course, to get there, 
but it is largely codified, it is largely embodied in the APA 
that my friend Mr. White just mentioned.
    And I am going to submit to you that the way the FSOC 
conducts its operations is entirely in keeping with APA norms, 
and APA values. It is not in any sense an outlier when it comes 
to regulators. There are countless regulators that act exactly 
as FSOC does in particular respects that people have called 
into question. And if you give me the opportunity during the 
Q&A, I would be happy to adduce examples.
    The second dilemma that I mentioned as sort of a more 
recent vintage is reconciling regulatory depth, say, with 
regulatory breadth, particularly in the financial sphere.
    So what do I mean by that? As you know, and as many people 
have noted, our financial regulatory system is very siloed, 
very much fragmented. And the reason for that is that at one 
time our financial system was very much siloed and very much 
fragmented.
    In other words, they were quite distinct, quite 
categorically distinct subsectors of the financial sector. And 
so it seems to make sense to have a specific regulator for each 
of those subsectors; that way, each regulator could get to know 
the field of its regulation in depth, right?
    The problem, of course, was that beginning in the 1980s and 
really accelerating over the course of the 1990s, we began to 
experience a form of what is known as financial convergence. 
And what that means is basically two things. It means on the 
one hand, institutions that used to be categorically distinct--
like insurance companies on the one hand, commercial banks on 
the other--began to engage in some very similar-looking 
transactions, right?
    Convergence also could be understood in a more 
institutional sense. And what that means is you actually found 
institutions affiliating under a single holding company or 
conglomerate structures.
    That, of course, presented a new challenge. If you think 
about it, one thing that has not been mentioned here yet is 
that MetLife was a bank holding company as recently as 2012, 
and it failed stress tests that were conducted when it was a 
holding company. This is just one example, but it shows you the 
sense in which you can't draw the same categorical 
distinctions.
    FSOC is a way of trying to kind of keep sector-specific 
regulators on the one hand, but to get regulatory breadth on 
the other by joining them into a council.
    Thank you very much.
    [The prepared statement of Mr. Hockett can be found on page 
32 of the appendix.]
    Chairman Duffy. Very impressive, with about 5 seconds to 
spare, Professor Hockett.
    Mr. Hockett. Thank you, Mr. Chairman.
    Chairman Duffy. Without objection, the Chair would like to 
submit for inclusion into the record a written statement from 
Peter Wallison and Arthur Burns, fellows in financial policy 
studies at the American Enterprise Institute, on the troubling 
interactions between the FSOC and the Financial Stability 
Board.
    Without objection, it is so ordered.
    The Chair now recognizes himself for 5 minutes for 
questions.
    I want to be clear: This is a hearing about the FSOC. This 
is not a hearing about discrimination. We have had those 
hearings and we may have more.
    This is not a hearing about anyone who has been designated. 
This is about the process, and I want to be clear on that.
    I don't think FSOC is being litigated in the Federal 
courts. But it is a role for Congress to look at the structure 
of FSOC and how well it works or how well it doesn't work.
    So with that in mind, Dodd-Frank implicitly provides that 
any hearing by FSOC would be an informal adjudication under the 
Administrative Procedure Act. And as a result, FSOC could base 
its decision to designate a company on materials that aren't 
part of the hearing record.
    Thus, FSOC could designate the company on the basis of 
evidence not subject to adversarial scrutiny by the company in 
its hearing itself. I think this potentially undermines the 
reliability of the designation process.
    And so with that, Mr. White, is it fair to go through this 
kind of a process without being able to confront the evidence 
in a hearing for a company who is potentially going to be 
designated?
    Mr. White. No, I don't think it is fair. As you indicated, 
the best test of fact is to try it from both sides and both 
directions. The adversarial process has been key both in the 
courts and also in administrative procedures.
    The courts have recognized limited instances in which it is 
okay for an agency to withhold evidence when national security 
is truly at stake, but nothing as far as I can tell--and, of 
course, I don't have access to the full record--in the FSOC 
procedures so far seem to justify the withholding of evidence. 
It injures the public.
    Chairman Duffy. And so what would be the--what is the 
benefit? If there is no national security interest in 
withholding that evidence, why couldn't FSOC present all of the 
evidence in these hearings to the subject company and let them 
confront it? Is there a good reason why they wouldn't allow all 
the evidence to be shown?
    Mr. White. As far as I could tell, no. I think they should 
show all the evidence, both for the benefit of the designated 
company and for the public at large.
    Chairman Duffy. And is this a good way to identify systemic 
risk?
    Mr. White. No, I don't think it is.
    Chairman Duffy. Okay.
    And again, maybe to Mr. Macey or Mr. Scott, is this a fair 
way to hold a hearing?
    Mr. Macey. I wrote an amicus brief in the ongoing 
litigation regarding MetLife's designation as a non-bank SIFI, 
and I wasn't even able to obtain access to the actual basis for 
the decision, putting aside the supporting documents. There is 
a public version of the rationale, and then there is a version 
that the public is not permitted to see even of the rationale 
that presumably adduces the evidence.
    So I think it is unfair, but it is also perplexing as to 
what is their motivation.
    I just would add simply that I think this is a significant 
problem. I think that it is a symptom of a much broader 
problem, which is that when someone is under scrutiny--when a 
company is under scrutiny for potentially being--or being 
accused, if you will, of being systemically important, it is 
counterpunching--it is fighting against a moving target. There 
are no established criteria. There is nothing that the firm can 
do in order to make a convincing argument because there are no 
rules.
    And so we have--the role played by evidence is very unclear 
because evidence is generally adduced so that you can show 
something. Here we have evidence being adduced for no clear 
reason other than apparently to support a conclusion that has 
already been made by the regulators, which is certainly what 
appears to be the case in the designations we have observed 
thus far.
    Chairman Duffy. And my time is almost up.
    One other quick question: Does it present any concern for 
the panel when you have, say with the designation of a MetLife 
or a Prudential, where you have the one FSOC member who has 
expertise in this area who votes no, and everyone else really 
without any expertise is voting yes, that those who have 
expertise are going against the grain of the rest of the FSOC 
members?
    Does that pose a concern, maybe, Mr. Scott, to you or Mr. 
White?
    Mr. Scott. It is a concern, obviously, that the person with 
the most expertise thinks it is ill-advised. Of course, one has 
to be careful because that person could be seen as a 
representative of the insurance industry, in this case.
    So I think the deeper problem is having votes by committee 
on such a matter. If you are going to engage in this process, 
it doesn't seem it should be subject to a vote, which includes, 
by the way, people on that committee who have no knowledge of 
this industry--none.
    You could argue that the SEC has some knowledge of the 
capital markets and therefore some knowledge of what the 
insurance industry is all about. I think it shouldn't be just 
left to the insurance regulator, because the designation has an 
impact on the entire financial system.
    So I think it is a concern, but it is a reflection of a 
deeper problem.
    Chairman Duffy. And, Professor, my apologies. I asked you a 
question as I was running out of time. So thank you for your 
answer, but I am a minute over.
    So with that, I will recognize the gentleman from Missouri, 
Mr. Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    About 3 years ago, my daughter married a guy who had just 
graduated from the K.U. Law School, and as a Missourian you 
have to understand, which I know that my colleague and friend 
from St. Louis, Mrs. Wagner, understands, that this is serious 
business if you live in Missouri. It is almost betrayal.
    And for people around the country who are probably unaware 
of the rivalry between Missouri and Kansas, I will just tell 
you very quickly that a few years ago K.U. won the national 
basketball championship, and Ike Skelton was the dean of our 
delegation, and as Members were asked to stand, Ike Skelton 
told the Missouri delegation not to stand. Now, he was 
considered to be one of the last gentlemen of the Congress, but 
that will get to it.
    But let me now say that we are proud in Missouri to have 
Professor Hockett here with us, who is a K.U. Law School 
graduate.
    And so times have changed, and we are very thrilled and 
proud of you, and claim you from your base in Cornell. So thank 
you very much.
    Professor Macey, one of your criticisms of the FSOC is that 
the Council does not distinguish plausible risk from 
implausible, so what is likely to occur, rather than what could 
occur. Maybe you have a stop sign, there is a possibility that 
could be an accident. That is why you have the stop sign.
    And so I am a little concerned about and hopeful that you 
can provide me with some more information on this whole issue. 
FSOC doesn't have as its purpose to examine what could occur so 
that potential--they are trying to find ways in which bad 
things don't happen again to the American public.
    I will remind everybody that the reason we have FSOC is 
because we discovered in this very room back in 2008 that we 
had lost about 9 million jobs and about $20 trillion in 
household wealth--$20 trillion. And so we took this action, and 
I am pleased that we did so. But the criticism sometimes, I 
think, forgets about that.
    So can you please help us understand your statements 
concerning risk?
    Mr. Macey. Certainly, Congressman. I very much appreciate 
the question and the opportunity to respond.
    Basically, my concern is that it is an elemental 
characteristic of risk regulation of any variety that the two 
vectors along which an analysis must occur are: one, the 
severity of the event about which one is concerned, the 
severity of a systemic event; and two, the probability that 
particular factors will cause that event to occur.
    And the basic insight is that if regulation were free, then 
we would regulate everything and have no risks whatsoever. But 
regulation is costly if we want to--we could vastly reduce the 
number of fatalities on the highway if we required everyone on 
the highway to drive a tank instead of an automobile, but there 
would be a cost to doing that.
    The same thing is true with risk regulation.
    What is of concern to me is that in its explanation of the 
basis of its final determination with respect to MetLife, the 
FSOC specifically asserted that because the statute--because 
Dodd-Frank does not expressly incorporate a standard of 
likelihood, the FSOC may assess harm to the financial stability 
of the United States based on risks that lack even basic 
plausibility--
    Mr. Cleaver. I hate to--
    Mr. Macey. --context.
    Mr. Cleaver. I apologize, but I only have 16 seconds and I 
am just interested, what would you assign as a probability for 
another 2008 crash?
    Mr. Macey. I'm sorry, another what?
    Mr. Cleaver. Probability.
    Mr. Macey. I know, a probability of what? I didn't hear--
    Mr. Cleaver. Of another 2008 economic collapse?
    Mr. Macey. In the next week, or year, or--
    Mr. Cleaver. I will finish, but as I understand, maybe Mr. 
Green and I are the only ones who were here; 4 months before we 
had the crash, we had the credit rating agencies in this 
committee hearing room--
    Mr. Macey. Okay.
    Mr. Cleaver. --telling us everything was great.
    Mr. Macey. Right. Yes, I am aware of that.
    I think that there is a reasonable probability. Let's take 
a 5-year time horizon. I would say that there is a reasonable 
probably: less than 50 percent but greater than 10 percent.
    As I said in my original testimony, I think that certain 
aspects of Dodd-Frank have increased, unfortunately, rather 
than decreased the probability of that occurring because of 
herding effects and the like.
    I certainly don't think it is the case that we have 
eliminated systemic risk. The problem of asset bubbles remains. 
Many other problems remain. So I think there is some reasonable 
probability.
    I wish I could be more precise than that, but I am doing 
the best I can for you, sir.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the Vice Chair of the 
subcommittee, the gentleman from Pennsylvania, Mr. Fitzpatrick, 
for 5 minutes.
    Mr. Fitzpatrick. I thank the chairman for the recognition.
    And as a matter of history, right before the 2008 crisis, 
we also had Fannie Mae before the committee, who also said 
everything was great right before they required about $180 
billion in resources to sort of stand up that organization and 
likely--and it has been written extensively about--had more to 
do with housing policy and what was happening. There certainly 
were problems within the banking sector, but housing policy, in 
my view, had much more to do with it.
    I thank the witnesses for their testimony here today.
    Professor Macey and Professor Scott, I want to ask you 
about a specific section of Dodd-Frank, Section 113, which lays 
out 10 factors that FSOC is required to consider when 
evaluating a non-bank entity company for SIFI designation.
    Does the FSOC explain how it uses the 10 factors when it 
issues the designation? For instance, does it explain how it 
weighs those factors? And specifically, when it is weighing 
those factors, is it considering, as it is thinking about those 
factors, whether a particular company is at risk or in 
distress, or is it just assuming the company is going to fail 
or the company is at risk and how those 10 factors then would--
and that bank's or the non-bank's company would--how their 
failure would affect the economy?
    Am I clear on that question?
    Mr. Scott. The short answer is ``no.'' I do think, however, 
that in general--that is ``no'' with respect to any particular 
designation. There is a general methodology that FSOC has about 
the use of these factors, which uses similar factors to those 
of the Financial Stability Board. So these factors actually 
emerge out of a more general G-20 consensus.
    But the application of these factors and how much they 
weigh those factors on any specific determination is not 
revealed by FSOC.
    And I would just add, going back to my oral testimony, that 
all of these factors are aimed at the idea of connectedness. 
So, for instance, one of the factors is how interconnected is a 
particular institution to somebody else. All financial 
institutions are very interconnected in a sense, but that 
doesn't prove that if one financial institution would fail, its 
counterparties would fail, which is the real concern about 
interconnectedness.
    So they don't demonstrate is that interconnectedness really 
important? If there were a failure, what would the consequences 
be? That is what we really care about, and they don't do that.
    So I would say, again, the short answer to your question is 
no, they don't.
    Mr. Fitzpatrick. But isn't it true, Professor Scott, that 
banks pose a special risk because of their interconnectedness? 
Do insurance companies or other financial non-bank companies 
pose that same sort of interconnected risk that you are talking 
about?
    Mr. Scott. They are connected, Congressman, obviously. We 
have an integrated global financial system. People do business 
with other financial firms. That is connectedness.
    But that doesn't provide the justification for singling out 
a firm and saying, ``You are connected, therefore we are going 
to impose more capital on you,'' or we don't even know what we 
are going to do to you, which is another issue. We don't even 
know what the consequence of this designation is.
    But just to say people are connected is to say, they are 
financial firms. Yes, they are all connected.
    But why do we care about that? Why is that important? Is it 
at the level--which is what we should care about--if they fail, 
that other firms will be severely affected?
    Now, back to the Congressman's point, sure, if MetLife or a 
big firm failed, there would be a tremendous economic impact. I 
don't--clear argument, okay? You could say that about a lot of 
firms in our economy.
    So I don't think we are going around designating firms as 
important whose failure would affect the economy. The focus 
here is the financial system and what the impact would be on 
the failure of MetLife to the rest of--
    Mr. Fitzpatrick. Professor Macey?
    Mr. Macey. I largely agree--
    Mr. Fitzpatrick. Can you turn your microphone on?
    Mr. Macey. I largely agree with Professor Scott.
    Just to provide another example, it would be--one could 
observe two financial institutions and one could say on a--
during a particular day these financial institutions 
consummated 50,000 transactions with one another and had 87,000 
electronic messages with regard to trading actions, and 
therefore these institutions are very interconnected.
    But as Professor Scott's point indicates, that doesn't tell 
us anything about whether the failure of one of these would 
result in the failure of another. One would need to know a lot 
more about the balance sheet of the entity; one would have to 
know about how the clearing and settlement is done, what the 
netting is done.
    And so, I think your point is exactly right, which is that 
it is--there is no weighting and there is no indication of how 
the criteria should be used properly, which is to say how are 
the--how are these criteria related to systemic risk as opposed 
to just existing in some form that is really very benign?
    Mr. Fitzpatrick. I am out of time. I appreciate the 
witnesses' views.
    Thank you.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentlelady from Missouri, Mrs. 
Wagner, for 5 minutes.
    Mrs. Wagner. Thank you all for joining us today to discuss 
the process by which FSOC designates non-bank firms as 
systemically important.
    Such a process goes far beyond the companies that are being 
designated, as these designations have a far-reaching impact on 
the broader economy, as we have discussed, and millions of 
customers who would be affected.
    According to research, designating asset management firms 
as SIFIs could ultimately cost as much--investors who rely on 
those services as much as 25 percent of the return on their 
investments over the long term, which is approximately $108,000 
per investor. In addition, designating insurance companies as 
SIFIs could reduce consumer benefits, increase prices, and make 
some products no longer available.
    Mr. White, Dodd-Frank does not require the FSOC to justify 
its SIFI designations by demonstrating that the designated 
financial company poses a substantial likelihood of causing 
systemic financial harm. Rather, it allows the FSOC to 
designate a financial company as a SIFI if it merely could pose 
a threat to the financial stability of the United States. In 
that way, FSOC can present certain cataclysmic events as a 
model no matter how unlikely they are.
    Do you think that FSOC needs to show actual significant 
risk of systemic financial harm in its designations, sir?
    Mr. White. Yes. I think it is the best reading of the law. 
And to the extent that courts ultimately disagree, I think it 
is incumbent upon Congress to place that standard on the FSOC.
    Mrs. Wagner. In a way, don't you think that FSOC 
considering unlikely yet cataclysmic events in a way takes away 
focus from actually observing legitimate systemic risk existing 
in the market?
    Mr. White. Yes, I do. And if I may expand on this point for 
just a moment, I don't mean to understate the difficulty of the 
task for the FSOC in terms of trying to regulate against these 
uncertain risks in what Secretary Rumsfeld once called the 
``unknown unknowns,'' or Nassim Taleb called ``black swans.'' I 
don't want to underestimate that.
    But the task should then fall to Congress, really, to 
deliberate on this to identify more specific standards for the 
agency and then set the regulators forward to execute them 
within clear legislative limits. Then, the courts can enforce 
those limits.
    Mrs. Wagner. I agree, and I think that it is the entire 
point of FSOC in the first place.
    Specifically in FSOC's designation of insurance companies, 
they have often presented the scenario of a run on the bank 
situation happening. Could you please explain how this scenario 
in fact is unlikely for insurance companies and how using it as 
a basis for designation is off base?
    Mr. White. I have to confess, of all the panelists here, I 
am probably the least expert on the specifics of financial 
regulation. But I will say that even a novice like me knows 
that an insurance company isn't the same as a Wall Street bank. 
Insurance companies are facing what is called maturity mismatch 
issues, where they aren't basing these things.
    I think to the extent that the FSOC is lumping everything 
together in one regulatory approach, it is a mistake.
    Mrs. Wagner. For Professors Macey and Scott, with regard to 
the asset management industry, while FSOC has not entirely 
ruled out designating specific companies, it has said that they 
will try an activities-based approach. Do you believe that FSOC 
should also consider this approach for designating insurers, 
rather than simply relying on the size of the company?
    Professor Scott or Macey, whomever?
    Mr. Macey. I think that this is the kind of regulatory 
initiative that increases rather than decreases systemic risk. 
The most basic concept in finance is the idea of safety through 
diversification.
    And one way that diversification manifests itself from a 
systemic perspective is if you have a lot of firms in the 
economy and they are all doing different things, so that if 
somebody is doing something that is stupid and causes the firm 
to fail, that is not such a big problem, because there are 
other firms in this heterogeneous economy that are doing other 
things that are successful.
    And if we take all firms and we move them under the aegis 
of a single risk regulator such as FSOC, and we regulate them, 
we lose the societal benefits of this heterogeneity and 
increase systemic risk.
    Mrs. Wagner. And let me, in my brief time that is left, 
ask, what is the rationale for using the activities-based 
approach in the asset management industry but not in the 
insurance sector?
    Professor Scott?
    Mr. Scott. I think we learned a lot from the asset 
management experience that demonstrated that whatever concerns 
you have in the asset management industry are not going to be 
solved by designating two or three large firms as SIFIs, 
because we have different firms holding different assets, and 
if there is an asset class concern, it might not involve the 
people that we designated as SIFIs.
    So we learned a lot. It seems to me we should go back and 
say, ``What did we learn from that, that would apply to the 
insurance industry?''
    Now I think there is one problem with insurance, 
Congresswoman. That is, unlike asset management where you have 
a Federal regulator of the asset managers, which is the SEC, in 
the case of insurance, we have no Federal regulator. And as you 
know, this committee in the past, even before the crisis, has 
considered the appropriateness of the Federal regulator on an 
optional or mandatory basis for insurance companies.
    I think that the lack of such a regulator actually plays 
into the SIFI process because if there were such a regulator 
you could say, just the way we did with asset management, the 
SEC or the Federal regulator can handle this. In the case of 
insurance companies, it is the States, okay?
    Mrs. Wagner. Right, which is to say that--
    Mr. Scott. So we have to have--
    Mrs. Wagner. --that deals ultimate jurisdiction--
    Mr. Scott. --we have to have a lot of confidence in the 
ability of the States to do that. Maybe we should. But the 
issue is slightly different for insurance than asset 
management.
    Mrs. Wagner. I am way over my time.
    Chairman Duffy. You are--
    Mrs. Wagner. I thank the Chair for his indulgence.
    And I thank you all.
    Chairman Duffy. The gentlelady's time has expired.
    The Chair now recognizes the gentleman from Colorado, Mr. 
Tipton, for 5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman.
    And I would like to thank the panel for taking the time to 
be here today.
    I am a small business guy from Colorado and I had a very 
simple business premise: If it is broken, fix it; if not, stop 
doing it.
    And, Professor Macey, when I was listening to your 
comments, I found them very concerning in terms of the 
potential impacts on our economy. You had made the comment that 
the FSOC has an impossible task that they are performing 
poorly--I may be paraphrasing you just a little bit--and there 
is no consequence for a type two error, designating an 
institution as a SIFI when it is not.
    Have we literally incentivized regulation and a broadening 
net of regulation in this country under Dodd-Frank?
    Mr. Macey. I think we have. I think that you can think 
about regulation pre-Dodd-Frank and post-Dodd-Frank in the 
following way: We used to think of the basic idea of risk 
regulation as the virtue of diversification; don't put all your 
eggs in one basket.
    Dodd-Frank says the opposite. It says, ``Let's put all of 
our eggs in one basket and watch the basket very carefully.'' 
And we have to have a lot of confidence and faith in those 
regulators.
    For example, take what Professor Scott was saying about 
insurance regulation. I think the evidence is pretty clear that 
despite what might be the lack of prestige of these State 
insurance regulators, the fact is the insurance industry in 
this country is extremely sound, with very strong balance 
sheets; a lack of mismatch between the term structure of assets 
and liabilities; is very well-collateralized; and is extremely 
responsible. Say securities borrowing, the entire business, I 
think, is a model.
    And I think there is a concern that was suggested by 
Professor Scott that when FSOC looks at insurance companies and 
they say, ``Of course they should be systemically important 
because they don't have a Federal regulator. So we will be 
their Federal regulator.'' Because once we designate them as 
systemically important, the Fed comes in.
    I think that it is a basic choice, and I think Dodd-Frank 
makes a choice that I personally don't think is the right one.
    Mr. Tipton. And that lends itself back--you just made the 
comment that we have to be able to have confidence in the 
regulators to be able to make these decisions. And this gets 
back to the point of likelihood, the actual exposure that is 
really going to be there.
    Professor Scott, would you like to comment on that?
    Mr. Scott. I personally do not have confidence in the 
ability of FSOC to reach the right result with respect to these 
designations. I don't think doing this by committee vote, 
including people who don't know much about the industry that we 
are talking about in any given situation, is just not the way 
to run a railroad. If we were going to do this kind of thing, 
at least we should have experts. So that undermines confidence.
    Now we have this bizarre situation where we don't know what 
the consequence is of designating them. So we designate them, 
and now the Fed is looking at, how are we going to regulate 
insurance companies that have been designated?
    You would think logic would say, let's know what the 
consequence of the designation is before we designate them. But 
we don't know what it is. That undermines confidence.
    It really comes back, Congressman, to the fact that we 
created this instrument, FSOC, to deal with our failure 
collectively to really reform the regulatory structure. And 
this is not the answer. And we are seeing now in spades why 
that is the case.
    Mr. Tipton. So you don't want the cobbler running the 
railroad, even though they are both in transportation. You have 
to be able to have some real common sense actually applied to 
the process.
    When we are talking about getting Congress involved--and, 
Mr. White, you might want to be able to jump in on this, as 
well--I am incredibly passionate about Congress being able to 
have a role. The only reason FSOC exists--I wasn't here when 
Dodd-Frank was passed, but the only reason that they--Dodd-
Frank and a lot of the entities, CFPB, we can go down the list, 
that they come out is because of an act of Congress.
    Is it incredibly important that we get Congress involved 
once again into the rulemaking process? You had cited having 
clear perimeters and we will let the courts decide. Would it 
actually be appropriate to have the people who wrote the laws 
actually play a role in that rulemaking process?
    Mr. White. Absolutely. The Supreme Court said in a recent 
case, the Free Enterprise Fund case, that often it is in one 
President's interest to give away his own powers, but that 
doesn't mean that should be allowed to happen. And the same 
could be said for Congress.
    You asked a moment ago, ``Are we just trusting the 
regulators?'' I guess I would use the line, ``trust but 
verify,'' and that requires three things: Congress setting 
clear standards; regulatory procedures in the sunshine; and 
meaningful judicial review.
    Mr. Tipton. Thank you.
    Mr. Chairman, my time has expired. Thank you.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Maine, Mr. 
Poliquin, for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very 
much.
    And thank you, gentlemen, for all being here today.
    I am sure you folks are all familiar with a study done a 
couple of years ago by the former Director of the nonpartisan 
CBO, Mr. Holtz-Eakin. If you aren't familiar with the study, 
effectively it says if you look at the long-term rate of return 
that asset managers, pension fund managers, and mutual funds, 
and so forth and so on, can generate for their clients, there 
is about a 25 percent reduction in the long-term rate of return 
if these non-bank financial institutions, i.e. asset managers, 
are designated as SIFIs.
    The reason for that, of course, is that the costs go up 
because the regulations, the product offerings shrink, and 
rates of return go down.
    Now, at a time where many Americans are concerned about 
running out of money before they run out of time, I would hope 
that you folks would agree that we want to make sure that we 
help small investors throughout our country prepare for 
retirement, help to save for college study, and so forth and so 
on.
    No, morphing into specifically some of the companies I have 
been talking about--or talking to over these last few months, 
many of them have come to me with business plans that are 
dramatically altered as compared to a few years ago. They are 
shedding product lines. They are consolidating. They are 
getting out of businesses that they normally would be in 
because of the regulatory burden of Dodd-Frank--in particular, 
the threat of being designated as a SIFI.
    Now, when you are an asset manager, we all know. And if Mr. 
Tipton and I run two different mutual funds and our performance 
is different, well the clients from one firm are going to go to 
the client of another where the better performance is. In this 
case, of course, my performance is better than Mr. Tipton's.
    Now, in which case these assets are not held on Mr. 
Tipton's balance sheet as his firm or mine. The assets are held 
at a custodial bank in another State, another country, or down 
the road. And so there is no systemic risk to the economy if 
one of these companies--they are not too-big-to-fail. It 
doesn't make any sense.
    There is no systemic risk posed by asset managers. So to so 
designate them as SIFIs and threaten the long-term rate of 
return of small investors doesn't make any sense to me.
    So my question to you is the following: Don't you think it 
makes sense if you are running an asset management firm, you 
should have clear, written criteria so you know if you are in 
these certain business lines? Then, the chances of you being 
designated a SIFI and having to go through all this is clear.
    And then once you are designated a SIFI, don't you think it 
makes sense that you should know what the off-ramp should be so 
I can make a decision, if I am in this business now or going to 
be in this business or offering this product line, that I know 
how to get out of the SIFI designation if I do certain things?
    Mr. Macey, why don't you take a shot at that, if you don't 
mind, sir?
    Mr. Macey. You raise a number of interesting points, and I 
want to focus on two.
    The first is the lack of any process, procedure, or 
guidelines, guidance of any kind about how an entity can stop 
being a SIFI once it receives that designation.
    We are seeing an interesting natural experiment, of course, 
with GE Capital, which has been designated as a SIFI, is 
consistent with your observations and the Congressional Budget 
Office's intuition. They looked at the cost of that and said, 
``We don't want to be in the finance business any more in a 
significant way.'' So that is a very significant concern.
    Generally speaking, I think if somebody came down to Earth 
from Mars and was handed Dodd-Frank, along with a number of 
other Federal statutes regulating the financial industry, and 
was asked, ``Can you build a plausible case that these are 
intended to hurt small business?'' the answer would have to be 
``yes.''
    Maybe they weren't intended to do that, but it certainly is 
the consequence and if you--so reasoning backwards from the 
consequence, one has to make that inference, in my view.
    Mr. Poliquin. Mr. Scott, we are a country of laws. And 
whether you are a defendant individually or you are a company 
lawfully conducting business in the financial services space in 
this country, don't you think it is reasonable and appropriate 
to make sure your government provides you with due process, to 
make sure you know the path going forward, what is best for 
you, your stockholders, and your customers?
    Mr. Scott. Certainly, Congressman. That is a hallmark of 
our country.
    Mr. Poliquin. And do you think that this whole SIFI 
designation process offers that due process?
    Mr. Scott. I am not a constitutional expert. I will defer 
to my colleagues. But in terms of a common understanding of 
that term, I don't think it offers due process.
    But just to stress the point, this is not just an issue for 
that company. This designation affects the entire financial 
system. It affects competitors, and it affects customers.
    So, yes, we worry about the due process to the company, but 
I am just as concerned with the economic impact on everybody 
else outside this company of that designation.
    Mr. Poliquin. Thank you, gentlemen, for being here. I 
appreciate it very much.
    Thank you, Mr. Chairman. I yield back my time.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentlelady from Ohio, Mrs. 
Beatty, for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman and Mr. Ranking 
Member. I am having a little voice problem this morning.
    And thank you, to the witnesses.
    I have just a few brief comments, and then, Mr. Chairman, 
if it is okay, I would like to relinquish the balance of my 
time to Congressman Green.
    First, let me just say thank you for being here this 
morning. I have a lot of insurance companies located in my 3rd 
congressional district. If one of my local or State domicile 
insurers were to be designated, can you explain to me what 
would be the process for determining the issues of regulatory 
jurisdiction between the Ohio Department of Insurance and the 
Financial Stability Oversight Council, if any?
    Mr. Macey. I guess in a nutshell, I would say it is sort of 
like being at a dance where you can dance with more than one 
person at the same time. So if there is an insurance company in 
your district and the FSOC designates that insurance company as 
a SIFI, it will continue to be regulated by your State 
insurance department and commissioner.
    In addition to that, Dodd-Frank provides that after the 
designation as a SIFI, the Federal Reserve has the authority to 
promulgate sort of customized bespoke regulation for that 
insurance company. And at the time of the designation, nobody 
has--it is going to be a mystery as to what the consequences 
are.
    So there will be regulation. And this is what we saw with 
GE Capital; this is what we saw with MetLife. We have seen it 
in every instance of a non-bank SIFI designation.
    And it will be--one of--if they think that your--the 
management of your--the insurance company in your district is 
not sharp or doesn't have experience, it will be more heavily 
regulated. If they think that the products, certain insurance 
lines of business, are riskier than others, it will be more 
heavily regulated.
    If there is a difference between what the Fed thinks should 
be done and what the State insurance office in your State 
thinks should be done, the regulators will tell them they have 
to comply with both sets of regulation, notwithstanding the 
fact that they may be in conflict.
    It is difficult, which is why I prefer academia to the real 
world. But it is a tough position that your constituent would 
be in, your insurance company constituent.
    Mrs. Beatty. Thank you.
    Mr. Chairman, I would like to relinquish the balance of my 
time to Congressman Green.
    Mr. Green. Thank you. And I pray that the gentlelady will 
recover quickly because her strong voice is very much needed in 
the Congress.
    Mr. Macey, dear sir, we were talking earlier--in fact, you 
and one of the members--about withholding evidence. And you had 
some concern about this withholding of evidence in the MetLife 
case. My assumption is that you are concerned about due process 
being afforded. Is that a fair statement?
    Sir, first we will have to--
    Mr. Macey. I was just saying I was--
    Mr. Green. I am going to have to do this--I have a little 
bit of time--
    Mr. Macey. Okay.
    Mr. Green. Let me just ask you.
    Mr. Macey. Okay.
    Mr. Green. Are you concerned about due process? Is that 
your rationale?
    Mr. Macey. A little bit. Not overwhelmingly. I would be 
more concerned if somebody--an individual citizen--I am 
concerned with their due process rights. I don't really, 
frankly, stay up at night--
    Mr. Green. You are not concerned about due process for--
    Mr. Macey. --worrying about--
    Mr. Green. You are not concerned about due process for a 
corporation?
    Mr. Macey. It is not my primary concern.
    Mr. Green. Okay.
    Mr. Macey. I am a little bit worried about it. I would like 
them to have due process. But my view is much more the societal 
consequences of--
    Mr. Green. And when we were talking about the withholding 
of this evidence, we were talking specifically--you and a 
member were talking about in the MetLife case, because that is 
the case in question, is it not?
    Mr. Macey. I thought we were just talking generally about--
    Mr. Green. No, you were talking about MetLife, because--
    Mr. Macey. Okay. I am happy to talk about MetLife.
    Mr. Green. Your testimony, sir, that--your written 
testimony is replete with comments about MetLife.
    Mr. Macey. Yes.
    Mr. Green. You haven't said much about it in your oral 
testimony, and I suspect that when I came in and threw the 
marker down, it created some problems for a lot of people. But 
your written testimony is replete--
    Mr. Macey. That is true.
    Mr. Green. --as is yours, Mr. Scott, with MetLife.
    And of course, Mr. Hockett, yours is too.
    And, Mr. White, let me commend you. You spoke of it when 
you gave your verbal testimony.
    So you are all talking about MetLife, and let's just be 
honest today: It is MetLife that we are talking about. If 
MetLife were not in a Federal district court here in D.C., we 
wouldn't be having this hearing. It is all about MetLife, a 
$900 billion company.
    Now, I am going to insist that I place some things in the 
record. The first will be the letter that I referenced earlier, 
wherein the ranking member and I made a request that persons 
who are not major corporations have an opportunity to have 
their cases litigated before the Congress--in a fair way, of 
course. Any objections--
    Chairman Duffy. Without objection, it is so ordered.
    Mr. Green. Thank you very much. We will place that in the 
record.
    I would also, given that this is about MetLife, like to 
place in the record a brief from many of the law professors who 
are in support of the position of FSOC as it relates to the 
litigation against MetLife.
    Chairman Duffy. Without objection, it is so ordered.
    Mr. Green. Thank you, Mr. Chairman.
    And now, let's just talk about these companies. MetLife, as 
you know, deals in derivatives, about $200 billion worth, 
according to Bloomberg. With these $200 billion worth of 
derivatives, I find that I have to be concerned about them.
    MetLife, while it is not AIG, we do know that AIG created a 
problem because of its derivatives. And that was so stated, as 
a matter of fact, by the Office of Thrift Supervision. They 
acknowledged it.
    So MetLife has $200 billion worth of derivatives, and it is 
a $900 billion company. So are you saying that under no 
circumstances, Mr. Macey, a $900 billion company with $200 
billion in derivatives--under no circumstances should it ever 
be a SIFI?
    Mr. Macey. No.
    Mr. Green. Thank you.
    Mr. Scott, are you saying that a $900 billion company, with 
$200 billion in derivatives--and if you want to know about its 
interconnectedness I can share that with you, because we have 
MetLife's own comments about how connected it is in the world--
are you saying that it should not be, under any circumstances, 
a SIFI?
    Mr. Scott. You will have to give me the opportunity to put 
this in context.
    Mr. Green. Okay. Let's do this then; we will pass.
    Let's go to Mr. Hockett.
    Mr. Hockett, sir, is it easier to place a bank holding 
company--a chartered bank--is it easier for a chartered bank to 
become a chartered bank through the OCC than for a major 
corporation that is a non-SIFI to become a SIFI?
    Mr. Hockett. That is actually a great example to bring up. 
The processes are actually quite similar.
    What is really interesting is that the OCC has a great deal 
of discretion in deciding whether to confer a charter on a 
bank. There is no formal sort of adjudication required, only 
informal, as in the case of SIFIs.
    A six-factor balancing test is applied. There is no sort of 
algorithmic tradeoff between different factors. They are not 
weighted. Indeed, the law is actually replete with multi-factor 
balancing tests that don't have sort of weighted factors.
    So actually, there are very strong, very close similarities 
between those two decision-making processes.
    If I could add in a quick note on transparency matters, it 
really makes a difference that this is an informal sort of 
adjudication. The transparency requirements in cases like that 
by law are less than they are in actual formal adjudications.
    The other thing that is worth noting is that one reason 
that you have less transparency in an informal process is there 
is a--an interest group that we are completely leaving out of 
account here so far, and that is the counterparties, right, of 
the prospective SIFI. That is to say, the institution that is 
being evaluated with a view to whether it is a SIFI is being 
evaluated partly by reference to its counterparties.
    Mr. Green. I have to reclaim my time. The--
    Mr. Hockett. That is confidential stuff.
    Mr. Green. I will have to reclaim my time and yield because 
of the essence of--
    Chairman Duffy. The gentleman's time completely expired 4 
minutes ago--rather, the gentlelady's time.
    The Chair now recognizes the gentleman from Arkansas, Mr. 
Hill, for 5 minutes.
    Mr. Hill. Thank you, Mr. Chairman. Thank you for hosting 
this hearing today on FSOC.
    I look at this whole FSOC process and the FSB world of 
looking at the idea of designating SIFIs, and I always try to 
follow Charlie Munger's long advice about life, which is to 
invert the question and look at it from the reverse.
    And so the first thing that always strikes me is after 
Dodd-Frank and after we have an FSOC established, we ought to 
ask, is there significant weakness in how, for example, 
insurance companies are overseen today, and then more 
specifically, life versus property and casualty? Or should we 
ask the question, is there something dramatically wrong with 
the way asset management firms are regulated today, instead of 
taking it as I think we have, which is kind of charging forward 
with the presumption that they probably are ultimately SIFIs 
and then justifying that outcome.
    So I really do approach it from the inverse. And part of 
that is based on my experience. I was at Treasury from 1989 to 
1991, and in that time the insurance industry had a very 
difficult time--the life industry particularly--due to GIT 
contracts; and the famous failure of Executive Life in 
California; and the state of the real estate market in a post-
market crash, post-Tax Reform Act of 1986.
    But the Treasury studied the existing State system, the 
guaranty system, the focus, and they found that it was 
amazingly resilient at that time. And so, I entered this debate 
with the presumption that American life insurance regulation is 
quite resilient, quite protective of consumers, and quite 
prudential in its oversight of the companies.
    It concerns me when FSOC has an expert, Roy Woodall, who 
dissents in FSOC's decision and he is not listened to.
    So a question I have is, maybe for Professor Macey to start 
out, the reasoning behind trying to even designate insurance 
companies as SIFIs before the Fed has even established what the 
rules of the road are just strikes me as premature and kind of 
nuts, from a Charlie Munger inversion question point of view or 
from a linear point of view, that we are going to make the 
presumption that they are.
    Could you just comment on that for me?
    Mr. Macey. I really appreciate that question for many 
reasons, not the least of which is that Charlie Munger is a 
hero of mine and he is a very practical, commonsense, smart 
guy.
    I think it is a concern, and the reason this is a concern 
for me, and the reason that MetLife is a concern for me, is I 
don't think the world will come to an end if MetLife maintains 
its designation as a SIFI. I think the problem you identify is 
the vagueness in the standard and the lack of any connection to 
an actual problem.
    And this type-one, type-two error issue raises the 
following specter, which is we are sitting here right now 
talking about MetLife. I could easily imagine, based on 
plausible scenarios I have seen in other areas of economic 
regulation, that we would be in here 5 years from now, or maybe 
a year-and-a-half from now if there is another financial 
crisis, talking about firms that are not in the hundreds-of-
billion-dollar category, but in the hundreds-of-million-dollar 
category, that you could--that every firm is--in the insurance 
industry is interconnected.
    So it would be plausible, under the vague standards we have 
that caused the designation of MetLife, to designate hundreds 
of insurance companies as SIFIs.
    Is it going to happen today? No. But that is why I think 
this is about more than MetLife and why I think your question 
is very germane.
    Mr. Hill. Yes. It concerns me because when you look over at 
the banking side. I feel like the left hand doesn't know what 
the right hand is doing. If you look at the capital surcharge 
that has been proposed for G-SIFIs, the Fed has a set of 
metrics that measure liabilities, interconnectedness, 
dependency, and maybe short-term funding flows, and a whole 
variety of things that one can pull effectively from public 
information, either 10-Ks or Y-9s.
    But we don't even attempt to do something similar for the 
non-bank holding company entities before we start down this 
road. So it is misdirected, I think, that we jump out and 
designate people before we have even decided what the rules 
are.
    I thank you, and I look forward to the next round of 
questions. Thanks, Mr. Chairman.
    Chairman Duffy. The gentleman yields back.
    Votes have been called, but we have two more Members here, 
and I think we can get through them before we walk off to vote.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Texas, Mr. Green, for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman.
    Let's go back to you, Mr. Hockett. You were giving us some 
intelligence about the OCC and its methodology and comparing 
that to a SIFI designation by FSOC. Could you please continue, 
or would you?
    Mr. Hockett. Yes, sure. Thanks for the question.
    So again, throughout the regulatory state, you could say, 
and throughout our body of law there are lots of multi-factor 
balancing tests that don't have weighted factors. I suspect 
that is partly in recognition of the fact that many decisions 
that have to be made are much too complex to be captured by an 
algorithm, that in other words, legislators, regulators, and 
judges probably won't ever be able to be replaced by machines.
    And so, you actually have lots of chartering decisions that 
oftentimes will be challenges, typically either by a would-be 
bank that is denied a charter, or by an incumbent bank that 
objects to a charter having been granted to an institution that 
will end up being in competition with that institution, and 
they routinely raise the same sorts of objections to the bank 
chartering authority, whether it be the OCC at the Federal 
level or whether it be a State banking commissioner who makes 
the chartering decision at the State level.
    Often, the arguments that they will make are very much like 
the arguments that MetLife has made against the FSOC in this 
particular instance.
    Mr. Green. Thank you.
    Mr. Chairman, I would also like to place in the record a 
document styled, ``The Basis for the Financial Stability 
Oversight Council's Final Determination Regarding MetLife, 
Inc.,'' and I shall read from this document on page 29.
    It reads, and this relates to how interconnected MetLife 
is, ``By design, the winding-down of a failed insurer's estate 
may take several years to accomplish while policyholders and 
contract holder liabilities are paid off as they come due and 
are transferred to solvent issuers.
    ``MetLife is a highly complex and interconnected financial 
services organization that operates in approximately 50 
countries and provides services to approximately 100 customers 
globally. The complexity of MetLife's operations and 
intercompany relations, including intra-group dependences for 
derivatives management, investment management, risk management, 
cross-border operations, and critical services, creates 
complexities that could pose obstacles to a rapid and orderly 
resolution.''
    And then it goes on to indicate that, ``there is no 
precedent for the resolution of an insurance organization the 
size, scope, and complexity of MetLife.'' Now, this comment is 
being made after AIG. And as we found out, AIG was a part of 
the glue that was holding the economic order together. So--
    Chairman Duffy. Mr. Green, without objection, the document 
will be included in the record.
    Mr. Green. Thank you, Mr. Chairman.
    With AIG, we found that we eventually had to bail them 
out--$182.3 billion, in fact. So the question is, given the 
complexity of MetLife, why would FSOC not seek to ascertain 
whether or not it should be designated as a SIFI? This is a 
huge, mega corporation.
    Mr. Hockett, would you kindly give some commentary?
    Mr. Hockett. Yes. Thanks so much for the question.
    Again, this goes back to something I mentioned in my 
opening statement, and that is that, again, there was a time 
when insurance companies were sort of categorically distinct 
from the other kinds of financial institution. And that is 
still largely true of many smaller insurance companies.
    But the fact is there are some very large insurance 
companies that are not traditional insurance companies and that 
depart in various ways from the traditional insurance company 
model. That is why I actually mentioned MetLife in my opening 
testimony just briefly, but I mentioned it in order to note, 
first, that it was a bank holding company as recently as 2012, 
that it failed a stress test at that time, and while it has 
since relinquished its bank holding company status, it 
nevertheless remains a very large, far-flung, highly complex 
financial institution.
    And indeed, the FSOC and many experts, including terrific 
business professors at the University of Chicago, at Stanford 
University, Yale, and elsewhere, and law professors, have noted 
that its--the term structure of its balance sheet--that is to 
say the term structure of its liabilities on the one hand and 
its assets on the other--are not those of the traditional 
insurance company and, indeed, there can be significant 
maturity mismatch in as much as some of the policies that 
MetLife in particular offers can be liquidated quickly.
    But again, I don't want to get too hung up on just MetLife. 
I think as a general matter, this is an important phenomenon.
    Mr. Green. I will have to yield back now.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    Mr. White, first question: In your written testimony, you 
note that SIFI designations can in some cases provide a 
competitive advantage despite the heightened regulatory 
requirements because of the lowered cost of capital an 
institution might receive due to the perception of being too-
big-to-fail. What reforms would you recommend to remedy the 
market distortion that could be caused by FSOC's unchecked 
authority?
    Mr. White. First of all, I am very glad you asked that, 
because I wanted to point out earlier that while MetLife is one 
case that is litigating these issues, a small West, Texas 
community bank that I represented in a lawsuit challenging the 
SIFI designation process, challenging it as a subsidy, that is 
where a lot of these issues were first raised.
    I think in terms of fixing the problem, first of all, I 
think clear standards are important. I think it is inevitable 
that this designation is going to operate as a subsidy, and so 
I think the regulators' discretion needs to be cabined so that 
they can't just hand it out willy-nilly. I think it is 
important that there are clear standards by Congress as to 
which companies these designations can be placed upon.
    Mr. Hultgren. Thank you.
    Professor Scott, in your testimony you note that the FSOC 
should involve potential designees in its process at the very 
start and should provide the designees with complete 
transparency into the basis for any potential designation. Two-
part question: First, based upon FSOC's actions to date, do you 
think they are inclined to provide this due process? And 
second, should they be required to do so and what can Congress 
do?
    Mr. Scott. Congressman, I don't think they have been 
provided that due process. They have not been able to see the 
record on which FSOC made this determination, and I think they 
should be provided that. As I said in my testimony, if FSOC 
doesn't do so on its own, I think the Congress should require 
that.
    Mr. Hultgren. Thank you.
    Professor Macey, if I can address this to you, as you know, 
in April 2012 FSOC issued a rule claiming the authority to 
require supervision and regulation of certain non-bank 
financial companies but determined a cost-benefit analysis was 
not required under the Regulatory Flexibility Act.
    Two-part question: First, what do you think would have been 
the outcome of a thorough cost-benefit analysis? And second, 
what costs is the FSOC imposing on life insurance policyholders 
and possibly investors through its SIFI designation, and does 
this threat or risk of a designation impose any costs?
    Mr. Macey. The designation certainly imposes significant 
costs. Really underlying your question, I believe, is the 
question of, does a SIFI designation convey too-big-to-fail 
status? And the answer to that is inevitably, definitively, 
``yes.''
    One of the things that we know as an institutional fact is 
that once an organization is designated as a SIFI, particularly 
a non-bank SIFI, there are regulators who are assigned to 
regulate that entity, and their entire career depends on that 
entity remaining in business and in operation.
    So inevitably, there will be both costs and benefits to 
being designated as a SIFI: massive regulatory burden; and 
higher capital requirements. And for different firms, those 
costs will or will not be outweighed by the benefits, which 
come in the form of a credit enhancement for this implicit too-
big-to-fail status.
    So it is generally just sort of a deadweight efficiency 
loss.
    It would be important to do a cost-benefit analysis. People 
talk about this, though, as though it is kind of a binary 
choice, which is to say, as you point out, if I don't have to 
do a cost-benefit analysis, maybe you should have to do one.
    A middle ground would be to say, okay, unlike, say, certain 
SEC rules, the cost-benefit analysis does not have to generate 
a result such that the benefits are greater than the costs. 
That doesn't mean you can't do the analysis.
    One could do the analysis just for informational purposes 
to kind of get a handle on what is at stake here. And at a 
minimum, it seems to me strange that we don't even make that 
attempt.
    Thank you.
    Mr. Hultgren. Mr. Chairman, I have about 20 seconds left. 
If the chairman wants, I would yield back to him. Otherwise, I 
yield back the balance of my time.
    Chairman Duffy. The gentleman yields back.
    In about an hour-and-a-half, we have packed a pretty good 
punch. I want to thank the panel for their testimony.
    As I have indicated, votes have been called. There is about 
zero left on the clock, so we are going to have to go do our 
constitutional duty and cast our votes right now.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    Again, thank you for your testimony.
    And without objection, this hearing is now adjourned.
    [Whereupon, at 10:52 a.m., the hearing was adjourned.]

                            A P P E N D I X

                           November 19, 2015
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
```