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

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

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

                                    HEARING

                                   BEFORE THE

                           SUBCOMMITTEE ON OVERSIGHT
                               AND INVESTIGATIONS

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               NOVEMBER 19, 2015

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-63

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

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

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

                       SEAN P. DUFFY, Wisconsin, Chairman

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

                                C O N T E N T S

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

                                   WITNESSES
                          Thursday, November 19, 2015

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

                                    APPENDIX

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

                  Additional Material Submitted for the Record

    Duffy, Hon. Sean:
        Written statement of the American Enterprise Institute for
          Public Policy Research.....................................   102
    Green, Hon. Al:
        ``Basis for the Financial Stability Oversight Council's Final
          Determination Regarding MetLife, Inc.,'' dated December 18,
          2014.......................................................   109
        Letter to Representative Waters and Representative Green from
          Chairman Hensarling, dated August 6, 2014..................   140
        Amici Curiae brief in MetLife, Inc., v. Financial Stability
          Oversight Council, dated May 22, 2015......................   142

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

                                  ----------

                          Thursday, November 19, 2015

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

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

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

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

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

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

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

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

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

                                A P P E N D I X

                               November 19, 2015

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