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





 
                        OVERSIGHT OF THE FINANCIAL


                      STABILITY OVERSIGHT COUNCIL

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

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT
                           AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 17, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-98
                           
                           
                           
                           
                           
                           
                           
                           
                           
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                 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. VELAAZQUEZ, 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  RUBEEN 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
              Subcommittee on Oversight and Investigations

              PATRICK T. McHENRY, North Carolina, Chairman

MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
    Pennsylvania, Vice Chairman      EMANUEL CLEAVER, Missouri
SPENCER BACHUS, Alabama              KEITH ELLISON, Minnesota
PETER T. KING, New York              CAROLYN B. MALONEY, New York
MICHELE BACHMANN, Minnesota          JOHN K. DELANEY, Maryland
SEAN P. DUFFY, Wisconsin             JOYCE BEATTY, Ohio
STEPHEN LEE FINCHER, Tennessee       DENNY HECK, Washington
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
ANN WAGNER, Missouri                 STEVEN HORSFORD, Nevada
ANDY BARR, Kentucky
KEITH J. ROTHFUS, Pennsylvania
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 17, 2014...........................................     1
Appendix:
    September 17, 2014...........................................    37

                               WITNESSES
                     Wednesday, September 17, 2014

Clowers, A. Nicole, Director, Financial Markets and Community 
  Investment Team, U.S. Government Accountability Office.........     8
Pinschmidt, Patrick, Deputy Assistant Secretary, Financial 
  Stability Oversight Council, U.S. Department of the Treasury...     7

                                APPENDIX

Prepared statements:
    Clowers, A. Nicole...........................................    38
    Pinschmidt, Patrick..........................................    57

              Additional Material Submitted for the Record

Maloney, Hon. Carolyn B.:
    Letter to FSOC Chairman Jacob Lew, dated July 29, 2014.......    62
Pinschmidt, Patrick:
    Written responses to questions for the record submitted by 
      Representative Barr........................................    65


                       OVERSIGHT OF THE FINANCIAL



                      STABILITY OVERSIGHT COUNCIL

                              ----------                              


                     Wednesday, September 17, 2014

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:33 a.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick McHenry 
[chairman of the subcommittee] presiding.
    Members present: Representatives McHenry, Fitzpatrick, 
Bachus, Duffy, Fincher, Hultgren, Barr, Rothfus; Green, 
Maloney, Delaney, Beatty, Heck, Kildee, and Horsford.
    Ex officio present: Representative Hensarling.
    Also present: Representatives Garrett, Neugebauer, and 
Royce.
    Chairman McHenry. The Subcommittee on Oversight and 
Investigations will come to order. The title of today's 
subcommittee hearing is, ``Oversight of the Financial Stability 
Oversight Council.''
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    The Chair will now recognize himself for 5 minutes for an 
opening statement.
    Today, we will follow up on a hearing that this 
subcommittee held in March of last year where we discussed the 
Financial Stability Oversight Council's (FSOC's) failure to 
address recommendations from a 2012 U.S. Government 
Accountability Office (GAO) audit. Unfortunately, nearly 2 
years after its September 2012 report, the GAO still concludes 
that the FSOC has not made satisfactory progress towards 
implementing many of its recommendations.
    The FSOC may well be the least transparent Federal entity 
in the government. Of the 42 meetings held, no substantive 
description of discussions or members' perspectives have been 
provided in the meeting minutes. In fact, two-thirds of the 
meetings were held in executive session, completely closed off 
to the public.
    For comparison's sake, even the Federal Reserve releases 
fairly detailed transcripts of meetings of the Federal Open 
Market Committee (FOMC), as well as background material relied 
on by meeting participants and lengthy minutes that describe in 
detail the issues considered and the participants' perspectives 
on those matters.
    What this means for the companies that are potentially 
subject to the SIFI designation by the FSOC is that they must 
submit vast quantities of information demonstrating systemic 
risk and have no idea whether this information is reviewed, and 
if so, by whom. Furthermore, it is unclear what role, if any, 
the Office of Financial Research (OFR) plays in the data review 
process and how the information is ultimately made available to 
the FSOC's voting members.
    Even Congress, which created the FSOC and its unprecedented 
authority under the Dodd-Frank Act, has been denied access to 
their process. The dearth of information in the FSOC's minutes 
makes it impossible for Congress to conduct effective oversight 
of the FSOC and to determine whether the agency has 
appropriately implemented the Dodd-Frank Act.
    For example, detailed minutes from the FSOC's designation 
of nonbank financial companies for ``heightened prudential 
supervision,'' would help Congress assess the effectiveness of 
the FSOC's application of the statutory criteria for 
designation. Detailed minutes would also help Congress assess 
other matters including: the nature and quality of members' 
discussions concerning systemic risk; the relationship between 
the FSOC and the several staff committees that assist it, 
including the extent to which the FSOC conducted independent 
analysis or simply served as a rubber stamp; and how the FSOC 
incorporated data and analysis provided by the OFR as part of 
its deliberations.
    The FSOC has now been in existence for 3 years, yet it is 
still not clear how the FSOC has performed annual reevaluations 
of its SIFI designations, as required by the law. Although the 
FSOC's July 31st meeting minutes of this year do indicate that 
reevaluations took place for 2 firms designated over a year 
ago, it is unclear what standards were used to conduct these 
annual reviews, and it is unclear whether a review has been 
planned or conducted for the third company.
    In fact, during a recent hearing this past July, a mere 2 
weeks before the FSOC voted on the reevaluations, Chair Yellen 
of the Federal Reserve testified that she was unaware whether 
redesignation decisions were on the agenda for the FSOC 
consideration. This is problematic.
    Therefore, it is not shocking that the GAO concluded that 
almost 2 years after its 2012 report, the FSOC has not made 
satisfactory progress in terms of complying with many of its 
recommendations, including those intended to ensure that the 
FSOC has a comprehensive set of systemic risk indicators, 
whether or not it is coordinating and clarifying rules with the 
OFR and other regulators, and whether or not it has the ability 
to adequately assess the effect of SIFI designations on the 
market and on the designated companies.
    I look forward to the hearing today and the testimony from 
our panel of witnesses. And I hope they will address these 
mounting questions that have developed about the FSOC process 
and its considerably opaque yet very powerful actions over the 
last 3 years.
    With that, I will recognize the ranking member of the 
subcommittee, Mr. Green of Texas, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. And thank you for 
holding this important hearing to discuss the Financial 
Stability Oversight Council, FSOC.
    The FSOC represents an important piece of the Dodd-Frank 
solution to the challenges we faced following the 2008 
financial crises. As a result of the crises, 489 banks failed 
between 2008 and 2013, while only 21 banks failed from 2002 to 
2007. An estimated 3.2 million foreclosures were completed from 
2009 to 2011, versus about only 1.4 million foreclosures from 
2006 to 2008.
    An estimated $3.4 trillion in real estate wealth was lost 
since 2008; 26.2 percent in pension value has been lost since 
2008. An estimated $7.4 trillion in stock market wealth was 
lost between July 2008 and March 2009.
    And on September 29, 2008, when the House initially voted 
down TARP, the Dow dropped 778 points. An estimated 8.8 million 
jobs were lost between 2007 and 2009.
    In 2008, the unemployment rate was 5.8 percent, versus 9.6 
percent in 2010. The suicide rate quadrupled between 2008 and 
2010. There were about 850,000 bankruptcies in 2007, versus 1.4 
million bankruptcies in 2009.
    Mr. Chairman, while we may disagree as to whether we should 
amend or end Dodd-Frank, there should be little disagreement 
regarding the lack of data and oversight of certain sectors of 
the financial markets, which led to overexposure and 
overleveraging of many large financial institutions. Some 
important lessons were learned that we should share with you.
    One of the lessons learned was that we need greater 
coordination and better data to fully understand the ways in 
which our financial markets were changing.
    Through Dodd-Frank, we created the FSOC, chaired by the 
Secretary of the Treasury. The FSOC is comprised of 10 voting 
members, our Federal regulators, and one independent member 
with insurance expertise, together with five non-voting 
members, including the Director of the Office of Federal 
Research, the Director of the Federal Insurance Office, a State 
insurance commissioner, a State banking supervisor, and a State 
securities commissioner. Congress empowered the FSOC to oversee 
the landscape of the financial markets and to designate certain 
financial institutions as systemically important financial 
institutions, or SIFIs. Through this designation, these firms 
could be subjected to heightened standards under the Federal 
Reserve to ensure the safety of our financial system.
    Nonbank financial institutions of any size can be 
designated by the FSOC through a two-thirds vote, and to date 
only three firms have been so designated. Nonetheless, despite 
only being a few years removed from the worst financial crisis 
since the Great Depression, the FSOC and its SIFI designation 
process is under scrutiny.
    Because clarity from the FSOC is important, I do not oppose 
companies asking for additional guidance or feedback regarding 
the FSOC process. Their contention that certain sectors of the 
financial markets are fundamentally structured differently than 
bank holding companies should be considered when determining an 
SIFI designation.
    However, we must remember that Dodd-Frank has been a 
massive undertaking for our Federal regulators. They continue 
to work tirelessly to implement the law, and adjustments will 
be needed.
    To be clear, I have always contended that I support efforts 
to improve Dodd-Frank, which is why I believe we should 
entertain questions regarding transparency in the FSOC's 
decision-making process. However, I do not support efforts that 
would ultimately undermine the FSOC's ability to monitor 
systemic risk in our financial system.
    I thank the witnesses for appearing today. I look forward 
to their insights.
    And I yield back the balance of my time.
    Chairman McHenry. We will now recognize the chairman of our 
Capital Markets Subcommittee, the gentleman from New Jersey, 
Mr. Garrett, for 5 minutes for an opening statement.
    Mr. Garrett. Thank you, Chairman McHenry--or is it Chief 
Deputy Whip Chairman McHenry--for holding this important 
hearing. I am not sure I will use all that time. I very much 
appreciate this hearing on oversight of FSOC, the Financial 
Stability Oversight Council.
    Conducting a thorough and robust overview of this Council 
is one of the most important things that this committee can be 
doing right now. Why is that? Because FSOC has repeatedly 
defied bipartisan calls to do what? To cease and desist its 
nonbank designations. We have asked them to improve the 
transparency of their operations, and also simply to use more 
data-driven and thorough analysis, and frankly, to be 
accountable to Congress.
    Rarely in all my years have I seen a regulatory body that 
is so defiant of the demands of bipartisan Congress.
    More recently, as media outlets have reported, FSOC has 
designated a new insurance company as a systemically important 
financial institution (SIFI). Designating more private 
companies as too-big-to-fail and turning their regulation over 
to the Federal Reserve and its ever-growing safety net, if you 
will, is not going to solve the problems of taxpayer exposure 
to the financial system. Now, I am sure everyone here has heard 
the old saying, ``When you are in a hole, stop digging.''
    Well, sir, I would ask you to do this: When you leave here, 
please tell Secretary Lew to put the shovel down.
    This is just not my analysis. Here is a quote from an 
independent financial analyst over at Guggenheim Securities, 
Jaret Seiberg. In a note he sent out to his clients, in 
referring to your most recent designation, he said, ``We 
believe customers now will prefer to do business with an 
insurer that the government has said is too-big-to-fail.''
    So by your designation, you are driving business that way.
    In conclusion, the FSOC must stop taking us down this road. 
It must stop expanding the taxpayer-backed safety net. It must 
stop distorting competitive forces in various financial 
markets. And hopefully, in several months, we will have in this 
body and in the Senate a critical legislative mass to be able 
to reform this agency and to stop spreading too-big-to-fail.
    With that, I yield back.
    Chairman McHenry. We will now recognize the gentlelady from 
New York, Mrs. Maloney, for 3 minutes.
    Mrs. Maloney. Thank you. And I thank the chairman and the 
ranking member for holding this hearing.
    The Financial Stability Oversight Council, or FSOC, has a 
three-part mission: identifying risk to financial stability; 
promoting market discipline; and finally, responding to 
emerging threats to financial stability.
    Dodd-Frank gave the FSOC one primary tool to mitigate 
systemic risk: the power to designate financial institutions as 
systemically important financial institutions, or SIFIs. This 
is an important and necessary power, and without it we would 
have no protection against another AIG.
    But because designating companies as SIFIs is so 
consequential to the companies that are designated, it is 
imperative that the designation process be as transparent, 
clear, and robust as possible. In setting up the designation 
process, the FSOC went through a lengthy public rulemaking that 
included three separate public comment periods. They should be 
commended for actively engaging with stakeholders and the 
general public in creating the designation process, but this 
doesn't mean that the FSOC designation process is perfect and 
that no improvements can be made.
    In fact, now that we have been through the designation 
process a few times, and three companies have been designated 
as SIFIs and one has been proposed for designation, I believe 
that the FSOC should review what has worked and what can be 
improved. And that is why in July, I sent a letter to Secretary 
Lew recommending four specific changes that I believe would 
make the designation process more fair, thorough, and 
transparent, without undermining the FSOC's ability to identify 
and mitigate systemic risk.
    I ask unanimous consent to place this letter in the record.
    Chairman McHenry. Without objection, it is so ordered.
    Mrs. Maloney. The four recommendations that I made are that 
first, the Council should provide notice to companies that they 
are in stage two and let them know what is happening, 
particularly if they are requesting this information.
    Second, the Council should begin its engagement with a 
company that is under consideration. Once it has advanced to 
stage two, start working with them, instead of waiting until 
stage three.
    Third, when the Council provides a company with notice that 
it has advanced to stage three, the Council should, to the 
extent feasible, identify what are the particular issues that 
they feel merit further review.
    And fourth, the Council should adopt a policy of 
automatically granting an oral hearing to the company upon 
request. These companies need to know, for their own planning 
and their own internal efforts what exactly is going on.
    I think these are common-sense proposals that I hope will 
be accepted by Treasury and FSOC. But also, it is important 
that we not lose sight of the problems that made FSOC 
necessary: the fact that no regulator prior to the crisis had 
responsibility for monitoring risk across the entire financial 
system, which allowed the huge risks to build up outside of the 
traditional banking sector.
    So I look forward to hearing the witnesses, and I thank you 
very much.
    Chairman McHenry. We will now recognize the gentleman from 
Maryland, Mr. Delaney, for 2 minutes.
    Mr. Delaney. Thank you, Mr. Chairman.
    My colleague, Mr. Garrett, made a good observation when he 
read from the research report, and I think he said that the 
analyst said that business would be going towards companies 
that were designated as systemically important. But it seems to 
me one of two things will happen to a certain percentage of a 
company's business if it is designated systemically important: 
either business will go towards it; or business will go away 
from it.
    Either way, this designation will affect how the market 
works and will affect these private enterprises, which is why I 
believe it is extraordinarily important that the process for 
designation and the communication and the transparency be done 
to the highest standard possible. Because in fact, every one of 
these enterprises that is being considered for designation is 
already a regulated institution, oftentimes to an 
extraordinarily high degree.
    So I am looking forward to hearing in your testimony how 
you plan on addressing some of the concerns that my colleague 
from New York has raised, and which I have also addressed with 
a piece of legislation that I have co-authored with my 
colleague, Mr. Ross, in terms of making sure that companies who 
are considered as a potential SIFI have an opportunity--they 
and their regulators--to discuss in great detail what the 
strategy is for designation and what other alternatives are 
available for these companies to avoid a designation, if 
possible.
    For example, if a business had an activity that the FSOC 
considered problematic, are we giving companies an opportunity 
to divest that activity so that the activity in concern could 
actually be removed from the institution? That seems to me to 
be, as an example, a better way to accomplish the objectives of 
FSOC.
    So I care a lot about transparency; I care a lot about 
process; and I care about making sure these companies have a 
seat at the table, as do their regulators, to have a robust 
dialogue and to come up with alternatives for SIFI designation. 
Because SIFI designation will, in fact, affect how these 
companies participate in their market, how businesses who do 
business with them, and counterparties who do business with 
them, think about them, either positively or negatively.
    Chairman McHenry. The gentleman yields back.
    The Chair will now recognize our witnesses for today's 
panel.
    Our first witness is Mr. Patrick Pinschmidt. He is Deputy 
Assistant Secretary of the Financial Stability Oversight 
Council. Mr. Pinschmidt was previously a Policy Advisor to the 
Congressional Oversight Panel created to review the current 
state of financial markets and the regulatory system.
    He also served as vice president of U.S. equity research 
for both Morgan Stanley and Merrill Lynch. He has a bachelor's 
degree from Georgetown University and received an MBA from 
Columbia Business School.
    Our second witness is Ms. Nicole Clowers. She is Director 
of the Financial Markets and Community Investment Team at the 
United States Government Accountability Office. Ms. Clowers has 
been with the GAO for over 15 years. She has a bachelor's 
degree from Virginia Tech and a master's in public 
administration from the University of Georgia.
    Thank you both for being here.
    The witnesses will be recognized for 5 minutes.
    I know this is not your first rodeo, and so you are aware 
of the lighting system. You are also aware that this committee 
has an atrocious sound system, so if you bring the microphone 
uncomfortably close to your face and then speak clearly, we 
might be able to hear you.
    And without objection, the witnesses' written statements 
will be made a part of the record.
    Mr. Pinschmidt, you are now recognized for 5 minutes.

 STATEMENT OF PATRICK PINSCHMIDT, DEPUTY ASSISTANT SECRETARY, 
 FINANCIAL STABILITY OVERSIGHT COUNCIL, U.S. DEPARTMENT OF THE 
                            TREASURY

    Mr. Pinschmidt. Thank you.
    Chairman McHenry, Ranking Member Green, and members of the 
subcommittee, thank you very much for the opportunity to 
testify today regarding the Financial Stability Oversight 
Council.
    Next month will mark the fourth anniversary of the 
Council's first meeting. Federal and State financial regulators 
now meet regularly to coordinate and work together to identify 
and respond to potential threats to financial stability. The 
Council has convened over 40 times, and just over the last year 
has considered issues including market volatility, the debt 
ceiling impasse, interest rate risk, developments in Europe and 
emerging economies, housing finance reform, operational 
incidents in the U.S. equity markets, and cybersecurity.
    The broad range of these issues illustrates the importance 
of an organization charged with looking across the financial 
system to identify, monitor, and respond to risks to financial 
stability.
    Congress gave the Council a number of authorities to 
address risks to financial stability. The Council has shown a 
willingness to use these authorities and a commitment to 
rigorous analysis.
    It has designated three nonbank financial companies for 
Federal Reserve supervision and enhanced prudential standards. 
It has designated eight financial market utilities for enhanced 
risk management standards. It has issued for public comment 
proposed recommendations regarding money market mutual fund 
reform. And it has made specific recommendations in its annual 
reports regarding reforms to address vulnerabilities in the 
tri-party repo markets and other areas.
    In its first 4 years, the Council has also worked 
extensively with the GAO and other oversight bodies, and we 
respect their role in making recommendations to help the 
Council fulfill its statutory responsibilities.
    I want to now highlight some of the ways in which the 
Council has built an organization framework that supports 
openness and collaboration throughout its work. Beginning with 
its very first meeting in October 2010, the Council voluntarily 
adopted a transparency policy. The Council expanded that policy 
earlier this year to improve the flow of information to the 
public.
    With respect to the nonbank designations process, the 
Council has established a rigorous and fair process for 
evaluating nonbank financial companies for potential 
designation. Although a rulemaking was not required in this 
context, the Council developed a rule and guidance regarding 
this authority and provided the public with three separate 
opportunities to comment on this approach.
    The Council's careful analysis of individual nonbanks 
include extensive interactions with the companies under 
consideration. Together, for the three nonbank financial 
companies that have been designated, the firms submitted 
thousands of pages of information to the Council, met with the 
Council or staff dozens of times, and each company received a 
detailed written explanation of the Council's analysis before a 
vote on the final designation was taken.
    It is important to note that much of the Council's work, 
particularly with regard to companies under consideration for 
potential designation, relies on sensitive, company-specific 
information that would not be shared by firms or regulators 
without an expectation of confidentiality. The Council has a 
statutory responsibility to protect the confidentiality of this 
information, as its disclosure could result in destabilizing 
market speculation.
    Within this context, the Council is continually examining 
how it can monitor emerging threats to the financial system 
while also opening up more of its work to the public. In this 
regard, the Council's annual report is an important example of 
the Council's commitment to sharing information about its work 
with Congress and the public in a clear and transparent manner.
    Since its first meeting, the Council has received a number 
of suggestions regarding its practices, including some from 
members of this committee. Although it is a relatively young 
organization, the Council has already demonstrated its 
commitment to improving the effectiveness of its work and its 
engagement with the public.
    Consistent with that history, I expect that the Council 
will consider potential changes to its nonbank designations 
process in the coming months and will continue to evolve.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Pinschmidt can be found on 
page 57 of the appendix]
    Chairman McHenry. We now recognize Ms. Clowers for 5 
minutes.

STATEMENT OF A. NICOLE CLOWERS, DIRECTOR, FINANCIAL MARKETS AND 
   COMMUNITY INVESTMENT TEAM, U.S. GOVERNMENT ACCOUNTABILITY 
                             OFFICE

    Ms. Clowers. Chairman McHenry, Ranking Member Green, and 
members of the subcommittee, thank you for having me here today 
to discuss our work on FSOC. As you know, FSOC was created to 
address a regulatory weakness highlighted by the recent 
financial crisis--namely, a lack of an agency responsible for 
looking across the system to identify and respond to threats to 
the financial system.
    In September 2012, we issued our first audit report of FSOC 
and made nine recommendations. Since that time, FSOC has taken 
steps to address some of the recommendations. However, as we 
reported in 2012, and our findings and recommendations made 
clear, additional work is needed.
    Our 2012 recommendations were intended to improve FSOC's 
risk-monitoring functions, accountability, transparency, and 
collaboration. Since 2012, as I said, FSOC has taken some steps 
to address our recommendations.
    For example, it has worked to improve communication with 
the public by redesigning its Web site and making more timely 
notices of upcoming meetings. FSOC has also developed bylaws 
for its deputies committee, which is an important collaboration 
improvement.
    However, more work is needed to fully address our 
recommendations. With the rest of my time, I would like to 
highlight some key recommendations where we think additional 
work is needed.
    First, we recommended in 2012 that FSOC develop a 
systematic and comprehensive approach to identify systemic risk 
in emerging threats. We noted that FSOC's approach might not 
help identify new risk that member agencies had not already 
identified.
    Two years later, FSOC continues to rely on largely the same 
process. While OFR has made some progress in developing data 
tools to support FSOC since the 2012 report, we observe that 
these tools suggest that one tool is still under development 
and the other is not risk-focused.
    Second, related to accountability and transparency, we 
recommended that FSOC keep detailed records of their closed-
door meetings. While no specific level of detail is required 
for FSOC's minutes, the limited documentation of their 
discussion makes it difficult to assess FSOC's performance.
    FSOC officials said they have attempted to improve meeting 
minutes that are provided to the public, but FSOC officials 
said they do not plan to keep more detailed minutes or have 
them transcribed because of the confidential information 
discussed. We continue to believe the lack of detailed minutes 
limits both transparency and accountability.
    Also related to accountability, we recommended that FSOC 
comprehensively evaluate whether the designations of financial 
companies for enhanced supervision are having the intended 
impacts. Congress intended that the designations would lead to 
greater financial stability. These designations will likely 
have other significant benefits and costs, both for the 
designated firms as well as the Nation's economy.
    Given these potential impacts, it is important that 
retrospective reviews of the designations are undertaken. FSOC 
has not yet begun preparations for or committed to conducting 
such reviews. We have previously reported on the importance of 
advanced planning for these reviews.
    Finally, to improve collaboration and coordination, we 
recommended that FSOC clarify its roles and responsibilities 
among FSOC and its member agencies for systemic risk 
monitoring, and adopt practices to coordinate rulemaking across 
member agencies. FSOC officials told us they do not plan to 
implement these recommendations because the overlapping 
responsibilities for monitoring systemic risk has not been 
problematic.
    They also said FSOC lacks the authority to direct 
independent agencies. We maintain that action within FSOC's 
existing authority is needed, as our past work has shown that 
the lack of clear roles and coordination can lead to 
duplication, confusion, and regulatory gaps.
    In conclusion, Mr. Chairman, FSOC has taken some steps to 
address our recommendations, but more work is needed. We 
believe that fully addressing our recommendations will improve 
FSOC's systemic risk monitoring functions, allow Congress to 
hold them accountable for results, and enhance collaboration 
among FSOC's members.
    Chairman McHenry, Ranking Member Green, and members of the 
subcommittee, this concludes my prepared statement. I would be 
happy to answer any questions at the appropriate time. Thank 
you.
    [The prepared statement of Ms. Clowers can be found on page 
38 of the appendix.]
    Chairman McHenry. Thank you, Ms. Clowers.
    And thank you both for your testimony.
    I will now recognize myself for 5 minutes for questions.
    Can you please describe, Mr. Pinschmidt, to what extent the 
FSOC and OFR have developed comprehensive mechanisms for 
identifying and monitoring systemic risk?
    Mr. Pinschmidt. Yes. Thank you.
    The FSOC operates a very robust committee system to--
    Chairman McHenry. I am asking very specifically here. We 
only have 5 minutes, so if you can just get into the specifics 
here.
    Mr. Pinschmidt. Yes. I guess what I would say is it is 
important to have some context in terms of the committee's 
structure and--
    Chairman McHenry. I am aware of the committee's structure. 
I am asking, the GAO report is a pretty damning one when it 
comes to this question of whether or not you have a 
comprehensive systemic risk monitoring system, and they say you 
do not. So what is your response to that?
    Mr. Pinschmidt. I believe Ms. Clowers is referring to the 
OFR Markets Monitor, which is a publication by the OFR that 
provides a systematic overview of the marketplace and key 
trends and developments, and it has been something that is 
shared on a regular basis at the FSOC Systemic Risk Committee 
on--
    Chairman McHenry. Is that sufficient?
    Mr. Pinschmidt. No. It is not really meant to be 
sufficient. It is one input--
    Chairman McHenry. What are the other ingredients for 
sufficiency so you can measure systemic risk?
    Mr. Pinschmidt. The other ingredients would be the other 
working groups, the other areas of the different regulatory 
communities that are focused on key areas of--
    Chairman McHenry. So, as a matter of oversight, to make 
sure that is, in fact, the case, how can I know that, when the 
GAO in their audit says that you do not have that systemic risk 
assessment?
    Mr. Pinschmidt. The systemic risk assessment that Ms. 
Clowers was referring to is viewed within the FSOC context as a 
complement to its ongoing work throughout the committee systems 
and the ad hoc groups that are focusing on specific risks.
    Chairman McHenry. Okay.
    Ms. Clowers, to this question, why does the GAO believe 
that the FSOC and OFR have failed to develop comprehensive and 
systemic mechanisms for identifying and monitoring systemic 
risk?
    Ms. Clowers. They lack such processes. They use the 
Systemic Risk Committee to help identify risk, but what happens 
in that committee is each member brings ideas and those ideas 
bubble up.
    What we are looking for is a comprehensive, systematic 
approach or a common set of indicators that would look across 
the system to identify potential threats, that these indicators 
would be forward-looking, risk-focused, and less dependent on 
who shows up to a meeting, rather that it be routine, everyone 
would know which data they are looking at.
    Chairman McHenry. Okay.
    So, Mr. Pinschmidt, I want to bring something up, and I 
know you are fairly well-versed in it. When you worked at 
Morgan Stanley, you wrote a piece in June of 2008 about Lehman 
Brothers. I know you have answered this question before, but 
the piece is entitled, ``Bruised, Not Broken, and Poised for 
Profitability,'' talking about Lehman Brothers. And going in 
just 2 months before Lehman's bankruptcy and failure, you are 
touting that they are on the road for profitability.
    I bring this up not to embarrass you. You have obviously 
written a lot. You have had a very long career. But this 
highlights how difficult it is to really assess systemic risk, 
does it not?
    Mr. Pinschmidt. Yes. Certainly, I made the wrong call on 
that, and a lot of other people did too. But what I would say 
is, sort of more importantly, the market misjudged the impact 
of Lehman's failure in terms of counterparties, other 
institutions. And it just kind of reminds us today--and I think 
to Ms. Clowers' point--that we need to make sure that there are 
appropriate safeguards in place.
    We need to make sure that there is increased transparency. 
To the extent that firms are large and outsized, we need to 
make sure that there are enhanced prudential standards and 
there are steps taken in terms of resolution authority to--
    Chairman McHenry. So to that question--
    Mr. Pinschmidt. --the risks from a firm's failure.
    Chairman McHenry. So to that question of transparency, that 
is what we are here today talking about.
    I want to move on. The FSOC recently announced that it is 
taking ``a more focused analysis of industry-wide products and 
activities to assess potential risks associated with the asset 
management industry.'' So does this mean that the FSOC is no 
longer going to designate asset management companies as SIFIs?
    Mr. Pinschmidt. Congressman, what that means is--and I 
think you are referring to the readout from the July 31st 
Council meeting. At that meeting, the Council directed FSOC 
staff and member agency staff to undertake an analysis of asset 
management activities and their products.
    That decision was--is driven by a recognition that asset 
managers are different from other companies--
    Chairman McHenry. Sure. But this was interpreted, so is 
BlackRock still at stage two in this process?
    Mr. Pinschmidt. Companies, unless they are voted on, remain 
in a stage.
    Chairman McHenry. So that is called purgatory, right? It is 
neither heaven nor hell. It may not be so bad. It may not be 
for any sort of length of time that you can determine. And you 
just leave people in a suspended state of animation. Is that a 
fair assessment?
    Mr. Pinschmidt. The Council operates a three-stage process. 
Stage one is based on public metrics that each company can 
assess. The key threshold is $50 billion in assets, and then if 
you trip one of five other metrics you are in stage two. Unless 
the composition of the company's metrics changes, that company 
remains in stage two.
    Chairman McHenry. Forevermore?
    Mr. Pinschmidt. Unless there is a vote.
    Chairman McHenry. Okay. And could there be a vote to put 
them back in stage one?
    Mr. Pinschmidt. That would only be appropriate--a vote 
isn't needed to put them into stage one. They would 
automatically go back to stage one if the metrics changed and 
therefore they didn't hit the thresholds to advance to stage 
two.
    What I would like to sort of stress on this is that stage 
one is purely mechanical. There doesn't have to be any analysis 
by the Council; it is based on publicly available data. If you 
trip those metrics, you are in stage two, and therefore subject 
to more evaluation by the Council.
    Chairman McHenry. I have gone well over my time.
    We will now go to Mrs. Maloney of New York for 5 minutes.
    Mrs. Maloney. Thank you.
    I think that there may be a disconnect between the 
Council's duty to identify and mitigate systemic risks and the 
tools that they have to work on it. For example, if the Council 
identifies a particular company that is systemically risky, it 
has by statute the tools to mitigate that risk by an SIFI 
designation, which puts them under stronger regulation with the 
Fed.
    But if the Council identifies an industry-wide activity 
which was really part of the prior financial crisis with the 
credit default swaps and other activities that are systemically 
risky, the most it can do to mitigate that risk, according to 
the statute, is to issue a nonbinding recommendation to other 
regulators.
    So my question is, is it fair to ask the Council to 
identify activities based on systemic risk but then not give 
the Council the authority to do anything about any of these 
activities except for a recommendation? I would like a comment 
on that.
    It seems to me that sometimes it is the activities that are 
the most risky in a financial situation, not necessarily the 
institutions, which may be reacting to a financial crisis that 
was created by the risky activities. To me, I think the risky 
activities should have more attention, really.
    So my question is that, and I ask Mr. Pinschmidt.
    Mr. Pinschmidt. Thank you, Congresswoman. What I would note 
is that the Council has very strong convening powers bringing 
regulators together across the financial system, and that in 
and of itself is very important when looking at activities, 
because activities don't necessarily impact individual 
institutions and individual marketplaces; they stretch across 
the financial system.
    So in that convening power there are a number of steps that 
the Council could take based on the nature of the risk, to the 
extent risk is identified. One of the steps is just asking for 
more information: working with the primary regulators; working 
with the industry; asking for more information and getting more 
detail and more data. A lot of times when risks are identified 
it is because there is not enough information there, so that is 
a very logical outgrowth of that process.
    Other times, to the extent a risk is identified and there 
is more work that a regulator can do, there are two options for 
the Council. It can highlight a risk in the annual report or it 
can issue a Section 120 recommendation to a specific regulator 
regarding potentially taking some action.
    So again, and I think in the broader context, though, it 
starts a process, it focuses regulators, and there are a number 
of authorities that can come out of that process.
    Mrs. Maloney. Do you think that the Council should have the 
authority to issue binding regulations to address serious 
activities that are based on risk?
    Mr. Pinschmidt. It is really not for me to answer that 
question, but I would defer to the Council on that.
    Mrs. Maloney. Okay.
    Ms. Clowers, can you comment on whether the FSOC has the 
tools it needs to carry out its statutory duties?
    Ms. Clowers. It has the tools necessary and the people 
necessary in the room to make decisions and carry out its 
duties. Where we have recommended that we think additional work 
is needed is work on the development of their systemic risk 
monitoring functions.
    There has been some discussion today of the different data 
tools that are available, including those provided by the OFR. 
We think those tools could be enhanced by making them more 
risk-focused and forward-looking. And also, even the OFR 
Advisory Committee has encouraged OFR to be more aggressive in 
the development of their tools.
    Mrs. Maloney. I would like to ask Mr. Pinschmidt, when the 
Council is analyzing whether a company is systemically 
important, they don't measure whether the failure of the 
company would destabilize the system in normal times; they 
measure whether it would destabilize the system in a period of 
stress in the financial industry. Can you comment on how that 
standard has affected the Council's analysis of whether 
companies are systemically important and what are the benefits 
or the drawbacks of that system?
    Mr. Pinschmidt. That guidance was built into the final rule 
on guidance for the nonbanks designations process, and 
essentially the rationale behind that was a recognition that 
rarely do firms fail in a vacuum; there is generally a 
precipitating event, there is broader market weakness, economic 
weakness. And so thus, it is appropriate to look at firms in 
the context of not perfect markets, not terrible markets, but 
not great markets either.
    Mrs. Maloney. What are the drawbacks of that system?
    Mr. Pinschmidt. I'm sorry, I--
    Mrs. Maloney. What are the drawbacks of that system, of 
just designating it in a time of extreme stress--and the 
benefits? Do you think that is the right approach? Should we do 
it just for financial stress times or also normal times?
    Mr. Pinschmidt. I think it is a recognition that when a 
firm is undergoing stress, there are generally precipitating 
events and the market is not functioning generally--
    Mrs. Maloney. So you support that approach. Thank you.
    Mr. Fitzpatrick [presiding]. The gentlelady's time has 
expired.
    I am going to recognize myself for 5 minutes.
    Good morning, and I appreciate your participation in the 
hearing.
    In his opening statement, Chairman McHenry, I guess 
referring to the GAO report, identified FSOC as perhaps the 
least transparent agency in all of the Federal Government. And 
likewise, Mr. Delaney, in his comments, addressed concerns that 
because of the significant influence that FSOC has in the 
designation process, how critical it is that the thought 
process, the reasoning, that it all be laid out and that it be 
transparent.
    So my question for you, Mr. Pinschmidt: Is it your position 
that FSOC cannot be made more transparent than it is today?
    Mr. Pinschmidt. What I would note is the FSOC really values 
transparency, and--
    Mr. Fitzpatrick. Could it be made more transparent?
    Mr. Pinschmidt. Yes. I think that has been a continuous arc 
since the first meeting 4 years ago.
    Mr. Fitzpatrick. Specifically, what actions are you 
prepared to take, including further clarification, more 
detailed meetings, minutes, and--
    Mr. Pinschmidt. Yes. I think there have been a number of 
suggestions, including from this committee, and we have 
received suggestions from outside stakeholders. And as I noted 
in my oral remarks, we expect, in terms of at least the 
nonbanks designations process, the Council will begin to 
evaluate potential changes there.
    And what I would note is, look, we are not--the Council 
shouldn't be frozen in its ways. To the extent that there is 
good feedback and suggestions out there that make sense, the 
Council is open to considering those, and I expect that, again, 
for--in the example of transparency, it is a balance for the 
Council--
    Mr. Fitzpatrick. Sure. Do--
    Mr. Pinschmidt. --because the Council--sorry.
    Mr. Fitzpatrick. Through August of 2014, you have had 42 
meetings. Have any of those meetings been transcribed? Have any 
of those transcriptions, if you have them, been released?
    Mr. Pinschmidt. The practice of the Council has been to 
release public minutes following the next meeting, once they 
are approved.
    Mr. Fitzpatrick. Where substantive matters are considered?
    Mr. Pinschmidt. The minutes serve as the record for the 
meeting.
    Mr. Fitzpatrick. And how about executive sessions? Are 
there executive sessions of the Council?
    Mr. Pinschmidt. Certainly from time to time there--like 
around Hurricane Sandy there were meetings that were held on 
short notice to bring regulators together to respond to what 
was going on.
    Mr. Fitzpatrick. Mr. Pinschmidt, on a slightly different 
matter, in testimony before the Senate Banking Committee on 
September 8th, Governor Tarullo expressed his, what he called, 
``pretty strong presumption'' that traditional or core 
insurance activities do not pose systemic risk.
    Former House Financial Services Committee Chairman Barney 
Frank expressed the same view earlier this summer before this, 
his old committee.
    Do you agree with Governor Tarullo and Chairman Frank that 
traditional or core insurance activities do not pose systemic 
risk?
    Mr. Pinschmidt. I haven't had the opportunity to speak with 
Governor Tarullo or former Chairman Frank on that. What I would 
note, in terms of the insurance analysis that has been done by 
the Council, that has been done at a company-specific level, 
looking at the designations authority. And the nature of those 
determinations for the two insurance companies that were 
identified was based on the size, interconnectedness, and 
leverage, and other factors of those institutions, not 
necessarily a reflection on core insurance products or 
practices that were particularly highlighted.
    Mr. Fitzpatrick. So the question is, do core insurance 
activities--do they or do they not pose systemic risk?
    Mr. Pinschmidt. The nature of the evaluation that was done 
by the Council on the specific insurance firms related to those 
firms' general size, structure, interconnectedness with the 
financial system, and the impact of their potential failure on 
market functioning.
    Mr. Fitzpatrick. So your answer is yes?
    Mr. Pinschmidt. What I am trying to say is the nature of 
the analysis undertaken by the Council on those companies was 
based on company-specific factors and what effect the failure 
of those companies would have on the broader financial system.
    Mr. Fitzpatrick. Governor Tarullo also noted that AIG and 
Prudential were designated as systemic not because of their 
core insurance activities but due to what he called 
``nontraditional insurance activities,'' where runnability is 
more of a concern, and also with respect to things that are not 
insurance activities of any sort. Do you agree with Governor 
Tarullo that to justify designating an insurance company as an 
SIFI that one would have to find that the company engages in 
activities that are not traditional insurance activities and 
that do pose systemic risk?
    Mr. Pinschmidt. I haven't had an opportunity to talk to 
Governor Tarullo regarding his testimony, but the analysis that 
was done for the insurance companies was company-specific 
rather than industry as a whole, and it was based on the size, 
leverage, and interconnections of those companies and how that 
makeup could transmit to the rest of the financial system.
    Mr. Fitzpatrick. I now recognize Mr. Delaney for 5 minutes.
    Mr. Delaney. Thank you, Mr. Chairman.
    MetLife is a 146-year-old company that has generally been a 
pretty well-regarded company, and it is likely that they are 
going to sue the United States over this designation, in part 
because they feel like the process was bad. Do you consider 
that a failure of the process?
    Mr. Pinschmidt. I cannot comment on any specific companies 
that have not been designated. What I can say is the Council 
runs a very thorough and robust process.
    I did note one example in my testimony. For one of the 
companies that was ultimately designated, the Council and its 
member agency staff met with or had phone calls with the 
company 20 times over a period of a year. There were 200 data 
submissions totaling 6,000--
    Mr. Delaney. Did the members of the Council meet with the 
senior management team of the company as a group?
    Mr. Pinschmidt. Prior to a vote on the final designation, 
the company was offered a hearing before the Council and the 
company presented to the Council, yes.
    Mr. Delaney. How much before the designation was that 
presentation made?
    Mr. Pinschmidt. That was 60 days before a vote on a final 
designation. And it is worth noting that prior to that hearing, 
the company was given a very detailed basis for the proposed 
designation, roughly 200 pages long outlining the key views of 
the Council.
    So it wasn't the company coming in there blind, not knowing 
where the Council was. They kind of had all the facts in front 
of them; they could argue different points and present their 
case.
    Mr. Delaney. When you talk about the factors that went into 
this designation, aside from activity-based analysis, which I 
think your comment to the Chair was that you considered other 
factors, and you talk about size and leverage--when you think 
about leverage, do you adjust for the nature of the 
liabilities? Because insurance companies have very long-dated 
liabilities.
    Mr. Pinschmidt. Certainly. This is not a mechanical 
approach by any stretch. It is very specific; it is very 
analytical. There is a lot of back-and-forth with the company.
    There are significant questions from the Council side. 
There are significant questions from the company side. So to 
sort of force certain metrics based on where they sit and make 
a determination would not be the right approach.
    Mr. Delaney. When you looked at the designation of MetLife, 
for example, did you factor into your analysis that MetLife, if 
it were to be designated, or other insurance companies that 
would be designated, would, in fact, as a result of 
designation, get out of certain businesses that they are 
currently in that have counterparty risks associated with them 
and that those businesses would likely run or go from a large, 
heavily regulated 150-year-old company into new startup 
insurance companies that were being organized in fact to take 
advantage of the fact that certain business activities would 
have to leave MetLife?
    Did you factor into your overall systemic risk analysis for 
the good of the financial system that designation actually 
forces activities out of large, well-regulated companies into 
institutions that have lighter regulation, are not as well-
capitalized, and don't have as long of a track record?
    Mr. Pinschmidt. The Council, as part of its ongoing risk 
monitoring, is, of course, always looking at what are the 
developments in the financial system, what is the impact on 
financial market functioning--
    Mr. Delaney. But my question is specifically as it relates 
to a company, did anyone sit there and say, ``Well, if we 
designate this company, the following businesses will likely 
leave the company and they will go into new startup, largely 
unregulated or lightly regulated institutions with limited 
track records,'' and did that--did risk associated with that 
transfer of activities from large, safe, big, long-term to new 
startup, unproven, lightly regulated--did that--the risk 
associated with that transfer, which I view there being risk, 
was that factored into the risk cost, if you will, of 
designation?
    Mr. Pinschmidt. In terms of the company-specific 
designation authority, the statute is clear on that front that 
the Council must consider--must identify risks in terms of kind 
of the remedy and what happens next, in terms of enhanced 
prudential standards--
    Mr. Delaney. But my question is, did someone sit at the 
table and say, ``If we designate this company, then the 
following businesses will likely go into other more lightly 
regulated institutions or new startup companies''--yes or no, 
was that considered?
    Mr. Pinschmidt. That is not part of the statutory factors. 
The Council is focused on risk identification--
    Mr. Delaney. So downstream risk that is created from a 
designation, right--because if you designate a company and it 
is really big, and because of your designation it cuts itself 
in half and it spins off a bunch of businesses and it gets spun 
off to small, lightly capitalized, lightly regulated 
businesses--the risks associated with that are not factored 
into the designation. That is what I am hearing, at least.
    Mr. Pinschmidt. Certainly, if that were to be the case, it 
would be something that would be looked at across the broader 
Council work streams and efforts. But in terms of the actual 
designation decision, the statute is very clear that the 
Council has to focus on risk identification and the Federal 
Reserve Board is responsible for--
    Mr. Delaney. It doesn't sound like a very balanced risk 
approach, at least in my judgment.
    I yield back.
    Mr. Fitzpatrick. Mr. Bachus, the chairman emeritus of the 
full Financial Services Committee, is recognized for 5 minutes.
    Mr. Bachus. Thank you.
    Welcome, Deputy Secretary. You concluded your oral 
testimony by saying the Council has received a number of 
suggestions regarding the process for evaluating nonbank 
financial companies, and that you expect that the Council will 
consider any potential changes in the coming months. I applaud 
that statement.
    And I wanted to point out to you that Mr. Neugebauer and I, 
in 2012, asked for a GAO study, and they reported back that 
Dodd-Frank requires the FSOC to periodically reevaluate its 
designations of nonbank financial companies. Are you aware of 
that requirement in Dodd-Frank?
    Mr. Pinschmidt. Congressman, I believe you are referring to 
the Council's intent to review at least every 5 years the 
metrics for stage one, in terms of kind of the initial 
threshold for companies that would be considered.
    Mr. Bachus. Also, they actually said that you will conduct 
a comprehensive assessment to determine whether the 
designations are having the intended impact. Well, no, they 
said that you don't have to do that. I'm sorry.
    But they suggested that it would be a good idea that you 
conduct an assessment after you have made the designation to 
see whether that designation is having the intended consequence 
of improving financial stability of the company and any risks 
that they might have. Congressman Ross and Congressman Delaney, 
who was just asking questions, have introduced a bill that I am 
cosponsoring which calls for an assessment of intended impact, 
which has been suggested by the GAO.
    Of course, AIG, G.E, and Prudential already have those 
designations made, with perhaps more on the way. Wouldn't you 
agree that it may be very helpful and important to know whether 
the designations are having the intended consequences, or 
whether maybe they are even having some negative consequences?
    Mr. Pinschmidt. Congressman, certainly we share, I think, 
your goal on that. The Council, across all different markets, 
and particularly with some of the largest institutions, is 
constantly monitoring as to how things are playing out. 
Specifically for designated entities, I would note that there 
is an annual review process of each designation that takes 
place, and that would--clearly we are not that far away from 
the initial designations, but you could imagine scenarios going 
forward as company businesses change, risk profiles change, 
market functioning change--
    Mr. Bachus. Do you make those public? Do you mean that 
every year you will review the designations, and part of that 
is whether they are having positive or negative implications--
    Mr. Pinschmidt. The annual review is consistent with the 
Council's statutory authority here focused more on the risk 
identification, and that would logically encompass what has 
happened to the profile of the firm, how are they engaging with 
other market players, are there any material changes in their 
business model and their riskiness.
    Mr. Bachus. Right. But do you understand what I am saying? 
Wouldn't it be a good idea once the designation is made maybe 
on that annual basis to also say, ``Okay, after we made this 
designation, this is what has happened, these are some 
positives, these may be some negatives,'' where you could 
adjust, or at least reconsider whether or not the designation 
was even helpful?
    Mr. Pinschmidt. Certainly in terms of how the designation 
impacts market functioning and these specific firms, that is 
considered on an annual basis.
    Mr. Bachus. Okay.
    Mr. Pinschmidt. I think to the general questions of market 
functioning, that encompasses ongoing work at the Council--
    Mr. Bachus. I would just say maybe take a look at that 
legislation and give me your thoughts on it, and Mr. 
Neugebauer, and maybe Mr. Ross, and Mr. Delaney. It is a 
bipartisan thing.
    Let me go quickly to AIG. Mr. Fitzpatrick was talking about 
the runnability, and we know that was a credit default swap 
thing where they wrote $430 billion, $440 billion worth of 
credit default swaps; they didn't buy any. A lot of people 
bought and sold.
    So that didn't impair their insurance operations until 
their credit rating changed. They had a tremendous credit 
rating problem, and that then did impact their insurance. And I 
can understand that designation if you have somebody doing 
something over here which may be dangerous, cause credit rating 
problems, and then impact their insurance market.
    I am not sure how that would go with a Prudential or a 
MetLife, and I just point that out to you. AIG really wasn't an 
insurance problem; it was a gambling problem. And it was being 
on one side of the market with $440 billion worth of debt and 
no money to back it up if it failed. I don't see that with 
G.E., Prudential, or MetLife.
    If you would like to respond?
    Mr. Pinschmidt. What I would note is that each designation 
is company-specific. There is a core group of--there are 10 
statutory considerations in a 6-category framework that comes 
into play, but the factors that are looked at at each company 
are very company-specific.
    And, generally speaking, it is a combination of issues. It 
is never one thing, or it hasn't been thus far one thing. So I 
would just note that, again, it is a company-specific analysis 
and it would be hard for me to kind of generalize.
    Mr. Bachus. Thank you.
    Mr. Fitzpatrick. And the gentleman's time has expired. 
Thank you.
    Mrs. Beatty is recognized for 5 minutes.
    Mrs. Beatty. Thank you so much, Mr. Chairman, and Ranking 
Member Green.
    And thank you to our witnesses today.
    We have talked a lot about being designated this morning as 
an SIFI, so let me ask you these two questions: Last night, a 
couple of my staff were singing the words to ``Hotel 
California,'' and one of them said, ``Is this a Hotel 
California scenario, where once designated a company, will you 
remain an SIFI forever?''
    If so, why? And if not, can you describe to me the process 
of review, including the frequency and high-level 
considerations in this review?
    Mr. Pinschmidt. Thank you for that question. Maybe if I 
could step back here and then sort of briefly outline the 
process of review of companies for designation.
    It is a three-stage process. Stage one is purely 
mechanical, based on metrics and thresholds. To the extent a 
company triggers those metrics, it automatically goes to stage 
two.
    And stage two is viewed as solely very preliminary. It will 
be--Council member agencies will pull the 10-Q if it is a 
public company, understand the company, do some initial 
analysis, and understand to the extent that there are potential 
risks here what might they be or what areas would there be 
opportunities for further investigation and understanding.
    To the extent that there is sufficient rationale to move a 
company to stage three, there is a vote by the Council on that 
action. And once a company is moved to stage three, that is 
when the real work and engagement begins with the companies 
under consideration.
    The companies are notified at the beginning of that 
process. As part of that notification there is a detailed 
information request, numbering up to 10 pages long, with 
potentially 100 to 150 different questions.
    And that begins a very long, robust back-and-forth between 
the Council and the company on just drilling down on the 
business, understanding the risks. There is a lot of 
opportunity for the company throughout that process to engage 
with the Council, to ask questions. And certainly based on the 
information that the Council is requesting of the company and 
the nature of the review, the company will get a sense for what 
the Council is interested in focusing on.
    So then closing out stage three, there is a vote on a 
proposed determination. If there is a proposed determination, 
then at that stage the Council delivers to the company a very 
lengthy basis outlining the reason why the Council is concerned 
or the factors that the Council is highlighting in its 
analysis.
    And that is very important because it provides the company 
the opportunity to sort of understand where the Council is, to 
level set, what are the key issues, what are the concerns. To 
the extent that they feel the Council is looking at the wrong 
thing or is misguided, they can address that.
    There is an opportunity for an oral hearing before the 
principals of the Council. The one company that chose to accept 
that offer came in, presented its case, again had a robust 
back-and-forth. All the principals of the Council were there 
and the Council took that information, incorporated it into its 
thoughts, and then, only then, was there a final vote.
    So, it is a very lengthy process from that standpoint.
    Mrs. Beatty. Okay.
    Mr. Pinschmidt. And then in terms of your initial question 
on sort of, once you are designated, what happens next, there 
is judicial review of a designations decision, and then 
annually the Council does evaluate the decision. So to the 
extent that the company's risk profile, footprint, and market 
dynamics change, and they rise to a certain level of 
materiality, then that would certainly come into play.
    Mrs. Beatty. Okay. I have a second part, and the clock is 
running out. I have several insurance companies in my 3rd 
Congressional District of Ohio. If one of my local State 
domicile's insurers were designated, can you briefly explain to 
me what the process would be of determining issues of 
regulatory jurisdiction between the Ohio Department of 
Insurance and the Federal Reserve?
    Mr. Pinschmidt. Yes. The role of the Council is on risk 
identification. Once a company is designated, they are subject 
to consolidated supervision by the Federal Reserve. That 
supervision, as I understand it, will be mainly focused at the 
holding company level and understanding the profile of the 
firm; it will not necessarily encompass some of the insurance 
activities and individual insurance subs.
    Mrs. Beatty. And lastly, will the Federal Insurance Office 
be involved in providing the guidance to the Fed? Because under 
Dodd-Frank Section 120, FSOC has recommendation authority.
    And we are out of time.
    Mr. Fitzpatrick. The gentlelady's time has expired.
    Mr. Hultgren is recognized for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    First question to Mr. Pinschmidt: I am told that during a 
Democrat staff briefing last week you told their staff that the 
FSOC principals would not meet with the entities that are under 
consideration for SIFI designation until an actual stage three 
designation was recommended. In practice, this means that 
companies will not have an opportunity to bring their case to 
the voting members until the eve of the designation, and after 
the decision is essentially made.
    The Wall Street Journal reports that the FSOC has followed 
this informal policy with the two asset managers that are 
reported to be under consideration for SIFI designation. These 
groups have not been able to meet with the FSOC principals or 
even get confirmation from anyone at the FSOC that they are 
even under consideration.
    How is it not contrary to basic standards of administrative 
procedure and due process for policymakers to draw what amounts 
to policymaking conclusions prior to the complete consideration 
of relevant facts and public input?
    Mr. Pinschmidt. In terms of the interactions with companies 
during the designations process, in stage three, which I 
believe you are referring to, there is significant interaction 
between the Council member agencies and the companies that 
extends for a very lengthy period of time. There are 
significant meetings; there are conference calls; there is 
information flow in both directions.
    And then after a proposed determination, the company has 
the opportunity to request an oral hearing, and the Council has 
noted that it expects to grant all requests for oral hearings. 
But more importantly, as part of that oral hearing, the company 
does receive a very detailed basis--sometimes 200 pages long--
outlining the Council's key concerns about the company and 
providing the company an opportunity to respond.
    Mr. Hultgren. Your policy, to me, appears to be in direct 
violation of due process. It feels like the decision has 
already been made. There may be hearings after that point, but 
for them not to hear sooner than the designation seems like a 
direct violation of administrative procedure.
    Let me move on.
    Is FSOC aware that the New York Superintendent of Financial 
Services, which is MetLife's chief regulator, wrote Treasury 
Secretary Lew on July 30, 2014, to encourage FSOC to reconsider 
a formal SIFI designation for MetLife? Mr. Lawsky argued 
against an SIFI designation because: one, MetLife does not 
engage in noninsurance activities that create an appreciable 
systemic risk; two, in the event that MetLife or one or more of 
its insurance subsidiaries were to fail, DFS and other 
regulators would be able to ensure an orderly resolution; and 
three, MetLife is already closely and carefully regulated by 
DFS and other regulators.
    Is it not concerning that MetLife's chief State regulator, 
who is no doubt intimately familiar with the company's business 
portfolio and any relevant risks, is so adamant against an SIFI 
designation? Will you commit to factoring his concerns into any 
final designation decision of the company?
    Mr. Pinschmidt. Congressman, unfortunately, I can't comment 
on letters relating to actions that haven't necessarily been 
taken by the Council. What I can note is that as part of the 
work of the Council on the designations authority, there is 
broad consultation not just within the Council and the members 
of the Council, but also at the State level.
    Mr. Hultgren. Mr. Pinschmidt, has FSOC conducted any 
analysis to determine how applying risk-based capital standards 
to insurers will affect the amount of coverage that insurers 
can offer? Could this ever cause the cost of insurance to rise 
to a prohibitive level? May there come a time when it is 
impossible to obtain certain kinds of insurance coverage 
because insurance companies that have been subjected to bank-
like capital standards simply won't be able to afford to offer 
it?
    Mr. Pinschmidt. Congressman, on that front, the Council is 
focused on risk identification. The enhanced prudential 
standards for insurance companies or designated entities will 
be developed by the Federal Reserve Board. My understanding is 
that they will make efforts to tailor them to the specific 
characteristics of the insurance industry, but as part of that 
process, I would expect there would be some consultation with 
the Council.
    Mr. Hultgren. I hope there would also be a consideration of 
the risk to consumers of losing options--insurance options--
that could be there because of your activity driving up the 
significant cost to insurance companies. Certainly, that would 
be a more significant risk to the marketplace.
    Let me finish up with one last question. Should FSOC show 
greater deference to an industry's primary regulators in making 
SIFI designation decisions?
    Mr. Pinschmidt. Certainly the Council looks to regulators 
and its members with industry expertise to hear that expertise 
as part of the discussion. The nature of individual company 
designations, however, encompasses broader market dynamics.
    The companies that are considered do not necessarily solely 
impact the companies within their industry. They can impact 
market functioning across asset classes, across industries. 
Therefore, it is also appropriate to hear the viewpoints of the 
broader Council members.
    Mr. Fitzpatrick. The gentleman's time has expired.
    Mr. Hultgren. My time has expired.
    I yield back. Thank you.
    Mr. Fitzpatrick. Mr. Heck is recognized for 5 minutes.
    Mr. Heck. Thank you, Mr. Fitzpatrick--Mr. Chairman. Has a 
nice ring to it, sir.
    Ms. Clowers, I have this bias that we are always fighting 
the last war with the last approach. It is like we are driving 
with our eyes transfixed in the rearview mirror.
    That is why I was so intrigued by part of the language in 
your report, if I may quote briefly, ``Second, in 2012 we 
recommended that FSOC develop more systematic, forward-looking 
approaches that would help in separating emerging threats to 
financial stability from more current risk and prioritizing 
them in its annual report. Since then, FSOC made some progress 
in addressing this recommendation but could do more.''
    Would you give a specific and concrete example of how they 
could do more in this regard?
    Ms. Clowers. Certainly. In looking at the most recent 
annual reports, it does look like they have become more focused 
in terms of identifying current and emerging threats. But 
still, they continue to report them together and they are not 
prioritizing those threats. And in talking to FSOC officials, 
they don't plan to prioritize the threats because they realize 
that could direct people's attention to certain areas.
    But that is exactly what we think should happen. There is 
not infinite, limitless resources, both among the regulators 
and the companies, and providing more specifics in terms of the 
priorities of the threats would be helpful in directing scarce 
resources.
    Mr. Heck. So you think they should separate current from 
emerging and prioritize them?
    Ms. Clowers. Correct.
    Mr. Heck. When it relates to emerging threats, again, be 
specific and concrete, how would they go about that analysis 
and evaluation? Give me an example of the kind of thing that 
might manifest itself in that regard, if you would, please.
    Ms. Clowers. Certainly. Start with what we have seen in the 
past is, for example, the debt of the government is listed as 
an emerging threat, when it was--I think it was listed in 2012 
when most anyone who was reading the papers could realize that 
was a current threat.
    There are also threats that would come and go off the list 
without any explanation of why. For example, modeling risk of 
different companies--it had appeared one year, wasn't there the 
next year, so you don't know why.
    To go to your question about how they could do a better 
job, it is using the tools that are under development, 
particularly the financial stability monitor that is a 
promising tool to develop a common set of indicators that would 
look across the system. But again, it must be forward-looking.
    To date, those--the metrics aren't forward-looking and goes 
to your point. It is looking at sort of what we know today and 
not what we know could happen in the future.
    Mr. Heck. Right. Thank you.
    Mr. Pinschmidt, why don't you keep transcripts?
    Mr. Pinschmidt. The meeting minutes that are produced by 
the Council generally serve as the official record of the--
    Mr. Heck. They are not transcripts. Why don't you keep 
transcripts?
    Mr. Pinschmidt. Congressman, the challenge for the Council 
is, there is a clear recognition that transparency is 
important, and we have taken a number of steps over the years 
to improve our transparency--
    Mr. Heck. Mr. Pinschmidt, why don't you keep transcripts?
    Mr. Pinschmidt. As I was trying to note, the obligation to 
transparency has to be balanced with an obligation to protect 
confidential, supervisory information. The nature of the 
Council meetings involves generally very highly sensitive, 
confidential company information, broader industry 
information--
    Mr. Heck. So does the FOMC. They keep transcripts but they 
retain them for a period of time. Why don't you keep 
transcripts?
    Mr. Pinschmidt. The practice has been to have the official 
minutes serve as the record for the Council--
    Mr. Heck. Why don't you keep transcripts?
    Mr. Pinschmidt. Congressman, the practice has been to have 
the minutes serve as the official record for Council meetings.
    Mr. Heck. So what I am hearing you say is you choose not to 
keep transcripts.
    Mr. Pinschmidt. The official minutes have served in that 
capacity.
    Mr. Heck. No, they do not. Official minutes are not 
transcripts.
    Mr. Pinschmidt. Congressman, I recognize your concerns on 
this, but the challenge for the Council is, the Council is 
charged with looking across markets, looking across 
institutions, discussing systemic risk. Those conversations, by 
their very nature, are very sensitive and confidential and--
    Mr. Heck. So do you believe they are--you literally believe 
they are even more sensitive than what the FOMC discusses?
    Mr. Pinschmidt. I really can't comment on the--
    Mr. Heck. Well, they are not. And you should keep 
transcripts.
    I yield back the balance of my time.
    Mr. Fitzpatrick. The gentleman yields back.
    The Chair recognizes the gentleman from Pennsylvania, Mr. 
Rothfus, for 5 minutes.
    Mr. Rothfus. Maybe if we can continue with that line that 
my colleague was asking about on transcripts, I mean, 
transcripts can be kept confidential, can't they?
    Mr. Pinschmidt. I am not really sure about that. I really 
have no basis to respond there.
    Mr. Rothfus. When FSOC proposes to designate a company as 
an SIFI and there are meetings being held at FSOC to discuss 
that, there is going to be an exchange of ideas and comments 
back and forth, I would assume, yes?
    Mr. Pinschmidt. Yes. So, Congressman, certainly in terms of 
individual proceedings regarding individual companies, the 
Council makes every effort, particularly in stage three, to 
communicate with the company, have a two-way conversation, make 
sure that the--
    Mr. Rothfus. Is the company there, though, when you are 
discussing whether or not to designate it as an SIFI, 
internally?
    Mr. Pinschmidt. After a proposed determination the company 
has the opportunity to present to the entire Council--
    Mr. Rothfus. But are they there when you are making the 
determination and the conversations are going back and forth 
among the committee members?
    Mr. Pinschmidt. Certainly the substance of the many company 
meetings with the Council member agencies and, in fact, 
presentations--
    Mr. Rothfus. I am talking about when the determination is 
being made among FSOC members. And that is where we are 
wondering about what the conversations are. And that is why we 
think, personally, that it is important to have a transcript, 
so that after the designation is made and the company wants to 
come in and find out what was going on, they can look at the 
transcript. Wouldn't that be fair?
    Mr. Pinschmidt. In terms of the record for the company, the 
Council provides a 200-page document to the company before a 
designation has been made.
    Mr. Rothfus. But the company is not going to have access to 
the internal deliberations of the committee if they can't be 
looking at transcripts of what was going on.
    Mr. Pinschmidt. But the company will have access to the key 
concerns and factors cited in the Council's proposed 
determination and has an opportunity to respond to that.
    Mr. Rothfus. Ms. Clowers, GAO made many recommendations to 
FSOC in its 2012 report that would assist in shedding some 
light on the way FSOC makes its decisions. In your written 
testimony you get into some of this, but could you tell us how 
many have been implemented to date?
    Ms. Clowers. We have seen progress on a few of the 
recommendations dealing with, for example, the communications 
with the public, redesigning their Web site. They have also 
made more information or more timely notices of their meetings 
with the public. We also saw steps in terms of trying to 
enhance collaboration among their committees by developing 
bylaws for their Deputies Committee, which we think is an 
important step.
    But as I said in my oral statement, we believe additional 
work is needed on a number of the issues you are highlighting, 
from transparency and accountability issues.
    Mr. Rothfus. So specifically, what recommendations haven't 
been implemented?
    Ms. Clowers. To date, we have not closed any of the 
recommendations. We continue discussions with the Council on 
all of them.
    For example, on the issue of the transparency that you have 
been discussing in your comments, we continue to look for 
additional steps by the Council to enhance the transparency of 
their decision-making. For example, with the minutes, if they 
are transcribed, that would provide a record not only for 
transparency but accountability, as you are suggesting, for 
future decision-makers to go back and to have a better 
understanding of the deliberations.
    Mr. Rothfus. One of the recommendations that you made was 
for FSOC to more fully incorporate key practices for successful 
collaboration. I think that would mean that FSOC should engage 
with regulators, industry, and academics. Has FSOC done this, 
from your perspective?
    Ms. Clowers. They have taken some steps to enhance 
collaboration. I know they have had different industry in for 
meetings, from asset managers to others. We continue to look 
for additional steps to be taken.
    Part of that recommendation was for FSOC to play a greater 
role in coordinating rulemaking among member agencies. We 
think, given FSOC's position of bringing together all the 
member agencies, they have an opportunity to create a forum for 
that type of discussion.
    Mr. Rothfus. Mr. Pinschmidt, is FSOC in the process of 
implementing any of the outstanding recommendations?
    Mr. Pinschmidt. Yes. What I would say is, we certainly 
value the work of the GAO. They bring a very important 
perspective to our work and--
    Mr. Rothfus. Which of the outstanding recommendations are 
you in the process of implementing?
    Mr. Pinschmidt. I think we are continuing to talk to them 
about all of them. And we have taken some steps on a number of 
their recommendations.
    Mr. Rothfus. Can you tell me one of them that you are 
currently implementing?
    Mr. Pinschmidt. I would point to, back in May the Council 
revised its transparency policy. That was a result of a months-
long review based largely on the GAO input. And as a result of 
that review, what we do now is we post meeting agendas one week 
in advance, and on the day of an actual meeting we provide a 
readout detailing what was discussed--
    Mr. Duffy [presiding]. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Nevada, Mr. 
Horsford, for 5 minutes.
    Mr. Horsford. Thank you, Mr. Chairman, and Ranking Member 
Green.
    I want to thank both of the witnesses for being here today, 
and I really associate myself with the comments of my 
colleagues on both sides of the aisle about the need for review 
of some of the methodology as well as greater transparency and 
improvement in that area.
    I do want to shift my question, though, to an area that has 
not been discussed yet this morning, which is one of the 
fundamental issues that led to the economic collapse in 2008, 
and that was the housing crisis. I am from Nevada and our 
housing market has still not recovered; we have the most 
unstable housing market in the country, with about a third of 
our homes at every income bracket upside down in value, some of 
them as high as 50 percent or more.
    It is my understanding that the GAO report, in its most 
recent report, noted that the FSOC should develop a systematic 
approach to identify potential threats to the financial 
stability.
    So, Mr. Pinschmidt, as you continue to look at threats to 
the market's financial stability, can you assure us that the 
health of the housing market will not be ignored? And what 
strategies is the FSOC pursuing in that respect?
    Mr. Pinschmidt. Certainly. The housing market has been 
something that has been highlighted 4 years running in the 
Council's annual report, and there is clearly more work to be 
done there in terms of the actual recovery, but also in sort of 
building out the structural mechanisms in the housing market 
following the collapse in 2008 and 2009.
    In terms of the annual report, it is something that 
recognizes when there is a risk that is outstanding and needs 
to be addressed, and it serves as a good barometer for what the 
Council is focusing on. So to the extent that this has been 
highlighted as a recommendation 4 years running now clearly 
indicates that this is a priority and ongoing work.
    Mr. Horsford. And so, what is being done? What discussions, 
what review? You said that one of the 40 meetings that you had 
was on the housing finance reform. What areas have you pursued 
and what recommendations are coming from that analysis?
    Mr. Pinschmidt. There are two sides to, generally, the 
Council's engagement on this issue. Clearly, there are a number 
of staff working groups and regulators with specific equities 
in this. There is the structural issue, in terms of housing 
finance reform, and then there is the broader issue, which I 
think you were alluding to, in terms of the very slow recovery 
and the impact on consumer spending, the impact on the economy, 
and broader issues. So, it is a two-front process.
    Mr. Horsford. Ms. Clowers, what would you suggest, from the 
GAO perspective, on this issue of the housing crisis as an 
emerging issue that is still very much a priority, or should 
be, for the FSOC to be working on?
    Ms. Clowers. I think it goes to our recommendations about 
the need to develop a systematic and comprehensive approach to 
identifying both current and emerging threats, that developing 
a common set of indicators across the system would allow 
regulators to determine where there might be threats emerging. 
And I would encourage FSOC to continue to work with OFR to 
develop those tools so they are risk-focused and forward-
looking.
    Mr. Horsford. Thank you.
    I would like to also ask about an issue that I have heard 
from one of our major industries in Nevada, which of course is 
gaming, and the fact that there is some concern that as a 
nonbank industry that does issue credit in the course of their 
business, that this is an area where FSOC may be pursuing. Can 
you give me some indication of what FSOC is thinking from the 
perspective of a major industry like gaming?
    Mr. Pinschmidt. I can't really comment specifically, but 
what I can note is the only nonbanks that are eligible for 
designation--and obviously there are other metrics and 
thresholds, but there has to be initial determination that 85 
percent of revenue or gross assets are in the business of 
finance or financially related. So I am not sure if that 
applies to the particular example that you noted, but I would 
throw that out there.
    Mr. Horsford. Okay. From a transparency standpoint--
    Mr. Duffy. The gentleman's time--
    Mr. Horsford. --it would be helpful to get that information 
out, because there are concerns.
    Mr. Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    Mr. Pinschmidt, moral hazard is a common justification for 
regulation, but it can also be exacerbated by government 
intervention. A criticism of the SIFI designation process is 
that being officially identified as too-big-to-fail can 
actually increase the moral hazard by incentivizing 
increasingly risky investments since taxpayers, and not 
shareholders or creditors, are likely to bear the costs.
    Is it possible that an SIFI designation or a designation 
for enhanced prudential supervision would actually exacerbate 
moral hazard for an investment fund, for example, rather than 
reduce that risk?
    Mr. Pinschmidt. The nonbank designations authority is 
designed to actually recognize where companies are large, 
interconnected, and where their material financial distress 
could pose a risk to financial stability. It is not designed to 
prevent material financial distress.
    What happens after a designation is the Federal Reserve 
Board issues enhanced prudential standards, and those are 
designed to basically put some safeguards in there. To the 
extent that the company was to get into trouble, they would 
have more capital.
    But also, there are other efforts that come into play, too. 
If failure is inevitable, then there is a resolution authority 
and living wills, and those are designed to manage that failure 
in a more effective way by limiting the collateral 
consequences--
    Mr. Barr. But what about this idea that designation as an 
SIFI actually would have the potential to increase risk because 
you are giving that institution a special designation that 
provides a layer of protection from the taxpayer and not from 
shareholders or creditors?
    Mr. Pinschmidt. The tools that come into play after 
designation are designed to basically make it so that a company 
can fail without threatening financial stability.
    Mr. Barr. Let me just shift gears here. Putting aside kind 
of exotic insurance products like credit default swaps, for 
traditional insurance activities like life insurance, how would 
traditional insurance activities pose a systemic risk to the 
financial system?
    Mr. Pinschmidt. The Council, in its evaluation of certain 
insurance companies under Section 113, that has been a company-
specific exercise, looking at the nature of those companies, 
the nature of their interaction, the leverage, the balance 
sheet exposure, understanding the impact of those specific 
companies if they were to get into trouble and fail and what 
would that impact be on the broader financial system. It didn't 
necessarily take into account specific activities; it was more 
company-focused.
    Mr. Barr. Well, okay. If it is company-focused and you have 
a hypothetical company that, again, does not engage in exotic 
insurance products like a credit default swap, like an AIG, but 
it is just a traditional life insurance company, would FSOC in 
any circumstance view that as a systemically risky company?
    Mr. Pinschmidt. It is all situational-dependent, as you can 
imagine. I think the key threshold for an FSOC designation is 
if that company's failure--it is--designation doesn't sort of 
contemplate, ``Is the company likely to fail? Is there 
something going wrong?'' It doesn't take any of that into 
account.
    It is, ``What happens if a company is failing? What would 
be the impact on the broader market system?'' And certainly 
activities can come into play on that, but generally speaking, 
for the companies that have been evaluated thus far, it has 
been on the company-specific factors.
    Mr. Barr. Final question--I want to talk about the Form PF, 
which has been described to me as a very onerous form. It is a 
form that I am told asset managers must provide to the SEC, the 
CFTC, and FSOC for systemic risk assessments. And the data that 
is required in filling out these forms and submitting these 
forms is apparently very voluminous and there are no clear 
procedures for how these forms are used by the relevant 
agencies.
    So the question is, who is reviewing these forms? Are they 
materially beneficial to the regulators and to FSOC in terms of 
evaluating systemic risk? Because there is apparently 
tremendous cost associated with assembling and reporting the 
data associated with these so-called Form PFs. What is the 
benefit and what is happening with that submitted paperwork?
    Mr. Pinschmidt. Congressman, in terms of the Form PF, those 
are submitted by the--generally the hedge fund industry to the 
SEC.
    Mr. Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, for 5 minutes.
    Mr. Garrett. Thank you.
    I just have a couple of questions. In Ms. Clowers testimony 
she states, ``Even if FSOC determines that some information 
should not be made public, its current practices do not provide 
detailed records even for policymakers, including members of 
FSOC, to assess decisions.'' Not only do I find that appalling, 
but obviously from a bipartisan perspective, members from both 
sides of the aisle find it appalling that more information does 
not come out and the transcripts do not come out.
    So, first question: Who made the determination that 
detailed information and the transcripts would not be kept? Who 
was the person who made that determination?
    Mr. Pinschmidt. Congressman, the practice of the Council 
has been--
    Mr. Garrett. I know the practices. Someone had to make the 
decision. Did you make the decision to do that--to keep it 
secret?
    Mr. Pinschmidt. Congressman, I think it is a reflection of 
the nature of the--
    Mr. Garrett. Did they have a vote on it at some point in 
time?
    Mr. Pinschmidt. If there was a vote, that would have been 
disclosed.
    Mr. Garrett. Okay. So there was never any vote, it just--
you never did it.
    You have heard from both sides of the aisle that we believe 
that information should be heard. Did you hear that from both 
sides, from Democrats and Republicans just now?
    Yes. That is a yes.
    Will you go back and now look in to see how this 
information can be kept confidential in the manner that you 
think it needs to be kept confidential but still provide the 
transcripts? Will you make that commitment to us today?
    Mr. Pinschmidt. Congressman, what I will say as part of my 
remarks, in terms of my oral statement, was that the Council is 
a young organization--
    Mr. Garrett. Will you go back and make that recommendation 
to do so?
    Mr. Pinschmidt. We recognize that there are areas that we--
    Mr. Garrett. Will you make that recommendation--I just need 
a yes or no.
    Mr. Pinschmidt. I can go back and get you more information 
if that would be helpful.
    Mr. Garrett. So you are going to keep it secret until some 
future date.
    You also talked, as far as other secret information that 
you continue to keep is with regard to the annual review. You 
told us what the annual review is and you said you have already 
reviewed some of these companies and you actually did it with--
for G.E. and Prudential I believe, right?
    That is a yes?
    Mr. Pinschmidt. That is correct.
    Mr. Garrett. That is right.
    For their annual review, I think, as far as I can tell, you 
simply sent out a notice to these companies saying that, ``You 
are still an SIFI.'' Is that basically correct?
    Mr. Pinschmidt. After the review, that is correct, yes.
    Mr. Garrett. After the review. Was the review the exact 
same process that you had for the initial review? In other 
words, did you go through the entire three-stage process, allow 
the executives to come back in and sit down and go through all 
that information again?
    Mr. Pinschmidt. The annual review was based--again, we are 
sort of in a unique situation here because it was just under 12 
months after the--
    Mr. Garrett. Okay.
    Mr. Pinschmidt. --initial designation--
    Mr. Garrett. Right.
    Mr. Pinschmidt. --but the annual review--
    Mr. Garrett. That is annual, 12 months.
    Mr. Pinschmidt. Yes. So the annual review took into account 
the key factors that weighed on the decision to designate.
    Mr. Garrett. So they don't get a chance to come back on 
each annual review to say, ``Well, this is our interpretation 
of this, and this is our interpretation of that?''
    Mr. Pinschmidt. Each company is provided--before the annual 
review commences they are notified and they are offered the 
opportunity to submit information and--
    Mr. Garrett. Submit information, but it is not the exact 
same process as the first time around, to come in with the 
staff and what have you and sit down and go through it, just as 
you said for the first time?
    Mr. Pinschmidt. At this stage, it is a different spot.
    Mr. Garrett. Will you recommend that it be changed back so 
that the annual review is commensurate with the first review?
    Mr. Pinschmidt. Congressman, certainly the spirit of your 
remarks and the suggestion about ways to improve, I think the 
Council is taking a lot of that in, and to the extent that 
there are ways to improve certain processes, including annual--
    Mr. Garrett. The Council is taking a lot into review. Ms. 
Clowers and others have made recommendations, but it doesn't 
seem that--you may hear them, but you may not implement them, 
is our concern.
    When you make this analysis for these companies and others 
and you are looking at across the horizon, as far as systemic 
risk, one of the items we heard from another panel is the ad 
hoc nature of intervention by the Fed, under Section 13-3 in 
the last case, that led to uncertainty in the marketplace. Is 
that something you look at too, as far as you look across the 
horizon as far as systemic risk potentialities--the ad hoc 
nature of the implementation of 13-3 by the Fed?
    Mr. Pinschmidt. So you are referring to the use of 13-3 
during the crisis?
    Mr. Garrett. That is what they did in the past, and they 
saw that that ad hoc nature some economists said led to the 
uncertainty in the marketplace and exasperated things. So now 
going forward, understanding that the Fed still has those 
powers, do--in a changed manner under Dodd-Frank, of course--do 
you look at that as being a potentiality for a systemic risk 
going forward?
    Mr. Pinschmidt. There is certainly a number of factors that 
are considered as part of the designation process, and--
    Mr. Garrett. I am not talking about the designation 
process, per se. I am looking into seeing what the Fed's powers 
are and how that may cause a systemic risk.
    Mr. Pinschmidt. That is not something I am directly 
familiar with, no.
    Mr. Garrett. You are not just looking at companies. Your 
own analysis shows that you are looking at monetary policy and 
other governmental policies and spending and what have you. You 
look at all those things, don't you?
    Mr. Pinschmidt. Yes, to the extent certain issues impact 
the financial functioning and--
    Mr. Garrett. So is 13-3 one that you look at?
    Mr. Duffy. The gentleman's time has expired.
    Mr. Garrett. Could he just answer--
    Mr. Duffy. The gentleman may answer the question.
    Mr. Pinschmidt. I can certainly get back to you on that 
one.
    Mr. Garrett. Thank you.
    Mr. Duffy. The Chair now recognizes the gentleman from 
Texas, Mr. Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    And I thank the witnesses for appearing.
    I would also like to thank the staff for the outstanding 
job that they have done in preparing us for this hearing.
    Much has been said about insurance companies--about them 
being regulated, about them having oversight. And to some 
extent, I think these are some statements that merit a lot of 
credibility.
    But we also have to remember that AIG was an insurance 
company. AIG was a regulated insurance company. AIG was also 
engaged in capital markets, credit default swaps, derivatives.
    FSOC exists in great part because of an insurance company, 
AIG, that was ostensibly holding the world together. It is 
unbelievable what the length and breadth of AIG's involvement 
in capital markets was. And I thank God we have an FSOC that 
can look across the entire spectrum and spot the AIGs of the 
world before they become a systemic risk and have an enormous 
impact on our economy.
    This process that FSOC has is something that Congress 
accorded it, for the most part, in that if a company is 
displeased with the decision, that company has the right to 
appeal. So it doesn't have to live with what FSOC concludes; it 
can appeal.
    A part of that process means that you go back to FSOC 
itself, but that is not unusual. In court when you file a 
motion for a new trial, the judge who heard your case is the 
judge who determines whether you should get a new trial. If you 
appeal beyond that, you can go to a district court, Federal 
district court. We trust the court system in this country.
    Appeal is a process that every person has if you are sued 
or if you file suit and you don't like the decision. And it is 
interesting to note that when people lose, people appeal. They 
don't always win when they appeal, but they can appeal.
    And corporations are people, my friends. Corporations do 
what people do. When they lose, they appeal. This doesn't mean 
that FSOC hasn't done its job because a corporation is 
disenchanted with the process or disenchanted with an appeal. 
That is what happens. That is the American way.
    Let's talk for just a moment about who really is impacted 
by what we are doing today, because to listen to what is being 
said, you would think that this is a big dispute between mega 
corporations and the government. But this is really about 
people.
    It is about the people who had their homes foreclosed on--
3.2 million of them when we had the crisis. And by the way, 
minorities were disproportionately impacted. Seventy percent of 
African-Americans were likely more impacted with foreclosures 
when this took place.
    $3.7 trillion in real estate wealth lost. That hurt 
schools. That was an impact on the tax base.
    This is what we are trying to protect with Dodd-Frank and 
FSOC--people, not mega corporations, not the AIGs of the world. 
We are trying to look into them and make sure they don't do 
what was done again.
    26.2 percent in pension value lost. $7.4 trillion in stock 
market wealth lost. That is about $66,200 per household.
    These are real people who suffered. I was there when we 
took that vote on TARP, and I saw the stock market as it took 
its 778-point decline. I got the calls the next day from people 
who were talking about their 401Ks.
    Real people suffer. This is about more than mega 
corporations doing battle with the government. Evictions: with 
8.8 million jobs lost, people got evicted.
    I stand with the people, and I stand for FSOC doing its job 
because if it doesn't, real people will be hurt.
    Thank you, Mr. Chairman. I yield back.
    Mr. Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, for 5 minutes.
    Mr. Royce. Thank you very much, Mr. Chairman.
    And I appreciate Mr. Pinschmidt being with us today. I will 
go back to something that Chairman McHenry mentioned, and that 
was following the FSOC's July 31st meeting, the Council 
announced that it would take a more focused analysis of 
industry-wide products and activities, and in the asset 
management industry they would do this this way rather than 
designating specific asset managers as systemically risky.
    So it is my understanding there has been a working group 
set up, or maybe about to be set up, to look at these products 
and activities. I have maybe five questions here that I would 
just ask you, and then you can give me your response.
    But if you want to list these as I go through them, the 
first would be, can you tell us the makeup of that working 
group, and the timeline for a review? Will there be a report 
put out for public comment at the conclusion? Does the OFR have 
a role in the process, I would ask? And will there be 
additional roundtables where all stakeholders can participate?
    Mr. Pinschmidt. Congressman, you are right. Following the 
July 31st meeting, the readout for that meeting noted that the 
Council asked staff to undertake a detailed review of asset 
management activities and products. The Council has long 
recognized that asset managers are different than perhaps other 
nonbanks, and that was part of the reason in the 2012 final 
rule on the designations authority that the Council noted that 
additional work needed to be done, and that was the impetus for 
the OFR study, which identified certain activities.
    So to the extent that work is being done there, clearly 
when you look at asset managers and you compare them to other 
nonbanks, even the largest asset managers, their balance sheets 
are substantially smaller than other nonbank firms. There is 
very little leverage.
    There is an agency business model, which is quite distinct 
from a balance sheet business model. So to the extent that a 
company was in distress, they are not necessarily selling their 
own assets. The customers are kind of--it is their decision.
    Mr. Royce. Right.
    Mr. Pinschmidt. So these are different--oh, sorry.
    Mr. Royce. But the makeup of the working group and the 
timeline for review, if you could give me some information on 
that?
    Mr. Pinschmidt. In terms of the process going forward--
    Mr. Royce. Right.
    Mr. Pinschmidt. --that is a decision that is being worked 
out at the Council level and--
    Mr. Royce. That decision hasn't been made yet? Will there 
be a conclusion put out for comment, do you think?
    Mr. Pinschmidt. To the extent the Council recognizes the 
importance of engaging with the public on its work, and that 
was part of the reason the Council hosted an asset management 
conference back in May. So we would expect, to the extent that 
this work moves forward, additional sort of consultation and 
collaboration--
    Mr. Royce. Maybe a public comment section--session at the 
end, then, would be appropriate, you are anticipating.
    Does the OFR have a role in the process?
    Mr. Pinschmidt. Certainly all the member agencies of the 
Council will be involved.
    Mr. Royce. Have the FSOC participants agreed that they will 
not meet with entities under consideration until an actual 
stage three designation is made, or--do you know? What is going 
on, on that front?
    Mr. Pinschmidt. Congressman, in terms of the nonbanks 
designations process, what I would note is that we did put out 
the final rule that was subject to three rounds of comment. We 
recognize that was done 2 years ago now, and we have gone 
through a process with three different companies for 
designation.
    There are clearly new facts on the ground. The Council 
doesn't want to be frozen in its ways and its process. So as I 
noted in my oral remarks, certainly the Council recognizes we 
have received a lot of input; we have gone through the process 
a few times and we are evaluating--
    Mr. Royce. Let me ask you this question: Is this policy 
formalized or documented? Are you putting out a documented 
process here that--
    Mr. Pinschmidt. Yes. In terms of the interpretive guidance 
that accompanies the final rule, it notes the interaction 
between the Council and this is also supplemented in the 
hearing procedures for the designations process--it notes the 
interaction between the Council and companies under 
consideration.
    Mr. Royce. We have talked about transparency and due 
process during this hearing, and I think a simple solution here 
would be publishing what the process actually is regarding 
interaction with companies in stage two, or purgatory, I think, 
as our colleague rightly termed it, and that might be your best 
way forward, if I might suggest.
    Thank you.
    Mr. Duffy. The gentleman's time has expired.
    The Chair now recognizes himself for 5 minutes.
    Mr. Pinschmidt, I listened to your opening statement and I 
was taken with your commitment and support for openness, 
transparency in policy, and a flow of information. I think 
those are some of the phrases that you used in your opening 
statement.
    As I have listened to the testimony today, I have great 
concern that FSOC isn't open, it isn't transparent, and there 
is not a good flow of information. And I think you have seen a 
bipartisan concern in regard to the information that flows, in 
regard to transcripts from the meetings, from FSOC.
    And I think all of us recognize that there are things that 
cannot be disclosed. There is confidential information that you 
have access to that the companies don't want disclosed and 
wouldn't want to share it with you if it was to be disclosed.
    But there is a lot of information and a substantial portion 
of a transcript that can be disclosed, and there can be 
redactions. And FSOC, per your testimony today, has no 
willingness to actually engage in a process of disclosing not 
minutes, but transcripts of a meeting, maybe even with a delay.
    So I guess as you sit here today, you are still committed 
to not using the various tools even that the FOMC will use, 
with a delay in time and redacting sensitive information, that 
FSOC is still not, seeing bipartisan concern here, going to at 
least go back and discuss the possibility of disclosing 
transcripts?
    Mr. Pinschmidt. Congressman, what I can say is that the 
Council recognizes it has a very important responsibility for 
transparency. It is a responsibility that has to be balanced, 
though, with the protection of confidential financial 
information.
    Mr. Duffy. Have you ever heard of redacting? Can you redact 
confidential information? That is a tool that you would have if 
you disclosed transcripts.
    Ms. Clowers, is that a tool that could be used--redacting 
sensitive information?
    Ms. Clowers. Yes.
    Mr. Duffy. Do you believe that if we had a little delay in 
time, as would be appropriate, and redacted sensitive 
information, that transcripts could be disclosed?
    Ms. Clowers. Correct. That is one of the things we noted in 
our 2012 report. We looked at different models, such as the 
open markets, and noted that those type of tools are available 
for FSOC.
    Mr. Duffy. Does the FOMC discuss sensitive information like 
monetary policy?
    Ms. Clowers. Yes.
    Mr. Duffy. And they still provide transcripts, yes?
    Ms. Clowers. Yes.
    Mr. Duffy. And, Mr. Pinschmidt, you are discussing far more 
sensitive information? Is that your testimony here today that 
the FOMC can provide transcripts to the public but you can't?
    Mr. Pinschmidt. Congressman, what I would say is that the 
Council is committed to getting more information out--
    Mr. Duffy. Listen, you are not. I would say I love the 
dance that you have done today, but you are not. You have not 
given us--any of us--a satisfactory answer that, listen, we are 
going to go back and we are going to have a hard conversation 
on transcripts and redacting and making sure that we send out 
more than--I am looking at your annual reevaluation of 
designation of nonbank financial companies and you wanted us to 
believe that your minutes, or the summary, which is a 
paragraph, is sufficient for the public.
    That is what you wanted us to believe, and as I look at it, 
at the end it says, ``Members of Council then asked questions 
and had a discussion.'' Nothing about the questions. Nothing 
about the discussion. Nothing. And then, ``The Council did not 
either--did not rescind either company's designation.''
    What was the vote on this? What was the votes that were 
taken? How did everybody vote?
    Mr. Pinschmidt. Congressman, the--
    Mr. Duffy. How did everybody vote?
    Mr. Pinschmidt. --the document you are referring to is the 
readout from the meeting.
    Mr. Duffy. How did everybody vote? Do you disclose the 
votes?
    Do you know that I have a card right here, and every vote I 
make is public. Go to the Supreme Court. Every vote is public.
    How does everybody vote on FSOC? That isn't even disclosed.
    And I look at the notice of proposed designation at 
MetLife. You had one present vote. Who was that?
    Mr. Pinschmidt. Congressman, I am not in a position--
    Mr. Duffy. Who was it?
    Mr. Pinschmidt. --to identify.
    Mr. Duffy. No, you are not.
    Again, you came and you said, you know what? We support 
openness, transparency, flow of information.
    You know what? I bet it was the one person who had 
insurance experience. And I would love to hear the conversation 
that he had with FSOC in those meetings, the one guy with 
insurance experience who voted present and probably would 
dissent.
    Again, don't come in and tell us you are open and 
transparent. We all want to see the process opened up; we want 
to see what is happening.
    Ms. Clowers, in her work--GAO has given you the same 
advice. So I guess I would look at the bipartisan effort and 
message that has been sent from this committee and go back and 
have a solid conversation and review the policies at FSOC.
    Mr. Pinschmidt. Congressman, we certainly look forward to 
working with the committee on that going forward.
    Mr. Duffy. Thank you. I appreciate that.
    My time has expired.
    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.
    And without objection, this hearing is adjourned.
    [Whereupon, at 12:25 p.m., the hearing was adjourned.]
                            A P P E N D I X



                           September 17, 2014
                           
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