[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]






                        EXAMINING THE DANGERS OF

                         THE FSOC'S DESIGNATION

                       PROCESS AND ITS IMPACT ON

                       THE U.S. FINANCIAL SYSTEM

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 20, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-79
                           
                           

                         U.S. GOVERNMENT PRINTING OFFICE 

88-541 PDF                     WASHINGTON : 2014 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Printing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001
                          
                          

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

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

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                    
                    
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 20, 2014.................................................     1
Appendix:
    May 20, 2014.................................................    59

                               WITNESSES
                         Tuesday, May 20, 2014

Atkins, Paul S., Chief Executive Officer, Patomak Global Partners     8
Barr, Michael S., Professor of Law, the University of Michigan 
  Law School.....................................................    13
McNabb, F. William III, Chairman and Chief Executive Officer, the 
  Vanguard Group, Inc., on behalf of the Investment Company 
  Institute (ICI)................................................    10
Scalia, Eugene, Partner, Gibson, Dunn & Crutcher LLP.............    12
Smithy, Deron, Treasurer, Regions Bank, on behalf of the Regional 
  Bank Coalition.................................................    15
Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy 
  Studies, the American Enterprise Institute.....................    17

                                APPENDIX

Prepared statements:
    Atkins, Paul S...............................................    60
    Barr, Michael S..............................................    70
    McNabb, F. William III.......................................    73
    Scalia, Eugene...............................................    88
    Smithy, Deron................................................   105
    Wallison, Peter J............................................   118

              Additional Material Submitted for the Record

Lynch, Hon. Stephen:
    ``Systemic Risk and the Asset Management Industry,'' by 
      Douglas J. Elliott, Fellow, The Brookings Institution, 
      dated May 2014.............................................   134

 
                        EXAMINING THE DANGERS OF

                         THE FSOC'S DESIGNATION

                       PROCESS AND ITS IMPACT ON



                       THE U.S. FINANCIAL SYSTEM

                              ----------                              


                         Tuesday, May 20, 2014

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:01 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Bachus, Royce, 
Capito, Garrett, Neugebauer, McHenry, Pearce, Posey, 
Westmoreland, Luetkemeyer, Huizenga, Hurt, Stivers, Fincher, 
Stutzman, Hultgren, Ross, Pittenger, Barr, Cotton; Waters, 
Maloney, Sherman, Meeks, Hinojosa, McCarthy of New York, Lynch, 
Scott, Green, Moore, Ellison, Perlmutter, Himes, Peters, 
Carney, Sewell, Foster, Kildee, Delaney, Sinema, Beatty, Heck, 
and Horsford.
    Chairman Hensarling. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time.
    The title of today's hearing is, ``Examining the Dangers of 
the FSOC's Designation Process and Its Impact on the U.S. 
Financial System.'' I now recognize myself for 4 minutes to 
give an opening statement.
    The committee's hearing today is on the Financial Stability 
Oversight Council which, like most Washington bureaucracies, 
has come to be known by its acronym, FSOC. FSOC was 
established, or so its supporters tell us, to make it easier 
for regulators to communicate and share information with each 
other. But the regulators didn't need an act of Congress to do 
that, and information-sharing is not what FSOC is really all 
about.
    Instead, FSOC is about one thing: increasing Washington's 
control over the U.S. economy, thus curtailing both economic 
freedom and economic prosperity. And FSOC does this through its 
power to designate systemically important financial 
institutions, or in bureaucratic speak, SIFIs.
    Having failed to prevent the last financial crisis, 
notwithstanding having every regulatory power necessary to do 
so, regulators were rewarded with even more power by the Dodd-
Frank Act. The Dodd-Frank Act represents a breathtaking 
outsourcing of legislative power to the Executive Branch. 
Federal agencies now have virtually unfettered discretion to 
expand their regulatory control through a designation process 
that is opaque, secretive, vague, open-ended, and highly 
subjective. And by empowering FSOC to designate SIFIs, Dodd-
Frank allows the Federal Reserve to impose bank-like standards 
on nonbank institutions. In other words, to move institutions 
from the nonbailout economy to the bailout economy.
    And that is what FSOC is doing, expanding the Fed's power 
to control the financial system using the pretext that size 
alone poses a systemic risk. Rather than offering up detailed 
data and compelling analysis to justify its efforts to 
commandeer large financial institutions, FSOC's perfunctory 
explanations are typical of an unaccountable group of agencies 
that feel they don't need to justify their actions to anyone.
    Many think it odd that FSOC has chosen insurance companies 
and asset managers as targets for SIFI designation when there 
are others that clearly pose far greater risk to financial 
stability. Insurance companies are already heavily regulated at 
the State level, and asset managers operate with little 
leverage. And since they manage someone else's funds, it is 
almost inconceivable that an asset manager's failure could 
cause systemic risk.
    In contrast, there were Fannie Mae and Freddie Mac, which 
were at the epicenter of the financial crisis. They were highly 
leveraged before the crisis and remain highly leveraged today. 
They are not only a source of systemic risk; they are its very 
embodiment. Then, there is the Federal Government itself. As I 
watch the national debt clock turn to my left and right, having 
borrowed upwards of $17 trillion, it is perhaps the most 
leveraged institution in world history, and, like charity, 
perhaps SIFI designation should begin at home.
    Americans should also be worried that FSOC seems to take 
its direction from an international organization that meets 
secretly: the Financial Stability Board (FSB). Though the 
United States is represented, and I use that word advisedly, on 
this international board by the Treasury Department, the 
Federal Reserve, and the Securities and Exchange Commission, 
neither the Treasury, the Fed, nor the SEC has ever reported to 
Congress about its participation, nor have they ever asked for 
Congress' approval to participate in the global organization.
    Now, while Administration officials are fond of invoking 
the risks that supposedly lurk in the so-called shadow banking 
system, great risks also lurk to U.S. financial stability and 
competitiveness in a shadow regulatory system in which Treasury 
and the Federal Reserve may have ceded U.S. sovereignty over 
financial regulatory matters to a secretive, unaccountable 
coalition of European bureaucrats. Just days ago, in this very 
hearing room, Secretary Lew refused to answer key questions 
regarding Treasury's participation in the FSB designation 
process.
    To most Americans, the SIFI designation process may seem 
like a classic inside-the-Beltway exercise, but the stakes are 
enormous. Designation anoints institutions as too-big-to-fail. 
Today's designations are tomorrow's taxpayer-funded bailouts. 
Americans may find themselves paying more to insure their homes 
and their families. Investors who relied on mutual funds to 
save for their children's education or their own retirement 
will find they have earned less. And our economy will suffer as 
sources of long-term investment capital dry up. I once again 
call upon FSOC to cease and desist further SIFI designations 
until Congress can review the entire matter.
    I now yield 6 minutes to the ranking member for an opening 
statement.
    Ms. Waters. Thank you, Mr. Chairman.
    Six years ago this March, our regulators were faced with 
the first of many difficult decisions related to the financial 
crisis: bail out Bear Stearns or risk its bankruptcy, spreading 
instability worldwide. This was the first of several 
interventions during an economic collapse that resulted in the 
destruction of trillions of dollars of wealth, millions of 
families' economic livelihood, and the world's confidence in 
our markets and our way of life.
    Despite the revisionist views of my Republican colleagues, 
this crisis resulted in part from an inability of markets to 
police themselves, which was compounded by the inability of the 
previous Administration and regulators to stop predatory 
practices on Wall Street. At the end of the day, Wall Street's 
greed had disastrous effects on Main Street.
    As we picked up the pieces, we learned that regulators 
lacked authority to regulate entire markets, such as the $600 
trillion over-the-counter derivatives market. Even worse, they 
did not have a comprehensive understanding of the companies 
they regulated, like AIG. For example, State regulators were 
barred from regulating AIG's derivatives as insurance products, 
but at the same time neither Federal regulators, nor AIG's own 
executives, understood the massive risk it was taking.
    Democrats responded to the massive vulnerabilities in our 
system by enacting the Wall Street Reform Act, which created 
the Financial Stability Oversight Council (FSOC) to identify 
such risks and take the steps necessary to prevent them from 
threatening our economic well-being. Because of the FSOC, 
supported by the Office of Financial Research (OFR), we now 
have a more complete view of the entire market, and when 
necessary the FSOC can subject financial firms to safeguards 
intended to prevent certain threats from harming the economy, 
and it can make recommendations to address risky activities or 
practices.
    Congress determined as a starting point that the FSOC would 
look at all bank holding companies with more than $50 billion 
in assets, but also directed the Council to look more broadly. 
Any firm or activity whose unregulated risk could create an 
economic pandemic should be identified and dealt with now, 
before it is too late. To date, the FSOC has identified two 
insurance companies that fit the designation, AIG and 
Prudential, as well as a finance company, GE Capital.
    It is important to note that these companies weren't just 
singled out without evidence. FSOC has provided an informative, 
detailed analysis that paints a picture of their exposure. For 
example, in the case of AIG, the FSOC determined that a large 
number of corporate and financial entities have significant 
exposure in its capacity as a global insurer and could suffer 
losses in the event of financial distress at AIG.
    Now, while these designations must be made on a strong 
analytical basis, at the same time I support a strong appeals 
process if industry stakeholders feel as if FSOC got it wrong. 
However, to date, I have not seen anything to suggest that 
FSOC's appeals process has failed. I have reviewed this appeals 
process with my staff, and I am convinced that the industries 
have an opportunity to make their case.
    The financial crisis demonstrated a need for heightened 
supervision of nonbank financial institutions, not just in the 
United States, but globally as well. That is why I have been 
mystified to see FSOC's decisions criticized as forgone 
conclusions based on the recommendations of the international 
coordinating body, the Financial Stability Board. Not only is 
there not a shred of evidence that supports this theory, but 
these critics are missing the point. Constructive engagement by 
U.S. representatives with the Financial Stability Board and the 
global boards coordinating insurance and securities regulation 
promote our global financial stability.
    Mr. Chairman, we in Congress have been clear that we expect 
FSOC's actions to be crafted in a way that mitigates specific 
risks. One-size-fits-all solutions are more likely to cause 
harm than promote stability. But I believe Congress must 
continue to support the Wall Street Reform Act, and as a result 
we must hold the FSOC accountable to its mission to prevent any 
one company or risky activity from ever threatening our 
livelihood again.
    Mr. Chairman, I have talked with many representatives from 
the industries that are concerned about whether or not FSOC is 
attempting to treat them as banks, and I am sympathetic to that 
argument, and I am looking very closely to see if this is true. 
And I, again, support an appeals process where these companies 
have an opportunity to lay out their case and to challenge the 
FSOC, and I am looking to see how this is going to work, 
because I do believe that the industries have a right to 
question this, but I also believe that FSOC by law has a 
responsibility to mitigate risk in this country.
    And with that, I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, Mr. Garrett, the chairman of our Capital 
Markets and GSEs Subcommittee, for a minute and a half.
    Mr. Garrett. Thank you, Mr. Chairman.
    I thank the witnesses for being here to share their 
knowledge and their insights on this important issue on FSOC. 
For some time now, this committee has been focused on the many 
failings of FSOC and its structure and its operation. We did 
that in hearings and letters and speeches, and we have asked 
FSOC for explanation and changes to address our concerns. So 
far, however, we have been met simply by stonewalling. 
Apparently some members of FSOC feel that public policy is best 
made under a blanket of secrecy and that argumentativeness is 
the best way to engage with Congress. The few answers that we 
do get are often strawman arguments that claim the only choices 
we have are FSOC's current way of doing things or nothing at 
all.
    Well, I don't accept that. FSOC did not come down from 
heaven, perfect in every way, and there is certainly room for 
improvement. To that end, I have introduced H.R. 4387, the FSOC 
Transparency and Accountability Act. This bill subjects FSOC to 
the Sunshine Act and Federal Advisory Committee Act. It also 
allows all members of the commission and boards represented on 
FSOC to attend and participate in the meetings. It also 
requires that an agency's vote represents the collective vote 
of the entire commission or board, not just the Chair. And 
finally, the bill permits members of the House Financial 
Services Committee and the Senate Banking Committee to attend 
FSOC meetings, as I have tried to do but was turned away in the 
past. So far, FSOC has done little to reassure this committee 
that it is a responsible body, and it would not be far-fetched 
to say that FSOC itself is one of the greatest threats to 
financial stability that we face today.
    Finally, Mr. Chairman, I agree with the chairman that the 
FSOC should be refrained from any additional designations until 
we understand more about the process and impact of SIFI 
designation. And I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Massachusetts, Mr. Lynch, for 2 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. I thank the ranking 
member, as well, and the witnesses for helping the committee 
with its work.
    In the wake of the historical global financial crisis that 
cost the U.S. economy over $22 trillion, the landmark Dodd-
Frank Wall Street Reform and Consumer Protection Act set 
systemic risk mitigation as one of the primary goals of 
comprehensive financial regulatory reform. To this end, Dodd-
Frank created the Financial Stability Oversight Council (FSOC), 
which is a collaborative body designed to identify 
institutional sources of risk and instability within our 
financial system.
    In furtherance of that mission, Section 113 of Dodd-Frank 
authorizes the Council to determine that a U.S. nonbank 
financial institution is systemically important upon a finding 
that, and this is a quote from the statute, ``material 
financial distress at the company or the nature, scope, size, 
scale, concentration, interconnectedness, or mix of activities 
of the company could pose a threat to the financial stability 
of the U.S.''
    Mr. Chairman, I support the FSOC. I think it could be an 
institutional and collaborative force for stability in our 
financial markets. However, in order to better ensure that the 
Council's evaluation process for all our financial companies 
under Section 113 of Dodd-Frank reflects the seriousness of 
SIFI designation, I would urge the Council to make every effort 
to conduct its review in a manner that maximizes transparency 
and accountability without compromising the laudable goals of 
our financial reform efforts.
    In addition, I would note that Dodd-Frank specifically 
contemplates that each financial company is different for the 
purposes of evaluating the risk it poses to the U.S. financial 
system. That is precisely why Dodd-Frank set forth the series 
of factors that the Council must consider in determining 
whether a nonbank financial institution is systemically 
important. These factors include the extent of a company's 
leverage and off-balance sheet exposures, the degree to which a 
company is already subject to regulation by one or more primary 
regulators, and the extent to which the assets are managed.
    I see I am running out of time. I think that in many cases 
those factors tend to favor acquittal on behalf of some of our 
mutual funds, and I just ask that FSOC take those 
recommendations to heart.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from West Virginia, 
Mrs. Capito, the chairwoman of our Financial Institutions 
Subcommittee, for a minute and a half.
    Mrs. Capito. Thank you, Mr. Chairman. And I want to thank 
the gentlemen for joining us for the hearing today.
    As we have heard, the FSOC was originally envisioned as a 
mechanism for regulatory agencies to share information about 
potential risks, but it has morphed into an opaque entity that 
is subverting the prudential regulatory agencies by ignoring 
their expertise on specific industries that they are charged 
with supervising.
    There are some very real economic consequences for many of 
the decisions that the FSOC is making, and this hearing will 
get to the heart of that. One of the tasks FSOC is charged with 
doing is designating nonbank SIFIs. In September of 2013, the 
FSOC designated a large life insurer as systemically 
significant despite extensive dissenting opinions from the 
FSOC's independent member having insurance experience. The one 
member of the FSOC who is charged with having a significant 
understanding of the industry argued that the FSOC's basis for 
the designation simply did not support the likelihood that the 
failure of the firm would cause disruption to the financial 
system. Furthermore, he argued that the majority of the FSOC 
that had approved the designation simply did not understand the 
basic fundamentals of the insurance industry.
    Similarly, we will hear concerns about a one-size-fits-all 
approach to the regulation of financial institutions larger 
than $50 billion in assets. I have long been concerned about 
how the various asset designations and thresholds are 
designated in Dodd-Frank. We need to move past these ambiguous 
thresholds and change the regulatory agencies, charge them with 
determining the financial risk to the system based on the 
riskiness of their operations. I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Mrs. Maloney, the ranking member of 
our Capital Markets Subcommittee, for 2 minutes.
    Mrs. Maloney. I thank the chairman, and I apologize for 
being late. I was doing an event with Congressman Poe on the 
anti-trafficking, sex trafficking bills that will be on the 
Floor later on today, and which I hope will enjoy wide 
bipartisan support.
    Mr. Chairman, one of the key lessons that we have learned 
from the financial crisis was that nonbank financial 
institutions that pose greater systemic risks need to be 
subject to stricter prudential standards. To implement this, 
Dodd-Frank created the Financial Stability Oversight Council, 
or FSOC, which is in charge of identifying the financial 
institutions that pose systemic risk and designating them as 
systemically important financial institutions (SIFIs). This is 
an important and necessary power, and without it we would have 
no protection against examples such as the AIG challenge that 
we faced.
    However, the fact that this power to designate firms as 
systemically risky is so important also means that it should be 
exercised with great care, especially for firms that don't 
operate like traditional banks, like asset managers. We must 
also make sure that any proposed changes to the SIFI 
designation process do not hinder the FSOC's ability to carry 
out its mission of identifying and mitigating systemic risks in 
the financial system. Policymakers have to strike a careful 
balance between ensuring that there is a fair and thorough 
process for designating firms as systemically important on the 
one hand, and preserving the FSOC's ability to identify and 
mitigate systemic risk on the other hand.
    I look forward to the hearing today, and I thank you very 
much. My time has expired.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Neugebauer, the chairman of our Housing and 
Insurance Subcommittee, for a minute and a half.
    Mr. Neugebauer. Thank you, Mr. Chairman, for holding this 
important hearing on the Financial Stability Oversight 
Council's designation process. The identification of nonbank 
systemically important firms is a serious exercise that has 
major implications for the competitiveness of U.S. firms and 
the stability of our financial markets.
    This has been an area where I have been outspoken since the 
beginning, as I strongly believe FSOC's structure and its 
process for designating systemically important firms is fatally 
flawed. Rather than using data, history, and economic analysis 
to justify SIFI designations, FSOC has used far-fetched, highly 
speculative, worst-case scenarios to justify an aggressive 
expansion of regulatory power for Washington. In addition, many 
of the targets of this new regulatory overreach had nothing to 
do with the financial crisis and pose very little risk to 
financial stability.
    No designation has been more symbolic of FSOC's flaws than 
the recent designation of an insurance company, Prudential 
Financial, as an SIFI. The Prudential designation ignored the 
expertise of the company's primary regulator, as well as FSOC's 
members specifically created to provide expert knowledge in the 
field of insurance. One of those members, Director John Huff, a 
State insurance commissioner from Missouri, recently stated 
that FSOC's misguided overreliance on bank concepts is nowhere 
more apparent than in FSOC's basis for designation of 
Prudential Financial. He went on to say that the basis for the 
designation was grounded in implausible, even absurd scenarios. 
The designated insurance expert, Mr. Roy Woodall, stated that 
the underlying analysis used by FSOC on the Prudential 
designation ran counter to fundamental and seasoned 
understanding of the business of insurance.
    Chairman Hensarling. The time of the gentleman has expired.
    Finally, the Chair recognizes the gentleman from Missouri, 
Mr. Luetkemeyer, the vice chairman of our Financial 
Institutions Subcommittee, for a minute and a half.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    For the most part the SIFI designation process seems to be 
shrouded in secrecy. We have seen no meaningful metrics used in 
decisions, and Secretary Lew and other officials have refused 
to answer questions about the process. While the designation 
process is opaque at best for many firms, it is pretty 
straightforward for bank holding companies--straightforward and 
thoughtless. If an institution has more than $50 billion in 
assets, it is an SIFI. It doesn't matter if a bank is smaller 
but engages in risky behavior or if a bank is larger but 
engages in no risky behavior. The only thing that matters is 
one arbitrary figure related to size. What kind of an 
evaluation is that?
    I understand that common sense is in short supply in this 
town, but FSOC's designation process has serious implications 
on the financial system and needs to incorporate some element 
of logic and transparency. I look forward to the hearing with 
our witnesses today. And I yield back the balance of my time, 
Mr. Chairman.
    Chairman Hensarling. We now turn to our witnesses. The 
Honorable Paul Atkins is the CEO of Patomak Global Partners, a 
financial consulting firm. He previously served as a Member of 
the Congressional Oversight Panel for TARP and as a 
Commissioner on the Securities and Exchange Commission. Mr. 
Atkins holds a law degree from Vanderbilt University.
    Mr. William McNabb is the chairman and CEO of the Vanguard 
Group, a position he has held since 2009. Before becoming CEO, 
Mr. McNabb served as managing director of Vanguard's 
institutional and international businesses. Today, we welcome 
his testimony on behalf of the Investment Company Institute.
    Mr. Eugene Scalia is a partner at Gibson, Dunn & Crutcher, 
where he is co-chair of the firm's Administrative Law and 
Regulatory Practice Group. He earned his law degree from the 
University of Chicago.
    Professor Michael Barr teaches financial institutions, 
international finance, and other aspects of financial law at 
the University of Michigan Law School. He previously served as 
Treasury Secretary Rubin's Special Assistant, and in other 
capacities at the Treasury Department. He earned his law degree 
from Yale Law School.
    Mr. Deron Smithy is the treasurer of Regions Bank, which is 
based in Birmingham, Alabama. Today, we welcome his testimony 
on behalf of the Regional Bank Coalition.
    Last but not least, and no stranger to our committee, Mr. 
Peter Wallison is the Arthur F. Burns Fellow in Financial 
Policy Studies at the American Enterprise Institute.
    Without objection, each of your written statements will be 
made a part of the record. Hopefully, each of you is familiar 
with our green, yellow, and red lighting system on the witness 
table. I would ask each of you to please observe the 5-minute 
time allocation.
    Mr. Atkins, you are now recognized for a summary of your 
testimony.

 STATEMENT OF PAUL S. ATKINS, CHIEF EXECUTIVE OFFICER, PATOMAK 
                        GLOBAL PARTNERS

    Mr. Atkins. Thank you. Good morning. Mr. Chairman, Ranking 
Member Waters, and members of the committee, it is a pleasure 
to be back before you all today. As the chairman said, I 
believe you have my formal statement, and I know the chairman 
is a stickler for time, so I shall try to highlight a few of 
the central points.
    But as a preliminary matter, I believe there is some 
clarification as to basic pronunciation that is in order. As 
you all know, Dodd-Frank gives the FSOC authority to label 
entities within the financial services industry as systemically 
important financial institutions, abbreviated as S-I-F-I. Now, 
former chairman Barney Frank quipped the other day that 
``SIFFY,'' as with all due respect some people, including on 
the committee, have pronounced it, sounds like a disease, but 
that is because, I think, with all due respect, that there is a 
mispronunciation. So how does one pronounce this? It is WiFi, 
and this is hi-fi, and this is SIFI. And by no coincidence, it 
has a homonym, sci-fi. And SIFI designation I think is the 
statutory gateway to a new level, and for some entities a whole 
new world of potentially a twilight zone of regulation by the 
Federal Reserve.
    I have two fundamental points. First, designating managed 
investment funds, particularly mutual funds, much less their 
advisers as SIFIs is a bad idea that lacks any demonstrated or 
I believe demonstrable analytic foundation. That point has 
nothing whatsoever to do with partisan politics or whether one 
is in favor of or opposed to Dodd-Frank.
    Second, facts matter. Investment funds and investment 
management are fundamentally different from banks or the 
banking business. Bank regulators' prudential regulation of the 
largest mutual funds or their advisers will not be a 
complement, much less a viable substitute for the existing 
capital markets' regulatory regime.
    Let me briefly touch on the two regulatory bodies affected. 
I am not here to defend the SEC's jurisdiction. If this were 
some sort of turf war, you wouldn't be hearing from me about 
it. The SEC is expert at regulating capital markets--risk 
markets. That is simply not what the Fed does, much less the 
FSOC. The Fed regulates to preferred outcomes. Central bankers 
are central planners. The SEC's entire experience and focus is 
on maintaining free and fair capital markets, while the Fed 
exists to ensure the safety and soundness, the continued 
viability of the banking system. So there is nothing in the 
Fed's 100-year history that even begins to suggest that 
applying prudential standards to capital market participants 
would be a benefit or that the Fed would be an effective 
capital markets regulator.
    I want to underscore a further point in that connection. 
Were the Fed to impose capital requirements on SIFI-designated 
funds or even advisers, investors, notably ordinary individual 
investors saving for retirement or a downpayment in their 
401(k) plans, would have to pony up or face Fed-imposed 
redemption restrictions. In fact, investment funds are 
overwhelmingly providers of capital. Mutual funds in particular 
tend to carry little or no leverage. A mutual fund does not 
transmit, but bears counterparty risk. To that extent, at 
least, mutual funds are the very opposite of the sort of highly 
leveraged entity enhanced Federal Reserve supervision was 
designed to address.
    So what, in sum, could we expect if a mutual fund were 
designated an SIFI and subjected to the Fed's prudential 
supervision? Besides higher costs and lower returns, there will 
be less flexibility and more exposure to uncertain market risk. 
The Fed could constrain investors' ability to redeem their 
shares on demand or elect to require fund managers to remain in 
positions that they otherwise would have exited. Imagine that 
disclosure to investors?
    Also, sound funds could be subjected to Fed demands to 
support failing banks under Dodd-Frank Section 210(o). Think of 
it as an investor-funded ``TARPs-are-us.'' The unfortunate 
investors in SIFI funds would be at risk of supporting too-big-
to-fail financial institutions under that section. None of this 
would provide any advantage to fund investors. Indeed, such Fed 
demands could easily force conflicts with the fund manager's 
fiduciary duty to the fund and therefore to investors.
    Moreover, if FSOC's cavalier treatment of the insurance 
industry is any precedent, we should all be extremely concerned 
that equally misguided and uninformed treatment of regulated 
investment funds, notably mutual funds, is soon to follow. Any 
FSOC move to designate regulated investment funds as SIFIs 
lacks analytic foundation. There is nothing in last September's 
self-serving--I would say sophomoric--OFR report (Office of 
Financial Research report) to suggest otherwise. And with that, 
my time has expired. Thank you.
    [The prepared statement of Mr. Atkins can be found on page 
60 of the appendix.]
    Chairman Hensarling. Mr. McNabb, you are now recognized for 
a summary of your testimony.

    STATEMENT OF F. WILLIAM MCNABB III, CHAIRMAN AND CHIEF 
 EXECUTIVE OFFICER, THE VANGUARD GROUP, INC., ON BEHALF OF THE 
               INVESTMENT COMPANY INSTITUTE (ICI)

    Mr. McNabb. Thank you, Chairman Hensarling, and members of 
the committee, for the opportunity to participate in today's 
hearing. I am Bill McNabb, chairman and CEO of the Vanguard 
Group, one of the world's largest mutual fund organizations. We 
have some $2.6 trillion in U.S. mutual fund assets entrusted to 
us by everyday people saving for college, retirement, 
education, and other goals.
    I appear today in my capacity as chairman of the Investment 
Company Institute. ICI's membership includes U.S. mutual funds, 
exchange-traded funds, closed-end funds, and unit investment 
trusts with aggregate assets of nearly $17 trillion. ICI 
members are subject to substantial regulation and oversight by 
the SEC and other agencies, and we support appropriate 
regulation to ensure the resiliency and vibrancy of the global 
financial system. But we are deeply concerned about the way in 
which regulators in the United States and globally are 
considering large mutual funds and their managers for 
designation as SIFIs. The Financial Stability Oversight Council 
here in Washington, and the FSB operating globally, appear to 
be singling out large U.S. funds or their managers to subject 
them to an added burden of bank-style regulation.
    Let me speak plainly. There is no justification for 
designating mutual funds or their managers as SIFIs. Stock and 
bond funds did not contribute to the financial crisis and do 
not pose threats to financial stability. If mutual funds or 
their managers are designated, millions of individual Americans 
could pay a tremendous price.
    ICI is concerned that many of those involved in FSOC are 
predisposed to view the world through a banking lens. There are 
important fundamental differences between banks and funds. 
Unlike banks, fund managers act as agents, investing the money 
of others, not as principals putting their own capital at risk. 
Unlike bank depositors, fund investors understand they can lose 
money, and unlike banks, funds operate without any need for 
government intervention.
    There are several compelling reasons why even the largest 
funds are not SIFIs. First, mutual funds use little to no 
leverage, which is the essential fuel of most financial crises. 
The very largest U.S. funds have roughly 4 cents of debt for 
every dollar of shareholder equity. The largest U.S. banks by 
contrast have $9.70 of debt for every dollar of equity.
    Second, funds don't experience financial distress that can 
threaten U.S. financial stability. Hundreds of funds exit the 
business every year, and none of them requires government 
intervention or assistance.
    Third, stock and bond funds don't face so-called runs even 
in the most turbulent markets. While domestic stock funds own 
about 25 percent of U.S. stocks, their gross stock sales during 
the financial crisis represented less than 6 percent of market 
trading per month. If anything, these funds and their long-term 
investors have a dampening effect on market volatility. They 
enjoy a stable investor base because 95 percent of assets in 
stock and bond funds are held by everyday households, and 
virtually all of those households report that they are 
investing for long-term goals, such as retirement and 
education.
    Fourth, the structure and comprehensive regulation of 
mutual funds limits risk and the transmission of risk. For 
example, daily valuation of fund portfolios, portfolio 
liquidity requirements, limits on borrowing, and simple 
transparent structures are among the features that both protect 
investors and limit risk. If the FSOC designates funds as 
SIFIs, the consequences for investors would be severe. Under 
Dodd-Frank, a designated fund could be subject to bank-level 
capital requirements with investors bearing the cost through 
higher fees and lower returns.
    It is particularly troubling that investors in a designated 
fund could be forced to help shoulder the costs of bailing out 
large failing financial institutions under the orderly 
liquidation provisions. This is essentially a tax on retail 
investors, and Congress wrote Dodd-Frank specifically to avoid 
burdening taxpayers with these costs.
    We are also concerned that the Federal Reserve's prudential 
supervision could conflict with a fund manager's fiduciary duty 
to act in the best interests of the fund. To protect the 
stability of the banking system, the Fed might pressure a fund 
manager to stay in certain markets or to maintain financing for 
troubled institutions, even if the manager believes those 
actions would harm investors. We don't believe that Congress 
created Dodd-Frank to target funds or to appoint the Fed as a 
significant capital markets regulator, and it is clear to us 
that SIFI designation, which was intended to be used quite 
sparingly, is not the right tool for addressing risk in these 
markets. If regulators believe specific activities or practices 
pose risk, they appropriately have considerable authority to 
address those risks.
    Members of this committee from both sides of the aisle have 
focused a great deal of attention on the FSOC's lack of 
transparency and vague processes. We share your concern. Mr. 
Chairman, we agree that FSOC should cease and desist on further 
designations until Congress can better understand the process.
    Thank you, and I will be happy to take questions at the 
appropriate time.
    [The prepared statement of Mr. McNabb can be found on page 
73 of the appendix.]
    Chairman Hensarling. Mr. Scalia, you are now recognized for 
5 minutes.

 STATEMENT OF EUGENE SCALIA, PARTNER, GIBSON, DUNN & CRUTCHER 
                              LLP

    Mr. Scalia. Mr. Chairman, Ranking Member Waters, and 
members of the committee, thank you for the opportunity to 
testify today regarding the Financial Stability Oversight 
Council. I am a lawyer at the firm of Gibson, Dunn & Crutcher, 
and this morning I would like to offer a few observations on 
FSOC from the perspective of the requirements of administrative 
law.
    The FSOC designation process is an unusual one. If there is 
a similar process before another government agency, I am 
unaware of it. The process begins with a company being told 
that it is being considered for designation. It is not told 
why, yet it is singled out and considered on a solitary and 
secretive basis. This is very different than a rulemaking, for 
instance, where the companies in an industry are publicly told 
that the government is considering changing the requirements 
that apply to them, and what follows is an open and public 
discussion about the proper outcome.
    A company that has been notified of potential designation 
is kept in the dark in at least two ways. First, the process 
itself is largely closed and unknown to the company. Until the 
very late stages it does not know why it is being considered, 
it does not know what opinions have been formed about it or 
what concerns and tentative conclusions have been reached. FSOC 
compiles extensive information on the company. None of that 
information is shared until after the FSOC members' proposed 
designation. Access to FSOC decision-makers is closely guarded, 
and as a practical matter is impossible.
    Second, the company has inadequate notice on the legal 
standards that will be applied to it. As a Nation, we value 
fair notice to the public of their legal obligations for two 
principal reasons. First, when we are told what the law is, we 
are able to conform our conduct to comply in order to avoid 
sanctions. Second, when the government commits itself in 
writing to what the law is, it limits its discretion and power, 
and that in turn helps prevent arbitrary government conduct.
    When it comes to SIFI designation, though, FSOC has done 
little more than list numerous factors it will consider without 
identifying the relative weight the factors will be given or 
what constitutes a passing grade under any one factor. 
Moreover, its SIFI designation decisions to date have applied 
such loose and subjective reasoning that other companies being 
considered have no way of knowing whether they will be 
designated or what changes they could make so they are not 
designated.
    This brings me to the substance of FSOC's designation 
decisions to date as reflected in the leading Prudential 
decision. That decision is an exceptionally weak specimen of 
regulatory reasoning by a government agency. I do not believe 
it would have survived review in a court. The problems with 
their decision are addressed at length in my written testimony. 
They include unsubstantiated conjecture; a subjective, 
standardless notion of excessive risk; and repeated disregard, 
as a number of you have mentioned, for the existing system of 
insurance regulation by the States.
    I want to conclude by emphasizing another aspect of the 
FSOC designation process that is very unusual and is a terrible 
way to make government decisions. FSOC is not considering the 
consequences of its actions. It is singling out individual 
companies and subjecting them to an entirely new regulatory 
regime without knowing what effect that regulatory framework 
will have. Suppose that just two or three companies in a 
robustly competitive industry are designated systemic, and 
suppose that SIFI designation will subject those companies to 
significantly more costly regulatory requirements than their 
competitors. Those increased costs should be an extremely 
important consideration for FSOC. Remember, designation is 
supposed to be buttressing companies, supposed to be shoring 
them up, but what if it actually weakens them by making them 
less competitive? In that case, SIFI designation may be doing 
exactly the opposite of what is intended.
    The government should never act without considering the 
consequences of its action. That is elementary. But FSOC does 
not make the consequences of designation part of its decision-
making process. Worse, FSOC does not know what regulatory 
requirements will result from designation. It does not know 
what capital standards will apply to companies that are 
designated, although it has every reason to believe that under 
current law, those capital standards will be essentially bank-
based, which are improper for other financial firms, such as 
insurance companies.
    Before asserting that designation is appropriate because it 
will bring better protections, the government must determine 
what those protections are and what effects they will have. 
Until then, designation decisions are premature.
    I want to conclude by commending the members of this 
committee for bringing attention to these issues. Our system of 
government rests on the belief that the government makes 
better, fairer decisions when it acts openly, through processes 
where the public, including Congress, have insight and input. 
Thank you for inviting me to speak here today, and I look 
forward to your questions.
    [The prepared statement of Mr. Scalia can be found on page 
88 of the appendix.]
    Chairman Hensarling. Professor Barr, you are now recognized 
for 5 minutes.

STATEMENT OF MICHAEL S. BARR, PROFESSOR OF LAW, THE UNIVERSITY 
                     OF MICHIGAN LAW SCHOOL

    Mr. Barr. Thank you, Mr. Chairman, and Ranking Member 
Waters. I am pleased to appear before you today to discuss the 
key role of the Financial Stability Oversight Council in 
reducing risks in the financial system.
    In 2008, the United States plunged into a severe financial 
crisis that shuttered American businesses and cost millions of 
households their jobs, their homes, and their livelihoods. The 
crisis called for a strong response. Under the Dodd-Frank Act, 
there is new authority to regulate major firms that pose a 
threat to financial stability without regard to their corporate 
form; to wind down such firms in the event of a crisis without 
feeding a panic or putting taxpayers on the hook; to attack 
regulatory arbitrage, restrict risky activities, and beef up 
supervision; to require central clearing and exchange trading 
of standardized derivatives, and capital, margin, and 
transparency throughout the market; to improve investor 
protections; and to establish a new Consumer Financial 
Protection Bureau to look out for American families.
    The Act also established a Financial Stability Oversight 
Council, with the authority to designate systemically important 
firms and financial market utilities for heightened prudential 
oversight, to recommend that member agencies put in place 
higher prudential standards when warranted, and to look out for 
risks across the financial system.
    One of the major problems in the lead-up to the financial 
crisis was there was not a coherent system of supervision for 
major financial institutions. The Federal financial regulatory 
system that existed was broken. Major financial firms were 
regulated according to their formal labels, as banks, thrifts, 
investment banks, insurance companies, and the like, rather 
than according to what they actually did. Risk migrated to the 
less well-regulated parts of the system and leverage grew to 
dangerous levels.
    The designation of systemically important financial 
institutions is a cornerstone of the Dodd-Frank Act. A key goal 
of reform was to create a system of supervision which ensured 
that if an institution posed a risk to the financial system, it 
would be regulated, supervised, and have capital requirements 
that reflected its risk regardless of its corporate form. The 
Dodd-Frank Act established a process through which the largest 
and most interconnected firms could be designated as 
systemically important and then supervised and regulated by the 
Fed.
    The Council has developed detailed rules, interpretive 
guidance, and a hearing process, including extensive engagement 
with affected firms, to implement this designation process. The 
existing rules provide for a sound deliberative process, 
protection of confidential and proprietary information, and 
meaningful and timely participation by affected firms.
    Critics of designation contend that it fosters too-big-to-
fail, but the opposite is the case. Regulating systemically 
important firms reduces the risk that failure could harm the 
real economy and destabilize the financial system. It provides 
for robust supervision in advance and provides for a mechanism 
to wind down such a firm in the event of a crisis.
    Other critics argue that the FSOC should be more beholden 
to the regulatory agencies that are its members, but again the 
opposite is true. Congress wisely provided for its voting 
members, all of whom are confirmed by the Senate, to 
participate based on their individual assessment of risks in 
the financial system, not based on the position of their 
individual agencies, however comprised.
    Some critics also contend that certain types of firms in 
certain industries or under certain sizes should be 
categorically walled off from heightened prudential 
supervision, but such steps will expose the United States to 
the very risks we faced in the lead-up to the last devastating 
crisis. The failure of firms of diverse types and diverse sizes 
at many points, even in very recent memory, from Long-Term 
Capital Management to Lehman and AIG, suggests that blind spots 
in the system should at the very least not be intentionally 
chosen in advance by the Congress.
    The way to deal with the diversity of sizes and types of 
institutions is to develop regulation, oversight, and capital 
requirements that are graduated and tailored to the types of 
risks that such firms might pose to the financial system. 
Beyond designation, FSOC and member agencies have other tools 
available, including increased data collection, transparency, 
collateral and margin rules, operational and client safeguards, 
risk management standards, and other measures that can be used 
in appropriate circumstances.
    Lastly, some critics complain that the FSOC's work is too 
tied to global reforms, including reforms by the Financial 
Stability Board, but global coordination is essential to making 
the financial system safer. And these global efforts are not 
binding on the United States. Rather, the FSOC and U.S. 
regulators make independent regulatory judgments about domestic 
implementation based on U.S. law.
    In sum, significant progress has been made in making the 
financial system safer and fairer and better focused on serving 
households, businesses, and the real economy. Now is not the 
time to turn it back.
    [The prepared statement of Mr. Barr can be found on page 70 
of the appendix.]
    Chairman Hensarling. Thank you.
    The Chair now recognizes Mr. Smithy for 5 minutes.

 STATEMENT OF DERON SMITHY, TREASURER, REGIONS BANK, ON BEHALF 
                 OF THE REGIONAL BANK COALITION

    Mr. Smithy. Good morning, Chairman Hensarling, Ranking 
Member Waters, and members of the Financial Services Committee. 
My name is Deron Smithy, and I am the treasurer of Regions 
Bank, based in Birmingham, Alabama. I appreciate the 
opportunity to speak to the committee about the systemic risk 
designation, its impact on regional banks, and the ways in 
which it can be improved.
    Regions Bank is a member of the Regional Bank Coalition, a 
group of 18 traditional lending institutions that play a 
critical role in the Main Street economy. Each of these banks 
are larger than $50 billion in assets, but operate basic, 
straightforward businesses that do not individually threaten 
the U.S. financial system. Regions Bank, for example, is a 
diversified, community-focused lender offering a full range of 
consumer and business lending products and services in 16 
States. We have a time-honored and relatively simple operating 
model that focuses on relationship banking, matching high-
quality customer service with industry expertise. Regions 
serves more than 500,000 commercial customers, including 
450,000 small business owners, and we bank nearly 4.5 million 
consumer households.
    Collectively, the banks in our coalition operate in all 50 
States, hold one-fourth of the U.S. banking deposits, and have 
credit relationships with more than 60 million American 
households, yet no regional bank maintains a national deposit 
share greater than 3 percent of total deposits. In aggregate, 
our asset base is less than 2 percent of GDP, roughly 
equivalent to that of the single largest U.S. bank. We are 
traditional banks that fund ourselves primarily through 
deposits, and we loan those deposits back into our communities.
    Regional banks are an important source of credit to small 
and medium-sized firms, competing against banks of all sizes 
throughout our markets. Regional banks are not complex. We do 
not engage in significant trading or international activities, 
make markets in securities, or have meaningful interconnections 
with other financial firms. Regional banks are not systemic and 
do not threaten U.S. financial stability.
    The Dodd-Frank Act adopted a blunt definition of systemic 
risk for banks, relying on a simple $50 billion asset 
threshold. I would note Federal Reserve Governor Tarullo's 
recent speech in which he highlighted the need to rationalize 
the regulatory structures so that regulators can more precisely 
consider differences among firms. He questioned many of the 
existing bright line, asset-only thresholds and contended that 
the aims of prudential regulation should vary according to the 
business activities. He also suggested that the 80-plus banks 
larger than $10 billion, but those not deemed global 
systemically important, are overwhelmingly recognizable as 
traditional commercial banks.
    On these points we would agree with Governor Tarullo, and 
we would support the bipartisan bill, H.R. 4060, introduced by 
Congressman Luetkemeyer and five other members of the 
committee. The bill would have regulators review five factors--
size, complexity, interconnectedness, international activity, 
and substitutability--before making a systemic designation. All 
are factors that regulators have used in other contexts to 
determine how firms might impact U.S. financial stability.
    Regional banks constantly react to regulatory and policy 
changes made in Washington, and these rules affect how we 
manage our organizations. Systemic regulation has both direct 
and indirect cost, and for individual regional banks these 
costs add up to hundreds of millions of dollars each year. They 
impact how we lend and how we price credit.
    Even absent systemic designation, protective regulatory 
guardrails that have evolved since the financial crisis would 
remain in place for regional banks. The Federal Reserve has the 
authority to continue the capital planning and stress testing 
processes started before Dodd-Frank. Moreover, regional banks 
would remain subject to new Basel III capital and liquidity 
requirements, as well as numerous other rules outside of Title 
I's enhanced prudential standards.
    To reiterate, the current designation process is imprecise 
and the costs incurred by regional banks are not commensurate 
with its impacts. Regional bank activities do not threaten the 
country's financial stability, nor are we complex organizations 
that would be difficult to resolve in a crisis. The current 
standard does not best serve the banks, taxpayers, and 
communities we serve, or the regulators. The regulators have 
requested clearer, less ambiguous ways to determine systemic 
risk. A multifactor, activity-based test would do this.
    Thank you again for the opportunity to testify before the 
committee today, and I look forward to answering any questions 
you may have.
    [The prepared statement of Mr. Smithy can be found on page 
105 of the appendix.]
    Chairman Hensarling. To bat cleanup, Mr. Wallison, you are 
now recognized for your testimony.

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

    Mr. Wallison. Thank you, Mr. Chairman, Ranking Member 
Waters, and members of the committee. Thank you for the 
opportunity to testify this morning.
    Under Dodd-Frank, the Financial Stability Oversight Council 
(FSOC) has the authority to designate any nonbank financial 
firm as a systemically important financial institution, or 
SIFI. That is if the institution's financial distress will 
cause instability in the U.S. financial system. Firms 
designated as SIFIs are turned over to the Fed for what appears 
to be bank-like regulation.
    The troubling aspects of the FSOC's authority were revealed 
recently when it designated Prudential Financial as an SIFI. 
Every FSOC member who was expert in insurance and not an 
employee of the Treasury Department itself dissented from that 
decision. Virtually all of the other members, knowing nothing 
about insurance or insurance regulation, dutifully voted in 
favor of Prudential's designation.
    Now, how could we entrust the decision to regulate a large 
insurer like a bank to a group with no expertise about 
insurance regulation, and when the FSOC could not possibly have 
known how the Fed would actually regulate an insurance firm?
    Even more troubling was the fact that the FSOC offered no 
facts, no analysis, and no standards in support of its 
decision. For example, interconnections are supposed to be one 
of the main reasons that SIFIs are SIFIs. All financial 
institutions are interconnected in some way, but the FSOC's 
Prudential decision says nothing about the degree of 
Prudential's interconnections or why they are a danger to the 
financial system. The same is true of all the other prior FSOC 
designations.
    Let me say it plainly: On the evidence of the Prudential 
decision, this emperor has no clothes. The FSOC seems to have 
no idea how to assess the danger of interconnections or any of 
the other reasons that SIFIs are considered such a threat to 
the financial stability that they require Fed bank-like 
regulation. This means the decisions are completely arbitrary. 
And since these decisions have a seriously adverse effect on 
competition and economic growth, they should not be allowed to 
continue until the FSOC can explain its decisions to Congress.
    There are other reasons to be concerned. Two months before 
the FSOC's Prudential decision, the Financial Stability Board 
(FSB), an international body of regulators empowered by the G-
20 leaders to reform the international financial system, had 
already declared Prudential an SIFI, also without facts and 
analysis. Since the Treasury and the Fed are members of the 
FSB, they had already approved the FSB's designation well 
before the FSOC designated Prudential as an SIFI in September.
    This raises two questions: first, the fairness and 
objectivity of the FSOC's designation process; and second, 
whether the FSOC will simply rubber-stamp the decisions of the 
FSB in the future. This is important because the FSB looks to 
be a very aggressive source of new regulation of nonbank 
financial firms.
    In early September, the FSB published plans to apply what 
it called its SIFI Framework to securities firms, finance 
companies, asset managers, and investment funds, including 
hedge funds. These firms are the so-called shadow banks that 
bank regulators are so eager to regulate. It will be very 
difficult to show that these nonbank firms are a threat to the 
financial system, but the Prudential decision shows that 
neither the FSB, nor the FSOC believes it has any obligation to 
demonstrate this.
    The question before this committee is not solely whether 
investment funds are SIFIs. The FSB has already suggested it 
will apply the SIFI Framework to securities firms, mutual 
funds, hedge funds, and many, many others. If the FSOC follows 
suit, and that has been the pattern, we may see many of the 
largest nonbank firms in the U.S. financial system brought 
under bank-like regulation.
    As shown in my prepared testimony, these capital markets 
firms and not the banks are the main funding sources for U.S. 
business. Subjecting them to bank-like regulation will reduce 
their risk-taking and innovation and thus have a disastrous 
effect on competition and economic growth, and this outcome 
would be the result of decisions by the FSB carried out by the 
FSOC.
    About 2 weeks ago, Mr. Chairman, you said that the FSOC 
should cease and desist on designations until Congress can 
assess the consequences. I hope that request is honored.
    [The prepared statement of Mr. Wallison can be found on 
page 118 of the appendix.]
    Chairman Hensarling. Thank you.
    The Chair now recognizes himself for 5 minutes for 
questioning.
    Mr. McNabb, you run one of the largest mutual fund 
companies in America. I assume there are a lot of mom and pops 
who entrust their savings with you to send somebody to college, 
maybe start a small business, maybe plan for retirement.
    Recently, I had a study come across my desk by Douglas 
Holtz-Eakin, the former Director of the Congressional Budget 
Office, which estimated that designating asset managers as 
SIFIs--sorry, Mr. Atkins, I am not sure the ``sci-fi'' is going 
to catch on, but it was compelling--over the lifetime of their 
investment, their investment portfolio could be hurt by as much 
as 25 percent, $108,000 per investor.
    Have you seen this study? Have your people analyzed it? And 
if that is in the ballpark, knowing that you deal with a lot of 
hard-working Americans' savings, what is this SIFI designation 
going to mean to the individual trying to save for retirement 
or send a kid to college?
    Mr. McNabb. Thank you for the question, Mr. Chairman. You 
are right. We do serve a lot of mom and pops. We have 25 
million investors, roughly, scattered around the country. 
Savings for retirement and for education would be the two 
primary reasons.
    I actually have a copy of that study; it just came across 
my desk yesterday. I am guessing the numbers are actually 
conservative in terms of the calculations because they did it 
as a one-time--they looked at a one-time investment and what 
would the consequences of bank-like capital be on the accrual 
of the account, if you will, and the estimate was that over a 
long period of time, the account value would be 75 percent of 
what it would have been were there no capital requirements.
    We have also looked at a couple of other analyses that are 
similar, where instead of looking at capital requirements, we 
looked at some of the proposed so-called SIFI taxes. In those 
cases, if you are an investor, for example, in our S&P 500 
Fund, which is one of the more basic funds we offer, your fees 
would quadruple. And at that level, it would be pretty 
disastrous for many investors.
    Chairman Hensarling. Mr. Wallison, as I was listening to 
your testimony, I think you said to some extent that the 
decision-making formula for FSOC to designate a nonbank SIFI 
was completely arbitrary. You mentioned about the G-20 
Financial Stability Board, their process that designated, I 
think, three U.S. insurers as global SIFIs. Wasn't it, I don't 
know, 10 or 12 days ago that we had Secretary Lew in this 
hearing room where I asked him, as head of FSOC, did Treasury 
consent or object to these designations? He refused to answer 
the question 3 different times. I suppose there is a 
possibility their representatives fell asleep during the 
proceedings and neither objected or consented. So that would 
seem to suggest that either the United States adopted whatever 
the criteria is of SSB, or they have their own, but yet they 
refuse to reveal it. I am not sure that anyone has been able to 
discern what this approach is.
    I noticed that yesterday, Treasury Under Secretary Mary 
Miller said that she was surprised that anyone would believe 
that FSOC is considering possibly designating the asset 
management industry as an SIFI. And she was quite adamant that 
FSOC did not follow the G-20's Financial Stability Board's 
designation of these three U.S. insurers.
    How credible is it to you that the FSB would have made 
these designations without the consent of Treasury and other 
U.S. participants?
    Mr. Wallison. It seems to me completely unreasonable to 
believe that the FSB would go ahead with a designation of U.S. 
firms without the agreement of the U.S. participants, 
particularly the Treasury Department and the Fed.
    Chairman Hensarling. What concerns do you have if the 
United States would continue to follow the FSB's lead?
    Mr. Wallison. I have a very serious concern about process 
here, because at least in the banking area, the Basel capital 
requirements are put into place by a group of regulators, and 
then they are put into place by the U.S. bank regulators here 
in the United States. I am afraid that some people are looking 
at the process of the FSB as similar to the bank capital 
process that is undertaken in Basel, and if that is so, they 
are expecting at the FSB that once they designate an 
institution as an SIFI, the FSOC here in the United States will 
simply take that designation and apply it in the United States.
    That is not, I think, what Congress intended when it set up 
the FSOC and expected some kind of analysis. And it is not 
getting that analysis anyway.
    Chairman Hensarling. The Chair needs to gavel himself down.
    The Chair now recognizes the ranking member, Ms. Waters, 
for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Mr. McNabb, I spent a considerable amount of time following 
this subprime meltdown that we had in this country, and I 
worked very hard to convince a lot of people, despite the fact 
I and others were criticized for it, to do this bailout because 
we felt that this country's economic future was at stake. And 
we felt that the recession could morph into a depression, and 
so we worked very hard to try and do what we thought was the 
best thing.
    In all of the work that we were doing, AIG, for example, 
emerged as a real problem, an insurance company. So my decision 
about whether or not I support FSOC being able to take a look 
at nonbank companies is based on some of what I learned during 
that awful period of time that we went through.
    Now, we find that AIG again is designated as an SIFI, and 
so I want to understand from you why you think FSOC is wrong in 
taking a look at something like AIG. It doesn't have to be 
specific, but I use that as an example.
    Mr. McNabb. Thank you, Ranking Member Waters.
    The AIG question actually, I think, highlights an important 
point. When you look at what happened at AIG, it was the 
activities at the firm. AIG had morphed into much more than an 
insurance company, and it was the activities that really led to 
their demise. The activities were extraordinary leverage and 
excessive risk-taking. And I would say both those kinds of 
activities have been present in almost every financial crisis 
going back 500 years.
    When we talk about the mutual fund industry, as an example, 
funds employ no leverage. And the other difference, of course, 
is that funds are acting as agents as opposed to proprietary 
traders and so forth, and that is a very big difference.
    And so the activities that drove AIG to the brink are 
certainly the kinds of activities that should be looked at. But 
it is not really based on the firm, it is really the leverage 
and the activities, much as my colleague Mr. Smithy here on the 
panel suggested regarding the regional banks.
    Ms. Waters. So you don't think that AIG, Prudential, as 
well as maybe GE Capital should be designated?
    Mr. McNabb. I am not expert enough on GE Capital or 
Prudential. Again, my take would be to look at the factors that 
make those firms either more risky or less risky. And it is not 
the firm's size or even the assets under--
    Ms. Waters. It is about risk, Mr. McNabb.
    I want to move to Mr. Barr now. Mr. Barr, I have heard a 
lot about the incompetence of FSOC. They don't know what they 
are doing, they don't know how to regulate or determine risk of 
insurance companies, et cetera.
    Do you agree that the FSOC has both the expertise and the 
authority to appropriately assess nonbank financial 
institutions such as insurance companies? Do they have the 
authority and the expertise?
    Mr. Barr. I believe they do, Ranking Member Waters. I 
believe that the FSOC has developed a quite extensive staff and 
expertise across the financial sector. They could always do 
more. I think the process of building expertise in a new agency 
is a challenging one. I think they should do more to build up 
their staff and the staff of the independent Office of 
Financial Research as well.
    But they certainly have the authority, and they have plenty 
of people with experience.
    Ms. Waters. Mr. Wallison, you made quite a point of talking 
about the lack of competence and expertise at the FSOC. If they 
were competent, if they had the expertise, if they could be 
designed in a way that you would design them, do you think 
there should be an FSOC?
    Mr. Wallison. Yes, I always thought there should be an 
opportunity, as there was with the Presidential Council that 
used to meet and talk about common problems in the regulatory 
area. And, in fact, something like FSOC could get together and 
talk about whether they think that there are systemic issues 
developing in the economy.
    My problem with FSOC is that it has the power to make 
decisions to turn over certain institutions to the Fed for 
bank-like regulation without even knowing what bank-like 
regulation would be, for example, for an insurance company, and 
without actually showing us the basis for those decisions.
    If we think about those decisions, they have to do with the 
future. Will a firm's distress cause instability in the U.S. 
economy? Those are guesses about the future, and if they 
provide no data about what they think will happen, I don't 
think this is a credible decision.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, the chairman of our Capital Markets Subcommittee, for 
5 minutes.
    Mr. Garrett. Thanks, Mr. Chairman.
    Mr. Wallison, can you briefly say, in your view, does SIFI 
designation reinforce too-big-to-fail?
    Mr. Wallison. Yes, I think that is one of the problems with 
it, of course, and that is once you are said to be an 
institution whose failure might cause the instability in the 
United States economy, you are saying it is too-big-to-fail.
    Mr. Garrett. Right.
    You heard the testimony of Professor Barr. He seemed to be 
saying that all is well with FSOC, with their expertise and the 
like. Do you concur?
    Mr. Wallison. I don't know any of the experts they have, 
but if you look at the decision that they made in the 
Prudential case, they provided no data that would suggest that 
they are experts. And--
    Mr. Garrett. That is a good point. So, Professor Barr, you 
just said a minute ago that they had the expertise, and you 
referred to the OFR. Have you read the OFR report that was--but 
for the fact that SEC put it up on their Web site would not 
have been disclosed? Have you looked at that? And is that what 
you base the fact that you think they have the expertise to do 
the job?
    Mr. Barr. I believe the question was asked about the 
expertise of the FSOC, which I think is strong. I think the OFR 
is a new organization and is still building.
    Mr. Garrett. You referred back to them and said--you 
referred back and said one of their bases of expertise is the 
OFR. So have you looked at the report?
    Mr. Barr. Yes, I have.
    Mr. Garrett. And do you know that virtually every one of 
the commentators on there have basically criticized it and said 
there is absolutely no empirical data in it? Did you find 
empirical data it in?
    Mr. Barr. The report was not something I would hang my hat 
on.
    Mr. Garrett. All right. So, you wouldn't hang your hat on 
it, but apparently FSOC hung their hat on it. So if that is--
    Mr. Barr. I have no idea--sorry, sir, to interrupt--one way 
or another about that.
    Mr. Garrett. That is a good point. So then, how can you say 
that they are acting with empirical data if you are not able to 
say, and we are not able to say, and I think that is Mr. 
Wallison's and Mr. Atkins' points as well, that when we look at 
FSOC, we cannot figure out what are their facts, what is their 
analysis, and what are their standards? And if we can't figure 
those things out from FSOC, how can you sit there and say that 
they are operating with facts, analysis, and standards?
    Mr. Barr. I am not privy to the internal processes at all 
of what is going on at the FSOC, but my understanding is they 
have not acted in any way with respect to some designation of 
asset managers. So I have no way of knowing one way or the 
other the extent to which the OFR report may or may not play a 
role in that process.
    Mr. Garrett. And isn't that really the point? That not only 
are you not privy to it, Members of Congress are not privy to 
it. I guess no one actually is privy to it. Even commissioners 
from the various agencies where the chairmen are members of are 
not privy to it.
    And I think that is one of the simple things that we could 
do is to allow the American public to be privy to this 
information, to be privy to how they make the decisions, what 
the facts are, what the analysis is.
    Mr. Atkins, would you agree that this sort of information 
by FSOC, how they make this, what the standards are, should be 
open to the American public and the industry as well?
    Mr. Atkins. Absolutely, Congressman Garrett.
    Mr. Garrett. Why is that?
    Mr. Atkins. Because when you look at it--this goes back to 
the essence of bank regulation, I think, versus other sorts of 
regulation--it comes down to transparency. And bank regulators 
love, because they are focusing on safety and soundness, to 
lurk in the shadows and do their regulation not in the broad 
daylight like other regulators do. I think that is part of the 
problem here with the FSOC.
    Mr. Garrett. I have a bill out there, and basically it 
would subject FSOC to the Sunshine Act and the Federal Advisory 
Committee Act. I will just throw this out to the whole panel.
    Is there anybody on the panel who would say that there 
should not be more transparency with FSOC? Is there anybody on 
the panel who would say that they should not have to operate 
like just about every other agency in the Federal Government 
and have a little bit of sunshine? Does anybody disagree with 
more transparency at FSOC?
    Mr. Barr. I think, Mr. Garrett, there ought to be 
regularized processes and transparency. I am not sure that the 
Sunshine Act is always the best way of doing that. And if you 
are asking me about the other regulatory agencies, I think that 
the Sunshine Act often makes, in its particular formulations, 
it difficult to do their job in a transparent way and in a way 
that is considered.
    So I would be for more transparency and regularization, but 
maybe not quite with that particular mechanism as the tool to 
do it.
    Mr. Garrett. Okay. I appreciate that. And I guess the rest 
of the panel is, instead, open to more transparency.
    Let me ask this, then. Until we get to that point, whether 
it is as far as I would like to go and other Members would like 
to go, or, as Professor Barr finds, some intermediate, is there 
anyone who would disagree with this statement, that until we 
get more transparency, more openness, and understand what the 
facts, analysis, and standards are, and they should cease and 
desist what they are doing right now? Does anybody disagree 
that they should be on hold until we know this?
    Mr. Scalia. I certainly agree with that prescription for 
two reasons: first, so that there can be a better public 
understanding of what the law is that they are applying; and 
second, because they need to look more closely at what the 
consequences of their designation decisions are going to be. 
And until we have those things, I do think it is precipitous 
for them to continue designations.
    Mr. Garrett. I appreciate that. And I thank the chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, the ranking member of our Capital Markets 
Subcommittee, for 5 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman, and Ranking Member 
Waters.
    Professor Barr, I am looking at the law right now, and 
there is an appeals process, and an open appeals process, in 
Title 1 of the bill. And it says, notice and opportunity for 
hearing and final determination.
    If I remember, we had a whole appeals process. If someone 
was designated, they could say, I disagree. There could be 
other hearings, another whole determination. And people say 
that the FSOC Board is not competent. It is composed of the 
head of the Treasury, the Federal Reserve, the OCC, the FDIC, 
the SEC, the CFTC, the CFPB, the FHFA, and the NCUA, and the 
independent insurance expert. So, it is the basic financial 
regulators.
    I would say we are in big trouble if our financial 
regulators, the head of these departments, are incompetent. 
That is just my statement. I think they are fully vetted and 
very competent.
    But, in any event, they can appeal the process, and even if 
they are designated over their objections, there is an appeal 
to the courts, where everything is publicly debated, and 
assessments are made before a court. Is that correct?
    Mr. Barr. That is correct.
    Mrs. Maloney. So I would argue there is an extensive appeal 
process as we see it.
    Now, there has been a lot of designation, or, rather, 
conversation, about AIG. And AIG was an insurance company, but 
what designated them as an SIFI was their financial 
entrepreneurship, shall we say. It was not the insurance area. 
The insurance area was well-run, was not a problem. It was the 
London office where they were in all types of risky products, 
which brought this country to a debt of $185 billion. So, that 
is what designated them.
    I have one question for the panel: Has any insurance 
company that is just totally insurance been preliminary 
designated or designated as an SIFI?
    It is my understanding that no insurance company that is a 
real insurance company--if you are experimenting in financial 
products, then they have been designated, but not one that is a 
pure insurance company. Has anyone been designated that is a 
pure insurance company?
    Mr. Scalia. Prudential was designated essentially 
exclusively on the basis of its insurance activities, which 
drew dissents from both members of FSOC who have expert in 
insurance. They spoke at length about how their colleagues on 
FSOC appeared to have no appreciation whatsoever for the 
industry.
    Mrs. Maloney. Then, why was that designated and other 
insurance companies were not? What was Prudential doing that 
was different in financial areas? I would like to ask Mr. Barr, 
since he is a professor and not involved in the industry. I 
respect the industry, but I want to hear from the professor and 
then from you.
    Mr. Barr. I don't know whether other insurance companies 
will or won't be designated in the future. My understanding is 
that the FSOC was concerned with the extent of the activity of 
Prudential that occurred both with respect to its investment 
activities and the relationship of various of its 
subcomponents. But I don't know whether or not the FSOC will be 
similarly concerned with other types of insurance firms in that 
regard.
    And I think that you are correct to point out with respect 
to AIG that AIG's activities obviously extended far beyond the 
regular activity of an insurance firm. There were also problems 
within AIG with respect to securities financing among the 
various affiliates within AIG that created additional risk.
    Mrs. Maloney. Let's go to Prudential. Was Prudential 
involved in any innovative entrepreneurship financing that was 
different from regular insurance? No?
    Mr. Barr. I have not examined with any detail for this 
hearing the balance-sheet and off-balance-sheet activities of 
Prudential.
    Mrs. Maloney. I would like to look at it and read the 
report and then get back with more questions.
    But I also have some other questions. I wanted to ask Mr. 
McNabb, in your testimony you noted that under the current law, 
the SEC now requires, I believe, at least 83 percent or 85 
percent to be liquid in their portfolios. And in your 
experience, during the crisis, did this remain liquid or not?
    Mr. McNabb. In our experience, it remained fully liquid.
    Mrs. Maloney. Okay. Would anybody else like to comment?
    And also during the redemption period when people--there 
was a run really on mutual funds and everything else. During 
the redemption period, were they in any stress at all that you 
are aware of?
    Mr. McNabb. First of all, I would say there was not a run, 
with all due respect.
    Mrs. Maloney. Okay.
    Mr. McNabb. A run really refers--
    Mrs. Maloney. Demand, shall we say, a demand.
    Mr. McNabb. Redemptions--monthly redemptions never totaled 
more than roughly 2 percent of fund assets on average; even in 
the most extreme cases it was single digits. And again--
    Mrs. Maloney. So there wasn't a--
    Mr. McNabb. There was plenty of liquidity in the equity 
markets.
    Mrs. Maloney. There was no crisis.
    Mr. Garrett [presiding]. The gentlelady's time has expired.
    Mrs. Maloney. Unfortunately. This is a fascinating panel. I 
want to thank all of you.
    Mr. Garrett. It is.
    I now yield to the gentleman from Alabama, Mr. Bachus, the 
chairman emeritus of the committee, for 5 minutes.
    Mr. Bachus. Thank you.
    The first point Mrs. Maloney has made is that AIG--it was 
their counterparty risk arising from the credit default swaps, 
which was nothing to do with your traditional insurance 
business. And any argument that insurance companies ought to be 
regulated because of AIG just simply fails on the facts.
    Insurance companies don't have the same problems with 
banks. Their obligations are long-term. They don't depend on 
short-term deposits and then lend long. So, it is just an 
absolute fallacy.
    Mr. Barr, I remember you sitting in the conference 
committee where about a third of Dodd-Frank was written, sort 
of orchestrating the different pieces with Chairman Dodd and 
Chairman Frank. So I think you are probably as close as anybody 
to being the author of it. It probably ought to be called Dodd-
Frank-Barr.
    So, I am not surprised--
    Mr. Barr. I doubt they would agree with that.
    Mr. Bachus. I am not surprised you are here defending it.
    I think Mr. McNabb makes an excellent point that I didn't 
know. I always learn something in these hearings that I didn't 
know, and that is that while the market was dropping 40, 50 
percent, and people were liquidating their entire portfolios, 
the mutual funds only sold 6 percent of their stock. So they 
were really more of a stabilizing influence during the 
financial crisis. Thank goodness that some of the pension funds 
weren't unloading, and the mutual funds weren't unloading. I 
can't imagine what it would have been like otherwise. And their 
structure, their operation, their risk profile, comparing them 
to a bank is--it is apples and oranges.
    Is there anybody who disagrees with that, maybe other than 
Mr. Barr?
    Mr. Barr. Let me address an aspect of that if I could, Mr. 
Bachus. I think that the portion of the industry that did 
experience a run is the money market mutual fund part of the 
industry. Money market mutual funds experienced quite a 
destabilizing run in the wake of Lehman Brothers' failure, and 
it was stemmed only with a $3 trillion guarantee--
    Mr. Bachus. It was less than 1 percent.
    Mr. Barr. --from the Treasury Department.
    Mr. Bachus. Again, their problems were sort of--when you 
have a panic, there was certainly maybe a perception, but there 
was absolutely no reality. And I am sure a lot of people went 
there because they were losing money and liquidity and cash 
from some of the pullback in lending.
    I understand what you are talking about. You are talking 
about maybe one money market fund, and it was less than 1 
percent. You are talking about ``breaking the buck.'' Is that 
what you are referring to?
    Mr. Barr. I am talking about the breaking the buck and the 
Reserve Primary Fund, but also the run that occurred in the 
money market mutual fund system that was arrested--
    Mr. Bachus. Was there really a run?
    Mr. Barr. --with a $3 trillion guaranteed--
    Mr. Bachus. Let me call on--
    Mr. Barr. --by the Federal Government.
    Mr. Bachus. Mr. Atkins, was there a run?
    Mr. Atkins. No. Well, I just heard of that. I think the 
empirical evidence and studies, like one by the firm Treasury 
Strategies, shows that was actually not the case.
    Mr. Bachus. I just think that there is a perception, just 
like this perception that AIG, their insurance business; they 
were fully reserved, their insurance business.
    Mr. Barr. I think we just have a--
    Mr. Bachus. I think we have to start with the facts, and 
the facts are when you are talking about a mutual fund, you are 
talking about a bank regulator regulating something that is not 
a bank in any way.
    Mr. Barr. I was--I'm sorry.
    Mr. Bachus. Let me ask you this. I am a cosponsor of Mr. 
Luetkemeyer's bill, for two reasons. One, Mr. Scalia mentioned, 
that we don't know what their criteria is. It is not an open 
process. You don't know what to address because you don't know 
what--why they are deciding, which, to me, is against the whole 
democratic process, rule of law. You don't know what the law 
is--Mr. Garrett going over and not being able to even attend.
    Don't you see a problem with that, that it is not open and 
transparent and--
    Mr. Barr. I think actually having congressional involvement 
in the FSOC would undermine the ability of the Congress to 
provide independent and effective oversight of the FSOC through 
forums such as this.
    Mr. Bachus. Okay. So if we understood what was going on, it 
would undermine our ability to have oversight?
    Mr. Barr. I do.
    Mr. Bachus. Okay. That makes a lot of sense.
    Thank you.
    Mr. Garrett. On that note, I yield now to the gentleman 
from California.
    Mr. Sherman. Mr. Atkins, I refuse to use ``sci-fi'' in lieu 
of SIFI because I don't want to besmirch my favorite genre of 
fiction.
    The gentlelady from New York points out that there is an 
appeals process, but, Mr. Scalia, I think you point out there 
are no standards to be applied. So if you can appeal to the 
Supreme Court and say, we don't meet the standard, but the 
standard is you are an SIFI because we say you are an SIFI, I 
think the Supreme Court would say, yes, you meet the standard.
    But, Mr. Scalia, I think you have it wrong when you say the 
FSOC is the most opaque government agency in making its 
decisions because you are clearly not familiar with the 
Financial Accounting Standards Board and its process. So at 
most, they are in second place.
    I think the FSOC got it wrong. By looking at everyone in 
this room, you all represent folks, with the exception of the 
professor, who might be designated SIFIs. The entities that 
were at the core of the meltdown were the credit rating 
agencies. They are not here because their balance sheets are in 
the millions, and your balance sheets are in the trillions.
    But the fact is that the decisions made by the credit 
rating agencies, paid for by the issuers, selected by the 
issuers, umpire selected by one of the teams, controls far more 
trillions of dollars than decisions made by the witnesses in 
this room.
    And the fact that the SEC hasn't even implemented the 
modest provisions of Dodd-Frank with regard to the selection of 
credit rating agencies makes me think I am going to be back in 
this room in 5 or 10 years talking about another meltdown.
    The gentleman from Alabama, I think, points out that 
insurance companies are different. I think the proof that we 
had better regulation in the States than we had in Washington 
is that AIG was obviously run at the top by drunken sailors. 
They crashed on the rocks all the ships that they were allowed 
to control. But even under that management, all of the ships, 
that is to say subsidiaries, that were subject to State 
insurance regulations survived and have even provided 
sufficient profits to resurrect the fleet.
    The problem, therefore, is not in the States, it is here in 
Washington, where we prohibit calling a credit default swap 
insurance, which is, of course, crazy. If I ran a fire 
insurance company and said, I am unregulated; if your house 
burns down, I won't give you a check, I will give you a U.S. 
bond; you can trade your house, your burnt-down house for a 
U.S. bond, that would be an end run around, say, fire insurance 
regulation, and we wouldn't allow it. But instead, we have this 
bizarre notion that if we insure your portfolio, that is 
insurance, but if you can trade your burned-down portfolio for 
U.S. bonds, that is not insurance.
    And so Congress allowed AIG and continues to allow these 
unregulated insurance policies on portfolios to be issued 
without any insurance regulation.
    Finally, I will point out that too-big-to-fail is too-big-
to-exist. It shouldn't be just a matter that these entities are 
so large that we will give them special regulation, and then 
they will save 80 basis points on their cost of funds.
    Mr. McNabb, you have all my money. You may not know this. 
The only way you are an SIFI in the sense that you could take 
an action that could cost Americans trillions of dollars would 
be if the money you say you are holding for me isn't in your 
vault.
    I am responsible for the investment decisions. Putting 
aside all the things you do voluntarily, and all the things you 
do as part of industry, and looking only at the requirements 
imposed by government, what requirements are there so that I 
know that the value of the assets in your vault is equal to all 
the statements you have mailed out to everybody in the country?
    Mr. McNabb. First of all, thank you, sir, for being an 
investor. I am very grateful for that.
    Mr. Sherman. Thanks for the low fees.
    Mr. McNabb. We are endeavoring to keep them as low as 
possible.
    The structure of mutual funds is very different--this is 
the big difference between funds and a bank-like organization. 
Each fund is a separate entity and is separately managed, has a 
separate board of directors, and the assets are custodied 
separately. So actually, there is no Vanguard vault where your 
assets reside; they are held by a separate custodian. And funds 
cannot be commingled.
    So, let us use the S&P 500 Fund as an example. If 
Vanguard--
    Mr. Sherman. You picked the one that has all my money.
    Mr. McNabb. If Vanguard went out of business tomorrow, then 
the fund's board would simply arrange another advisory 
agreement with another firm to manage these assets. Those 
assets would be separate and whole. Different funds also cannot 
commingle assets. So one fund being down can't borrow from 
another fund in order to ``make it whole.'' Each fund has to be 
treated as a separate entity.
    And again, this goes to the whole nature of the difference 
between funds and banks. We are acting as agents. You are an 
equity holder in a fund, and we are acting on your behalf, 
whereas a bank is a proprietary institution.
    Chairman Hensarling. The time of the gentleman has expired, 
but the Chair found the answer interesting.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, the chairman of our Housing and Insurance 
Subcommittee, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    The identification of a nonbank systemically important firm 
is a fairly serious exercise. And I think it has a lot of 
implications for the competitiveness of some of those firms. It 
says to the world that this institution has systemic risk to 
the financial markets.
    It has been discussed that recently Prudential was found to 
be one of these SIFIs. And it was interesting, and I think it 
has been brought out in testimony, that several of the people 
who sit on FSOC, either in an advisory capacity or a voting 
capacity, didn't agree with that decision. In fact, John Huff 
said that FSOC's misguided overreliance on banking concepts is 
no more apparent than FSOC's basis for the designation of 
Prudential Financial. He went on to say that the basis for that 
designation was grounded in implausible, even absurd scenarios.
    Mr. Scalia, what were your views on FSOC's mythology and 
their final decision?
    Mr. Scalia. The Prudential decision is an unusually thinly 
reasoned and poorly substantiated decision for a government 
agency in several ways. As you note, the members of FSOC who 
had the expertise in insurance were very troubled by the 
analysis or lack thereof.
    Mr. Wallison talked about the coordinating function of 
FSOC. We have talked about the expertise of FSOC. Those can be 
valuable things, but if those members of FSOC who have the 
expertise in that specific industry are deeply troubled and 
ignored, that is going to yield a very poor government 
decision, which is exactly what happened there. So I don't 
think that FSOC--to the extent it has expertise--functioned 
properly in that case.
    Mr. Neugebauer. There has been a lot of discussion about 
what does that mean, and what does that mean to that company. 
What would you see some of the consequences that a firm might 
experience, and its customers, for being designated as an SIFI?
    Mr. Scalia. The consequence of SIFI designation that is, I 
think, most apparent is being subjected to different capital 
requirements. And we currently, under Dodd-Frank as written and 
as interpreted by the Fed, have every reason to believe that a 
designated company will be held to the capital requirements 
applied to a bank, which is remarkable, because I think there 
is unanimity that bank-based capital standards are really 
inappropriate for other kinds of financial institutions.
    I think what is transpiring is that FSOC is taking the 
position, ``We don't make the capital standards decision, the 
Fed does;'' and the Fed says, ``We don't make the designation 
decision, really, FSOC does.'' And so, you have designation 
with consequences that everybody recognizes are quite 
problematic, but the answer seems to be, that is okay because 
the left hand doesn't know what the right hand is doing, which 
is not ordinarily how the government ought to defend its 
actions, particularly when you have this body, FSOC, which is 
supposed to be coordinating and ensuring consistent 
intelligence in how regulatory matters are approached.
    Mr. Neugebauer. Thank you.
    Mr. Wallison, you described FSOC's designation of 
Prudential as perfunctory and data-free, I believe. In fact, 
you said that the only useful numbers in its designation were 
the page numbers.
    So should the FSOC's designation process be more rigorous 
or more transparent, or what would you think is a more 
appropriate process for FSOC to go through for these 
designations?
    Mr. Wallison. I think we have to recognize from the 
beginning that what they are doing is very serious for the 
firms involved, and serious, actually, for the economy as a 
whole. And so we would expect that when they make a 
designation, they would actually be able to show us, especially 
show Congress, what it was they based the designation on.
    I also said in my remarks that the FSOC used the word 
``significant'' 47 times in a 12-page paper, which was their 
entire justification for designating Prudential as an SIFI. 
This is not adequate. And one of the reasons I said that they 
seemed to be an emperor without any clothes is that I went back 
and looked at what they did for the other previous designees, 
AIG and for GE Capital. Same thing. No specifics.
    So I have the idea--and I would like to see it disproved--
that they have no way of demonstrating the things that they are 
required to demonstrate, which is that a firm's financial 
difficulties would lead to instability in the U.S. economy. And 
if they have no way of demonstrating that, they shouldn't be 
allowed to make these decisions arbitrarily.
    Mr. Neugebauer. Thank you. My time has expired.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Hinojosa, for 5 minutes.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Before the financial crisis, the financial regulators 
focused on different segments of the market, which caused a 
fragmented approach to oversight. There was no organization 
tasked with taking an eagle's-eye view of the entire financial 
system to watch for impending trouble.
    The Financial Stability Oversight Council was created to do 
just that. Had there been a council in place, it is possible 
they might have identified the systemic risk infecting the 
economy and could have diverted the crisis.
    The Financial Stability Oversight Council is the 
cornerstone of the Dodd-Frank Act. Let us not forget the cost 
of the disjointed approach to financial regulation prior to 
that crisis. The Government Accountability Office estimates 
that the 2008 financial crisis cost the U.S. economy more than 
$22 trillion. Whereas today's hearing supposedly seeks to 
examine the dangers of the FSOC's designation process, the real 
danger to the American economy arises when our regulators are 
asleep at the switch.
    As the Financial Stability Oversight Council proceeds with 
identifying systemically important institutions, Congress 
should seek to improve its effectiveness, not hinder it.
    Some criticize that the FSOC's designation process has been 
opaque. My first question is to Mr. Barr. Do you have any 
suggestions for increasing transparency in this process?
    Mr. Barr. I think that you are correct that the FSOC 
designation process is essential to policing the boundaries of 
systemically important financial institutions and ensuring that 
there is a safe system in place.
    There are undoubtedly ways that the process, which is a 
quite new process, can be made more standardized and more 
transparent over time. I think that the FSOC has done a good 
job, given the new nature of the proceedings, to get started. 
There may be ways of providing more information in advance to 
firms that are more specific about the types of showings that 
will be required. As it currently exists, a lot of that 
information is provided to firms during the process of the--the 
provisional designation, and it may be possible over time to 
move that data and information up further in the process.
    Mr. Hinojosa. Mr. Barr, is the FSOC appropriately balancing 
the need for transparency against the need to protect sensitive 
market and supervisory information?
    Mr. Barr. I think the balance they have struck so far is a 
reasonable one. It is not the only one you could strike, but I 
think that it is a reasonable one. And I think that firms have 
a great deal of time to participate in the process, the ability 
to provide essential information to the FSOC that is necessary 
for a designation.
    Again, I think over time it may be that the FSOC, after 
reviewing its experience over the initial period, may move the 
process one way or another along the lines of providing greater 
transparency, but I think the path they have chosen thus far is 
a reasonable one, given the newness of the process.
    Mr. Hinojosa. Lastly, Mr. Barr, do you agree that the FSOC 
has both the expertise and the authority to appropriately 
assess the nonbanking financial institutions, such as insurance 
companies?
    Mr. Barr. I do. It certainly has the expertise and the 
authority to act in these areas based on not only its own 
staff, but the staff of its member agencies. As with any 
organization, I think that it is going to continue to want to 
build the expertise, the in-house capacity, the data analytics, 
the data collection that is necessary to be effective, but I 
think they are doing a good job so far.
    Mr. Hinojosa. I yield back, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from West Virginia, Mrs. Capito, the chairwoman of 
our Financial Institutions Subcommittee, for 5 minutes.
    Mrs. Capito. Thank you, Mr. Chairman. And I apologize for 
having to step out of the hearing during your statement. I just 
have a couple of questions.
    One question I wanted to ask was alluded to in my opening 
statement, and that is the $50 billion threshold for automatic 
SIFI designation for banks. As you know, there has been a lot 
of discussion as to whether that is an arbitrary deadline--
arbitrary designation threshold. And I guess I would like to 
ask each of you to answer the question.
    There have been a lot of folks who have said that we need a 
more nuanced approach where we are looking more at the risk 
profiles and deeper into each institution's business models as 
opposed to just using a specific $50 billion as a threshold. So 
I am just going to go down the line and ask each of you if you 
have an opinion on that, and I will start with Mr. Atkins.
    Mr. Atkins. Thank you.
    I think that to have an arbitrary type of threshold like 
that does not make a lot of sense. But I think, to what is 
being discussed here, if you look at what even President 
Obama's designee on the FSOC said about the whole process with 
respect to Prudential, he criticized and said it was not 
reasonable, not supportable, no data was run. So even the 
President's own insurance designee had that to say about the 
flow of process.
    Mrs. Capito. Okay. Mr. McNabb?
    Mr. McNabb. Again, the asset level makes no sense to me 
either, neither for banks nor for investment companies.
    I would say any focus that the FSOC should have should be 
on activities as opposed to institutions or asset levels.
    Mrs. Capito. Is there a feeling that the threshold is too 
low? It should go to $100 billion, or just an arbitrary 
threshold is--
    Mr. McNabb. I think just arbitrary.
    Mrs. Capito. Okay. Mr. Scalia?
    Mr. Scalia. My principal concern with the threshold is that 
there is no evidence that there is anything beyond that 
threshold that is being considered and resulting in 
designation. It appears to be the case, for example, when you 
read the Prudential decision that once you hit the threshold, 
the agency will simply engage in a series of speculative 
hypotheses and designate you.
    Mr. Wallison has pointed out that the sort of undefined 
word ``significant'' appears 47 times. There is actually a word 
that appears almost twice as much. In this 12-page decision, 
the word ``could'' is used 87 times. The words ``would'' or 
``will,'' which constitute findings, scarcely appear at all. So 
there is this very speculative approach once you hit that 
threshold.
    Mrs. Capito. Mr. Barr?
    Mr. Barr. I think the key question is, the key point is to 
make sure that the approach that is taken to firms is a 
graduated approach and a nuanced approach that is consistent 
with not just their size, but their risk profiles. So I don't 
think there is an on/off switch. If you are a $50 billion plain 
vanilla bank, you need a much lighter touch form of oversight 
than if you are a complicated institution. And I think having 
nuance and graduated approaches that are tailored to the risks 
that firms do or don't pose is the essential thing.
    Mrs. Capito. Right. But that doesn't exist presently. It is 
just a threshold and on type of approach, correct?
    Mr. Barr. In the current structure, it is not just an on/
off switch; there is a graduated approach to regulation. I 
think that the--the point would be making sure that it is 
graduated enough and nuanced enough. It is not an on/off switch 
now. There are higher, more intrusive forms of regulation, of 
supervision, of capital requirements, of stress testing, of 
resolution planning that are more stringent at much higher 
levels of asset size--
    Mrs. Capito. Right.
    Mr. Barr. --than they are for a smaller firm. I think that 
is good and appropriate. And the question is, I think, can you 
just make that even more of a graduated nuanced approach? I 
think there is room to do that.
    Mrs. Capito. Okay. Mr. Smithy?
    Mr. Smithy. Thank you.
    So as we stated in our written testimony, we do believe an 
arbitrary asset size threshold is inappropriate, as we stated. 
Our business models are very straightforward. We are simple. We 
take deposits and make loans. We are not engaged in the range 
of activities that would lead to a situation where it threatens 
the U.S. financial system, and so we do believe the arbitrary 
nature of that threshold is inappropriate. We think a more 
activity-based approach would give regulators the flexibility 
to tailor regulation to the risks inherent in each firm.
    Mrs. Capito. Thank you.
    Mr. Wallison?
    Mr. Wallison. If regulators on the FSOC are able to 
designate nonbank financial institutions as SIFIs, then they 
ought to be able to do exactly the same thing for banks, and 
that is not what they are told to do. They have been told to 
choose an arbitrary number.
    I might mention that the International Association of 
Insurance Supervisors made up a methodology for how you judge 
the riskiness of an insurance company, and they provided that 
to the FSB, which apparently was never used. But, in any event, 
what it said is that size is about 5 percent of the question. 
There are other, much more important questions that don't have 
anything to do with size.
    Mrs. Capito. Thank you. I think my time just expired. 
Excuse me.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    Mr. Chairman, I just have a couple of procedural things. I 
have here a letter from Damon Silvers, he is the policy 
director and special counsel for the AFL-CIO; a letter from the 
Americans for Financial Reform; and a white paper by Douglas J. 
Elliott, a fellow at the Brookings Institution, assisted by 
William Becker. The title of it is, ``Systemic Risk and the 
Asset Management Industry.'' I would like to have those entered 
into the record.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Lynch. This piece by Douglas Elliott is particularly 
good. I don't necessarily agree with all of it, but I think it 
serves the purposes of what we are talking about here today.
    I think it is an easy question. I want to thank the 
witnesses. It has been a very helpful discussion.
    The easy case, I think, is the case of a garden-variety 
mutual fund. I think there are a lot of aspects that you have 
all pointed out that acquit the idea of SIFI designation for 
mutual funds. The revenue stream is fairly stable, they get 
their money from fees, very low use of leverage, much smaller 
balance sheets than what we are generally concerned about, very 
little debt. The share price is published and recalculated each 
day, and shareholders are free to redeem their shares every 
day.
    And, best of all, mutual funds have really allowed average 
families, average working families, to assemble wealth. It has 
been an enormous benefit to a lot of American families, and it 
would be--as Mr. Elliott points out in his paper--a shame if we 
were to regulate these funds in such a way that destroyed that 
opportunity for a lot of hard-working families.
    The tougher question really, and I think, Mr. Barr, you 
have tried to address this on a couple of occasions, is the 
question of hedge funds that operate more like banks and that, 
quite differently, have no limits on leverage. They are not 
subject to any of the regulations that registered funds are 
subject to. They can impose very onerous redemption 
restrictions on investors, and they are exempt from many of the 
oversight and reporting requirements we have on other funds.
    In the other case is money market funds that operate in the 
repo market, and you started to talk about that earlier with 
the gentleman from Alabama. And those are the tougher 
questions, because those are examples of the problems that we 
are trying to get at, but they are ``asset managers.''
    So, Mr. Barr, how would you get at the risks that these--
look, some hedge funds don't operate high leverage, but a lot 
of them do, and there is no limit on the investment strategies 
that they adopt. They are sort of out there, and we don't know 
a heck of a lot about them until something goes wrong.
    How would you address the situation with these hedge funds 
and with the money market funds that operate in the repo market 
that we saw runs on previously?
    Mr. Barr. With respect to money market mutual funds, I am 
in favor of the SEC using its existing authority to remove the 
regulatory provisions that permit funds to carry a stable net 
asset value unless they have capital that deals with the run 
risk from such a fund. I think that having that option is the 
preferred policy approach.
    With respect to hedge funds, the Dodd-Frank Act gave the 
SEC the authority to collect information with respect to hedge 
funds, and obviously the FSOC and the OFR also have such 
authority. And I think having that information on such funds is 
the primary way of understanding what is going on in that 
marketplace.
    If a hedge fund was sufficiently systemically important, 
the FSOC also has the ability to designate such a firm and to 
subject such a firm to supervision and capital requirements. In 
the absence of such a finding, most hedge funds, even highly 
leveraged ones, can operate and disappear without anyone 
worrying about it.
    Mr. Lynch. Yes. What about the money market operating in 
the repo market where we have had runs before?
    Mr. Barr. I think that repo market reform directly is 
probably the most efficient way of getting at that. I think 
there is much work that can still be done to reduce risk in the 
triparty market in particular, and the Fed has existing 
authority to do that.
    Mr. Lynch. Thank you. I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from North Carolina, Mr. McHenry, chairman of our Oversight and 
Investigations Subcommittee, for 5 minutes.
    Mr. McHenry. Thank you, Mr. Chairman.
    Mr. Barr, you said the OFR's asset management report is not 
something you would hang your hat on--I think that is what you 
said a little bit earlier. And I think that is interesting, 
because the FSOC directed the Office of Financial Research to 
issue the report, to undertake this. So, this was a directive 
of the FSOC. And it is interesting because OFR has functioned, 
as you well know, as basically, a vassal of the Treasury 
Department, or contained within it and the reporting structure.
    So, do you think that the research would be better done by 
independent agencies?
    Mr. Barr. The OFR can and does have independent authority 
within the Treasury Department, akin to the kind of 
independence that the OCC has within the Treasury Department. 
And I think that it, from at least all intents and purposes, 
was working with that independence in mind.
    Do I also think that it would be good for other agencies to 
look at the sector? Yes, I do. I think there is expertise in 
other member agencies and the FSOC staff at the SEC and 
otherwise, and that is healthy for the system.
    Mr. McHenry. To that end, at the SEC, they put up this 
report for notice and comment. Do you think that was positive?
    Mr. Barr. I do. I think that was a very healthy move by the 
SEC, as they have done with the money market mutual fund report 
and other efforts.
    Mr. McHenry. Sure.
    But the notice-and-comment part of this is not a 
requirement of the FSOC; is that correct?
    Mr. Barr. There is a formal process with respect to 
designation. The issuance of a report--
    Mr. McHenry. But they have to follow the Administrative 
Procedures Act.
    Mr. Barr. The issuance of a report by any government agency 
does not usually require, just for the issuance of the report, 
a notice-and-comment process. I think it is a healthy and 
useful thing for agencies to do, to put out draft reports and 
to get comments on it.
    Mr. McHenry. Do you think FSOC should be under the 
Administrative Procedures Act?
    Mr. Barr. It is governed by the Administrative Procedures 
Act with respect to its work.
    Mr. McHenry. Should the OFR?
    Mr. Barr. It is already under the Administrative Procedures 
Act, but, again, normally the issuance of a report is not the 
kind of regulatory step that would require a formal process. I 
think it is healthy and good for regulators for all government 
agencies when they are issuing a report do so.
    Mr. McHenry. I appreciate it. Thanks.
    Mr. McNabb, when the Financial Stability Board has already 
decided that asset managers are systemically important, so it 
seems like the FSOC's designation, because we just assume they 
are going to go forward with this designation of asset 
managers, it is sort of mindlessly following the FSB on this.
    So what I don't understand is asset managers being not--
they are not leveraged, so how do higher capital standards 
actually--how does that actually make sense? Higher capital 
standards would have absolutely no impact on an asset manager's 
ability to run its funds.
    Mr. McHenry. So to actually put bank-like regulations, 
capital requirements is completely unfitting with what asset 
managers do. Is that right?
    Mr. McNabb. That is correct, sir.
    Mr. McHenry. Okay.
    Mr. Wallison, you wrote that the designation process will 
result in one of two things, and let me quote you: ``Either we 
will have large, successful, government-backed firms that 
swallow up smaller competitors or we will have large, 
unprofitable, heavily-regulated giants that are gradually 
driven to failure by their more nimble and less-regulated 
competitors. In the former case, small firms are the victims 
and in the latter case taxpayers will pay for the bailouts.''
    So, designation must be the proverbial ill wind that blows 
no good. Would you concur?
    Mr. Wallison. It looks that way to me because I was talking 
there about the question of too-big-to-fail, and many people 
have said, including the former chairman of this committee, 
that, well, why is everyone opposing becoming an SIFI if, in 
fact, it is a benefit if you are too-big-to-fail? And the 
answer is that nobody really knows what the consequences will 
be. There may be benefits in the financing that you get, but 
there may be detriments in the cost of the regulation you have 
to suffer.
    And the point I was trying to make in the paragraph that 
you read is either way, as a public policy matter, it is a bad 
idea, because either we have firms that are benefited and 
outcompete those that are not designated as SIFIs or, in the 
other way, they are hurt by excessive regulation, and as a 
result they fail and the taxpayers have to come in and bail 
them out.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    First, Mr. William McNabb, let me welcome you to the 
committee. You are a graduate of the Wharton School of Finance 
at the University of Pennsylvania, the absolute greatest school 
of finance and business in the world. Of course, I am graduated 
from there, and I got my MBA there as well. And we both spent a 
lot of tough times in Lippincott Library and Dietrich Hall. 
Welcome.
    Mr. McNabb. Thank you.
    Mr. Scott. Let me just ask you this: How do you rank the 
basic general risk in the market now?
    Mr. McNabb. Could you be a little bit more specific? Equity 
markets or the bond markets or--
    Mr. Scott. As we look at this, in either market, what do 
you see as our greatest challenges as far as risk in the market 
today, whether it is the bond market--maybe the bond market. I 
will wait for you to assume which of the markets has the 
greatest risk. But I think it would be helpful to this 
committee if you could tell us what you see as the top three 
threats, risks to the market.
    Mr. McNabb. The largest threat I see to the markets is one 
that actually hasn't been talked about in any of the 
discussions, and it is the cyber risk that exists out there. 
And it is more than just a financial institution risk, it is 
really a risk to all businesses. When you look at what has 
happened in the last 18 months where nation-states are getting 
way more involved in this, that trumps almost anything I have 
seen in my career.
    Mr. Scott. Good.
    While I have the time, I also want to go to you, Mr. 
Smithy. You referenced Governor Tarullo's speech on prudential 
regulation in your comments. Why do you think that he seems 
willing to reconsider some of the existing asset thresholds 
from regulatory supervision?
    Mr. Smithy. Thank you. Based on my read of his speech, I 
think he thinks an arbitrary asset threshold is imprecise in 
its nature, and he is in favor of more tailored solutions 
reflecting the differences among firms, and he is in favor of 
regulation that is commensurate with the risk of each of these 
firms. And in his comments, I think he believes that an asset-
only threshold only subjects firms that do not engage in risky 
activities to the added burden of regulation.
    Mr. Scott. Now, correct me if I am wrong, but is it not 
true that regional banks hold one-fourth of the Nation's total 
bank deposits? Is that an accurate statement?
    Mr. Smithy. The 18 banks in the Regional Bank Coalition do 
hold one-fourth of the Nation's deposits, yes.
    Mr. Scott. And let me ask you what your greatest concerns 
are, given the status of the regional banks, as opposed to our 
much larger banks in relationship to this asset threshold 
supervision.
    Mr. Smithy. The cost burden is both direct and indirect. 
For Regions Bank, which I can speak to specifically, the cost 
of compliance and regulation has more than doubled over the 
last 5 years. It is the largest single increasing cost in our 
operating structure. There are many elements to it that seem 
unnecessary, given the activities that we are engaged in. A 
point I would give you is we now have more folks in compliance 
activities than we do in commercial lending, than commercial 
lenders at our bank. So, again, I think that speaks to the 
direct costs of compliance.
    There are also indirect costs, which are management and 
board's time and attention focusing on compliance matters and 
away from serving the needs of our communities and our 
customers.
    Mr. Scott. And if I am also clear, regional banks, unlike 
other size banks, probably do more of asset building and 
lending to small businesses as a percentage of what you do. Is 
that correct?
    Mr. Smithy. That is correct. We serve a lot of smaller and 
medium-sized markets, much like the community banks. The larger 
banks, the more internationally active banks tend to focus on 
larger organizations. So we are an important source of credit 
for small and medium-sized firms in smaller and medium-sized 
markets.
    Mr. Scott. So this asset threshold regulatory supervision 
issue that you are talking about would have a negative impact 
on your ability to assist small businesses?
    It looks like my time is up on that, and the chairman has 
done it twice. So I take the message.
    Mr. Luetkemeyer [presiding]. Thank you.
    With that, the gentleman from California, Mr. Royce, the 
chairman of the House Foreign Affairs Committee, is recognized 
for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    I have a question for Mr. Wallison and Mr. McNabb, and I 
have a question about the now infamous OFR asset management 
report, a report that even Michael Masters' Better Markets shop 
called inexplicably and indefensibly poor quality, and today a 
report that Professor Barr said he would not hang his hat on. 
And so, as has been referenced, the SEC opened the OFR's report 
for comment, which gave the public the opportunity to directly 
point out the flaws and poor analysis in the report. I think 
this simple but important step by the SEC has raised some 
serious questions about whether the OFR should be required to 
follow the same notice-and-comment procedures as financial 
regulatory agencies.
    As it relates to reports, is there any good public policy 
reason to exempt the OFR from providing public notice and 
comment as the American people expect from other regulators in 
a system that we are trying to run here that is transparent and 
open? And is there any good public policy reason to exempt the 
OFR from consulting with and incorporating changes proposed by 
prudential regulators, proposed by the safety and soundness 
regulators? And would you support congressional action to 
mandate this openness and inclusion of outside expertise?
    Mr. Wallison?
    Mr. Wallison. Yes, I think it makes all kinds of sense for 
these organizations like OFR to make their reports public. The 
public is paying for those reports, and the other agencies are 
relying on those reports. It is essential that people know what 
is in the reports that institutions, agencies are relying on, 
and the quality of those reports. If the SEC had not put out 
this report for comment, no one would have realized what a poor 
quality piece of work it was. The likelihood is the FSOC would 
have relied on it, might have even stated they were relying on 
it, and no one would have known that it provided no substantial 
guidance. So I certainly agree that, with your legislation, 
that is what should be required.
    Mr. Royce. Thank you, Mr. Wallison.
    Mr. McNabb?
    Mr. McNabb. I would agree with Mr. Wallison. When you look 
at the consequences of a report like this and the amount of 
activity that has been created since its release, I think it 
goes without saying that it should be available to the public 
and should be available for comment. I think the SEC comment 
period offered an opportunity for many people who really 
understand these issues pretty deeply to point out some of the 
data inaccuracies and the flaws in the report.
    Mr. Royce. The other aspect of my question was, in terms of 
the functional regulators, what about the concept of having the 
OFR, currently exempted from consulting with, what about a 
mandate for a consultation there where you allow an 
incorporation of the changes of those who have the 
responsibility to look at such issues as prudential regulation 
and so forth?
    Mr. McNabb. That would make sense to me in that it would 
lead to a better outcome, a better, more accurate report.
    Mr. Royce. Thank you.
    And I was going to ask Mr. Atkins, this issue was raised 
previously, but not to you directly. So when we are talking 
about SIFI designation, or as you have termed it ``sci-fi'' 
designation, and we look at that designation of asset managers, 
what we are really talking about is something here that lends 
to the destruction of wealth because of the costs involved. 
Because of the regulatory burden, the compliance costs that 
come with it, it is a destruction of wealth, but it is not Wall 
Street's wealth here. If you think it through, it is wealth 
held by average Americans, those saving for retirement, those 
saving for a downpayment, those saving for college tuition. 
They are going to have a lower return on their investment 
because of the higher costs.
    And it is not really justified by a risk in the market, 
given that the asset managers themselves are controlling or are 
handling accounts by individuals. Can you explain more clearly 
why designating asset managers as SIFIs would harm average 
investors? Do you want to walk through that argument?
    Mr. Atkins. Thanks for that question. Like you are saying, 
being designated as an SIFI is not just joining a club or some 
exclusive club. There are consequences to it, and that is the 
imposition potentially of a bank capital type of regulatory 
structure. And like we were saying with asset managers, it is 
ultimately the investors who bear the burden because, as Mr. 
McNabb was saying, it is investors' capital, it is 100 percent 
capital in most cases in mutual funds, it is either on them or 
on the asset manager. And so it is all inapposite.
    Mr. Royce. Thank you, Mr. Atkins.
    Thank you.
    Mr. Luetkemeyer. Thank you.
    With that, we will go to Mr. Meeks for 5 minutes, the 
gentleman from New York.
    Mr. Meeks. Thank you, Mr. Chairman.
    Let me just say this first because sometimes I think we 
forget how we got here in the first place. We created FSOC 
because it was quite evident that we needed an interagency 
process to better understand the very complex multisector and 
multimarket nature of systemically important financial 
institutions and companies, and to adopt a stronger 
microprudential approach to financial supervision. And the 
Financial Stability Board was created to address the lack of 
coordination of these issues at the global level, as these very 
large institutions and companies act on a global scale, with 
global interconnectedness and risk exposures.
    Furthermore, FSB was meant to deal with harmonization of 
financial regulations across the global financial markets, and 
I have often talked about how vital harmonization of rules to 
ensuring that American banks and companies can compete on a 
level playing field. This is vital to our economic interests 
and job creation here in America.
    And I know that sometimes I have raised concerns also about 
heightened supervision of insurance companies by the Federal 
Reserve and the risk of applying banking standards to an 
industry that operates a completely different business model. 
But that is not a valid reason to undermine the FSOC 
designation process, and designation is separate and different 
from supervision and rulemaking.
    So my question goes first to Mr. Wallison. Do you think it 
is wrong for domestic authorities to come together on an 
international level and cooperate with one another as the FSB 
and G-20 are demonstrating currently?
    Mr. Wallison. I don't think it is wrong at all. I think 
those kinds of consultations should occur all the time, it is 
very important. It is important here in this country and it is 
important internationally. The only question is whether these 
international bodies should take positions that have an effect 
on our domestic economy, and I am afraid that the positions 
that they are talking about will have very adverse effects on 
our economy.
    Mr. Meeks. Then, would you not say that FSB and the G-20 
are playing significant and important roles in terms of seeking 
the global cooperation and harmonization on financial markets 
and international banking rules?
    Mr. Wallison. That isn't my understanding of what the G-20 
told the FSB to do. It wasn't just harmonization. They told 
them to develop reforms to the international system to avoid 
the next financial crisis. And the FSB has taken that baton and 
run with it to attempt to designate individual companies that 
ought to be regulated specially in order to achieve that goal.
    That isn't the only way to achieve that particular goal. It 
is the regulators' way of achieving that goal, and that is to 
get hold of companies and tighten the regulations on them. That 
isn't necessarily the way that you would ordinarily do it if 
you were asked to attempt to prevent the next financial crisis. 
That is, however, how the FSB interpreted the G-20's 
instructions.
    Mr. Meeks. Mr. Barr, let me ask you the same two questions. 
How would you respond?
    Mr. Barr. I think the role of the G-20 and the Financial 
Stability Board are absolutely critical in not only 
harmonizing, but also raising standards internationally, and 
that is helping to make the U.S. financial system and the 
global financial system safer. I think that there are probably 
initiatives that the FSB could take to make its own process 
more transparent and more regularized that would be helpful.
    And I should just point out, as I did in my testimony, that 
the actions that are taken by the G-20 and the FSB are not 
binding on the United States. The United States makes 
independent judgments about how to and whether to adopt or 
adapt international rules, international standards, 
international designations in the domestic context. And you 
have seen already lots of examples where the United States has 
chosen to take a somewhat different course from the 
international standard-setting bodies, and you see other 
countries around the world doing that, too, the U.K., 
Switzerland, and the like.
    So there is flexibility to approach the domestic regulatory 
questions independently and in light of our own domestic 
judgments about risk.
    Mr. Meeks. I would ask another question, but I only have 15 
seconds, and the chairman has a quick hand with that hammer, so 
I guess I will just yield back the balance of my time.
    Mr. Luetkemeyer. I thank the gentleman. I don't think it is 
that quick. We had a little leeway here with a couple of them. 
But, thank you.
    With that, the chairman grants himself 5 minutes for 
questions. My first comment is to Mr. Atkins.
    I understand your concern with ``sci-fi'' and SIFI, Mr. 
Atkins. I come from ``Missouree'' or ``Missouruh,'' nobody 
knows for sure, so I understand your concern.
    But thank you all for being here today. It is an 
interesting discussion. As Mr. Smithy indicated, I have a bill 
that tries to address some of this, as far as the banking 
institutions anyway.
    And with that, Mr. Smithy, I have a couple of questions for 
you. I have here in front of me a chart that actually lists one 
bank, JPMorgan, and then the next 14, the largest 14 regional 
banks in size, they only make up as much as what JPMorgan is. 
And I think this gives you an idea of the relationship and size 
with regards to the different entities we are talking about. It 
puts things in perspective.
    When you are looking at derivative contracts, the top 4 
bank holding companies have 76 percent trading assets, 84 
percent of the total market, credit default exposure 94 
percent, whenever these regional banks have less than 1 or 2 
percent of all that. So I think we are looking not only at 
size, but you are also looking at the size of the risk, the 
risky activities they are engaged in, and it would seem to me 
that it would flow that FSOC would take a rather positive view 
of this.
    However, that being said, it seems that they have a 
different idea. And I would just like your comment with regards 
to that, Mr. Smithy, with regards to how you view, after seeing 
these statistics and your position on this, where we are at 
with FSOC.
    Mr. Smithy. Sir, obviously we do not go through that 
process currently. We are deemed an SIFI based on asset size 
alone, which is at the heart of the issue for us. As you point 
out in that chart, we are traditional lenders. Our sizes in 
aggregate only rank as large as the largest U.S. bank. But I 
think more than that, it is the range of activities within 
which we are engaged. We don't have the complex legal 
structures that are difficult to resolve in a crisis, we do not 
engage in securities market making, we are not in trading 
activities. We are simply traditional lenders.
    We are simply asking for due process similar to what the 
nonbanks would go through in determining whether or not the 
range of activities within which we are engaged would deem us 
systemic, and that is what we would expect, that the FSOC would 
put us through a similar process as they do the nonbanks.
    Mr. Luetkemeyer. Mr. Wallison, I have been in a meeting 
where you were engaged in discussing this subject as well, and 
you seem to have a similar opinion to what Mr. Smithy does of 
institutions. You base it on risk, connectivity, not just asset 
size.
    Mr. Wallison. Yes, especially for banks, as I said before. 
If the FSOC is really able to designate nonbanks as SIFIs, then 
certainly for banks, they could do the same thing. And so we 
shouldn't actually set any kind of arbitrary size for these 
institutions but rather look at their activities and determine 
whether they could cause an instability in the financial 
markets if they ran into some sort of financial difficulty.
    Mr. Luetkemeyer. It is kind of interesting--the gentlelady 
from New York made a comment a while ago about all the experts 
on FSOC, yet whenever FSOC made its SIFI designation to 
Prudential, it disregarded all the insurance experts on the 
committee. I wonder why? Interesting. It would seem to me that 
maybe they are trying to justify their existence by doing 
something rather than allowing the actual existence of facts 
and data to drive their decisions versus trying to justify 
their existence.
    Mr. Scalia, you had made some interesting comments during 
the course of your commentary. I jotted down in my notes that 
you made some comments with regards to how most of the 
decisions of FSOC couldn't pass legal muster from the 
standpoint that they don't justify what they are doing, there 
is no transparency, and if you ask them how they could come up 
with this decision, there isn't a logical or reasoned way to do 
it that could actually, if this was taken to court, pass 
muster. Would you agree with that comment of mine or my 
assessment of your comments?
    Mr. Scalia. That is accurate. Actually, it was the ranking 
member who said that what we should expect from an SIFI 
designation is a strong analytical basis, and I think we all 
agree, and that is what is so sorely absent. The Prudential 
decision, for example, it is meant to be a risk assessment, 
right? We are doing a risk assessment. Well, a risk assessment 
considers the probability of the event and the magnitude, and 
neither of those things is determined or even estimated in the 
decisions that have been issued so far by FSOC.
    Mr. Luetkemeyer. Okay. Thank you.
    With that, I will turn next to the gentleman from Texas, 
Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I thank the ranking 
member as well, and I thank the witnesses for appearing.
    If you are of the opinion that there should not be an FSOC, 
would you kindly extend a hand so that I may identify you. I 
think the record should reflect that Mr. William--is that 
correct?
    Mr. Wallison. Wallison.
    Mr. Green. Wallison, excuse me, my vision is poor, and the 
distance is quite a ways from me. And who is the other person? 
Would you speak your name again?
    Mr. Atkins. Paul Atkins.
    Mr. Green. Mr. Atkins. The two of you are of the opinion 
there should be no FSOC at all?
    Mr. Atkins. As currently constituted, right.
    Mr. Green. Thank you. And let's go into some other areas 
now. Do you agree that Prudential was a $1 trillion company in 
terms of assets, above a trillion? Or is?
    Mr. Wallison. If you are asking me, I don't know the exact 
number, but I will accept a trillion.
    Mr. Green. It wouldn't surprise you to know that it was a 
trillion?
    Mr. Wallison. No.
    Mr. Green. Okay.
    And let's go to Mr. Barr. Mr. Barr, this company, 
Prudential, had the right to appeal. Is this correct?
    Mr. Barr. Yes.
    Mr. Green. And this is in a Federal court. Is this correct?
    Mr. Barr. Yes.
    Mr. Green. And would you just briefly outline the process 
that allows a Prudential or any company similarly situated to 
appeal?
    Mr. Barr. There is a process that is set out by the statute 
and by the FSOC internal rules and guidance that describes 
three stages of review--a first stage review, a second stage 
review, and a third stage review--that ultimately could lead to 
a provisional determination and a final determination. At the 
conclusion of a final determination, the affected company has a 
right to seek review in Federal court of that final 
determination to assess whether that determination meets the 
legal requirements for a designation.
    Mr. Green. Is it fair to say that Prudential, a $1 trillion 
corporation, has some pretty good lawyers? Is that a fair 
guess?
    Mr. Barr. I actually don't know their legal counsel at all.
    Mr. Green. Would you just guess that a $1 trillion 
corporation has some pretty good lawyers?
    Mr. Barr. I have seen terrific lawyering and bad lawyering 
at all levels of our economy.
    Mr. Green. I will speak for you. With a trillion dollars, 
my suspicion is that they can afford some pretty good lawyers.
    Mr. Barr. I would agree with that statement.
    Mr. Green. All right, they can afford pretty good lawyers. 
Is it true that they did not appeal?
    Mr. Barr. It is true.
    Mr. Green. Is it true that they had the right to appeal?
    Mr. Barr. Yes.
    Mr. Green. If they did not appeal, is it also correct that 
perhaps they concluded that there was good reason to stay 
within the system and to abide by the rules and regulations 
imposed upon it?
    Mr. Barr. I am not privy to their internal deliberations, 
and often firms have a complex range of reasons for taking or 
not taking legal action. So I would rather not opine on what 
they were thinking.
    Mr. Green. Is it true that some of your colleagues have 
opined and concluded that they were not treated fairly?
    Mr. Barr. I'm sorry, I don't--
    Mr. Green. Some of your colleagues on the panel--
    Mr. Barr. Oh.
    Mr. Green. --have concluded that they have not been treated 
fairly?
    Mr. Barr. I should maybe let them speak for themselves 
about that. I understood them to be critical of the FSOC 
process.
    Mr. Green. The process. If the process is in some way 
flawed, would not appeal be a means by which--or if the 
decision is one that you believe to be inappropriate or unfair, 
would appeal be an appropriate remedy for you?
    Mr. Barr. I think that a Federal district court is, 
generally speaking, a pretty tough and good place to go seek 
redress if legal procedures have not been followed. My 
experience is that the Federal courts are quite attentive to 
failures by regulatory agencies to follow the rules that are 
set out for them.
    Mr. Green. And in that process would a Prudential or any 
entity have an opportunity to have some degree of discovery?
    Mr. Barr. I haven't looked carefully at what materials were 
already provided and what would be protected material and not 
protected material in that context. They would certainly be 
able to gather and present information about whether the 
procedures were followed and whether the standards set forth in 
the statute were met in their case.
    Mr. Green. Let me just close with this comment. Assuming 
that Prudential disagreed, and a lot has been said about 
Prudential, there was the ability and the right to appeal. A $1 
trillion corporation which had the ability to hire good 
lawyers, could have appealed, and did not do so.
    Mr. Barr. Correct.
    Mr. Green. I trust the judicial system in this country. I 
don't always agree with it. And I think that in and of itself 
gives FSOC some credibility, as well as OFR, because the appeal 
process is readily available to any company that believes it 
has a grievance as a result of a decision made by FSOC.
    Thank you, Mr. Chairman.
    Mr. Luetkemeyer. With that, we will turn next to the 
gentleman from New Mexico, Mr. Pearce.
    Mr. Pearce. Thank you, Mr. Chairman.
    And I thank each one of you for your presentations here 
today.
    Mr. Barr, Mr. Scalia was very precise in his descriptions 
of the Prudential decision. He says it presupposes severe 
financial distress with no consideration at all to whether 
there is any indication that such distress is likely to occur, 
then relies on a broad unsubstantiated assertion to conclude 
that material financial distress could pose a threat. Do you 
have an opinion about that same case that would differ from the 
observations by Mr. Scalia? Because to me, sitting up here, I 
find those accusations to be intensely interesting in the 
process. And so, do you find that not so concerning as he does?
    Mr. Barr. I have not reviewed in detail the Prudential case 
to judge item by item what my views of the substantive merits 
are.
    Mr. Pearce. Okay, that is fair.
    Mr. Barr. I would say that the process that the FSOC 
followed with respect to that decision was an engaging and 
searching process, at least as it appeared from the outside. I 
am just judging based on the extensive review process that they 
engage in, the provisional determination, and then final 
determination.
    Mr. Pearce. In your testimony, you indicate that Dodd-Frank 
was created to create a system of supervision which ensured 
that if an institution poses risk to the financial system, it 
would be regulated, supervised, blah, blah, blah. So you lay 
out the requirements. Are Fannie and Freddie supervised under 
Dodd-Frank?
    Mr. Barr. Fannie and Freddie are currently supervised by 
the FHFA under the authority granted through HERA.
    Mr. Pearce. Do they come under FSOC?
    Mr. Barr. I think that one could make a case that they are 
subject to the same rules as anyone else and that the FSOC 
should review them.
    Mr. Pearce. I am taking from your answer that, no, they 
don't, they are not currently included in the scope of work of 
the FSOC.
    Mr. Barr. No, I wasn't saying that, sir. I was saying that 
I think that under the provisions of the Dodd-Frank Act, the 
Dodd-Frank Act could provide authorization for FSOC review of 
those entities. I have no idea whether or not they are 
separately under FSOC review. Obviously, the FHFA is their 
current regulator and sits on the FSOC.
    Mr. Pearce. If I could take the time back, there are many 
people who think they don't come under the, that they are 
limited from discussion of those two entities, and definitely 
they do have the potential, they are big enough size to where 
they might ought to be considered.
    Mr. Scalia, you had mentioned in one of your comments that 
the access to FSOC data is closely guarded. And so my question 
is, what are the risks if--is that data fairly important in a 
competitive sense, fairly important to other firms, the data 
that is being collected?
    Mr. Scalia. I'm sorry, the question is whether designation 
is important?
    Mr. Pearce. No, no, no, whether the access to the data, 
that data that is collected, is that fairly important data in a 
competitive sense?
    Mr. Scalia. Some of the data can be competitive. However, 
much of the data that FSOC compiles and presumably relies upon 
in its designation decisions is about markets generally. And 
there has been discussion about the appeal process, for 
example. Ordinarily in, say, an appeal process where a record 
is created before the agency, the parties who are going to be 
affected get the chance to see that and to provide their views 
so that they are heard by the decision-maker. But that kind of 
opportunities is not being provided.
    Mr. Pearce. But there is not any data that would be 
critical if it is released? That is my question then.
    Mr. Scalia. There can be some sensitive data about the 
individual companies being considered. Of course, there is no 
reason those companies themselves can't see the data about 
themselves. But if there were public disclosure of FSOC 
proceedings, you would want care about that, but there is 
market economic data that is not sensitive and should be 
available.
    Mr. Pearce. Okay. I just wondered if you had a Snowden-type 
release, somebody goes in and takes everything and releases 
everything, that is fairly more plausible today than we might 
have thought it was a couple of years ago. So, it is just this 
accumulation of financial data I always worry about.
    Mr. Barr, should the FSOC consider the pension funds? The 
estimates are that they are trillions overdrawn. They pull 
money in, distribute money out, so they are kind of a bank in 
the system. Should the FSOC be looking at pensions?
    Mr. Barr. I think the FSOC should look at risks throughout 
the financial system. Whether or not that is in furtherance of 
some regulatory goal or just to understand risks in the system 
I think is not the issue, but having the ability of the FSOC to 
look broadly across the financial sector and to see where risks 
are arising, I think is important.
    Mr. Pearce. Thank you. I yield back, Mr. Chairman.
    Mr. Ross [presiding]. Thank you. The gentleman's time has 
expired.
    The gentleman from Delaware, Mr. Carney, is recognized for 
5 minutes.
    Mr. Carney. Thank you, Mr. Chairman.
    And thank you to all the panelists today. It has been a 
very interesting discussion. I would like to return to the 
discussion we had led by the gentleman from Alabama, Mr. 
Bachus, around whether mutual funds present a systemic risk. 
During that conversation, Mr. McNabb described the way mutual 
funds were structured, at least Vanguard was structured and 
kind of walled off, if you will. And it seemed like there was 
considerable disagreement among the panelists about whether 
mutual funds do pose those kinds of systemic risks.
    And, Mr. Barr, I was wondering what your reaction was to 
Mr. McNabb's description? I got the impression that you believe 
that mutual funds oppose those systemic risks. Could you 
explain to us why you think that is the case?
    Mr. Barr. I think that asset managers and banks have 
fundamentally different business models and fundamentally 
different balance sheets and fundamentally different risks that 
they face.
    Mr. Carney. So you agree with me?
    Mr. Barr. The particular issue that I was addressing was 
risk to the system from a particular form of mutual fund, money 
market mutual funds that are able to maintain and promise, in 
essence, a stable net asset value. And that could--
    Mr. Carney. If I may interrupt, because we only have a 
limited amount of time, so the SEC is dealing with that issue 
in terms of the floating NAV and they have a whole series of 
regulations. And I don't know, there has been some discussion 
and some disagreement on the committee and in the industry 
about that, but that is moving in a separate way. So do you 
believe, then, that because those money market funds pose 
systemic risk that the other mutual funds should be swept in as 
SIFIs as well or the larger entities that have those mutual 
funds?
    Mr. Barr. I think that the presence of risks in the system 
may or may not be appropriately dealt with by designation. 
There are lots of other regulatory tools. In the case of money 
market mutual funds, I think having the ability to either 
impose capital requirements on stable funds or to float the NAV 
is an appropriate response that is aside from designation. And 
similarly, in the asset management field as a whole, there are 
operational risks that if they are of sufficient concern can be 
addressed in existing frameworks with or without designation. 
So I don't think that everything, the risks in the systems 
hinge on designation or not designation. They are about 
appropriately tailoring a regulatory response to the risk that 
you see.
    Mr. Carney. Fair enough.
    I would like to move on to the bank designations of SIFI. 
There are Members on both sides of the aisle here who have been 
looking at how to differentiate those designations beyond the 
$50 billion threshold, if you will. In fact, Governor Tarullo, 
I think last week at a speech at the Chicago Fed, said that he 
believed that we should take another look at that and maybe 
firms under $100 billion shouldn't be subject to designation as 
an SIFI.
    Mr. Smithy, I assume you would agree with that? There is 
legislation here many of my colleagues have put forward to 
differentiate among banks differently than just a $50 billion 
or a $100 billion threshold. Do you have any thoughts on that?
    Mr. Smithy. So, again, we would agree that an arbitrary 
asset-only threshold would not be appropriate. Simply raising 
it to $100 billion, though, I don't think solves the issue. We 
would favor a multifaceted approach, which is activity-based, 
to determine who is indeed an SIFI based on the range of 
practices within the organization and the risks they pose.
    Mr. Carney. So the kinds of activities like, for instance, 
what would it be? There is a bill I think Mr. Luetkemeyer is 
the lead sponsor on, I am looking at my colleague Ms. Sewell, I 
believe she is a cosponsor of that bill, that would 
differentiate based on activities, how risky they might be. Is 
that what you are talking about?
    Mr. Smithy. Absolutely. We would expect they would review 
whether or not you are engaged in significant international 
activities, trading activities, whether or not your institution 
is substitutable, and the complexity of your overall 
organizational structure.
    Mr. Carney. I have 29 seconds left. Does anybody else have 
any thoughts on Mr. Tarullo's comment about the $100 billion 
threshold? Mr. Atkins?
    Mr. Atkins. Yes, I think that I agree with the panelists 
here that all of these thresholds are very arbitrary. And so, I 
think they are actually counterproductive.
    Mr. Carney. So it is not really the thresholds, it is the 
activity, in your view?
    Mr. Atkins. Right.
    Mr. Carney. Everybody seems to be shaking their head.
    Mr. Barr, would you agree with that? I think you did.
    Mr. Barr. I think that within the existing framework you 
can tailor and graduate the extent of regulatory compliance. I 
don't think it needs a legislative fix, but I agree that much 
more nuance could be in the system than is there now.
    Mr. Carney. Thank you very much, each and every one of you.
    Mr. Ross. Thank you.
    The Chair now recognizes himself for 5 minutes.
    Mr. Wallison, it was interesting to read your opening 
testimony, and in it you state that FSOC uses the word 
``significant'' 47 times in their 12-page statement designating 
Prudential as an SIFI. And being a litigator for 25 years, I 
know that when we have ambiguities we try to look at the plain 
meaning of either the statute or the word to determine what was 
intended. Based on your extensive legal background, do you have 
any definition for the word ``significant'' that is being used?
    Mr. Wallison. No, sir, I have no definition for that.
    Mr. Ross. I guess my question is, how can these 
organizations that are under review for SIFIs anticipate 
whether they are going to be designated as such when we really 
can't get our hands around what ``significant'' means? As you 
point out, it is very arbitrary.
    Mr. Wallison. It is arbitrary, it is not a standard, it is 
not something that anyone can use to adjust, no firm can use to 
adjust its activities. There is really no information that is 
conveyed by that term.
    Mr. Ross. So not only in the assessment of the 
organization, but then after the assessment or designation, if 
you will, other organizations--once Prudential is designated, 
then how can another insurance company, if you will, act 
accordingly to make sure that they are not so designated? There 
is no road map, in other words?
    Mr. Wallison. There is no road map. I mentioned before that 
the IAIS, which is an international insurance group, had set up 
a methodology for making this kind of determination, and they 
actually put percentage weights on things. That was a very 
valid way to proceed. That doesn't necessarily mean I agree 
with it, but it is a valid way to proceed. That was ignored by 
the FSB.
    Mr. Ross. So organizations, a company today has no real 
road map to avoid being designated as an SIFI until it is too 
late?
    Mr. Wallison. That is right.
    Mr. Ross. When we look at the McCarran-Ferguson Act, which 
I think has been very good for this country for consumers' 
purposes and regulating insurance based on a State-by-State 
assessment, don't you foresee that there is going to be some 
serious conflicts there once an insurance company may be 
designated as an SIFI in trying to maintain certain capital 
requirements, either as risk-based capital versus GAAP 
accounting? How does that help the consumer?
    Mr. Wallison. This is pretty radical, what we are talking 
about here, and this is something that has never happened 
before, and that is that an entire industry will be bifurcated 
between those that are regulated at the Federal level by the 
Fed differently.
    Mr. Ross. Do they keep a separate set of books?
    Mr. Wallison. In many ways, of course. But differently by 
the Fed, with different capital requirements from the other 
similar although smaller institutions that are regulated at the 
State level. This will be a very difficult thing for--
    Mr. Ross. And a very expensive thing.
    Mr. Wallison. And very expensive.
    Mr. Ross. Mr. McNabb, just briefly, with regard to the 
Basel-type approach of capital requirements and applying it to 
asset managers, aren't we really just not only saying to asset 
managers what capital they can or cannot reserve, most likely 
they must reserve, but aren't we also just basically telling 
them what they can and cannot invest in?
    Mr. McNabb. I think that is one of the potential 
consequences of prudential regulation of asset managers, is 
that we as asset managers could be put in a position of 
conflict where we are told for ``safety and soundness reasons'' 
to either invest in something or not invest in something when 
it is not in the best interests of the shareholders or in the 
prospectus that we have delivered to the shareholders.
    Mr. Ross. And don't you foresee that leading to a new cause 
of action? If your fiduciary responsibility is to your clients, 
and now we have this regulatory arm telling you what you can 
and cannot do, and basically who is your obligation to? I guess 
what I foresee here is, is that once asset managers are brought 
under this tent, I foresee in some of the creative ways a new 
cause of action being created that would lead to litigation, 
and then greatly increase that $108,000 assessment that now is 
going to be placed over the life of the investment, according 
to Mr. Eakin.
    Mr. McNabb. It is a very large concern.
    Mr. Ross. One last thing, I understand that there is a 
genuine relationship between risk and return, and they are 
directly related. The higher the risk, the greater the return. 
But aren't we, what we are trying to do now is to eliminate any 
and all risk and as a result lower the return? If we are going 
to lower the return, how do we anticipate for retirement 
purposes and, more importantly, addressed for student loans, 
which is right now the largest liability that this country has?
    Mr. McNabb. Mr. Chairman, I think you make a good point in 
that there is a lot of confusion between what I would call 
idiosyncratic risk, which is the individual risk of a single 
fund or a single entity, versus systemic risk, and I think to 
other panelists' points earlier, there has not been a clear 
definition of what systemic really means versus what we all 
know is idiosyncratic today.
    Mr. Ross. Thank you. I see my time has expired.
    I now recognize the young lady from Alabama, Ms. Sewell, 
for 5 minutes.
    Ms. Sewell. Thank you, Mr. Chairman.
    I want to thank all of our panelists for a very interesting 
discussion today.
    I wanted to address my questions to Mr. Smithy. Can you 
talk to me a little bit about the difference between--in your 
testimony you talked about a business model of regional banks 
versus your larger peers, and really making the case that 
regional banks should be treated differently. Could you 
elaborate a little bit on that model?
    Mr. Smithy. Absolutely. So as I stated, we are traditional 
lenders. We focus primarily on smaller to medium-sized markets, 
whereas some of our larger bank competitors are in the larger 
metro markets, would focus on larger companies. We are focusing 
on small businesses and medium-sized businesses, traditional 
lending products, and traditional deposit products as well. We 
are not engaged in complex trading activities, we don't make 
markets and securities, and we don't have meaningful 
interconnections with other financial firms, which I think is a 
key differentiator between us and the larger banks.
    Ms. Sewell. What about the supervision that you currently 
have? If you are not designated as systemic, don't you feel 
that the current supervision model that you are operating under 
would prevent regional banks from being sort of swept into the 
same systemic risks?
    Mr. Smithy. Assuming we would go through an evaluative 
process such as what is presented in the Luetkemeyer bill, even 
if we were deemed not systemic, the regulators still have a 
suite of processes that they put us through, annual stress 
test, required capital plans, as well as on-site reviews, along 
with the Basel 3 capital and liquidity rules, that we think 
would be sufficient for regulation of regional banks in the 
range of practices in which we are engaged.
    Ms. Sewell. How do you think the regulators would deal with 
a regional bank failure in such that compared to sort of what 
Dodd-Frank would make you do if you were a systemic 
institution?
    Mr. Smithy. As you know, the regional banks have recently 
submitted, at the end of last year, a resolution plan which we 
think will lay out or will suggest that regional banks are 
resolvable under the traditional bankruptcy framework, either 
in whole or in part. I think clearly there is a range of sizes 
we are talking about here within the coalition. We think that 
all of the banks' business models within the coalition are 
fairly homogenous, and so therefore again can be either 
resolvable in whole in a normal purchase situation or in part 
and absorbed into competitors across their footprints.
    Ms. Sewell. Great.
    Mr. McNabb, I wanted to ask you how you thought the asset 
managers being designated as SIFIs would affect investors? We 
have talked a lot about your business model and how it affects 
asset managers, but what about investors?
    Mr. McNabb. I think, again, we don't know the exact 
remedies being designated, but if you look at what has been 
suggested, costs for investors for those in designated firms or 
designated funds would go up. And so, again, our estimate was a 
quadrupling of fees in a couple of our most basic funds. That 
is going to vary, obviously, firm to firm.
    I think you are also going to see a situation, though, 
where the competitive landscape is altered. So if you were to 
look at the FSB's designation process or at least what they 
suggested, they named 14 U.S. funds, which comprise roughly 1 
percent of the world's market, as being systemically important. 
And if you are an investor you might ask yourselves, why would 
I invest in one of those funds when there is a like product 
where I am not going to be designated and I am not going to 
have to pay these additional fees and possible resolution costs 
and so forth?
    Ms. Sewell. I know that mutual funds are currently subject 
to comprehensive regulations that serve both to protect the 
shareholders as well as to reduce the potential for systemic 
risks. For example, funds have strict limits on your leverage 
and diversification requirements. Can you discuss how these 
regulations distinguish mutual funds from other financial 
institutions and the impact their potential would have on posed 
systemic risks.
    Mr. McNabb. Yes. So I think you hit on actually some of the 
most important points. Transparency is very important and funds 
are valued every day, so an investor knows what his or her 
value of the portfolio is. There is little to no leverage in 
all funds. There are extremely clear reporting requirements and 
transparency to the end investor. So when you add that up, you 
have a very heavily regulated product that is really very low 
risk from a systemic standpoint, not to say that there aren't 
idiosyncratic risks within each individual fund.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr, for 5 minutes.
    Mr. Barr of Kentucky. Thank you, Mr. Chairman.
    Mr. Scalia, in your written testimony, and in your verbal 
testimony, you made the point that FSOC's regulations and 
interpretive guidance have done little to give potentially 
regulated parties adequate notice of the legal standards that 
will be applied to them and whether, in view of those 
standards, they are likely to be designated systemically 
important, and what changes that they could make in their 
structure operations so that they are not so designated. Short 
of abolishing FSOC, what policy recommendations would you offer 
to Congress to either more clearly define FSOC's standards that 
they use or what changes could we make to FSOC to provide 
regulated parties more notice, more concrete notice?
    Mr. Scalia. I think that deliberations such as this are a 
valuable step forward. One hopes that FSOC's members are paying 
attention to the discussion today and will take account of 
those things.
    The Dodd-Frank Act itself requires FSOC to consider other 
risk-related factors beyond those that are enumerated in the 
statute, and one of those factors plainly is the risk to the 
company and its customers and shareholders of designation. FSOC 
hasn't thought about that yet. So I think that much of what 
would be helpful is in the statute.
    I did want to briefly talk about the Prudential decision, 
and there were questions asked earlier of Mr. Barr regarding 
Prudential's decision not to appeal. There are, as actually 
Professor Barr I think quite fairly said, a number of different 
reasons that a company would decide not to take the government 
to court. That is a big step. But the question shouldn't merely 
be, well, what opportunity do you have to go to court when the 
government has made a serious mistake and violated your rights? 
The mere fact that the government has made a serious mistake 
and violated your rights is troubling enough. Even when you 
decide not to seek government recourse, we have this body, as 
well as the courts, to oversee what agencies are doing, and I 
think that is an important dynamic regardless of the decision 
of an individual company not to take the government to court.
    Mr. Barr of Kentucky. As an administrative law 
practitioner, what would be helpful in terms of additional 
direction from Congress in terms of how FSOC operates?
    Mr. Scalia. I think that the statute as written should be 
one that FSOC could administer to give much greater respect to 
participating companies' rights than it gives currently. But 
that said, I think a significant improvement would be if FSOC 
considered companies on a broader sort of industry-wide type 
basis rather than singling them out one by one. Now, I don't 
think that the statute has to be read to require singling them 
out one by one, but that is what it is doing, and I think one 
change to be considered is that.
    There is proposed legislation to increase transparency. 
That could be valuable. Perhaps most important, when you look, 
for example, at both insurance companies and mutual funds, is 
the problem of FSOC designation resulting in the imposition of 
bank-based capital standards, which is what Fed Members have 
indicated necessarily follows. There is legislation pending 
that would make it clear that is not required, and I think that 
would be an important change, too.
    Mr. Barr of Kentucky. I think the fact that former 
Congressman Frank, for whom the Act was named, said that it was 
not his intent that asset managers be designated as SIFIs says 
a lot about the designation process.
    And as a segue, just a final question to Mr. McNabb. 
Obviously it is your position that the application of bank-like 
regulation of mutual funds would not limit systemic risk, but 
would obviously disrupt capital markets and increase costs for 
your investors. What is your amplified opinion about what this 
would do not only to your investors, but to the capital markets 
and capital formation and the ability of retail investors to 
provide liquidity to our commercial system?
    Mr. McNabb. That is a very hard question to completely 
speculate on, but higher costs, if the cost of capital goes up 
dramatically--and the mutual funds are roughly 25 percent of 
the U.S. equity market, so it is a very important source of 
funding--if that cost of capital goes up dramatically, then by 
definition, you are going to have slower growth. And if we have 
slower growth, it is going to create less jobs and so forth.
    Mr. Barr of Kentucky. Thank you. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Foster, for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman.
    And thank you to all the witnesses.
    It seems to me that the SIFI designation process in 
principle has the opportunity to take risk out of our system by 
negotiating the business model for a firm that is under 
consideration for SIFI designation. So my question, I guess to 
Mr. Scalia, if you could discuss the actual process that the 
analytical staff at the FSOC play in the review and designation 
process, and specifically with respect to the reports that the 
staff at each agency produces for the voting member and how 
important the meetings are, and is there a to and fro between 
the analytical staff from each Council member and the companies 
under review?
    Mr. Scalia. I will do my best to describe that process, 
although part of the challenge is that it is opaque. But the 
essential process is that a company is told that it is under 
consideration after a point, is required to submit information, 
and may submit additional information, and then has 
opportunities to meet with the staff to make presentations and 
answer their questions. However, what is not known is what 
additional information and reports the staff and the members 
may have access to. Those aren't shared with the company that 
is under consideration until at earliest when there is what is 
called a proposed designation decision.
    Now, once there is a proposed designation decision, a 
written explanation of some sort is provided to the company 
which can take an appeal which has been described. But here is 
what is really unusual. The FSOC members make the proposed 
designation, and then internally at FSOC, who do you appeal to? 
The same people. I am not familiar with another legal process 
like that where a group of people makes a decision against you, 
and you get to appeal to them to try to persuade them to change 
their minds. That is not really an appeal. I think at that 
stage, too, there is a real question of the extent to which the 
company has access to the data in the reports that FSOC is 
relying upon. Ordinarily, that would be provided.
    Mr. Foster. So you wouldn't really characterize it as being 
a negotiation where the business model could be adjusted. And 
what I am fishing for is whether potentially some future AIG, 
they could have said, look, if you stay away from securities 
lending, stay away from credit default swaps, you are going to 
maintain a lower level of SIFI designation. But that sort of 
negotiation, to your knowledge, doesn't really happen here?
    Mr. Scalia. I am not aware that it has occurred. And this 
relates in part to the question about clear standards that has 
been discussed earlier. If there were clear standards, then 
companies would be able to look at how they are currently doing 
business and saying, oh, if I change these couple of things, 
then I wouldn't be supervised by the Fed and have all the added 
costs for my customers and shareholders. But that opportunity 
is not present now.
    Mr. Foster. Now, I sense a lot of enthusiasm from the panel 
for gradations in oversight and SIFI designation, that having 
it be an approximately binary thing makes it uncomfortable in a 
number of ways. And I accept Professor Barr's point that there, 
in fact, are different levels of oversight depending on the 
exact nature of the company.
    But my question is, is there a problem with--there is a 
bailout mechanism for assessing industry fees to other SIFIs if 
one of them has to be bailed out, and so is this adequately 
transparent? I think, when was it, Long-Term Capital had to be 
bailed out, there was an assessment after the fact of I think 
14 different financial services companies chosen somehow, which 
I think was probably not a very transparent operation, but I 
was wondering is there a view that there is a lack of 
transparency for a future assessment when that mechanism is 
called into play? Anyone?
    Mr. Barr. Let me just take a first stab. The FDIC is 
authorized under the statute, required under the statute to 
provide for the assessment schedule, and so there is a process 
under which people can comment, provide notice and comment, 
provide input into that. And so the basic rules of the game I 
think are able to be reasonably established in advance. The 
caveat to that is, of course, you don't know in advance whether 
a particular firm will be subject to resolution, whether that 
firm will be resolved with the assets that are available to the 
firm or the FDIC would be required to borrow, and if it 
borrowed, what that amount would be.
    Mr. Atkins. I think that is the problem of Section 210(o) 
of Dodd-Frank where it gives the FDIC huge discretion in this, 
in the future. And so folks, if they go down the line to 
designate asset managers, you will have real investors, if they 
have to pony up capital, then subsidizing the too-big-to-fail 
banks or whichever institutions fail.
    Mr. Foster. Which is one of the reasons that companies are 
kicking and screaming to not be designated because it makes an 
unknown potential burden on them.
    Mr. Atkins. And investors are kicking and screaming.
    Mr. Foster. Right, right. Whereas, a multitiered 
designation might avoid some of that.
    Mr. Atkins. And, in fact, one of the problems is, I think, 
the FSOC has flouted Congress, because Congress in Title I of 
Dodd-Frank told the FSOC to come up with parameters for this 
designation process. FSOC basically regurgitated the statute in 
its rule.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    And I thank you gentlemen for being here today. You have 
discussed, I know, the heightened prudential standards that we 
have on insurance companies, but what do you think will happen 
5 or 10 years down the road? Give me your perspective of 
applying these bank-like risk capital requirements to insurance 
companies. Could we start with Mr. Wallison?
    Mr. Wallison. One of the problems here, of course, is that 
we don't have any idea what kinds of standards are going to be 
imposed eventually by the Fed. The Fed will do the imposing and 
they have not indicated yet, first of all, whether they are 
actually bound to do that. They say they are, but we don't know 
what they mean by that. And then, secondly, after a period of 5 
or 10 years, what we might find, and this would be the most 
troubling thing, is that the ones that are subject to these 
bank-like capital standards are failing as a result of the fact 
that they are subject to standards that don't fit with the way 
an insurance company works.
    And so, we then have these very large financial 
institutions that are being driven out of business by their 
regulatory process. That should be unacceptable. And one of the 
reasons we should stop this SIFI process is to make sure that 
the FSOC itself knows what the Fed is going to do when it gets 
hold of an insurance company or an asset manager, for example.
    Mr. Pittenger. Mr. Scalia, would you like to comment on 
that?
    Mr. Scalia. Just to add to that, that is a central 
question, and it is one FSOC itself has never asked, much less 
answered during the designation process, what will result once 
we designate this company as a consequence of the new 
regulatory requirements. They haven't been determined, but the 
Fed has indicated they will be bank standards.
    The concerns I think are a couplefold. One is the 
competitive burden, which Mr. Wallison has talked about. It is 
so extraordinary to take as broad an industry as, say, 
insurance or mutual funds and pick three or four or five 
companies in this enormous industry and only treat them to a 
different regulatory set of requirements. I have not seen that 
done elsewhere. I believe there is also risk that bank-based 
standards will just inaccurately reflect the real risk on the 
books of an insurance company or mutual fund, overstating that 
risk sometimes, potentially understating sometimes, not 
providing accurate read back to investors and regulators the 
way that standards designed for insurance companies already do.
    Mr. Pittenger. Thank you.
    We have a diverse economy that I think we all agree is 
better served by a very diverse financial set of institutions. 
Are you concerned with the shrinking number of financial 
institutions? I know we have lost, I think, 1,700 banks in the 
last couple of years. Do you think that our policies are 
driving this trend? What would you do to mitigate that? Do you 
think it makes sense to regulate large internationally active 
money centers the same way that you are going to regulate 
smaller banks?
    Mr. Smithy from Regions?
    Mr. Smithy. Thank you. So, no, as we have stated, we think 
it is inappropriate to have the same regulatory framework and 
the same standards for banks of all sizes, and in fact just 
establishing an asset-only threshold does not get at the heart 
of the inherent risk of the banks. We are more in favor of 
having regulation that is tailored to the specific risks of the 
banks. So we would not think that is appropriate.
    Mr. Pittenger. Mr. Atkins?
    Mr. Atkins. Yes. I think part of the problem that we have 
with respect to the banks in particular is the huge power of 
bank examiners and the bank regulators in a very arbitrary and 
capricious way to deal with banks in their regulatory realm. So 
I think that is what a lot of us--I was a Commissioner at the 
Securities and Exchange Commission where things tend to be more 
transparent, or hopefully so, than as compared to the banking 
side--I think that is what we are concerned about with respect 
to this potential designation process.
    Mr. Pittenger. Mr. Wallison?
    Mr. Wallison. In my prepared testimony, Congressman, I have 
a chart which shows that the capital markets and securities 
business has far outcompeted the banks in financing business. 
And one of the reasons they are doing that is that the banks 
are heavily regulated and very expensively regulated so that, 
as we just heard, more people are involved in the business of 
compliance than are actually making loans. That is a very 
troublesome thing and one of the reasons why the banks cannot 
provide the kind of financing that is much more efficiently 
provided by the capital markets.
    Mr. Pittenger. It is troubling when the only jobs you 
create are compliance officers.
    Thank you. I yield back my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Illinois, Mr. Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman, and I am banking on 
the concept that the last shall be first one day.
    First, I want to address this to Professor Barr. Earlier, I 
know you said to Mr. Bachus that you think congressional 
oversight of FSOC would jeopardize its ``independence'' and 
therefore--
    Mr. Barr. Could I just correct that?
    Mr. Hultgren. First of all, I disagree with that concept. I 
wondered if you would extend that rationale to other financial 
regulators. Should we stop all oversight of the Fed, the SEC, 
the OCC? Why should FSOC be beyond accountability to my 
constituents?
    Mr. Barr. Oh, I completely agree that it should be subject 
to full and complete congressional oversight. My response to 
Mr. Bachus was to his suggestion about whether a Member of 
Congress should participate in FSOC meetings. And my comment 
was that participation by Members of Congress in FSOC meetings 
would undermine Congress' independence in exercising exactly 
the kind of oversight that you are doing today and that I think 
is absolutely critical to a functioning democracy. So I am 100 
percent in favor of the oversight you are exercising on the 
FSOC and on the other financial regulatory agencies.
    Mr. Hultgren. I appreciate you clearing that up. So you do 
support accountability and transparency and oversight there.
    Let me get on to some other things because I have some 
other questions I want to ask here quickly. I know throughout 
the hearing today we have discussed FSOC's SIFI designation 
authority, which lets the FSOC impose a costly regulatory 
regime upon certain financial institutions. Unfortunately, I 
see that this largely unchecked authority will end up hurting 
Main Street instead of protecting it because it imposes 
unnecessary regulatory costs upon institutions that really pose 
no systemic risk to our financial system.
    I want to ask about the structure of the FSOC itself and if 
it requires regulators to rule on topics in which they really 
have no expertise. One of the reasons that Congress delegates 
the task of regulation to independent regulatory agencies is 
that we expect the agencies to use their expertise and 
experience to tailor regulations that are effective and 
appropriate to meet specific needs without being unduly 
burdensome. I wonder, is the FSOC structure consistent with 
this expectation and does the FSOC structure give appropriate 
deference to experience and expertise?
    Maybe I will just start with Mr. Wallison, if you have a 
thought on that?
    Mr. Wallison. I think that the Prudential case shows 
precisely the question you are asking is a problem. The two 
members of the FSOC who were insurance specialists and experts 
and are not employees of the Treasury Department dissented from 
the decision in the Prudential case, but it was voted 
overwhelmingly to designate Prudential. And who voted for that? 
It was bank regulators and it was regulators of other kinds of 
financial institutions, none of whom knew anything about what 
regulation of an insurance company would entail. In addition, 
they dissented because they thought that the standards that 
were imposed for the designation were also wrong. And, again, 
nobody paid any attention to them.
    So if we are going to have regulators, we want them to be 
specialists, we want them to understand the industries they are 
regulating fully, and here we have a set of regulators who 
can't possibly understand all of the nuances of the individual 
industries that come before them.
    Mr. Hultgren. I want to try and ask one last question in my 
minute left. As everyone knows, last September the Office of 
Financial Research released a study on the risks associated 
with the asset management industry. This study achieved instant 
notoriety here in Washington as it was criticized by almost 
everyone. Better Markets, which is not normally thought of as a 
bastion of deregulatory zeal, pointed out the inexplicably and 
indefensibly poor quality of the work presented in the report. 
In particular, most observers believed it largely ignored the 
extensive regulation of mutual funds that exist already and 
focused on dozens of hypotheticals about remote risks that are 
extremely unlikely ever to happen.
    My question is, what happens if the FSOC implements the 
logic of this flawed study and designates certain asset 
managers as SIFIs? Mr. McNabb, I know that this hearing has 
focused on how asset managers help everyday Americans. The 
problem is that people look at a company like BlackRock, which 
has around $4 trillion assets under management, and don't think 
that it provides a Main Street service. I wonder if you could 
explain why it does?
    Mr. McNabb. Far be it from me to talk about one of our 
largest competitors, but I will attempt to do the best I can.
    Mr. Hultgren. Sorry about that.
    Mr. McNabb. BlackRock manages nearly $2 trillion in mutual 
funds of that $4 trillion, and those mutual funds, much like 
ours or Fidelity's or T. Rowe Price's or any of the other big 
firms that you are familiar with, serve Main Street. 
Collectively, the mutual fund industry serves 95 million 
investors, roughly one out of every two households. BlackRock 
also manages very large amounts of pension funds, which benefit 
everyday workers.
    Mr. Hultgren. My time is pretty much up. And you would say 
other companies are in that similar situation of providing that 
service to Main Street?
    Mr. McNabb. Totally.
    Mr. Hultgren. With that, I yield back, Mr. Chairman. Thank 
you.
    Chairman Hensarling. The time of the gentleman has expired. 
There are no other Members present in the queue, so I would 
like to thank our witnesses for their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing stands adjourned.
    
    [Whereupon, at 1:08 p.m., the hearing was adjourned.]
    
                            A P P E N D I X



                              May 20, 2014
                              
[GRAPHIC] [TIFF OMITTED]