Financial Stability: New Council and Research Office Should Strengthen the Accountability and Transparency of Their Decisions
Published: 2012-09-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created FSOC to identify and address threats to the stability of the U.S. financial system and OFR to support FSOC and Congress by providing financial research and data. GAO was asked to examine (1) any challenges FSOC and OFR face in fulfilling their missions (2) FSOC and OFR's efforts to establish management structures and mechanisms to carry out their missions, (3) FSOC and OFR's activities for supporting collaboration among their members and external stakeholders, and (4) the processes FSOC used to issue rules and reports. GAO reviewed FSOC documents related to the annual reports, rulemakings, and committee procedures, as well as documents on OFR's budget, staffing, and strategic planning. GAO also interviewed FSOC and OFR staff, FSOC member and member agency staff, and external stakeholders, including foreign officials, industry trade groups, and academics.
section_title: What GAO Found
paragraphs: These new organizations--the Financial Stability Oversight Council (FSOC) and Office of Financial Research (OFR)--face challenges in achieving their missions. Key FSOC missions--to identify risks and respond to emerging threats to financial stability--are inherently challenging, in part, because risks to financial stability do not develop in precisely the same way in successive crises. Collaboration among FSOC members can also be challenging at times, as almost all of them represent independent agencies that retained existing authorities. OFR faces the challenge of trying to establish and build a world-class research organization while meeting shorter-term goals and responsibilities.
FSOC's and OFR's management mechanisms to carry out their missions could be enhanced to provide greater accountability and transparency. FSOC and OFR have taken steps toward establishing such mechanisms. FSOC has established seven standing committees generally composed of staff of its members and member agencies to support the council in carrying out its business and provide information to the council for decision making and adopted a memorandum of understanding on information sharing to help govern its activities. FSOC and OFR have also issued annual reports on their activities and created web pages that provide some information to the public. However, certain mechanisms could be strengthened. For instance:
FSOC's Systemic Risk Committee, which is responsible for identifying risks to financial stability, has procedures to facilitate analysis of risks raised by staff. However, without a more systematic approach and comprehensive information, FSOC member agencies, on their own, may not be well positioned to judge which potential threats will benefit from interagency discussions. GAO recommends that FSOC collect and share key financial risk indicators as part of a systematic approach to help identify potential threats to financial stability.
Public information on FSOC's and OFR's decision making and activities is limited, which makes assessing their progress in carrying out their missions difficult. GAO recommends that (1) FSOC keep detailed records of closeddoor sessions and (2) both entities develop a communication strategy to improve communications with the public.
FSOC's annual reports--which serve as its key accountability documents--do not consistently identify which entities should monitor or implement the identified recommendations or give time frames for specific actions. To hold FSOC accountable for its recommendations, GAO recommends that FSOC recommend a lead agency or agencies to monitor or implement each recommendation within specified time frames.
OFR issued a strategic framework in March 2012 as an important first step in adopting a strategic planning and performance management system. However, that document lacked some leading practices such as linking activities to strategic goals and performance measurement systems. GAO recommends that OFR further develop a strategic planning and performance management system that includes these elements and will allow it to be held accountable.
Although FSOC and OFR have taken steps to promote collaboration among FSOC members and external stakeholders, FSOC could further adopt key practices. FSOC member agency staff noted that agencies have leveraged their joint expertise and resources to produce FSOCs mandated reports and rules. OFR has also taken steps to collaborate with external stakeholders by initiating a working paper series, moving to form an advisory committee, and coordinating U.S. efforts at the international level to help create a legal entity identifier for financial entities that could enable regulators to identify parties to financial transactions. However, FSOC could do more to promote collaboration. For instance, FSOC, and OFR are required to monitor risks to financial stability, but they have not yet clarified agency responsibilities for implementationcreating the potential for regulatory gaps or duplication of effort. In addition, FSOC could take better advantage of statutory mechanisms to leverage external resources, including developing advisory committees. To improve collaboration and coordination among its member agencies and with external stakeholders, GAO recommends that FSOC (1) develop policies to clarify when formal collaboration or coordination should occur and FSOCs role in such efforts, (2) more fully incorporate key practices for successful collaboration that GAO has previously identified, and (3) clarify roles and responsibilities for implementing requirements to monitor risks to the financial system.
FSOC has issued rules that improve the transparency of its processes, and statutorily mandated reports but has not established processes to help ensure that these will have their intended results. While FSOC has issued rules on processes for designating nonbank financial entities for additional oversight and intends to review certain aspects of those rules, it has not developed plans for comprehensively evaluating whether designations are having their intended impactreducing threats to financial stability. The impact of the designations on the economy and the financial entities will depend, in part, on a number of rules being issued by independent FSOC member agencies that will be applied to those being designated. Without a comprehensive assessment of the impact of these rules that will require the cooperation of individual FSOC members, understanding whether the designations are having their intended impact will be difficult. GAO recommends that FSOC develop a comprehensive framework for assessing the impact of its designation decisions. In addition, FSOC has not developed a systematic forward-looking process for identifying potential emerging threats in its mandated annual reporting process. In particular, FSOC does not have processes for consistently identifying such threats, separating them from more current threats, or prioritizing them. Identifying a large number of threatsthe 2011 report identified over 30without prioritizing them makes focusing on those that are most important difficult for decisionmakers. The 2012 report also included many threats, and neither report separates current threats from those that are potentially emerging. To improve FSOCs annual reporting on potential emerging threats, GAO recommends that FSOC develop more systematic approaches that are forward looking and help to prioritize the threats.
section_title: What GAO Recommends
paragraphs: GAO makes 10 recommendations to strengthen the accountability and transparency of FSOC and OFR's decisions and activities as well as to enhance collaboration among FSOC members and with external stakeholders. Treasury said, as Chairperson, that the council and OFR would consider the recommendations, but questioned the need for FSOC and OFR to clarify responsibilities for monitoring threats to financial stability and stated that OFR expects to share some risk indicators. However, stronger and more systematic actions are still needed in these areas.

section_title: Letter
paragraphs: The 2007-2009 financial crisis focused attention on weaknesses in the  U.S. regulatory structure, including the lack of an agency or mechanism  responsible for monitoring and addressing risks across the financial  system and a shortage of timely information to facilitate that oversight. In  response to the crisis, Congress passed the Dodd-Frank Wall Street  Reform and Consumer Protection Act (Dodd-Frank Act) in July 2010,  which provided for a broad range of regulatory reforms. Among many  other things, the act established the Financial Stability Oversight Council  (FSOC) to monitor the stability of the U.S. financial system and take  actions to mitigate risks that might destabilize the system. The Dodd- Frank Act also created the Office of Financial Research (OFR) to support  FSOC and Congress by providing financial research and data. Congress  gave FSOC a number of significant authorities to help it execute its broad  mission, including to designate nonbank financial companies for  heightened supervision by the Board of Governors of the Federal  Reserve System (Federal Reserve) and to require financial companies to  provide data to OFR. Congress set up some specific accountability  mechanisms for FSOC and OFR, such as requiring annual reports and  testimonies. However, some members have emphasized that to hold  FSOC and OFR accountable, it needs to have a full understanding of the  operations and decision making processes of these entities to help  ensure that FSOC and OFR use their authorities as Congress intended.
To help provide oversight of FSOC and OFR, the Dodd-Frank Act gave  GAO authority to audit these new entities, including their structures,  staffing, and decision making processes. Under this authority, you asked  us to examine the standing-up of these new entities. This report examines  (1) any challenges FSOC and OFR face in fulfilling their missions; (2)  FSOC’s and OFR’s efforts in establishing management structures and  mechanisms to carry out their missions and attain their goals; (3) FSOC’s  and OFR’s activities for supporting collaboration among members and  external stakeholders, including international bodies and regulators; and  (4) FSOC’s processes used to issue rules and reports.
To identify and examine any challenges faced by FSOC and OFR, we  reviewed our prior reports on financial reform and the 2007-2009 financial  crisis and statements by government officials and academic experts. To  assess their progress in establishing management structures and  mechanisms, we reviewed documents and interviewed officials on  FSOC’s and OFR’s missions, budgeting, staffing, data security, and  planning. We assessed the reliability of OFR’s staffing data and  determined that the data were sufficiently reliable for the purposes of this  report. In addition, we reviewed literature on tools used or proposed by  entities that write financial stability reports, and others, to identify potential  threats to financial stability. We also coordinated with the inspectors  general from the Department of the Treasury (Treasury) and the Council  of Inspectors General on Financial Oversight (CIGFO) on their reviews of  OFR and FSOC, respectively.
To evaluate FSOC’s and OFR’s activities for collaboration among  members and external stakeholders, we analyzed FSOC policies,  procedures, and products to determine whether and how their practices  compared with key elements of effective collaboration we have previously  identified. We also reviewed selected documents from international  bodies for evidence of changes in their dealings with U.S. financial  regulators since FSOC’s creation. To examine FSOC’s processes for  issuing rules and reports, we identified products that had been issued as  of July 20, 2012, and reviewed the processes used to develop them. We  compared documentary and testimonial information from Treasury  officials with rulemaking criteria established in our prior work and with  standard economic practice. For all objectives, we interviewed FSOC and  OFR staff and officials from FSOC’s member agencies. We also  interviewed external stakeholders, including foreign officials, industry  trade groups, and academics on various topics related to our objectives.  For more information on our scope and methodology, see appendix I.
We conducted this performance audit from November 2011 to September  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: For some time, we have been reporting that the U.S. financial regulatory  system has relied on a fragmented and complex arrangement of federal  and state regulators to oversee its institutions.place over the last 150 years—has not kept pace with major  developments in financial markets and products in recent decades. In  particular, the current system was not designed to oversee today’s large  and interconnected financial institutions, whose activities pose new risks   This system—put into  to the institutions themselves as well as to the broader financial system.  This risk to the broader financial system, called systemic risk, refers to the  possibility that a single event could broadly affect the entire financial  system, causing widespread losses rather than just losses at one or a few  institutions. Given these observations and concerns, we offered a  framework for crafting and evaluating regulatory reform proposals that  would have the characteristics that should be reflected in any new  regulatory system. For example, we said that a regulatory system should  minimize regulatory burden and promote accountability. We also  designated reforming the financial regulatory system as a high-risk area  in 2009.
FSOC’s three primary purposes under the Dodd-Frank Act are to  1.  identify risks to the financial stability of the United States that could  arise from the material financial distress or failure, or ongoing  activities, of large, interconnected bank holding companies and  nonbank financial companies, as well as risks that could arise outside  the financial services marketplace;  2.  promote market discipline by eliminating expectations on the part of  shareholders, creditors, and counterparties of these large companies  that the U.S. government will shield them from losses in the event of  failure; and  3.  respond to emerging threats to the stability of the U.S. financial  system.
To achieve these purposes, the Dodd-Frank Act gave FSOC a number of  important authorities that allow it to  collect information across the financial system so that regulators will  be better prepared to address emerging threats; designate for supervision by the Federal Reserve those nonbank  financial companies that pose risks to the financial system as defined  by the act; designate as systemically important certain financial market utilities  (FMU) and payment, clearing, or settlement activities, requiring them  to meet prescribed risk management standards, and subjecting them  to enhanced regulatory oversight;  recommend stricter standards for the large, interconnected bank  holding companies and nonbank financial companies designated for  enhanced supervision;  vote on determination by the Federal Reserve that action should be  taken to break up institutions that pose a “grave threat” to U.S.  financial stability; and  facilitate information sharing and coordination among the member  agencies to eliminate gaps in the regulatory structure.
FSOC is chaired by the Secretary of the Treasury. As the chairperson of  FSOC, the Secretary has certain powers and responsibilities related to  FSOC’s meetings, rulemakings, recommendations, and reports and  testimony to Congress. The Secretary, in consultation with the other  FSOC members, is also responsible for regular consultation with the  financial regulatory entities and other appropriate organizations of foreign  governments or international organizations. As shown in figure 1, the  Dodd-Frank Act provides that FSOC consists of 10 voting members and 5  nonvoting members. The 10 voting members provide a federal regulatory  perspective and an independent insurance expert’s view. The 5 nonvoting  members offer different insights as state-level representatives from bank,  securities, and insurance regulators or as the directors of some new  offices within Treasury—OFR and the Federal Insurance Office—that  were established by the Dodd-Frank Act. The Dodd-Frank Act requires  that the council meet at least once a quarter.
The Dodd-Frank Act established OFR to serve FSOC and its member  agencies by improving the quality, transparency, and accessibility of  financial data and information, conducting and sponsoring research  related to financial stability, and promoting best practices in risk  management. The act requires OFR to set up a data center and a  research and analysis center to, among other things, perform applied and essential long-term research; develop tools for risk measurement and monitoring; and make the results of its activities available to financial regulatory  collect and provide data to FSOC and member agencies;  standardize the types and formats of data reported and collected;  agencies.
FSOC and OFR do not receive appropriated funds. During the 2-year  period following the enactment of the Dodd-Frank Act, the Federal  Reserve provided OFR funds to cover the expenses of the office. Moving  forward, OFR will be funded through assessments levied on bank holding  companies with total consolidated assets of $50 billion or more and  nonbank financial companies designated by FSOC for supervision by the  Federal Reserve. Until FSOC finalizes its designations for nonbank  financial companies, assessments will be levied only against large bank  holding companies. The collected assessments will be deposited into the  Financial Research Fund, which was established within Treasury to fund  the expenses of OFR. FSOC’s expenses are considered expenses of  OFR. The President’s fiscal year 2013 budget included estimates of about  $123 million for the Financial Research Fund for fiscal year 2012 and  about $158 million for fiscal year 2013. Most of these funds are to support  OFR, but the estimates include about $8 million for FSOC operations in  fiscal year 2012 and nearly $9 million in fiscal year 2013. Most of OFR’s  funding is budgeted for contractual services—including reimbursable  support from Treasury and administrative services from the Office of the  Comptroller of the Currency (OCC) and the Bureau of Public Debt— employees and equipment.
section_title: FSOC and OFR Face Challenges Achieving Their Missions
paragraphs: Key FSOC missions—to identify risks to U.S. financial stability and  respond to emerging threats to stability—are inherently challenging. Risks  to the stability of the U.S. financial system are difficult to identify because  key indicators, such as market prices, often do not reflect these risks.  Further, such threats do not develop in precisely the same way in  successive crises, making them harder to identify. As FSOC’s  chairperson acknowledged in FSOC’s 2011 Annual Report, the most  significant threats to the stability of the financial system will often be the  ones that are hardest to diagnose and preempt. Moreover, financial  innovations that are not well understood further complicate the challenge.  For example, prior to the 2007-2009 financial crisis, some experts viewed  the risks associated with falling housing prices as a regional  phenomenon. With the advent of mortgage-backed securities, these  experts believed that the danger that falling house prices posed on the  regional level had been mitigated, as they thought these securities had  diversified and dispersed the risks. Although this dispersion of risk was  expected to limit the impact of regional downturns, it helped to transmit  the downturn in housing prices across the financial system and the  nation. Experts have also noted that the task of effectively monitoring and  mitigating systemic risk is both vast and procedurally complex.  Additionally, actions to preemptively mitigate threats may appear  unnecessary or too costly at the time they are proposed or taken.  Although achieving FSOC’s key missions is inherently challenging, failure  to achieve them will continue to leave the financial system vulnerable to  large or multiple shocks that could result in the large losses in asset  values, higher unemployment, and slower economic growth associated  with previous financial crises.
Although the Dodd-Frank Act created FSOC to provide for a more  comprehensive view of threats to U.S. financial stability, it left most of the  fragmented and complex arrangement of independent Federal and State  regulators that existed prior to the Dodd-Frank Act in place and generally  preserved their statutory responsibilities. As a result, FSOC’s  effectiveness hinges to a large extent on collaboration among its many  members, almost all of whom come from state and federal agencies with  their own specific statutory missions. In testifying on the coordination of  Dodd-Frank rulemakings assigned to specific FSOC members, before the  U.S. House Financial Services Committee in October 2011, the  chairperson of FSOC recognized this challenge. He noted that the  coordination challenge in the rulemaking process was hard because the  Dodd-Frank Act left in place a financial system with a complicated set of  independent agencies with overlapping jurisdictions and different  responsibilities. However, the Chairperson also noted that certain  agencies were working much more closely together than they did before  the creation of FSOC. In our prior work, the federal financial regulators  also emphasized the importance of maintaining their independence while  serving as members of FSOC. For example, several FSOC member  agencies noted in our prior work on Dodd-Frank rulemakings that any  effort to coordinate rulemakings assigned to specific agencies through  FSOC would need to be balanced against the statutory requirements of  the independent agencies involved. In addition, the Chairperson has  similarly noted that he does not have the authority to force agencies to  coordinate, and neither he, nor FSOC as a whole, can force agencies to  adopt compatible policies and procedures. FSOC members’ staffs and  staff at member agencies also noted that differences in policies and  procedures are designed to address the differences in the entities they  regulate. Regulators have also pointed to their differing statutory  requirements to explain why they have differing views on policy issues.  During the Basel II deliberations, for instance, U.S. bank regulators—the  Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and  OCC—each had a different view of various aspects of those   The regulators traced their differences back to their  requirements.specific statutory responsibilities. Furthermore, although the United  Kingdom (UK) and the European Union (EU) have established or are in  the process of establishing councils to oversee systemic risk, in the UK  and the EU the central bank has more members or more votes than other  entities on these councils. In contrast, in the United States, the central  bank—the Federal Reserve—has one member on FSOC and one vote  among the 10 voting members. FSOC policy staff and staff at member  agencies noted that the diverse perspectives of FSOC members enrich  FSOC deliberations.
OFR also faces the challenge of trying to build a world-class research  organization from the ground up while meeting shorter term goals and  responsibilities. Recognizing these difficulties, the Dodd-Frank Act  required that OFR submit annual human resource planning reports to  Congress that cover the new entity’s plans for recruitment and retention,  training and workforce development, and workforce flexibility. The  September 2011 plan stated that a key feature of the recruitment  message was to highlight OFR’s ability to engage top academic and  industry professionals through several unique opportunities. These  included the ability to work in innovative research networks and with  unique data sets, as well as the historic opportunity to be involved from  the beginning in a new institution with broad, challenging goals. OFR  recognizes the challenge of attracting and retaining highly trained staff,  who often have other employment alternatives. When asked about  challenges they face, OFR officials noted that one challenge to starting a  research organization that is an unknown entity derives, in part, from  some prospective employees wanting to see which other researchers are  in place before agreeing to an employment offer. OFR officials told us that  the organization is making steady progress toward reaching a point at  which it will have an established core of staff and greater name  recognition that will lessen this challenge. Those researchers who  supported the creation of OFR have suggested that it will take many  years for the new entity to provide the insights that will ultimately be  expected of it. These researchers have also noted that the absence of a  director for the organization has slowed this process. At the same time  that OFR faces the long-term challenges of building a world-class  research organization, it also faces the challenge of balancing this longer- term goal with the need to meet shorter-term goals such as providing  ongoing support to FSOC and standardizing the types and format of data  collected and reported by the financial regulatory agencies.
section_title: FSOC’s and OFR’s Management Structures and Mechanisms Could Be Enhanced to Provide Greater Accountability and Transparency
paragraphs: FSOC and OFR have taken steps toward meeting the challenges they  face, including setting up their management structures, communicating  their mission and goals, and hiring staff. However, both entities could  enhance their accountability mechanisms and level of transparency.  FSOC and OFR have also taken steps to build mechanisms to identify  potential threats to financial stability, but additional actions would  strengthen this key mission of both entities. Additionally, while FSOC and  OFR have developed web pages on Treasury’s website and taken other  steps to provide information to the public, these efforts have limitations  and do not always fully inform Congress or the public about their activities  and progress. Without taking additional steps to improve accountability  and transparency, FSOC and OFR are missing the opportunity to  demonstrate their progress in carrying out their missions.
subsections: section_title: FSOC and OFR Have Set Up Initial Structures and Hired Staff, but Some Key Leadership Positions Remain Vacant at OFR
paragraphs: As we have reported in the past, agencies can manage or mitigate many  of the challenges of setting up new organizations by developing strong  management structures and control mechanisms. The literature on  control mechanisms and government performance suggests that certain  mechanisms, such as setting out goals and linking staffing, activities, and  budgets to them, are key even when new agencies are being formed.Such control mechanisms provide management, staff, stakeholders, and  the public with a good understanding of the organization’s mission and  goals, the steps it intends to take to carry out those goals, and an ongoing  level of accountability. Agencies also need to establish measures to  gauge their performance so that they can change strategies that are  deficient in a timely manner. Organizations must also maintain an  appropriate level of transparency. Because certain agencies rely on  confidential information, such as that obtained during regulatory  supervision, an appropriate level of transparency recognizes the need to  maintain confidentiality and information security. In addition, agencies  must balance the need for transparency with the need for those involved  in deliberations to be able to express their views.
FSOC has begun setting up its management structures. It has  established a dedicated policy office within Treasury’s Office of Domestic  Finance, led by a Deputy Assistant Secretary, which functions as the  FSOC Secretariat. Among other duties, the policy office works with staff  of other FSOC members to support FSOC in its day-to-day operations by  helping to draft rules, studies, and reports and prepare and circulate  relevant materials to agency members prior to council meetings. The  office also serves as a mechanism to bring issues to the council quickly.  As of June 2012, there were 25 staff members in the FSOC policy office.
FSOC has established seven standing committees generally composed  of staff of its members and member agencies to carry out the business of  the council including developing the information the members need to  make decisions effectively. The Deputies Committee, which meets every  2 weeks and consists of senior officials designated by members, is  responsible for coordinating and overseeing the work of the staff  committees. The deputies may resolve issues that arise in the other  committees and determine the information that needs to be passed on to  the FSOC members for discussion. Some other committees include the  Systemic Risk Committee that analyzes emerging threats to financial  stability, designations committees that support FSOC in evaluating FMUs  and nonbank financial companies for certain additional oversight, and the  Data Committee that supports OFR’s data collection efforts. FSOC  policy staff stated that all members and member agencies were invited to  have staff participate on any committee and, in some cases, FSOC  members attend committee meetings as well. They also noted that ad hoc  staff groups were formed periodically to work on issues that might not fit  within the purview of a standing committee. For example, an ad hoc  group helped draft FSOC’s 2011 Annual Report, and an ongoing legal  working group holds conference calls as needed to address legal issues.
OFR has also taken steps to set up needed management structures. As  shown in figure 2, OFR has developed an organizational structure that is  built around a Data Center and Research and Analysis Center—the two  programmatic units established by the Dodd-Frank Act. OFR has adopted  certain hiring policies required under the Dodd-Frank Act, including  special salary schedules that are higher than the General Schedule, and  used Treasury’s existing authority from the Office of Personnel  Management for Schedule A excepted hiring. In testimony delivered to  the House Financial Services Subcommittee on Oversight and  Investigations, in April 2012, the Chief Operating Officer described plans  to build up to a staffing level of from 275 to 300 staff in the next 2 to 3  years. OFR officials noted that they had relied on a variety of tools to  solicit applicants, including letters to academic institutions. OFR’s  recruitment message has highlighted the opportunity to work on unique  data sets and the historic opportunity to build a new institution that would  promote financial stability. As of August 15, 2012 OFR had 112  employees. About three-quarters of these employees were direct hires  (including 22 reimbursable staff from other Treasury departments) with  the other quarter a combination of external detailees and student interns.  Although this level is below the target employment level in OFR’s budget,  it represents marked progress from the second quarter of 2011, when  OFR had seven employees and relied mostly on nonpermanent staff.
As it is for any agency, having effective leadership is critical to hiring  qualified staff and providing effective governance. OFR has filled five of  its eight top leadership positions, but two of the most important positions  are not permanently filled: the OFR director and the deputy director of the  Research and Analysis Center. A former Treasury official with knowledge  of the search process for the director position said that it was difficult to  attract a qualified candidate to head the agency for a 6-year term. After  17 months, the President put forth a nominee to head OFR in December  2011 who had been serving as the Counselor to the Secretary since April  2011 and continues to serve in that position. As of July 2012, the   Since OFR has also not  nominee is awaiting full Senate confirmation.filled the deputy director position at the Research and Analysis Center,  the Chief of Analytical Strategy has assumed responsibility for standing  up the Research and Analysis Center, including overseeing the hiring  process, determining data needs, and defining the center’s objectives and  strategy. In June, OFR filled the Data Center Deputy Director position by  promoting the Chief Business Officer to this position. The new Data  Center Deputy Director will continue to serve as the Acting Chief  Business Officer until this position is filled. In addition to these vacancies,  a number of lower-level management vacancies remain, including  positions at the Research and Analysis Center. For example, none of the  assistant director positions under the Deputy Director of Research and  Analysis have been filled. In addition, two of five assistant director  positions under the Chief Technology Officer are open. However, OFR is  not actively looking to fill one of the assistant director positions until the  office reaches a mature state and has the need for this additional  position.
section_title: FSOC and OFR Have Adopted Certain Policies but Could Strengthen Mechanisms to Fully Ensure Accountability and Transparency
paragraphs: FSOC has implemented policies such as bylaws, a transparency policy,  and a consultation framework, and members have signed a memorandum  of understanding (MOU) on sharing confidential information to govern  FSOC activities and promote accountability and transparency. OFR has  also adopted policies and procedures for its operations.
FSOC’s bylaws describe the duties of the Chairperson, members of  the council, and staff; provide the governance structure for council  meetings; and describe some policies for confidentiality and access to  information, among other things. The bylaws also allow the  Chairperson to appoint, with council approval, an Executive Director  and Legal Counsel and to delegate some responsibilities to the  Executive Director. As of July 2012, no one had been appointed to  these positions. Instead, Treasury staff perform duties associated with  these positions, such as providing ethics information to FSOC  members.
The transparency policy commits FSOC to holding at least two open  meetings per year but also establishes reasons why other meetings  might be closed. For example, meetings may be closed during  discussions of supervisory or other market-sensitive information or if  an open meeting would result in the disclosure of information  contained in investigation, examination, operating, or condition  reports; or would necessarily and significantly compromise the  mission or purposes of FSOC if it were disclosed. The policy also  states that FSOC will release minutes to the public after the meetings.
FSOC’s framework for consultation applies to regulations or actions  required by the Dodd-Frank Act that must be completed in  consultation with FSOC. For example, under the act, the Securities  and Exchange Commission (SEC) must consult with FSOC in  determining what information is to be collected from certain  investment advisers to private funds relating to the assessment of  systemic risk. The framework provides a timeline for holding initial  meetings, circulating and commenting on staff recommendations, and  briefing key policy staff of interested FSOC members on those  recommendations.
FSOC members also signed an MOU to help ensure confidentiality of  nonpublic information. The MOU requires that FSOC members not  share this information with anyone outside their member agencies or  otherwise specified support staff. Treasury officials and FSOC staff  said that the MOU is necessary because it enables council members  to share nonpublic information within the council and provides  assurance to covered staff that they will not incur penalties for sharing  information consistent with the MOU’s terms. They noted, for  example, that sharing certain supervisory information without such an  agreement could carry severe penalties. In June 2012, CIGFO  released a report on FSOC’s controls over nonpublic information.CIGFO found that to date FSOC had shared limited nonpublic  information, but this situation will change as OFR builds its capacity.  CIGFO also found differences in the way FSOC member agencies  marked and handled nonpublic information and noted that not  addressing these differences could pose risks to the senders and  receivers of such information. The FSOC Data Committee has  undertaken a project to address these issues.
OFR has adopted policies and procedures for its operations, including  those for data security, human resources, budget execution, and  procurement. Because data operations are an important feature of  OFR’s operations, OFR officials said that they had spent significant  time on data security architecture, looking at issues of confidentiality,  user access, and cyber threats such as hacking. OFR has adopted  Treasury procedures for ensuring data security and is expanding its  security controls as necessary for OFR-specific systems and data, as  well as for information sharing across FSOC member agencies. To  further ensure confidentiality, they have also adopted postemployment  restrictions, as required by the Dodd-Frank Act, stating that OFR  employees generally may not be employed by or provide advice or  consulting services to financial companies for one year after if they  have had access to certain confidential information.
In addition, FSOC has some planning under way and OFR has taken  some actions and planned others that are consistent with legal  requirements or leading practices for new organizations relative to  strategic planning and performance management. In our prior work, we  have identified three key steps for successful results-oriented  organizations—(1) defining clear missions and desired outcomes; (2)  measuring performance to gauge progress; and (3) using performance as  a basis for decision making. These practices are consistent with the  Government Performance and Results Act of 1993, as amended (GPRA),  which requires agencies to periodically produce strategic plans, annual  performance plans, and performance updates. FSOC, which is subject  to GPRA, is in the early planning stages of how to satisfy its requirements  and may, given its relatively small monetary outlays, request an  exemption from certain GPRA requirements from the Office of  Management and Budget. In the interim, Treasury’s strategic plan for  fiscal year 2012-2015 describes FSOC and the Treasury Secretary’s role  as FSOC chairperson, but it does not include information on FSOC’s  goals or how it will measure FSOC’s progress in achieving them.
OFR, which is not independently subject to GPRA, also received limited  discussion in Treasury’s 2012-2015 strategic plan. Specifically, the plan  notes only that Treasury’s Office of Domestic Finance supports OFR and  that OFR was created by the Dodd-Frank Act. Similar to other entities  within the Treasury such as the Bureau of the Public Debt and the  Internal Revenue Service, and consistent with leading practices for new  organizations, OFR is undertaking an independent strategic planning and  performance management effort. OFR issued a strategic framework in  March 2012 to cover fiscal years 2012-2014. In the strategic framework  OFR lists five strategic goals, including supporting FSOC through the  secure provision of high-quality financial data and by conducting the  analyses needed to monitor threats to financial stability; developing and  promoting data-related standards and best practices; and providing the  public with key data and analyses while protecting sensitive information.  The framework also highlights a number of objectives under those goals  and lays out implementation priorities for the first year covered by the  document, fiscal year 2012. The framework also notes the importance of  transparency and that OFR is subject to oversight from the Treasury  Office of the Inspector General (OIG) and GAO, which have both  exercised that authority during OFR’s first two years, and that the Dodd- Frank Act requires that the OFR Director testify before Congress annually  on OFR’s activities. However, OFR acknowledges within its framework  document, that it does not yet have certain other key elements of  performance management in place including linking programmatic,  human resources, and budgetary decision making to its strategic goals  and developing a performance measurement system. The framework  identifies establishing these elements of a performance management  system among its fiscal 2012 priorities. OFR officials told us that they  have begun to link its budget and human resources to strategic goals and  that the human resources plan to be submitted to Congress in September  2012 and the fiscal year 2014 budget submission to be issued in 2013 will  reflect these linkages. They added that at the time they issued the  framework, they were not in a position to include performance measures,  as the agency was not sufficiently established. However, they plan to  include performance measures in their fiscal year 2014 budget  submission. In June 2012, the Treasury OIG issued a report on the  progress OFR had made in developing an implementation plan that lays  out how it will stand up all of its operations and also noted the need to  develop performance measures.such performance measures, neither the agency nor the public can  determine whether OFR’s expenditures and activities are most effectively  aimed at accomplishing its mission.
The Dodd-Frank Act requires individual members to submit a signed statement to  Congress to accompany many FSOC reports saying whether they believe that FSOC, the  government, and the private sector are taking all reasonable steps to ensure financial  stability and mitigate systemic risk that would negatively affect the economy. If they did not  believe this the statement would need to indicate what actions the member believes  should be taken. 12 U.S.C. § 5322(b). frames are specified. More specifically, in the 2011 Annual Report some  recommendations identified relevant parties only as “market participants”  or “regulators” but did not consistently identify the targets of the  recommendation or designate parties responsible for monitoring or  implementing them. Another recommendation only discusses Dodd-Frank  Act reforms, while several others express support for certain aspects of  international coordination on financial reforms. In the 2012 Annual Report,  FSOC adds some specificity to these recommendations, such as  recommending an expeditious implementation of the Dodd-Frank Act. In  the 2012 Annual Report, FSOC also more clearly identifies  recommendations starting each one with “the council recommends,” but it  still does not consistently designate an FSOC member or members to  monitor or implement the recommendations nor does it establish time  frames for certain actions such as reporting to the council on the status of  the recommendation. Treasury officials noted that the Dodd-Frank Act did  not give the chairperson or council authority to require that independent  regulators take action or impose time frames on them. However, they  noted that some recommendations in the 2012 Annual Report were made  to specific agencies and put greater stress on more immediate action  than others. For example, the report emphasized the importance of a  recommendation to SEC to take action to address money market fund  risks by saying that wholesale short-term funding markets are a critical  component of a well-functioning financial system, and FSOC continues to  be focused on structural vulnerabilities in money market funds that could  disrupt these markets. Enhancing FSOC’s accountability could lead to  more effective oversight and public confidence in financial institutions and  markets.
In addition, while FSOC releases minutes from its meetings, as required  by its bylaws, it does not keep detailed records of deliberations or  discussions that take place at these meetings or at the committee level.  While no specific level of detail is required for FSOC minutes, the limited  documentation of their discussions makes it difficult to assess FSOC’s  performance. Another deliberative body, the Federal Reserve’s Federal  Open Market Committee, keeps transcripts of its meetings and voluntarily  releases these transcripts to the public after 5 years. Releasing the  transcripts after a period of time should allow the members of the  committee to talk freely and provides documentation that can be used to  assess the entity’s performance and monitor their decision making  process.
section_title: FSOC and OFR Have Taken Steps to Build Mechanisms to Identify Potential Threats to Financial Stability, but More Work Is Needed to Realize This Goal
paragraphs: FSOC has taken steps to meet its statutory responsibilities related to  identifying risks and potential emerging threats to U.S. financial stability,  but has not yet developed comprehensive and systematic mechanisms to  realize these goals. These steps include setting up the Systemic Risk  Committee that is responsible for systemic risk monitoring and plays a  key role in reviewing sources of systemic risk. Potential threats to  financial stability are also discussed at FSOC meetings; for example,  FSOC officials noted that a teleconference was convened to discuss MF  Global. The Systemic Risk Committee generally meets every 2 weeks  and is co-chaired by the Commodity Futures and Trading Commission  (CFTC), FDIC, the Federal Reserve, and SEC. The committee is  operating under draft procedures in which member agency staff suggest  risks or threats that, in their view, may benefit from interagency  coordination. In December 2011, FSOC members’ staff provided 40  suggestions, which FSOC policy staff grouped into categories for  discussions at the committee’s monthly meetings. According to FSOC  policy staff, if there is agreement that an issue would warrant further  examination, an agency is assigned to develop the issue, including  identifying vulnerabilities in the financial system. When the committee  determines the issue is sufficiently developed, it presents the issue to the  Deputies Committee. Sending some issues to the Deputies Committee  sooner than others does not imply that the committee attaches greater  importance to the issue but only that enough analysis has been  completed to allow it to move forward. According to the draft procedures,  if issues are elevated beyond the Deputies Committee to FSOC  members, agencies may respond with a variety of actions, including  enhanced monitoring, additional analysis, the development of potential  policy responses, or the implementation of a particular policy response.
OFR participates in the Systemic Risk Committee and is building capacity  to monitor the financial system for threats to financial stability. OFR has  developed the Financial Stability Monitor, a collection of metrics and  indicators related to financial stability that is to be continuously updated,  according to OFR and Treasury officials. According to these officials,  OFR began sharing the Financial Stability Monitor with the Systemic Risk  Committee and FSOC member agency staff in February 2012. OFR is  assessing options for analyzing risks to financial stability and produced a  working paper in collaboration with outside researchers, published in  January 2012, to survey existing approaches. In addition, OFR and  FSOC sponsored a conference in December 2011 to discuss data and  technology issues and analytical approaches for assessing threats to  financial stability.
Such a data-sharing exercise is akin to what the International Monetary Fund proposes  with its Financial Soundness Indicators. See International Monetary Fund, Financial  Soundness Indicators: Compilation Guide (Washington, D.C.: March 2006). reveal patterns occurring across the financial system. OFR, through a  mechanism such as the Financial Stability Monitor, could play a role in  collecting, analyzing, and reporting on these indicators. A senior OFR  official told us that this was the ultimate intent of the Financial Stability  Monitor. A sample of the Financial Stability Monitor that we reviewed  included, among other topics, some indicators of leverage and liquidity  that were based on data from the federal banking agencies and  purchased databases.
Many analytical tools have been developed by researchers or are in use  by international bodies to assess the risk of a financial crisis or identify  vulnerabilities in the financial system. Some of these tools—such as early  warning models—can be useful to assess the overall level of risk in the  financial system, while others, such as system-wide stress testing, could  be helpful in identifying new vulnerabilities and interconnections (see fig.  3). In general, these tools are methods of integrating large volumes of  financial information to generate specific insights about financial stability.  Experts we spoke with were generally supportive of developing and using  such tools for monitoring risks to financial stability and also emphasized  the importance of using multiple tools. These tools, which all have useful  features as well as shortcomings, may complement each other, and  exploring a variety of tools will provide insight into which ones will be the  most effective. According to FSOC policy staff, FSOC has not formally  considered whether to develop early warning models or conduct system- wide stress tests. OFR staff said they are evaluating a range of metrics  and methods that had been proposed for measuring and analyzing  financial markets and systems and are in the early stages of developing  network maps and other tools to assess financial stability. OFR evaluated  11 measures against a series of crises over time and reported on some of   In addition, OFR has a statutory  these efforts in its 2012 Annual Report.responsibility to report on stress testing, and OFR officials told us that  they interpreted that responsibility as contributing to the development and  evaluation of quantitative tools that are used in stress tests, improving the  data used in stress tests, and helping to advance the state-of-the-art in  stress test methodologies. As such, OFR’s survey of systemic risk  approaches described several stress testing models and the OFR Annual  Report noted that methodologies will need to advance to expose  vulnerabilities in the financial system as a whole. OFR would support  FSOC in evaluating system-wide stress tests, according to OFR officials.
Although FSOC and OFR have adopted communication methods to  provide information to the public and Congress on their activities, some of  their methods could be strengthened. For example, both entities have  web pages on Treasury’s website. FSOC’s web pages include minutes of  the council’s meetings, annual reports, frequently-asked-questions, and  information on FSOC rulemakings. OFR has also posted key documents  on its web pages, including its annual report, strategic framework, and  updates on recent developments, such as the status of the legal entity  identifier. OFR’s first annual report discusses its activities and agenda  for the next year, and its approach to researching financial stability as well  as current threats. The annual report also covers other topics including  data gaps in the areas of leverage, liquidity, and interconnectedness as  well as the benefits of data standards. Treasury officials also provided us  with examples of emails they have sent to congressional committees on  key FSOC or OFR products or actions, such as the designation of  nonbank financial companies, and described the wide range of  correspondence they respond to on congressional inquiries involving both  entities.
FSOC releases the minutes of its meetings. However, the minutes  describe general agenda items for the meetings and information on the  presenters for each agenda item and lack additional detail even when the  information being discussed is not likely to be market sensitive or limit the  quality of deliberations. For example, the meeting minutes for October 11,  2011, show that several presentations were given during an executive  session, including one on money market reform updates. The minutes  provide the names of those who gave the money market presentation and  note that updates were provided on actions taken since the last  presentation on the topic. However, the minutes lack any content of the  actual presentation or discussion. Specifically, the minutes say the  following. “Money Market Fund Reform Update  “The Chairperson then turned to the agenda item regarding an update on money  market fund reform and called on Robert Plaze, Associate Director, Division of  Investment Management, SEC, Matthew Eichner, Associate Director, Division of  Research and Statistics, Federal Reserve, Matthew Rutherford, Deputy Assistant  Secretary for Federal Finance, Treasury, to make the presentation. The  individuals listed above provided the presentation which included a review of the  actions taken since the last presentation regarding money market fund reform to  the Council, the reform options under consideration, and next steps.
The members of the Council asked questions about the presentation.”
In addition, in our review of meeting minutes for meetings held from  October 2010 through December 2011, we found that minutes from more  recent meetings generally have less detail than those from earlier ones.  As a result, the public receives little information about FSOC’s activities  and deliberations, which limits the public’s understanding of its activities.  More recently, however, FSOC provided additional transparency on a key  decision—its 2012 Annual Report provides extensive information on the  designation of FMUs as systemically important, including the names of  the designated entities and a discussion of the reasons for their  designation.
FSOC policy officials acknowledged that the issue of transparency is  challenging. They recognized the need for transparency but also noted  that certain information is protected from disclosure under various  statutes and cannot be released. FSOC staff also noted the need to  balance the desire for transparency with the need to provide an  environment that allows for open discussion and deliberation of issues  and policy options. As we have previously reported, transparency is a key  feature of accountability even when there is a need to safeguard certain  sensitive information to protect the marketplace. In addition, the  Freedom of Information Act (FOIA) recognizes that deliberative processes  also need to be safeguarded so that decision makers can have  meaningful discussions and certain information that FSOC considers,  such as that collected by bank supervisors, is prohibited from public  disclosure. However, similar bodies, such as the Federal Open Market  Committee and the Interim Policy Committee in the UK—an entity that  has a similar role to FSOC’s—publishes minutes that provide greater  detail. Although the Federal Open Market Committee makes certain  announcements on the day it meets, after a 3-week delay, it publishes its  more detailed meeting minutes, which usually include a detailed  discussion of developments in financial markets and the economy,  committee member views, and an explanation of committee policy  actions. In addition, as noted earlier in this report, 5 years after its  meetings, the Federal Open Market Committee voluntarily releases  transcriptions of those meetings. The minutes of the Interim Policy  Committee in the UK provide information on what the committee  discussed and an update on the health of the economy, including threats  to financial stability.
Additionally, neither FSOC nor OFR has taken full advantage of modern  communication tools to communicate information about their activities or  progress. While using a search engine, such as Google, identifies web  pages for both entities on Treasury’s website, the pages are not easy to  locate from Treasury’s homepage nor are the sites user friendly. For  example, the FSOC and OFR web pages are in a section of Treasury’s  website called Initiatives and are further embedded under a section titled  Wall Street Reform. While FSOC does post the dates and times of its  meetings on its web page, this information is in a link at the bottom of the  page rather than being prominently displayed. In addition, FSOC does not  have an online service that regularly alerts interested parties to changes  to its web pages or upcoming meetings. Further, one member of FSOC  noted that FSOC relies on emails to members and staff rather than  having a portal where members can access needed information more  easily and securely.
OFR’s web pages have been evolving over time especially during July  and August of 2012, but it could further improve its website. For example,  we had noted in June 2012 that OFR did not consistently display agency  testimonies in the same place; in August 2012, OFR rectified these  omissions. Similarly, in March 2012, OFR told us that the Treasury daily  blog provided information about OFR activities, but timely notices relevant  to OFR have not regularly appeared there. For example, many of the  recent developments related to global approval of the legal entity  identifier, which OFR cites as a major endeavor, have not appeared in a  timely manner. In July 2012, OFR added an online service to its own web  pages to inform those who register that updates have been made to the  site, but there was a delay in having the feature work consistently.   However, OFR has not posted some information that would show the  progress the agency is making in standing up its operations, such as its  organization chart including the names of its top managers. In  comparison, the Consumer Finance Protection Bureau, which was also  created by the Dodd-Frank Act, has for some time had its own domain  name, an easily identifiable website that includes an organization chart,  and online services that provide regular updates to interested parties.
Some industry representatives, academics, and former government  officials have questioned the progress that the new entities have made.  Some industry representatives with whom we spoke said that they did not  believe that FSOC and OFR had met their expectations for streamlining  regulatory requirements (e.g., responding to data requests), improving  coordination on new regulations, or providing new information on  systemic risks. Some members of FSOC and their staffs said that they  learned a great deal from working on and reading the 2011 Annual  Report; however, some industry representatives with whom we spoke  said that they did not find that report useful. Among other concerns,  industry representatives told us that the report did not contain any new  information on systemic risks or the status of Dodd-Frank act reforms. In  addition, a group of former government officials, academics, and industry  representatives convened the Systemic Risk Council in June 2012 to  address concerns that they said stemmed, in part, from the lack of  progress made by the members of FSOC and OFR. They said that their  concern increased each day that the implementation of systemic reform  languished. The Systemic Risk Council also noted that it was essential for  FSOC to provide clear and transparent explanations of regulatory reforms  in a way that the general public could understand. Communicating more  effectively with groups critical to their missions and the public could  improve FSOC’s and OFR’s ability to effectively and efficiently achieve  their missions.
section_title: FSOC and OFR Have Taken Steps to Collaborate but Could Enhance Their Efforts
paragraphs: The Dodd-Frank Act recognizes the importance of collaboration and  requires FSOC and OFR to collaborate on various activities. Effectively  building mechanisms to identify risks and potential emerging threats to  U.S. financial stability will also require FSOC and OFR to collaborate with  a number of internal and external stakeholders. To date, FSOC and OFR  have taken steps to promote collaboration; however, they could enhance  collaboration by more fully incorporating some key elements of effective  collaboration. Taking full advantage of opportunities to work with  stakeholders could strengthen FSOC’s and OFR’s ability to carry out their  missions. For example, in testifying about the need to coordinate agency  rulemakings, FSOC’s Chairperson noted the importance of coordinating  both domestically and internationally to prevent risks from migrating to  regulatory gaps—as they did before the 2007-2009 financial crisis—and  to reduce U.S. vulnerability to another financial crisis. In addition, effective  collaboration could eliminate unnecessary duplication for both the  industry and regulators.
subsections: section_title: The Dodd-Frank Act Recognizes the Importance of Collaboration to FSOC’s and OFR’s Missions
paragraphs: Recognizing the importance of collaboration to FSOC’s and OFR’s  missions, the Dodd-Frank Act assigns specific collaboration duties and  responsibilities to these new entities. Title I of the act directs FSOC to  facilitate information sharing and coordination among its member  agencies and other federal and state agencies regarding domestic  financial services policy development, rulemaking, examinations,  reporting requirements, and enforcement actions. In addition, FSOC  must consult with the primary financial regulatory agency, if any, before  designating a nonbank financial company for supervision by the Federal  Reserve.
The Dodd-Frank Act also encourages collaboration between FSOC and  external stakeholders, especially state regulators and international  entities. For example, it permits FSOC to appoint technical and  professional advisory committees which could include industry  representatives and academics as well as state regulators that may be  useful in carrying out the council’s functions. The act eases the creation  of committees by generally exempting them—and FSOC—from the  Federal Advisory Committee Act (FACA), which requires agencies to  adhere to a formalized process to ensure that committees are objective  and accessible to the public. The act also directs the FSOC  chairperson, in consultation with FSOC members, to regularly consult  with financial regulatory entities and other appropriate organizations of  foreign governments or international organizations on matters relating to  systemic risk to the international financial system. Further, when  designating foreign nonbank financial companies for supervision by the  Federal Reserve, FSOC must consult with appropriate foreign regulatory  authorities, to the extent appropriate.
The Dodd-Frank Act also specifies a number of duties for OFR that  require collaboration with FSOC members and others. In particular, OFR  must collect data on behalf of FSOC, provide the data to FSOC and  member agencies, and standardize data collection among the agencies. These activities require collaboration not only with FSOC member  agencies but also with commercial data providers, publicly available data  sources, and the financial industry. In addition, like FSOC, OFR can  appoint technical and professional advisory committees to help leverage  necessary resources, but these are not exempt from FACA.
section_title: FSOC and OFR Have Taken Steps to Promote Collaboration
paragraphs: The Dodd-Frank Act provides that member agencies, in consultation with OFR, must  implement regulations promulgated by OFR to standardize the types and formats of data  reported and collected on behalf of FSOC. However, it also explicitly notes that this  provision does not supersede or interfere with the independent authority of a member  agency under other law to collect data in such format as the agency requires. developed good working relationships with staff from other agencies.  Prior to FSOC, two means of collaborating were the President’s Working  Group on Financial Markets and the Federal Financial Institutions  Examination Council. Members’ staffs noted that communication within  FSOC had been broader and deeper than in either of those forums  because staff from more agencies participate in FSOC at various levels.  For example, staff said that various FSOC committees and working  groups have allowed staff to develop contacts at other agencies with  whom they can consult and share information on a variety of topics. In  addition, staff said that through FSOC they had become acquainted with  others having different expertise and have had the opportunity to share  their views and experience with others. For example, the independent  insurance member and his staff noted that they had used FSOC as a  forum to provide information on insurance companies’ use of money  market funds, which may differ from the more common retail fund  mechanisms.
Through the committee structure, FSOC members’ staffs also noted that  agencies had leveraged their joint expertise and resources to carry out  FSOC’s statutory responsibilities, including rulemakings. For example, an  ad hoc interagency lawyers group was formed shortly after the passage  of the Dodd-Frank Act to provide regular input into the rulemaking  process. The standing committees also provide input on rulemakings  dealing with issues within their areas of expertise. In addition, throughout  the rulemaking processes the Deputies Committee was briefed regularly,  especially on issues that could not be resolved in other committees or  working groups. The deputies kept their respective FSOC members  informed throughout the rulemakings.
We discussed with Treasury staff the FSOC chairperson’s consultations  with financial regulatory entities and other appropriate organizations of  foreign governments or international organizations on matters relating to  systemic risk to the international financial system.  Treasury staff noted  that the FSOC chairperson, who is also the Secretary of the Treasury,  has regular contact with foreign officials and shares information from  these interactions with other U.S. regulators at FSOC meetings. They  said that they have monitored these activities and believe that FSOC is  complying with the Dodd-Frank requirement.
Further, OFR has taken some actions to collaborate by leveraging the  expertise of external stakeholders and coordinating U.S. activities  internationally. In particular, FSOC and OFR held a joint conference in  December 2011 to discuss data and technology issues and analytical  approaches for assessing threats to financial stability. The conference  included attendees from the financial regulatory community, academia,  public interest groups, and the financial services industry. OFR has also  initiated a working paper series in which OFR researchers have  collaborated with outside academics to catalog systemic risk monitoring  systems and ways to improve risk management at financial institutions. In  addition, OFR has invited experts on various aspects of financial stability  to give seminars to OFR and FSOC policy staff. OFR has also announced  plans to create the Financial Research Advisory Committee to solicit  advice, recommendations, analysis, and information from academics,  researchers, industry leaders, government officials, and experts in the  fields of data and technology. Applications were due in April 2012, and in  August 2012 OFR officials said that the list of applicants was in the final  stage of review. OFR officials also noted that they play a key role on  FSOC’s Data Committee, which supports coordination of and consultation  on issues related to FSOC data collection and sharing.
In addition, OFR is working to standardize data reporting systems among  FSOC member agencies. OFR officials noted that the agency had begun  a three-stage process to assemble an inventory of data collected by  FSOC member agencies as a first step toward standardizing data,  reducing duplication, and eventually lowering costs for industry and  regulators. The three stages examine data (1) purchased by the  agencies, (2) collected through regulatory activities, and (3) derived by  the agencies from data they purchased or collected. An OFR official said  that the first phase was complete but had taken longer than initially  envisioned because of the complexities of the project including agencies’  use of different terminology for the same databases. For instance, the  official noted that it had been difficult to create an effective survey  instrument to capture the data purchased by the agencies, because the  survey instrument had to capture the different terminology used by the  various agencies. OFR officials said that they expected the process to  allow them to determine when multiple agencies used the same data,  identify data gaps more effectively, and seek potential savings in data  acquisition. For example, they have been able to negotiate contracts that  provide the small office of the independent insurance member of FSOC  with access to expensive private databases. OFR officials said that OFR  is also working with FSOC member agencies through FSOC’s Data  Committee to address differences in existing security classification  systems and support efficient, secure data-sharing efforts given the  statutory responsibilities agencies have to ensure the confidentiality of  certain data. Many industry representatives with whom we spoke said that  this project could help relieve regulatory burdens by standardizing data- reporting systems and reducing duplication, noting that currently multiple  agencies ask for the same data but in different formats or at different  times.
Moreover, OFR has collaborated with industry, foreign government  entities, and international bodies to create a legal entity identifier, which  OFR describes as an emerging global standard that will enable regulators  and companies around the world to quickly and accurately identify parties  to financial transactions. Building on earlier industry and interagency  efforts and on CFTC’s and SEC’s responses to mandates on data  standards, OFR led U.S. government efforts to promote global adoption  of the identifier. Within the expert group appointed by the Financial  Stability Board to develop recommendations for the Group of 20 (G20)  countries regarding the identifier, OFR led the U.S. consultative group,  and OFR staffers have been leading singly or jointly the development of a  governance framework and operating protocols. The Financial Stability  Board endorsed the expert group’s recommendations in May 2012. In  June 2012, the G20 endorsed the proposal, which includes a target for  implementing a legal entity identifier system globally, with some  allowance for variation across countries, by March 2013. OFR continues  to serve as the vice-chair for the Americas on the group charged with  implementing the identifier.
section_title: FSOC Could Enhance Collaboration by Incorporating Key Practices
paragraphs: While the previous examples show the progress FSOC and OFR have  made in terms of promoting collaboration, other examples suggest that  additional actions are needed. In our prior work, we have identified  practices that agencies can use to enhance and sustain their  collaborative efforts. These include identifying and addressing needs by  leveraging resources, agreeing on roles and responsibilities, and  establishing mutually reinforcing or joint strategies. The examples below  highlight areas in which FSOC’s collaboration efforts could be enhanced  by more fully reflecting these principles.
Leveraging resources. FSOC has not taken advantage of  opportunities to leverage resources through its authority to appoint  technical and professional advisory committees. In addition to  state regulators and council members, the Dodd-Frank Act  specifies that such committees could include other persons. Such  persons could be those from the industry and academics. Industry  representatives have commented on the benefits of having  industry input through such a committee, but, to date, FSOC has  not established such committees. Moreover, the ability of FSOC  members to leverage expertise varies. For example, while FSOC  members from federal regulatory agencies are able to draw on  staff from across their agencies, the independent insurance  member and state representatives have limited support structures.  The state representatives are limited by the number of support  staff that have been allowed to sign required confidentiality  agreements and this may limit these members’ access to certain  regulatory expertise. The representative of state insurance  regulators noted that he must rely solely on his limited department  staff and a small group of staff from the National Association of  Insurance Commissioners that have been detailed to his  department and have signed the confidentiality agreement to  support his FSOC activities, including committee  representation. In a letter to the FSOC Chairperson, the National  Association of Insurance Commissioners and the State Insurance  Representative that is a member of FSOC, stated that the State  Insurance Representative had been prohibited from discussing or  seeking guidance from other relevant state regulators even on a  confidential basis. Subsequent to this letter, FSOC issued an  “operational interpretation” of the MOU on the treatment of  nonpublic information. This interpretation states in part that the  MOU does not prevent an FSOC member from consulting or  discussing with anyone FSOC proposals, rules or other matters  provided that the member does not (1) disclose specified types of  confidential information; (2) attribute nonpublic proposals, rules or  other matters to FSOC or any of its members or (3) disclose their  views on such matters.
Similarly, the representative of the state banking regulators is  supported by four staff from the Conference of State Bank  Supervisors and the representative of the state securities  regulators by two staff from the North American Securities  Administrators Association. The state banking member’s staff  noted that Treasury had worked with the state members to secure  their assistance, and that the State Banking Supervisor generally  had adequate staff support. However, they did note that they think  the process limited access to other state banking supervisors with  specialized expertise. For example, they noted that they might  want to consult with New York banking staff on international  issues before FSOC, but confidentiality restrictions limit them to  sharing information on FSOC matters only with the member, his  state banking staff, and others who have signed a confidentiality  agreement. In addition, the FSOC state insurance representative  and his staff told us that because of the confidentiality restrictions,  they had limited their discussions at International Association of  Insurance Supervisors meetings, because they thought they could  not speak to issues being discussed within FSOC.
Agreeing on roles and responsibilities. As noted earlier, FSOC is  tasked with monitoring the financial services marketplace to  identify potential threats to U.S. financial stability, and OFR must  develop and maintain metrics and reporting systems for risks to  U.S. financial stability as well as monitor, investigate, and report  on changes in system-wide risk levels. These responsibilities  overlap somewhat, but this overlap is not unexpected given OFR’s  primary mission of supporting FSOC. FSOC and OFR staff cited  their statutory responsibilities for monitoring risks to U.S. financial  stability as the reason that both organizations are pursuing efforts  in this arena. FSOC and OFR staff also noted that OFR  participates on the Systemic Risk Committee, allowing for some  coordination of efforts. The Dodd-Frank Act defines certain  responsibilities for FSOC and OFR, but, the lack of clear  responsibility for implementation can lead to duplication,  confusion, and gaps in their efforts. This risk is further  compounded by the fact that many FSOC member agencies have  risk analysis and data collection functions associated with their  supervisory responsibilities. Some of these functions are explicitly  focused on risks to financial stability, and some member agencies  have created their own programs to examine these risks. For  example, in 2010 the Federal Reserve created an Office of  Financial Stability Policy and Research to identify and analyze  potential threats to financial stability. FDIC, SEC, and the Federal  Housing Finance Agency have also created offices in recent years  to monitor risks to financial stability originating in their regulated  markets. To the extent that these programs provide unique  information to FSOC, they will be contributing to the overall effort.  However, if not properly coordinated, these separate efforts could  be duplicative, resulting in wasted time and resources.
Establishing reinforcing or joint strategies. To achieve a common  outcome, collaborating agencies need to establish strategies that  work in concert with those of their partners or that are joint in  nature. Such strategies help in aligning activities, core processes,  and resources to reach a common outcome. In this area, FSOC  has taken actions to better coordinate members’ rulemakings. In  October 2010, it issued an integrated implementation road map for  the Dodd-Frank Act that included a list of the rules regulators were  required to promulgate, provided a time line for those rulemakings,  and identified the agencies responsible for each rulemaking.  FSOC has also developed a consultation framework for the  agencies involved in rulemakings where consultation is required  by the Dodd-Frank Act. The framework establishes time frames  for coordinating three tasks: initial interagency meetings,  circulation of term sheets for interagency comments, and  circulation of proposed rules for interagency comments. In a  November 2011 report, we noted that although FSOC’s road map  and consultation framework were a positive development in  facilitating coordination, they had limited usefulness. For  example, the consultation framework does not provide, nor  according to FSOC staff is it intended to provide, any specifics  about staff responsibilities or processes to facilitate coordination.  For example, it does not mention the extent to which interagency  coordination is required or what happens when rulemakings  conflict with or duplicate each other. As a result, we recommended  that FSOC work with the federal financial regulatory agencies to  establish formal coordination policies that would clarify issues  such as the timing of coordination, the process for soliciting and  addressing comments, and FSOC’s role in facilitating  coordination. To date, FSOC has not implemented this  recommendation. Industry representatives with whom we spoke  also questioned why FSOC could not play a greater role in  coordinating member agencies’ rulemaking efforts. As an example  of how coordination could be improved, representatives noted that  FSOC’s rule and interpretive guidance on designating nonbank  financial companies for Federal Reserve supervision was finalized  before the Federal Reserve had issued a rule laying out the  requirements for determining whether a company would fall within  the statutory definition of a financial company. FSOC and  Federal Reserve staff said that after the timetable was set for the  FSOC rule, the Federal Reserve decided that it needed to clarify  some issues with its rulemaking, creating the anomaly of having a  process for designating financial companies before the  requirements for meeting the definition of a financial company had  been adequately identified. The Secretary of the Treasury,  FSOC’s Chairperson has noted in testimony before the Congress  that he does not have the power to force FSOC members to  collaborate on rulemakings.
section_title: FSOC Has Issued Rules and Reports but Processes May Not Ensure That Ongoing Activities Have the Intended Results
paragraphs: The Dodd-Frank Act requires FSOC to consult on a number of regulatory  agency rulemakings, but it gave FSOC a few responsibilities that have led  it to issue its own rules. These responsibilities include the authority to  designate FMUs as systemically important and nonbank financial  companies for supervision by the Federal Reserve under its enhanced  prudential standards and to reevaluate the latter designations annually.  While individual designations are not made by rule, in an effort to be more  transparent, FSOC has issued rulemakings explaining the processes and  criteria it will follow in making the individual designations. However, FSOC  is not required to and has not developed a separate process to assess  the overall impact of these designations including whether they are  having the intended result of improving U.S. financial stability. The Dodd- Frank Act also mandated that FSOC issue a number of reports during its  first two years, and FSOC has issued these by the mandated due dates.  Most of these were one-time reports; however, FSOC is also mandated to  report annually on a number of items, including potential emerging threats  to financial stability. Both the 2011 and 2012 Annual Reports identify a  number of threats, but they do not use a systematic forward-looking  process for doing so. As a result, the reports may not be providing the  public and Congress with the best information for guiding their decisions  relative to these threats.
subsections: section_title: FSOC Has Issued Rules on Processes for Designating Certain Financial Entities for Additional Supervision and the Freedom of Information Act
paragraphs: The Dodd-Frank Act provided FSOC with the authority to designate FMUs  as systemically important. FMUs are to be considered systemically  important if FSOC determines that the failure of an FMU or a disruption in  its functioning could threaten U.S. financial stability. Similarly, the Dodd- Frank Act provided FSOC with the authority to designate nonbank  financial companies for supervision by the Federal Reserve under its  enhanced prudential standards. The act stipulates that FSOC may  designate these companies for Federal Reserve supervision if material  financial distress at that company, or the nature, scope, size, scale,  concentration, interconnectedness, or mix of the activities of the  company, could pose a threat to U.S. financial stability. The Federal  Reserve has not issued final rules on its enhanced prudential standards,  but other final rules that will apply to designated nonbank financial  companies have been issued. These rules include a rule on resolution  plans or “living wills,” jointly issued by the Federal Reserve and FDIC that  will require designated nonbank financial companies to prepare resolution  plans and a rule, issued by the Treasury, which establishes an  assessment schedule for the Financial Research Fund—the fund that  finances OFR and FSOC under the Dodd-Frank Act.
FSOC issued final rules on the processes FSOC intends to use for  designating FMUs as systemically important and nonbank financial  companies for Federal Reserve supervision in July 2011 and April 2012,  respectively. In accordance with the Dodd-Frank Act, both rules specify  that two-thirds of FSOC’s voting members, including the chairperson,  must vote to designate FMUs and nonbank financial companies. Each  rule, with any accompanying interpretive guidance, also outlines a  multistage process that FSOC intends to follow in designating these  entities, including a process for designated entities to request an FSOC  hearing before the designation becomes final. In its 2012 Annual Report,  FSOC reported that it had designated eight FMUs as systemically  important. In contrast, FSOC has not yet designated any nonbank  financial companies.
In April 2012, FSOC also issued a rule implementing the Freedom of  Information Act (FOIA). The Dodd-Frank Act states that FOIA, including  its exceptions from disclosure, applies to any information submitted to  FSOC or OFR under title 1 of the act. It further states that FSOC, OFR,  and member agencies are to maintain the confidentiality of such  information if that confidentiality is protected from public disclosure by  federal or state law. While FOIA would apply with or without a rule,  FSOC issued a rule setting out the procedures for requesting access to  information contained in its records.
According to Treasury officials and staff, FSOC’s rulemaking authority is  narrow compared to that of the member agencies. The Dodd-Frank Act  requires that those agencies issue a large number of rules, while it  assigns few authorities to FSOC that may lead to rulemakings. Although  FSOC does not have extensive rulemaking authority or written policies  and procedures, its rulemakings followed a general process. For each  rule, FSOC published a notice of proposed rulemaking in the Federal  Register before issuing a final rule and included a time period for public  comments (see table 1). Treasury staff noted that FSOC was not required  to issue the various rulemakings but went through this process to provide  greater public transparency of its processes. According to FSOC and  Treasury officials, officials and staff from Treasury’s Office of General  Counsel led the rule-drafting process, with officials and staff from  Treasury’s Office of Domestic Finance, including the FSOC policy staff,  and members’ staffs contributing significantly to the drafting of the  designations rules. The processes relied on various groups and  mechanisms to get feedback from officials and FSOC members’ staffs  including standing committees and ad hoc working groups. The Deputies  Committee was briefed regularly throughout the process, especially on  issues that could not be resolved in other committees or working groups.  Deputies kept their respective FSOC members informed throughout the  rulemakings, and the members received all of the rule-making notices  and final rules at least 48 hours before they were to be voted on at FSOC  meetings. FSOC members voted unanimously to issue all of the rule- making notices and final rules before they were published in the Federal  Register.
Although the process for the rulemakings followed a general pattern, the  number of notices, the time between the initial notice and the final rule,  and the number of comments varied considerably across rules. Generally,  these differences reflected differences in priorities and the potential  impact of each rule. For example, FSOC and some member agency  officials attributed the longer lapse between receiving comments on the  notice for implementing FOIA and issuing the final rule to the relatively  low priority attached to completing this rule. Officials told us that the rule  remained a relatively low priority because FSOC had not yet begun  gathering information under the FMU and nonbank financial company  designation rules. In contrast, the long gap between the receipt of  comments on the first notice of proposed rulemaking for the nonbank  financial company rule and the issuance of the final rule reflects the  complexities of developing a rule that encompasses a broad range of  industry segments and the potential impact on them.
During the gap between the first and second notices of proposed  rulemaking for designating nonbank financial companies, FSOC and OFR  staff developed information to support a set of thresholds for determining  which nonbank financial companies would pass from the first stage of the  designation process to the second. The thresholds, which were included  in the interpretive guidance that accompanies the second notice, use  publicly available information so that the first stage would be transparent.  Financial companies have to meet a size threshold of $50 billion in assets  and one of five other thresholds, including measures of leverage and  debt. The thresholds generally reflect staff calculations. Staff generally  calculated thresholds by placing the threshold at an interval above the  mean that considers the dispersion of the data from the mean. Staff also  tested to see whether certain companies that experienced material  distress during the 2007-2009 financial crisis would have been captured  by the threshold. The data used were generally either data on the 19  largest bank holding companies or nonbank financial companies in 2007  and 2008.
FSOC is subject to laws and executive orders that require certain  regulatory analyses as part of its rule-making processes. These include  the Paperwork Reduction Act and the Regulatory Flexibility Act, as well  as Executive Orders 12866 and 13563 (Executive Orders). Among other  things, the Paperwork Reduction Act requires agencies to justify any  collection of information from the public and to estimate the time and  expense required to comply with the paperwork requirements in the rule.  The Regulatory Flexibility Act requires federal agencies to assess the  impact of their regulation on small entities and consider regulatory  alternatives to lessen any regulatory burden. The Executive Orders  require FSOC to assess the economic effects of economically significant  rules, including the quantitative and qualitative benefits and costs of those  regulations.
However, FSOC was required to consider costs and benefits only as they  relate to the Paperwork Reduction Act for the FMU and nonbank financial  company rulemakings. As a result, these rules contain estimates of the  time needed to comply with paperwork requirements. FSOC estimates  the annual reporting burden for the FMU rule at 500 hours and for the  nonbank financial company rule at 1,000 hours. The FMU rule does not  include an estimate of the cost of the projected hours; the cost for the  hours imposed by the nonbank financial company rule is estimated at  $450,000 a year. FSOC concluded that small entities were unlikely to be  designated as posing a risk to U.S. financial stability, and thus an analysis  of the rules designating FMU and nonbank financial companies’ impact  on small entities was not required. In addition, FSOC did not conduct a  benefit-cost analysis for the rules designating FMUs or nonbank financial  companies because the Office of Management and Budget determined  that these rules were not economically significant. Treasury officials noted  that the rule did not impose substantive requirements on specific entities,  but only laid out the process by which they could become subject to other  rules and regulations. In addition, FSOC member staff noted that costs  and benefits of the designation were not among the factors that the Dodd- Frank Act directs FSOC to consider when making a designation.
Designating FMUs and nonbank financial companies was intended to  address certain risks to financial stability posed by these entities. The  designations, however, have the potential to confer certain benefits and  costs on the wider economy and individual entities being designated.  Examples of potential benefits and costs of subjecting FMUs and  nonbank financial companies to heightened supervision include the  following:  Economy-wide benefits. The Dodd-Frank Act provides FSOC with  the authority to designate nonbank financial companies because  Congress believed that these companies could threaten U.S.  financial stability. Subjecting companies to enhanced supervision  may contribute to financial stability.
Individual benefits. Some research has shown that certain large,  interconnected financial institutions considered too big to fail may  have higher credit rating agency ratings and lower borrowing costs  than would otherwise be warranted. As a result, designated  nonbank financial companies that are not already treated as too  big to fail by rating agencies or markets could see their borrowing  costs fall.
Economy-wide costs. Industry representatives have noted that  regulations such as minimum capital requirements that may be  imposed on designated entities have the potential to reduce the  availability of credit and slow economic growth.
Individual costs. Some of those who commented on the nonbank  financial company rule noted that being designated would impose  a significant regulatory burden on the designated companies.  Designated nonbank financial companies will be subject to  supervision similar to that for large bank holding companies,  required to prepare resolution plans, and assessed fees to fund  the operation of OFR and FSOC. However, the impact of these  Dodd-Frank Act provisions on designated nonbank financial  companies will not be known until the rules are applied.  Designated FMUs could also experience increased costs.
The Dodd-Frank Act requires FSOC to rescind any designation if the  institution no longer meets the FMU or nonbank financial company  standards and specifically requires FSOC to reevaluate nonbank financial  company designations at least annually. The final rule for designating  certain nonbank financial companies for enhanced supervision says  FSOC will notify a nonbank financial company prior to an annual  reevaluation and provide the company up for review with an opportunity  to submit written materials to contest the designation. However, the rule  also notes that reevaluations will focus on material changes since a  previous review rather than a full replication of the original designation  process. In the interpretive guidance for the nonbank financial company  designations, FSOC says that it also intends to review the  appropriateness of both the stage one thresholds and the levels of the  thresholds that are specified in dollars as needed, but at least every five  years, and to adjust the thresholds and levels as it may deem advisable.  However, FSOC has not set up processes to conduct a comprehensive  assessment of the overall impact of designations.
Doing a comprehensive analysis to assess whether designations are  having their intended impact of providing greater financial stability and the  extent of any other impacts will be challenging. Namely, establishing a  baseline from which to evaluate the overall impact of various rules will  likely be complex because the impact of being designated will depend on  the application of a number of rules being written by multiple independent  regulatory agencies and issued over a span of time. the CFTC, Federal Reserve, and SEC are writing will help determine the  impact of being designated a systemically important FMU. Similarly, the  impact of being designated a nonbank financial company will be  influenced by the rule the Federal Reserve is writing, to implement  enhanced prudential standards; the Federal Reserve and FDIC rule on  resolution planning; and Treasury’s rule on assessments to fund FSOC  and OFR. Moreover, not all of these agencies are required to conduct  cost-benefit analyses that might be useful in establishing a baseline for  ongoing evaluation. For example, neither the Federal Reserve nor FDIC  are subject to the Executive Orders that require an economic analysis of  the costs and benefits of certain rules. Furthermore, while some  regulatory agencies may conduct periodic retrospective reviews of their  rules, these reviews tend to focus only on the rules issued by their  agency.
FSOC is uniquely positioned to address this challenge. FSOC is  responsible for designating FMUs and nonbank financial companies, and  its member agencies are responsible for writing the rules that will impact  these designated entities. Moreover, FSOC can rely on OFR for some  data collection and analysis. However, FSOC members would need to  collaborate on such an assessment, because FSOC policy and OFR staff,  who are Treasury employees, may not have access to all of the needed  information. In addition, collaboration is needed because, according to  Treasury officials, it would be inappropriate for FSOC staff to review rules  drafted by independent agencies unless those agencies agreed to  participate in the comprehensive assessment. Without such an  assessment, decision makers may not have the information they will need  to determine whether designating new entities for enhanced supervision  and other requirements and restrictions is addressing a perceived gap in  the regulatory system and improving the stability of the financial system  or whether policy changes should be considered.
section_title: FSOC Has Issued Mandated Reports, but Does Not Have Sufficient Processes for Identifying or Prioritizing Emerging Threats
paragraphs: As table 2 shows, the Dodd-Frank Act mandated that FSOC issue a  number of reports, including five one-time studies and ongoing annual  reports. Although some of the timelines were short—two of the studies  had to be issued in 6 months—and the subject matter difficult, FSOC met  all of its mandated report timelines and generally strove to address the  specific items in the mandate. For example, the mandated studies  generally began with a discussion of the mandate itself and the extent to  which the report could address certain questions. The 2011 Annual  Report also generally addressed the subjects in the mandate, including  identifying emerging threats to financial stability of the nation and  recommendations to enhance the integrity, efficiency, competitiveness,  and stability of U.S. financial markets; promote market discipline; and  maintain investor confidence.
The processes that FSOC used to issue all of the reports were generally  similar to those used for rulemakings. Treasury officials led activities  related to issuing the studies, except that the Federal Reserve staff led  activities for and was the author of the study on concentration limits. For  the annual reports, FSOC brought on detailees from Federal Reserve  District Banks to lead the process. For all of the reports, the process  relied on ad hoc working groups of member staff to provide input. FSOC  also relied on the Deputies Committee to help manage the process and  keep FSOC members informed of key decisions. The members voted  unanimously to issue all of the reports.
FSOC’s annual reporting process is an ongoing responsibility which, in  the absence of a strategic plan, functions as its major strategic planning  document and method for communicating with Congress and the public,  especially regarding potential emerging threats to U.S. financial stability.  FSOC’s early annual reports provide extensive information about the  current economy and complex issues, such as high-frequency trading and  the MF Global bankruptcy. In addition, the reports provide extensive  discussions of current known threats such as those associated with  money market funds and the European sovereign-debt crisis and makes  some recommendations to address them. However, FSOC has not  developed a structure that supports having a systematic or  comprehensive process for identifying potential emerging threats. The  process for identifying these threats is similar, in some ways, to that used  by the Systemic Risk Committee. Members’ staffs, including some  members of the Systemic Risk Committee, identify specific threats for  consideration. As a result, new threats that members or staff have not  already identified may not be included.
In addition, the lack of a systematic process for identifying potential  emerging threats leads to potential inconsistencies in identifying such  threats. For instance, certain potential threats related to U.S. debt, are not  in the 2011 Annual Report. Instead this report has a conflicting message  on the danger the U.S. debt poses to financial stability. The project  leader of the 2011 Annual Report said that the report did not include the  U.S. debt as an emerging threat because of issues of balance and the  inappropriateness of FSOC speculating on the credit risk associated with  U.S. Treasury securities. However, the 2012 Annual Report identifies the  U.S. debt as a potential threat, but does not explain what has changed  since the 2011 report. Similarly, the 2011 report includes several threats  associated with possible unintended consequences of new regulations  being written to implement the Dodd-Frank Act, but the 2012 report does  not include these threats. The 2012 report does include a framework for  identifying potential emerging threats, but, this framework, which  separates threats into shocks to the system and vulnerabilities in the  system that would exacerbate shocks, is not equivalent to the kind of  systematic analysis that would help determine both the likelihood of a  threat and its likely severity. Without a systematic process that  consistently identifies threats Congress and the public might believe that  a threat has grown in importance or been addressed when that is not the  case.
Similarly, neither the 2011 or 2012 annual reports use a systematic  forward-looking approach to identify potentially emerging threats. As a  result, they comingle threats that emerged during the 2007-2009 crisis,  current threats, and potentially emerging threats. Although the 2012  report notes that structural vulnerabilities that contributed to the 2007- 2009 financial crisis associated with mortgage-backed securities backed  by subprime mortgage debt built up over an 8-year period, the report  does not use a systematic mechanism for identifying similar kinds of  asset build-ups or other market changes that might signal a potential  emerging threat. Rather the report often identifies risks, such as those  associated with the European sovereign-debt crisis or money market  funds, which are ongoing or have previously been identified, although it  acknowledges that these events may change in the future in ways that  are not currently known. The 2012 report does include at least one area  that could be considered potentially emerging—threats associated with  having a low interest rate environment. Specifically it notes threats  associated with market participants taking on more risk to increase their  earnings but says it does not see evidence of this now. Threats that  emerged during the crisis or those that are currently evident likely require  different and perhaps more immediate responses than those that are  potentially emerging. The comingling of well-known risks with risks that  are developing, but less well-known, reduces the ability of policymakers  and market participants to develop effective and timely responses for the  latter.
Further, the FSOC process for identifying threats limits its ability to  explicitly prioritize the large number of threats identified. The 2011 report  includes over 30 threats without explicitly specifying which are most  important. The 2012 report also includes a lengthy list of threats without  explicit prioritization. In contrast, other entities, such as the International  Monetary Fund and European Central Bank, issue reports that explicitly  prioritize potentially significant threats. Treasury and FSOC officials and  staff noted that FSOC’s Annual Reports have a different purpose and  implicitly prioritize the threats in the recommendations sections of the  reports. For example, they noted that the recommendation for money  market funds—a threat included in the potentially emerging section— notes that the vulnerabilities associated with money market funds are a  particular focus of FSOC. They contrasted this recommendation with  other recommendations, such as those related to the low interest rate  environment that notes that regulators and industry should adopt certain  practices to help monitor the situation. However, the lack of a systematic  process that explicitly prioritizes potential emerging threats leaves  policymakers without the information they need to focus on or allocate  scarce resources to the most important threats.
section_title: Conclusions
paragraphs: The 2007-2009 financial crisis highlighted how the nation’s fragmented  regulatory structure was not equipped to monitor and address risks  across the financial system, nor did it have the needed information to  facilitate that oversight. To address this weakness, Congress created  FSOC and OFR to improve the U.S. government’s ability to identify and  respond to future threats to financial stability. This is a daunting task, and  one that is made more challenging as FSOC and OFR must concurrently  stand-up organizations and establish a sense of collective accountability  among the independent regulators and other members.
Successfully implementing their mandates will require FSOC members to  actively work together and with external stakeholders. Appropriate  accountability and transparency mechanisms also need to be established  to determine whether FSOC and OFR are effective and to ensure that the  public and Congress have sufficient information to hold the entities  accountable for results. Over the last 2 years, FSOC and OFR have  made progress on these fronts. Staff from FSOC member agencies told  us that the level of collaboration and communication among the agencies  has increased since the creation of FSOC and that such collaboration has  resulted in more information sharing and diverse perspectives being  considered. OFR has also made contributions to international efforts,  such as coordinating U.S. input on the Legal Entity Identifier, to enhance  governments’ abilities to track financial activity.
While FSOC and OFR have made some progress, continued efforts to  improve the entities’ accountability, transparency, and collaboration are  needed. As we have seen, for example:
OFR issued a strategic framework in March 2012 that covered the  period fiscal years 2012-2014. This represented an important step for  the new agency in adopting leading practices in performance  management. The framework identifies OFR’s strategic goals,  highlights a number of objectives under those goals, and lays out  implementation priorities for the first year covered by the document.  However, as OFR acknowledges, the framework does not include key  elements of a performance management system, such as linking  programmatic, human resources, and budgetary decision making to  its strategic goals and developing performance measures. OFR  expects to communicate progress on these key elements when it  provides a new human resources plan to Congress in September  2012 and in its fiscal year 2014 budget submission. Moving forward,  transforming its framework into a comprehensive strategic planning  and performance management system can provide the agency with a  long-term vision and allow others to hold it accountable which will be  critical for OFR.
The critical role of monitoring threats to financial stability and  responding to emerging threats also needs to be further developed.  Potential threats to financial stability are discussed at FSOC meetings  and FSOC has established a Systemic Risk Committee to facilitate  coordination among members’ staffs, including member agencies that  often have their own groups devoted to risk analysis. In addition, OFR  is evaluating a variety of potential tools for assessing financial stability  and studying methods to improve stress tests. Collectively, these  efforts remain incomplete. The approach of the Systemic Risk  Committee can help FSOC analyze known risks but does not take full  advantage of FSOC member agency resources to identify new threats  to the financial system. Without more systematic and comprehensive  mechanisms, including comprehensive sharing of key financial risk  indicators, risks to financial stability may develop in the system  without being recognized.
FSOC and OFR have attempted to be transparent with some of their  decision making and activities. FSOC, for instance, posts the minutes  from its meetings and other key documents on Treasury’s website,  and it provided insight into its designations processes through multiple  rulemakings and comment periods as well as by providing additional  information on the designation of FMUs in its 2012 Annual Report.  OFR also posted some information on Treasury’s website and  provided information on a wide range of OFR activities and research  in its first annual report issued in July 2012. As we found, however,  both FSOC and OFR could be more transparent. For example,  FSOC’s minutes contain limited details about the council’s discussion  and the amount of detail included in the minutes has declined over  time. While some information discussed must remain confidential  given potential market sensitivities, legal restrictions on sharing  certain information, and the need for members to deliberate, striving  to be as transparent as possible given the potential impact of some of  its decisions on institutions and markets is important for FSOC.  FSOC’s and OFR’s limited transparency has caused some former  government officials, industry representatives, and academics to  question whether they are making progress. Continued efforts to  increase transparency will allow the public and Congress to better  understand FSOC’s and OFR’s decision making, activities, and  progress.
FSOC and OFR have taken some steps to encourage collaboration,  such as FSOC setting up standing committees composed of  members’ staffs and OFR beginning to establish a professional and  technical advisory committee. However, more needs to be done to  promote collaboration—both among FSOC members and between  FSOC and external stakeholders. For example, FSOC has not yet set  up advisory committees, and OFR and FSOC have not yet clarified  their responsibility for implementing statutory requirements for  monitoring and reporting on threats to U.S. financial stability, including  the responsibilities of member agencies. More fully incorporating the  key practices for successful collaboration, including agreeing on roles  and responsibilities and establishing reinforcing or joint strategies,  could make FSOC’s and OFR’s existing collaboration efforts more  effective. Effective collaboration could eliminate unnecessary  duplication for both the industry and regulators. In addition, it could  help to fill regulatory gaps so that risks would not migrate to  unregulated markets or countries as they did prior to the 2007-2009  financial crisis.
One of FSOC’s most significant actions, to date, has been finalizing  its rules for designating FMUs and nonbank financial companies for  additional oversight. The Congress intended that the enhanced  supervision of those entities designated would lead to greater financial  stability. In addition, the designations will likely have other important  ramifications for the designated entities—which will become subject to  a number of other rules and regulations—and potentially the nation’s  economy. While FSOC must periodically reevaluate the nonbank  financial company designations and intends to review the thresholds  for stage one of the nonbank financial company process at least every  5 years, it is not required to conduct a comprehensive assessment to  determine whether the designations are having their intended impact  of improved financial stability as well as other consequences.  Establishing a baseline and developing a framework to  comprehensively assess the impact of the designations will be difficult  because of the number of independent regulators involved. But,  without such an analysis, Congress, the affected institutions, the  public, and FSOC cannot determine whether the designations and  associated oversight is actually helping to improve financial stability.
While FSOC’s annual reports identify a number of potential emerging  threats to the nation’s financial stability, they do not use a systematic  forward-looking approach to identify such threats. Thus, some threats  may not be identified consistently or at all. Threats such as those  associated with the long term U.S. debt appear in FSOC’s 2012  Annual Report but had not appeared in FSOC’s 2011 Annual Report  and there was no explanation for the change. The reports are also not  forward-looking in that many of the identified threats, such as those  associated with money market funds or the European debt crisis, will  not potentially emerge but rather emerged during the 2007-2009  financial crisis or more recently. Finally, the reports do not explicitly  prioritize the emerging threats relying instead on a careful reading of  the recommendations to determine which are critical. In addition,  these recommendations do not consistently identify which member  agency or agencies are recommended for implementing or monitoring  the council’s recommendations. The lack of this information makes  determining which well-recognized threats require immediate action,  which potential emerging threats are most likely to have severe  outcomes, and how best for decision makers to address the differing  threats. Finally, it does not allow Congress to hold FSOC accountable  for identifying potential emerging threats or implementing the  recommendations.
Whether FSOC and OFR fundamentally change the way the federal  government monitors threats to financial stability remains an open  question. This is due, in part, to the newness of the entities, as both  continue to develop needed management structures. But limits to FSOC’s  and OFR’s transparency also contribute to questions about their  effectiveness. Addressing the issues we have identified will help FSOC  and OFR shed more light on their decision making and activities and  allow Congress to hold them accountable for results. Moreover,  addressing these issues can help FSOC and OFR to further promote  collaboration among FSOC’s members and with external stakeholders,  which is critical to their ability to achieve their missions. If they do not  succeed in achieving their missions the financial system will remain  vulnerable to large or multiple shocks that could result in large losses in  asset values, higher unemployment, and slower economic growth  associated with previous financial crises.
section_title: Recommendations for Executive Action
paragraphs: While FSOC and OFR have made progress in establishing their  operations and approaches for monitoring threats to financial stability,  developing accountability and transparency mechanisms, and enhancing  collaboration among the financial regulatory agencies, these efforts could  be strengthened. Therefore, we are recommending that the Secretary of  the Treasury take 10 actions—some in his capacity as the Chairperson of  FSOC, in consultation with FSOC members, and in his leadership role for  OFR, which does not yet have a confirmed director.
We recommend that FSOC and OFR clarify responsibility for  implementing requirements to monitor threats to financial stability across  FSOC and OFR, including FSOC members and member agencies, to  better ensure that the monitoring and analysis of the financial system are  comprehensive and not unnecessarily duplicative.
As FSOC continues to develop approaches for monitoring threats to  financial stability, we recommend that FSOC develop an approach that  includes systematic sharing of key financial risk indicators across FSOC  members and member agencies to assist in identifying potential threats  for further monitoring or analysis.
To improve the transparency of FSOC and OFR operations, we  recommend that FSOC and OFR each develop a communication strategy  to improve communications with the public. The strategy could include  using technology more effectively to communicate, such as having fully  developed websites, sending regular notices to interested parties, and  developing methods to communicate with the public.
To support the growth of OFR into a viable and sustainable entity, we  recommend that OFR build on its strategic framework by further  developing its strategic planning and performance management system  so that it links its activities to its goals and uses publicly available  performance measures to measure its progress.
To strengthen accountability and collaboration in FSOC’s decision  making, we recommend that FSOC take the following six actions:
Keep detailed records (for example, detailed minutes or transcripts) of  closed door sessions of principals meetings and to the extent possible  make them publicly available after an amount of time has passed  sufficient to avoid the release of market-sensitive information or  information that would limit deliberations.
Establish formal collaboration and coordination policies that clarify  issues such as when collaboration or coordination should occur and  what role FSOC should play in facilitating that coordination.
More fully incorporate key practices for successful collaboration that  we have previously identified. Internally, this could include working  with agencies to rationalize schedules for rulemakings and conducting  collaborative system-wide stress testing. Externally, this could include  using professional and technical advisors including state regulators,  industry experts, and academics.
Establish a collaborative and comprehensive framework for assessing  the impact of its decisions for designating FMUs and nonbank  financial companies on the wider economy and those entities. This  framework should include assessing the effects of subjecting  designated FMUs and nonbank financial companies to new regulatory  standards, requirements, and restrictions; establishing a baseline from  which to measure the effects; and documenting the approach.
Develop more systematic forward-looking approaches for reporting on  potential emerging threats to financial stability in annual reports. Such  an approach should provide methodological insight into why certain  threats to financial stability are included or excluded over time,  separate current or past threats from those that are potentially  emerging, and prioritize the latter.
Make recommendations in the annual report more specific by  identifying which FSOC member agency or agencies, as appropriate,  are recommended to monitor or implement such actions within  specified time frames.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretary of the Treasury—as the  Chairperson of FSOC and in his leadership role for OFR—for review and  comment. Treasury’s Under Secretary for Domestic Finance, on behalf of  the Chairperson of FSOC, provided written comments, which are  reprinted in appendix III. Treasury also provided technical comments on  the draft report, which we incorporated as appropriate. Treasury solicited  views from staff of the FSOC members and member agencies on the  draft report and reflected these views in the comments provided to us.
In their written comments, Treasury emphasizes the progress that FSOC  and OFR have made since their creation. For example, Treasury  highlights FSOC’s work in issuing a final rule and guidance relating to the  designation of nonbank financial companies for enhanced supervision  and designating eight systemically important FMUs that will be subject to  enhanced risk management standards. Treasury also highlights OFR’s  progress in building its organization and analytical capabilities, including  the launch of OFR’s working paper and seminar series for research on  financial stability and risk management. Treasury also outlines efforts  FSOC and OFR have taken to promote transparency and accountability,  including testifying before Congress, responding to requests for  information from oversight bodies, conducting voluntary rulemakings, or  making information available on websites. In addition, Treasury also  emphasizes that the progress that each entity has made to date should  be viewed with the understanding that both entities are relatively new.  Nevertheless, Treasury recognizes that more work remains. In the report,  we also describe FSOC’s and OFR’s efforts, to date, in fulfilling their  statutory responsibilities and efforts to promote accountability and  transparency. The report also notes that both entities were established in  2010.
In its letter, Treasury states that officials will carefully consider the report’s  findings and recommendations. Treasury further notes that the Secretary,  in his role as Chairperson, will share the recommendations with the  Council for their review and consideration. Treasury also offers initial  reactions to several of our recommendations. First, regarding our  recommendation that FSOC and OFR should clarify their responsibilities  for monitoring threats to financial stability, Treasury states that there is no  existing confusion or overlap of responsibilities. Furthermore, Treasury  states that both organizations are working together to pursue their  distinct, but complementary, statutory missions, and cites OFR’s efforts to  develop the Financial Stability Monitor, a collection of indicators related to  financial stability that Treasury expects will be shared with FSOC  members. In the report, we point out that Congress gave both FSOC and  OFR responsibilities for monitoring systemic risk—responsibilities that  both entities must fulfill. We also highlight that multiple FSOC members,  such as the Federal Reserve, also have ongoing efforts to monitor threats  to financial stability. The report does not suggest that any overlap  between these efforts currently exist. Rather, the report recommends that  these similar statutory responsibilities and ongoing efforts should be  clarified and carefully coordinated. While Treasury notes that no  confusion or overlap currently exists, our past work has shown that  without clearly delineating and coordinating roles and responsibilities  there can be duplication of efforts, confusion, and regulatory gaps. In  addition, the report notes the importance of a systematic and  comprehensive approach to identifying threats to financial stability. While  OFR’s Financial Stability Monitor could be a vehicle for sharing key  financial risk indicators, it does not yet reflect a comprehensive  interagency effort to collect and share indicators related to financial  stability.
Second, Treasury states that it expects FSOC will consider the effects on  the financial system resulting from designation in its periodic  assessments in response to our recommendation that FSOC develop a  framework for assessing the impact of its decisions for designating FMUs  and nonbank financial companies on the wider economy and those  entities. The Dodd-Frank Act requires FSOC to periodically review the  designation of nonbank financial companies, and FSOC intends to  periodically review FMU designations. However, FSOC is not currently  required to examine the potential economic impact of the designations. In  our report, we detail the types of benefits and costs that individually  designated firms, as well as the economy at large, may experience as a  result of the designations. Given the potential magnitude of these benefits  and costs of the designations, a comprehensive assessment of their  impact is warranted.
Third, Treasury agrees that OFR should implement a robust strategic  planning and performance management system as the office grows.
Treasury describes OFR’s past and ongoing efforts on this front,  highlighting, for example, OFR’s March 2012 strategic framework. In the  report, we note that the strategic framework was an important first step for  OFR, and we also describe OFR’s efforts to develop an independent  strategic planning and performance system, including performance  measures, and time lines for publicly releasing this information. We  acknowledge OFR’s efforts in continuing to develop the elements  required for a strategic plan and performance management system and  will review this information when it is publicly released.
Finally, Treasury notes our recommendation regarding OFR’s  communications strategy is consistent with the office’s ongoing efforts.  The letter describes OFR’s efforts to improve communication and notes  that FSOC’s website is being redesigned to improve usability and  navigation. The report also recognizes OFR’s recent efforts to improve  their communication methods, such as the recent capability OFR added  to its website enabling the public to sign up for email alerts on recent OFR  activities.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to interested  congressional committees and members, the Secretary of the Treasury,  and other members of FSOC. The report also is available at no charge on  the GAO website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  A. Nicole Clowers at (202) 512-8678 or clowersa@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. GAO staff who made major  contributions to this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report are to examine the Financial Stability  Oversight Council’s (FSOC) and Office of Financial Research’s (OFR) (1)  challenges in fulfilling their missions; (2) efforts in establishing  management structures and mechanisms to carry out their missions and  attain their goals; and (3) activities for supporting collaboration among  members and external stakeholders, including international bodies and  regulators; as well as (4) FSOC’s processes used to issue rules and  reports.
To identify and examine any challenges faced by FSOC and OFR, we  reviewed our prior reports on regulatory reform and the financial crisis.  We also reviewed statements of government officials, members of  Congress, and academic experts. In addition, we interviewed FSOC  policy staff and support staff of FSOC members, including staff and  officials at member regulatory agencies. At OFR, we interviewed senior  officials and some staff members.
To examine FSOC’s and OFR’s efforts in establishing management  structures and mechanisms to carry out their missions, we reviewed the  Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act), FSOC’s bylaws and organizational structure (including its  committee structure), and OFR’s strategic framework. We reviewed  minutes from FSOC’s principals’ meetings (i.e., the meetings with the  designated FSOC members, many of whom are heads of regulatory  agencies), and we reviewed the minutes from the Federal Reserve’s  Federal Open Markets Committee and the United Kingdom Interim Policy  Committee meetings for comparison purposes. We also examined the  entities’ fiscal years 2012 and 2013 budget requests, budgetary and  staffing data, and congressional testimonies. We assessed the reliability  of OFR’s staffing data by comparing the data provided with information  contained in the President’s budget for fiscal year 2013 and FSOC  testimony in April 2011. We also tested the data for consistency over  time. We determined the data were sufficiently reliable for our purposes.  To understand the steps OFR is taking to protect the sensitive data it  collects, we interviewed OFR officials with knowledge of data security  efforts, reviewed the OFR strategic framework, and reviewed  Congressional testimony provided by OFR. In addition, we reviewed the  Department of the Treasury Inspector General reports on the stand-up of  OFR and the Consumer Financial Protection Bureau. We used criteria  from Standards for Internal Control in the Federal Government, our past  work on the stand-up of federal entities, such as the Millennium  Challenge Corporation, and managing for results to evaluate FSOC and  OFR management structures and mechanisms, including their need for  strategic planning and performance measures. We reviewed selected  academic literature on tools used or proposed to identify potential threats  to financial stability by entities that write financial stability reports,  including the European Central Bank, Bank of England, and International  Monetary Fund, and others, including the Institute for International  Finance and Pew Financial Reform Project. We also attended FSOC’s  and OFR’s December 2011 conference entitled Macroprudential Toolkit:  Measurement and Analysis. We interviewed some FSOC members;  officials from FSOC federal regulatory agencies whose heads are  members of FSOC (member agencies); support staff of other FSOC  members; FSOC, OFR, and other Treasury officials and staff; and  academics who have published research related to systemic risk and  worked on financial stability reports. We also coordinated with the  Treasury Office of Inspector General and the Council of Inspectors  General on Financial Oversight regarding their ongoing audits of FSOC  and OFR.
To determine how FSOC and OFR support collaboration, we reviewed  our criteria for effective collaboration and compared it to FSOC and OFR  policies and practices. We analyzed the Dodd-Frank Act requirements for  collaboration, FSOC’s transparency policy, hearing procedures, Dodd- Frank Act integrated implementation roadmap, and memorandum of  understanding on information sharing. We also reviewed FSOC’s  products, such as the 2011 Annual Report, and interviewed FSOC staff  and officials from FSOC member agencies and some FSOC member  support staff to determine how FSOC members collaborate, including  how they participate in the drafting of the products. To determine how  collaboration practices among and between domestic and international  financial regulators have changed since the creation of FSOC, we  reviewed FSOC, OFR, and some member agencies’ congressional  testimony and reports from international bodies, such as the Financial  Stability Board. Finally, we interviewed representatives from industry  trade groups, government officials in the United Kingdom, and experts  from the European Union. We selected individuals from the United  Kingdom and European Union because those entities have experience  working with U.S. federal financial regulators and councils designed to  enhance financial stability.
To examine the process and procedures FSOC and OFR used in issuing  products, we analyzed FSOC rules or reports issued before July 2012  including FSOC’s 2011 and 2012 Annual Reports. We analyzed the  content of public comments on three proposed rules to examine how  FSOC addressed them in the final rules. We also reviewed  documentation on the process FSOC staff used to document and address  comments from member agencies on the 2011 Annual Report. In  addition, we examined the analyses and other materials provided to  FSOC members prior to their meetings, including material to be  presented at the meetings dating from October 2010 through December  2011 and selected documents thereafter through March 2012. We  interviewed officials from FSOC member agencies, FSOC and OFR  policy staff who had responsibility for contributing to the products within  our scope, academics who have published research related to systemic  risk, and industry or trade groups who submitted comments on a number  of FSOC rules and reports. Finally, using testimonial and documentary  evidence, we compared FSOC’s rulemaking process, rules, and reports  with key practices identified in our prior work on rulemaking and standard  economic practice, where applicable.
We conducted this performance audit from November 2011 to September  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Standing Committees of the Financial Stability Oversight Council
paragraphs: FSOC has established seven standing committees. The committees and  brief descriptions are listed below.
Deputies Committee: Coordinates and oversees the work of the  interagency staff committees. The members of the Deputies  Committee are senior officials from each of the member agencies.  Treasury chairs this committee.
Systemic Risk Committee: Includes senior staff and reports to the  Deputies Committee. The committee is accountable for systemic risk  monitoring and will play a role in prioritizing the review of sources of  systemic risk and guiding the work of staff and the systemic risk  subcommittees. Treasury chairs this committee. It has two  subcommittees.
Institutions Subcommittee: Focuses on identifying and analyzing  issues that affect financial institutions in the medium and longer  term. It also attempts to identify structural issues within financial  institutions that could threaten financial stability, such as trends in  leverage or funding structure, new products, or exposures to  particular risks. The Board of Governors of the Federal Reserve  (Federal Reserve) and the Federal Deposit Insurance Corporation  (FDIC) chair this subcommittee.
Markets Subcommittee: This subcommittee focuses on identifying  and analyzing issues that affect financial markets in the medium  and longer term, including structural issues within financial  markets that could threaten financial stability, such as trends in  volatility or liquidity, market structure, or asset valuations. The  Commodity Futures Trading Commission (CFTC) and Securities  and Exchange Commission (SEC) chair this committee.
Designation of Nonbank Financial Companies Committee: Supports  FSOC in considering, making, and reviewing designations of nonbank  financial companies to be supervised by the Federal Reserve. The  Federal Reserve and FDIC chair this committee.
Designation of Financial Market Utilities Committee: Supports FSOC  in considering, making, and reviewing designations of financial market  utilities and payment, clearing, and settlement activities. The Federal  Reserve, SEC, and CFTC chair this committee.
Heightened Prudential Standards Committee: Supports FSOC in  making recommendations for heightened prudential standards with  respect to designated nonbank financial companies and large,  interconnected bank holding companies, and with respect to other  financial activities and practices that could impact financial stability.  This committee also supports FSOC’s authorities for monitoring  regulatory developments, facilitating information sharing,  recommending supervisory priorities and principles, and identifying  gaps in regulation that could pose risks. The Federal Reserve and the  Office of the Comptroller of the Currency chair this committee.
Orderly Liquidation Committee: Supports any FSOC  recommendations on resolution plan requirements, consideration of  filed resolution plans, and consideration of FDIC and Federal Reserve  proposed orders to require divestiture; and consults with FSOC on  rulemakings to implement the Title II orderly liquidation authority.  FDIC and Treasury chair this committee.
Data Committee: Supports FSOC coordination of, and consultation  on, agency rulemakings on data collection, and seeks to minimize  duplication of data gathering operations. The committee supports a  coordinated approach to information sharing and provides direction to,  and requests data from, the Office of Financial Research (OFR).  Additionally, the committee works with OFR on data standardization  efforts. Treasury chairs this committee.
section_title: Appendix III: Comments from the Department of the Treasury
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Kay Kuhlman (Assistant  Director), Holland Avery, Nancy Barry, Emily Chalmers, Rudy Chatlos,  Rachel DeMarcus, Christopher Forys, Michael Hoffman, Marc Molino,  Susan Sawtelle, Rachel Siegel, and Henry Wray made significant  contributions to this report. Other assistance was provided by Janet  Eackloff and David Martin.