[Senate Hearing 114-113]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 114-113


  OVERSIGHT OF THE FINANCIAL STABILITY OVERSIGHT COUNCIL DESIGNATION 
                                PROCESS

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                 SECURITIES, INSURANCE, AND INVESTMENT

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING THE FINANCIAL STABILITY OVERSIGHT COUNCIL DESIGNATION PROCESS 
    FOR NONBANK FINANCIAL COMPANIES THAT COULD POSE A THREAT TO THE 
                FINANCIAL STABILITY OF THE UNITED STATES

                               __________

                             JULY 22, 2015

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MICHAEL CRAPO, Idaho                 SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
JERRY MORAN, Kansas

           William D. Duhnke III, Staff Director and Counsel

                 Mark Powden, Democratic Staff Director

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

         Subcommittee on Securities, Insurance, and Investment

                      MIKE CRAPO, Idaho, Chairman

          MARK R. WARNER, Virginia, Ranking Democratic Member

BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
TIM SCOTT, South Carolina            ELIZABETH WARREN, Massachusetts
BEN SASSE, Nebraska                  JOE DONNELLY, Indiana
JERRY MORAN, Kansas

               Gregg Richard, Subcommittee Staff Director

                  Milan Dalal, Senior Economic Advisor

                                  (ii)










                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JULY 22, 2015

                                                                   Page

Opening statement of Chairman Crapo..............................     1

                                WITNESS

Patrick Pinschmidt, Deputy Assistant Secretary, Financial 
  Stability Oversight Council, Department of the Treasury........     2
    Prepared statement...........................................    24

                                 (iii)

 
  OVERSIGHT OF THE FINANCIAL STABILITY OVERSIGHT COUNCIL DESIGNATION 
                                PROCESS

                              ----------                              


                        WEDNESDAY, JULY 22, 2015

                                       U.S. Senate,
     Subcommittee on Securities, Insurance, and Investment,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 10:17 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Subcommittee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. This hearing will come to order.
    Today's hearing will focus on the Financial Stability 
Oversight Council's designation process for nonbank financial 
companies that could pose a threat to the financial stability 
of the United States.
    Last year, I requested that the Government Accountability 
Office initiate a study to examine the process that FSOC uses 
when designating nonbank financial institutions. The report 
concluded that FSOC's process lacks transparency and 
accountability, insufficiently tracks data, and does not have a 
consistent methodology for determinations.
    In February, FSOC approved supplementary procedures 
designed to improve the SIFI designation process. I am 
interested in learning how this improved the process and what 
other changes are being considered by FSOC to improve 
transparency, accountability, and communications.
    One of the criticisms that I hear is that while lots of 
information is being requested and reviewed by FSOC, there is 
not a lot of meaningful opportunity for companies to correct or 
contextualize information being evaluated and to contest 
specific allegations of the threat that a company poses to the 
financial stability.
    In previous hearings, it has been suggested by some 
witnesses that FSOC needs to pinpoint specific activities that 
contribute to the company's systemic risk profile and provide a 
process for a company to eliminate the identified risks before 
being designated by FSOC.
    In the April hearing that Senator Warner and I held, the 
witnesses agreed that FSOC needed to have an off ramp to allow 
designated SIFIs to de-risk and shed their designation level. 
The goal of such reforms is to ensure that FSOC is more 
transparent during the designation process about which 
activities, together or separately, pose the greatest threat to 
financial stability so a company has the opportunity to address 
them.
    Understanding that a process that involves nine regulatory 
heads, an independent member, and five nonvoting members is 
never simple, it is important to understand the timeline and 
the details of the designation process and how we can ensure 
there is sufficient transparency, accountability, and clarity. 
I look forward to hearing from our witnesses on these issues 
today.
    With that, we have with us today Mr. Patrick Pinschmidt. 
Mr. Pinschmidt will--excuse me. I am looking for your official 
title here. He is Deputy Assistant Secretary of the Financial 
Stability Oversight Council, and he will testify today from the 
Department of the Treasury, and we appreciate your being here, 
Mr. Pinschmidt. I know there is a lot of business going on this 
morning, and so I expect you will see Senators floating in and 
out. But we appreciate your taking the time here with us, and 
you may have 5 minutes now to make your presentation. Your 
entire written presentation will be made a part of the record, 
and we ask you to try to summarize your comments in 5 minutes 
so we will have plenty of time for questions. Please proceed.

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

    Mr. Pinschmidt. Thank you very much, Mr. Chairman.
    Chairman Crapo, Ranking Member Warner, and Members of the 
Subcommittee, thank you for inviting me here today to discuss 
the Financial Stability Oversight Council's nonbank 
designations process.
    The financial crisis taught us that we need a clear 
accountability for the overall stability of the financial 
system. Congress created the Council to bring together for the 
first time the entire financial regulatory community to 
identify and respond to potential threats to financial 
stability.
    Today the Council convenes regularly to monitor market 
developments and to take action when needed to protect the 
American people from potential threats to the financial system.
    Our approach from day one has been data-driven and 
deliberative, while providing the public with considerable 
information regarding the Council's actions and views. As 
Secretary Lew has made clear, Council members recognize that 
the Council should be open to adapting its procedures and 
engaging broadly with stakeholders. Just since last year, the 
Council has demonstrated this commitment by enhancing its 
transparency policy, strengthening its internal governance, 
approving supplemental procedures to its nonbank financial 
company designations process, and soliciting public comment on 
potential risks from asset management products and activities.
    You asked me here today to discuss the Council's 
responsibility to designate nonbank financial companies for 
enhanced prudential standards and supervision by the Federal 
Reserve. The Council takes such action if it determines that a 
company's material financial distress or activities could pose 
a threat to U.S. financial stability.
    This authority addresses a key weakness brought to light by 
the financial crisis: that the failure of large, complex, and 
interconnected companies without appropriate supervision could 
pose risks to financial stability.
    Designating a firm is not a decision the Council takes 
lightly. Before making a final decision, the Council goes 
through a lengthy, multistage, in-depth analysis. The review 
covers every aspect of a company, including financial 
statements, business activities, market dynamics, and existing 
regulation.
    The Council works with the company and its regulators to 
understand how the firm's financial distress could affect the 
broader financial system. Most of the companies the Council has 
considered so far have not met the standard for designation, 
but in four cases, after considerable and thoughtful 
deliberation, the Council has found that a firm needs to be 
held to a higher standard to protect the U.S. financial system.
    The Council recently adopted supplemental procedures for 
its designations process. These changes were informed by 
extensive outreach with more than 20 stakeholders, including 
trade groups, companies, and public interest organizations. We 
also solicited input from each of the three companies then 
subject to a designation.
    Under the new procedures, companies will now know early in 
the process where they stand, and they will have earlier 
opportunities to engage with and provide input to the Council. 
For example, the Council will notify a company when it first 
comes under active review and provide it with the opportunity 
to meet with staff, review the Council's primary sources of 
public information, and provide information relevant to the 
Council's review.
    The Council is also providing companies with a clearer and 
more robust annual review process. Company representatives are 
now provided an opportunity to discuss the scope and process 
for the review, and they can present information regarding any 
change that may be relevant, including restructurings, 
regulatory developments, market developments, or other factors.
    In addition, the Council will provide each designated 
company an opportunity for an oral hearing to contest its 
designation every 5 years. These changes open the door to more 
engagement with the Council following a designation to make 
sure there is ample opportunity to discuss and address any 
issues that a company wants to put before the Council.
    Altogether, these and other changes strengthen the 
Council's process while also addressing many of the suggestions 
made by stakeholders.
    As Congress contemplates additional changes to the 
designations process, it is important that such changes do not 
compromise the Council's fundamental ability to conduct its 
work. We are particularly concerned with legislative proposals 
that would dramatically lengthen an already long and 
deliberative designation process, impose insurmountable 
practical hurdles on the Council's work, and prevent the 
Council from taking action to address potential threats to 
financial stability.
    As the President and Secretary Lew have both made clear, we 
will not support legislation that weakens important taxpayer, 
investor, and consumer protections by impeding the ability of 
regulators to identify and respond to threats to financial 
stability. U.S. markets and financial institutions are 
constantly evolving, and we must remain alert and responsive to 
new challenges in order to maintain the safety, soundness, and 
resiliency of our financial system.
    I thank the Subcommittee for the opportunity to discuss the 
Council's nonbank designations process, and I look forward to 
answering your questions.
    Chairman Crapo. Thank you very much, Mr. Pinschmidt.
    Senator Warner, did you want to make an opening statement?
    Senator Warner. I will defer.
    Chairman Crapo. All right. Thank you. Then we will go right 
into questions.
    Mr. Pinschmidt, the February supplemental procedures appear 
to be a positive step toward increasing communication between 
FSOC staff and firms under review. However, while lots of 
information is being requested and reviewed, the process does 
not seem to provide clarity to the companies about which 
activities together or separately pose the greatest threat to 
financial stability. So a company basically does not have an 
effective opportunity to address these issues before and after 
designation.
    Can you please explain when in the designation process 
companies are informed of the risks that FSOC believes they 
pose?
    Mr. Pinschmidt. Certainly. So you noted the supplemental 
procedures that the Council approved in February. Essentially, 
that opened up the process. Previously, it was a three-stage 
process. It is still a three-stage process. Stage 1 was purely 
mechanical based on certain mechanical thresholds. If you trip 
one of those thresholds, you go into Stage 2.
    Previously, Stage 2 was a preliminary internally facing 
review by the Council internal facing. If it was a public 
company, the Council would download the 10-K and 10-Q, do a 
very preliminary analysis to determine if a company should be 
considered in Stage 3. And Stage 3 was the more robust back-
and-forth period with the Council.
    As a result of the supplemental procedures approved in 
February, companies under consideration by the Council will now 
be informed at the beginning of Stage 2 once an active review 
commences on that company. So they will have an opportunity on 
day one, once an active review is commenced, to come in, meet 
with a Council analytical team, present information to Council 
member staff, ask questions if they want to ask questions, and 
also as part of Stage 2, get a sense for the type of materials 
that the Council is reviewing during Stage 2 as it looks at the 
company.
    So that was an important facet of the supplemental 
procedures allowing companies to engage earlier in the process, 
raise questions, and review the type of materials that the 
Council----
    Chairman Crapo. But in that process as it begins, is there 
a point at which the FSOC staff inform the company of which 
factors and which concerns they are having, if they are having 
any?
    Mr. Pinschmidt. So, yeah, that is a very important point. I 
think one thing to keep in mind is this is the beginning of the 
process. This is the first time the Council member staff are 
engaging with a company, so, you know, it is probably not 
practical to assume that firm views and positions on the risk 
will be developed in that process. The threshold consideration 
in Stage 2 is: Are there enough questions here? Is there a 
there there to advance the company to Stage 3 to do a deeper 
dive and a drilldown with the company?
    But that being said, as part of the new supplemental 
procedures, to the extent that through Stage 2, through that 
engagement, through that preliminary review that is conducted 
by the Council, again, just relying on publicly available 
information and information from regulators, there is no 
provision to get nonpublic information from the company in 
Stage 2. But based on that preliminary information available to 
the Council, should the Council decide to advance a company to 
Stage 3 for additional review, the Council will inform the 
company at the beginning of Stage 3: Hey, this is what we 
learned in Stage 2; these are the factors we are looking at; 
this is what we expect to explore in Stage 3; we are going to 
send you a list of questions asking very detailed questions; 
these foot to these key concerns.
    Chairman Crapo. So if I understand you right, the point at 
which you are transitioning from Stage 2 to Stage 3 is the 
point at which FSOC will tell the company that we have 
identified these risks, and these risks, taken either together 
or separately, are what is potentially going to cause a 
designation?
    Mr. Pinschmidt. I just want to be careful on that because 
it is--you know, Stage 2 is preliminary. It does not benefit 
from the robust back-and-forth that happens during Stage 3. It 
does not benefit from nonpublic information that the company 
provides to the Council. So any view at that stage of the 
process at the end of that preliminary review is a high-level 
sense of like, well, these are the potential risk areas we want 
to drill down deeper on. It is not a firm view as to like these 
are three things we are going after, we are worried about; you 
know, these are the three threats to financial stability.
    Chairman Crapo. So even at Stage 3, the company is not 
going to be informed as to what the specific risks are.
    Mr. Pinschmidt. Well, I guess what I would say, at the 
beginning of Stage 3, if the company is advanced to Stage 3, 
there is a rationale for that decision. The Council comes 
together, evaluates the record in Stage 2. To the extent that 
there are potential areas that have been highlighted and 
Council members are concerned about these areas and want to 
explore them more in Stage 3, those areas will be highlighted 
to the company at the beginning of Stage 3.
    You know, Stage 3 is a lengthy process. It lasts over a 
year. It will probably last up to a year and a half going 
forward. So, you know, that gives a company a sense of the 
areas that the Council is interested in pursuing with the 
company, and certainly there will be an opportunity for 
significant engagement throughout Stage 3.
    For example, one recent company had over a dozen meetings 
with the Council staff. They submitted over 20,000 pages of 
information. There are a lot of conversations. So as the 
company goes through Stage 3 those preliminary areas of inquiry 
will become much more crystallized for the company.
    Chairman Crapo. All right. Thank you.
    Just quickly, how many companies to date that have been 
moved into Stage 3 have gone through Stage 3 without ultimately 
being designated?
    Mr. Pinschmidt. The Council has considered nine companies 
in total. Of those nine companies, five were considered in 
Stage 2, and the decision was made not to advance them to Stage 
3. Of the four companies that advanced to Stage 3, the four 
companies were designated.
    Chairman Crapo. All right. Thank you.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. I wonder if I 
could get an extra minute since I skipped my opening statement. 
I just want to cite for the record that here we are 5 years 
later, there are some very good things that have happened in 
Dodd-Frank. There are things, I think, that still need 
improvement. But I think if the record was ever written about 
how this provision came about, let me just assure you that 
there was robust discussion about whether nonbanks should be 
SIFI designated.
    I think one of the concerns that Senator Crapo, Senator 
Corker, Senator Warren, and I have all had is that this 
designation of SIFI should not be a Hotel California where you 
can never de-designate. And I am going to ask some questions 
about that. I just want to make a couple of comments.
    So, first, I share a lot of my colleagues' concerns about 
the transparency of the process and how we have moved. I think 
there has not been enough transparency. I think Secretary Lew's 
change last year made improvements. I think some of the 
discussions about how firms are brought in, how much 
information is shared now are moving in the right direction.
    I also think we have seen in the case of--Senator Toomey 
and I may disagree on this one, but on the money market issues, 
what happened with the SEC moving and saying that size alone 
should not be a factor was an interesting process. And one of 
the things that I continue to believe is that size is not 
necessarily the guiding factor on a SIFI designation. It should 
be the underlying activities, not simply the size itself.
    Now, we have got an example how this should work out with 
GE. I would point out we saw the Fed's capital requirements I 
think on Monday of this week. GE has made the business decision 
to spin off a number of its GE Capital assets. As a matter of 
fact, CEO Jeff Immelt said, when he announced that move, ``This 
is exactly what was envisioned by the FSOC process.'' So you 
got one of America's leading CEOs saying, you know, by making 
this choice to bring down the size of his firm rather than 
falling into the full SIFI designation, you know, he is making 
a business decision that I think is both appropriate and will 
lessen the amount of risk in the overall system.
    As we look at GE, though, I would like to go through--let 
me just read off a couple of questions, and then you can 
respond. What risk would the failure of GE Capital pose today 
in its current status? As GE Capital spins off some of its 
assets, how does FSOC plan to monitor the transfer of those 
assets throughout the financial system to ensure that they do 
not end up at another firm that would inadvertently trigger 
other systemic concerns? To what extent are GE's excessively 
risky assets moving into any kind of shadow banking system? And 
if they are in that shadow banking system, how would the FSOC 
monitor? And do you believe that the FSOC and Federal Reserve 
have the tools and authority necessary to address any existing 
concerns that may arise with GE's de-risking process?
    Mr. Pinschmidt. Thank you very much, Senator.
    In terms of GE Capital, as I am sure you can appreciate, it 
is probably not appropriate for me to get into too much of the 
details of the company's ongoing restructuring.
    Senator Warner. Well, any particular firm, as you take 
assets that may be risky, if they could go into the shadow 
banking, or if they simply moved to other firms, how do you 
monitor that process?
    Mr. Pinschmidt. Yeah, I think as a general matter, you 
know, this has been an area, again, speaking generally in terms 
of the migration of activities or assets from one space to 
another space, that the Council is very well positioned to 
monitor, because the Council brings together regulators from 
across the regulatory community, looking at different types of 
institutions, looking at different types of markets, and is in 
a very good position to understand what is driving this. Are 
there business issues? Are there competitive issues? Are there 
regulatory issues? And what are the potential consequences in 
terms of financial stability?
    So, more broadly, this is an issue that the Council 
continues to monitor. It has highlighted this issue in its 
Annual Report and this will obviously remain a focus going 
forward.
    I think in terms of GE Capital, I mean, clearly there is a 
process in place. The company alluded to that in terms of them 
pursuing their de-designation strategy with the Council. This 
process was elaborated on in the February supplemental 
procedures. It is very clear, to the extent a company wants to 
pursue this strategy, there is an off ramp available, and there 
is a process that they can engage with at the Council. They can 
ask questions. They can get responses to those questions and 
the purpose is to be as transparent as possible to give 
companies the right information to make decisions.
    Senator Warner. Let me just in my last remaining moments 
say that another area of great concern has been the whole 
question around insurance designations--obviously AIG, one of 
the firms that caused the crisis in 2008. What have you learned 
from the designation of AIG that helped guide you when you went 
through the same process with Prudential and MetLife? 
Obviously, I believe Roy Woodall offered a dissenting opinion 
on that issue. Could you explain why you disagree with Mr. 
Woodall's dissent? And just on a more general basis, under what 
circumstances do you believe an insurance firm could pose 
systemic risk? And can you see any kind of hypotheticals going 
forward since this is going to be an area that I know a number 
of my colleagues have concerns about as well?
    Mr. Pinschmidt. So I think generally, in terms of the 
Council's approach to the three insurance companies designated, 
these were company-specific analyses, you know, that took over 
a year on each of them, sometimes as much as 2 years. So, you 
know, I think each company is different, and each company poses 
a different set of potential risks, not in their standard 
operations but should they encounter financial distress in 
terms of what that impact would be on broader market 
functioning. That was, of course, the threshold decision by the 
Council.
    I think generally speaking, across the three firms, the 
Council's analysis--which is outlined on the public bases on 
the Council's Web site, providing a summary of the rationale 
for each of the designations. But I think speaking generally, 
the focus of the Council was on the exposure of broader 
financial markets directly and indirectly to each company and 
also the asset liquidation channel in the sense that if the 
company got into trouble, had to liquidate assets, what would 
be the consequences of that liquidation on broader market 
functioning? So I think, you know, generally speaking, because 
of these companies' size, interconnectedness, not necessarily 
their vanilla or straightforward insurance operations, but, you 
know, other operations that are not really in that category, 
the decision was made to designate them.
    Senator Warner. Thank you, Mr. Chairman. I would just 
simply close by saying that I know there is great reluctance 
from the administration about codifying any changes with the 
process. I understand some of your concerns, but I do think 
there have been some movements in the right direction on 
transparency and ensuring that those transparency requirements 
are going to last into future administrations. I look forward 
to--if it is not legally codified, how can we ensure that? So 
that might be for a future round of questions.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. I thank you and 
the Ranking Member for having this hearing, and you, sir, for 
your testimony.
    Look, with FSOC, my sense is we have a number of people in 
the Senate that would like for FSOC not to designate anybody as 
a SIFI. There are probably some people, on the other hand, that 
think FSOC is working just fine the way that it is.
    But my guess is there is a pretty large group of folks that 
would like to see the process be improved, and my guess is even 
you would like to see the process get better as it moves along.
    So I want to ask one long question for you to respond. 
There are three areas where I think there could be a lot of 
consensus around improvement. One would be the disclosure prior 
to designation--I know that you talked a little bit about that 
in answering Senator Crapo's question--but really being more 
transparent about the analysis that is given, and give people 
the opportunity on the front end to more fully understand.
    Second, as they are moving into the upper stages, as you 
alluded to in your comments, giving them a predesignation off 
ramp so that before they are designated, they can off-ramp, 
they can just go ahead and share with you, and you can work 
with them toward that end to make sure in advance of being 
designated they have the opportunity to off-ramp. My sense is--
you alluded to GE just a minute ago. Maybe there was not that 
opportunity for them even though it appears that they have 
certainly done a lot to make sure they are not a SIFI. You can 
decide whether they have or not.
    And then after that, especially Section 113 of Dodd-Frank 
says that the FSOC will reevaluate each determination at least 
once a year. It seems to me that if we could work more fully to 
understand how you could have a post designation off ramp, 
there would be a lot of consensus on this Committee toward 
supporting that. And I wonder if you might just lay out whether 
you agree that some of those types of things would be helpful, 
and if so, what those things might be that we could come around 
legislatively.
    Mr. Pinschmidt. Yes, and, certainly, I think you raise some 
good questions, and I would like to sort of tick through them, 
and please interrupt me if I am not addressing it the way you 
wanted me to address it.
    So in terms of disclosure throughout the process and 
getting companies as much information so they know where they 
stand as they are going from Stage 2 to Stage 3 and within 
Stage 3, I would reiterate that this is a very lengthy process. 
There is a lot of engagement. There is a lot of paper going 
back and forth. There are a lot of meetings. And that being 
said, as part of the supplemental procedures we put out in 
February, we recognize that to the extent the Council has 
formed views or has questions, that information will be shared 
with companies sooner in the process. For example, in Stage 2, 
allowing the company to come in and meet with Council member 
staff, allowing the company to present anything it wants to 
present, and basically allowing the company to ask the Council 
member staff what information are you using in your analysis 
today. So I think----
    Senator Corker. If I could, just on that point, so when 
they do that, if Company X says, ``Look, I will just unload my 
entire financial arm. I am a manufacturing operation, an 
industrial operation. I will just unload my entire financial 
arm,'' which a particular company has done, would you all then 
say, ``OK, well, if you will do that, then forget it, we will 
not designate you''? Does that kind of process occur?
    Mr. Pinschmidt. So what I would say is that the Council 
will always consider any information or requests brought to it 
by companies under consideration. So of the four companies that 
the Council has designated, there was never one specific issue 
that triggered the designation. So there was----
    Senator Corker. But if you are not in the financial 
business, I would think that would be a pretty big clue that 
maybe they are not a threat to the financial system. Would that 
be the case in one particular--and I do not want to drive home 
one company, but if you are an industrial company, you say I am 
going to be out of the financial business, would that keep you 
from being designated as systemically risky to the financial 
system? I just think it would.
    Mr. Pinschmidt. I was referring--it was not the industrial 
company that was designated. It was the sub. And if you look at 
the basis that was posted publicly for that decision, it was a 
confluence of different factors that drove that decision. I 
guess what I am referring to is hypothetically, let us say it 
is Company X and they have this business that is doing 
something that is very scary, and that is the reason they are 
going to be designated. So if that company wanted to come to 
the Council and say, look, we have a proposal to deal with 
this, that is certainly a conversation that can happen within 
the current process. It just has not happened with the four 
companies that were previously designated because there was no 
one factor that triggered it.
    Senator Corker. But there is a clear opportunity for them, 
though, to present and say, look, if this is of concern to you, 
it is not worth it to us to be identified in this way, it hurts 
our investors, so we will do away with this. There is a clear 
process laid out where they can do that and be off-ramped.
    Mr. Pinschmidt. Yeah. Certainly, we are talking about a 2-
year process from beginning to end for a designation. So that 
is a lot of time, and there are certainly a lot of 
opportunities for the company to bring information, the primary 
regulator to bring information that would be considered by the 
Council.
    Senator Corker. And the other two issues--I realize I have 
run over my time, but we will send you a question so you can 
give us some information about the post-designation off ramp 
and what you are doing to make sure that companies have a route 
to be undesignated. And I guess that process exists somewhat 
today. Yes or no?
    Mr. Pinschmidt. Yes. I would be happy to discuss it quickly 
if you wanted me to.
    Senator Corker. Well, I do not know if the Chairman is that 
lenient today, but thank you.
    Chairman Crapo. Thank you.
    Senator Donnelly.
    Senator Donnelly. Mr. Chairman, in the interest of my 
colleagues' questions, are you in that mood today, sir? Just 
kidding.
    Thank you very much for being here, sir. One of the 
questions I wanted to ask is: Based on your participation at 
recent FSOC meetings, one of the other things that you have 
responsibility for is what are some of the emerging threats 
that you see in the economies, whether here or overseas, that 
are most concerning? Obviously, first and foremost I wonder 
about here. One of the things I have always tried to do is say, 
OK, what might be out there that might lead toward a similar 
situation that we had in 2008 and how do we prevent it?
    Mr. Pinschmidt. Thank you. So that goes to the core of what 
the Council does. I know a lot of focus is always on----
    Senator Donnelly. I know it goes to the core. I am just 
asking what are the things you are looking at right now that 
have you most concerned.
    Mr. Pinschmidt. So the Council's Annual Report highlights 
the key risks that the Council believes are in the current 
financial system and the best recommendations to address those. 
I think this year's Annual Report, consistent with prior years, 
highlighted cybersecurity. I think that one remains at the top 
of everybody's list in terms of fostering greater information 
sharing between Government and the private sector, making sure 
that technological capabilities are in place, and just 
understanding the threat and how it would potentially play out 
in terms of responding to that threat and recovering from that 
threat. So that is a key area of focus for the Council.
    I think given the current economic backdrop, one recurring 
theme throughout the report is the reach for yield dynamic. You 
know, we have had interest rates low for a long time, and it is 
only natural that some investors and some market participants 
will reach for yield, whether it is on a looser credit quality, 
whether it is taking on much more risk for incremental gain, 
and that is an area for market participants and regulators to 
be very focused on going forward.
    I think two areas that were highlighted in this year's 
Annual Report that were not highlighted in previous reports. I 
think central clearinghouses as Dodd-Frank is implemented--and 
certainly Dodd-Frank anticipated this--clearinghouses are 
playing a much bigger role in terms of providing transparency 
and stability to the system. But because of that rule and the 
more transactions that are going through them, it is important 
that regulators continue to remain vigilant as to how these 
entities are being run, how they are being risk-managed. There 
is certainly a lot going on. There continues to be a lot going 
on on that front. But it is a very strong focus.
    And I think, finally, another new area that was highlighted 
in the Annual Report was--and this is something we are hearing 
a lot about lately--emerging market structures across different 
asset classes. You have seen an increase in electronification. 
You have seen structural changes in how markets operate and 
understanding how those changes are impacting market 
functioning and to the extent that they could pose any 
potential risks.
    Senator Donnelly. Let me ask you a question I have been 
asked by folks back home, as well as in other places, and that 
is, for mutual funds, which many of us have used for 401(k) or 
for other purposes. So you have a mutual fund that gets in 
$1,000 and invests $1,000 into the market or into bonds or 
wherever for you, that they are not running margins, that they 
do not--you know, you give them 10 bucks, they invest 10 bucks, 
period. Where is the systemic risk in that?
    Mr. Pinschmidt. So, yeah, I think you are absolutely right 
when you think about traditional mutual funds. They are a 
different animal in terms of how they invest and how they 
operate. They do not have the balance sheet. They do not have 
the leverage. It is an agency model. They are not investing 
their own money.
    But I think, broadly speaking--and this is why the Council 
is doing some work on this front. There has been incredible 
change in that space, and there are certain activities across 
the industry that there are a lot of legitimate questions on in 
terms of certain products, for example, ETFs and certain 
liquidity features of certain products.
    The Council right now is not focused on individual 
companies. The Council is prioritizing a review of industry 
activities and products, and issued a Federal Register notice 
last December with a series of questions, just trying to get 
more information from the industry and other stakeholders, 
including information on some of the issues you are raising.
    Senator Donnelly. So if you have not--and I apologize if 
you already did make a list of--you mentioned ETFs. If you have 
put out a list of here are the things we are concerned about so 
that companies have an idea of what to avoid if they want to 
avoid being systemically designated.
    Mr. Pinschmidt. So let me just clarify that. I think it is 
premature to say the Council is concerned about any one thing 
right now. What the Council did in December was issue a Federal 
Register notice highlighting four key areas for exploration.
    Senator Donnelly. What I think is important is: How do you 
know what to avoid if you are not being told here are the 
things we want you to avoid?
    Mr. Pinschmidt. So what I would say is the Council has not 
really--has not finished its process in terms of understanding 
if there are even legitimate risks there. It is an ongoing 
process. It is engaging with the industry. The Council is 
focusing on four areas: liquidity and redemption risk, 
leverage, operational risk, and resolution. And within each of 
those four areas, the Federal Register notice asked a series of 
questions, probably eight questions in each section, and points 
out potential areas of concern to explore. And we are trying to 
get information, understand the nature of potential risks. And 
to the extent there are risks, then, there will be a dialogue 
about those risks. But I think it is premature to point out to 
any one single feature rising to a certain level at this 
juncture.
    Senator Donnelly. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. Good morning, Mr. 
Pinschmidt.
    Mr. Pinschmidt. Good morning.
    Senator Scott. I personally think it is highly unlikely 
that asset managers pose a systemic risk, honestly. But Federal 
Reserve Governor Tarullo recently suggested that activities-
based designation in the asset management industry would be 
preferred to entity-based designation. Can you please commit 
that if the FSOC goes down this path with asset management 
activities, it will revisit the entity-based designation of the 
insurance SIFIs and consider an activities-based designation 
for them as well?
    Mr. Pinschmidt. Thank you for your question. So you are 
right that for asset management the Council is currently taking 
an activities-based approach. The Council made a decision back 
in July of last year, asking staff to prioritize an industry 
review focused on asset management products and activities. But 
I think in terms of the larger question here, in terms of 
entity review versus industry-wide review, it is really not an 
either/or question.
    I think where there are risks at individual firms based on 
their size, interconnectedness, and the consequences of their 
failure to the financial system, the Council has taken action. 
Where there are broad-ranging questions regarding certain 
activities or products, the Council has also sought to get 
answers to those.
    Neither approach precludes the other option. So to the 
extent that you are looking at industry activities, it does not 
mean you cannot look at individual companies. And to the extent 
you are looking at individual companies, it does not mean you 
cannot look at industry activities.
    I think, in the case of insurance, certainly in the Annual 
Report, the Annual Report has talked about areas whether it is 
captive reinsurance, whether it is the ``reach for yield'' 
dynamic I referred to earlier, that there are certainly ongoing 
questions on an industry-wide basis that the Council needs to 
explore.
    Senator Scott. Dodd-Frank turned 5 years old yesterday, and 
in an interview with the Wall Street Journal with the bill's 
author, former House Financial Social Security Committee 
Chairman Barney Frank said, ``I do think there is a tendency 
for an overreach by the FSOC. I do not think straightforward 
insurance companies or money managers should be covered and 
regulated as SIFIs.'' Do you agree or do you disagree with 
Chairman Frank?
    Mr. Pinschmidt. So I certainly have the utmost respect for 
Chairman Frank. I guess what I would say is the Council was 
created 5 years ago to bring together regulators from across 
the regulatory system with a common responsibility to identify 
and respond to threats to financial stability. The rationale 
for that was a recognition that threats evolve over time. 
Financial institutions and markets are not static and, thus, 
risks evolve over time.
    So to the extent 5 years ago there were certain risks folks 
were worried about, those risks have changed over the past 5 
years, and they will change again over the next 5 to 10 years.
    I will say in the case of the Council's review of insurance 
companies, it has not been the straightforward dynamics or the 
vanilla dynamics of the insurance companies that triggered the 
designation. These were large, highly interconnected companies 
whose failure could potentially pose a threat to financial 
stability.
    I think his comments also referenced mutual funds. As I 
just alluded to earlier, the Council has not designated any 
mutual funds. The Council is focused on products and activities 
across the industry--engaging with the industry to better 
understand the nature of potential risks, which are albeit very 
different from other risks in the financial system.
    Senator Scott. Thank you.
    Senator Warner. [Presiding]. Senator Toomey.
    Senator Toomey. Thanks, Mr. Chairman.
    [Laughter.]
    Senator Warner. You get used to that.
    Senator Toomey. Yes, never mind.
    [Laughter.]
    Senator Toomey. I want to pursue this discussion that, 
well, almost everybody has been talking about. You have 
acknowledged that there is a focus in the asset management 
space on activities and products, but you also seem to suggest 
that that is not to be understood to be an alternative to 
entity designation. So I just want to be--first of all, let me 
be clear. Let me ask you, are you telling us today that entity-
based designations are still on the table and that it is still 
entirely possible that individual asset management firms will 
be designated as SIFIs as such?
    Mr. Pinschmidt. So I was responding generally to the 
question on terms of activities versus entity-based reviews.
    Senator Toomey. Right.
    Mr. Pinschmidt. I think the Council has been very clear. 
The Council has been evaluating risks in the asset management 
space for some time. And after about a year of work in multiple 
different work streams on that front, across different areas, 
the Council directed staff to prioritize a review of asset 
management products and activities. So that certainly is the 
focus of the Council.
    Senator Toomey. I understand. That did not even come close 
to answering my question. My question is: Has the FSOC taken 
off the table entity-based designations? Or is it still 
entirely possible that the FSOC will decide to designate asset 
managers as SIFIs per se?
    Mr. Pinschmidt. I cannot speak to the Council in terms of 
what it may decide down the road----
    Senator Toomey. Wait a minute. You cannot answer the 
question of whether or not you have taken off the table entity-
based designations and substituted exclusively activity-based 
designation? You cannot tell us whether that is your criteria?
    Mr. Pinschmidt. What I can say is the Council is firmly 
focused on products and activities across the industry, and a 
broad review informed that focus by the Council. So I think the 
Council is very committed to this. They issued a Federal 
Register notice for comment. They are engaged in a back and 
forth with the industry and other stakeholders, designed at 
understanding the risks. And I think what triggered that is a 
recognition that asset management firms are different. You 
know, they----
    Senator Toomey. Yeah, we know that. But I got to tell you, 
this--you know, the opacity with which the FSOC has been 
operating is extremely disturbing, and when you come here today 
and you continue to obfuscate about a very fundamental and 
basic question, that is extremely problematic.
    Senator Donnelly raised the question: How can a firm choose 
not to be systemically risky if it does not know what 
activities you consider to be systemically risky? I do not 
understand how it is defensible not to have a clear, objective, 
public description of the activities that you think give rise 
to systemic risk so that a firm could decide to note engage in 
them and know in advance that thereby it will avoid this 
designation. How can that be unreasonable?
    Mr. Pinschmidt. Senator, I think that is completely 
reasonable. I mean, I----
    Senator Toomey. Except you do not do it.
    Mr. Pinschmidt. I guess my point is the Council is in its 
risk identification phase. It really has not, you know, come to 
conclusions on risks in the asset management----
    Senator Toomey. It seems to be pretty far down the path of 
designating individual firms.
    Mr. Pinschmidt. Again, I think the Council was very clear a 
year ago that it is focusing on products and activities rather 
than individual firms, and to the extent the Council arrives at 
some decisions in terms of potential risks, those decisions 
will obviously be shared with the public.
    Senator Toomey. So can we be assured that no firm will be 
designated until the Council has reached the decision about 
what activities give rise to systemic risk?
    Mr. Pinschmidt. I mean, certainly, the process now is not 
looking at individual firms. It is looking at activities and 
products across the industry. And to the extent there are 
specific activities and products that concern the Council that 
pose risks, the Council will then obviously engage further in 
terms of the specific concerns----
    Senator Toomey. Well, here is another problem we have. If 
you guys decide a particular activity deserves to be 
designated, one of the things that is still entirely unclear is 
how the Fed will choose to regulate a nonbank that gets drawn 
into this web.
    It seems to me that the only way that a firm can make an 
informed decision about whether or not it wants to exit an 
activity that is the source of its designation would be to know 
how that activity is going to be treated. So can we be assured 
that we will not have any designations until the Fed also comes 
out and publicly discloses how it intends to regulate these 
activities?
    Mr. Pinschmidt. So the role of the Council and the Fed is 
clearly different here. The Council is responsible for risk 
identification. The Fed is responsible for addressing that risk 
with enhanced prudential standards.
    What I would say--and, again, I am sort of speaking for the 
Fed on this. What they have said previously and certainly how 
they have approached it with some of the prior designations is 
they recognize each industry is different and the players 
within industries are different. So their view and their 
approach has been to tailor the enhanced prudential standards 
for the risks posed by individual firms. And I think that in 
order to tailor, you need to understand what the nature of the 
risk is first, so, therefore, there is kind of a sequencing 
there.
    Senator Toomey. Well, and the sequence should include that 
all of that should be very well known and understood and 
publicly debated before anyone is subject to this regulation 
that they had no way to avoid but might well have chosen to 
avoid.
    Thanks, Mr. Chairman.
    Chairman Crapo. [Presiding]. Thank you, Senator Toomey.
    Senator Heller.
    Senator Heller. Mr. Chairman, thank you, and to the Ranking 
Member also. I am not a Member of this Subcommittee, but this 
is a fascinating discussion, and probably in my home State one 
of the--probably one of the biggest issues that I get 
questioned on constantly. This financial downturn did not help 
the State of Nevada by any means, and most people are very 
aware of the amount of unemployment. We lost a lot of banking 
entities in the State. We probably lost more than half of our 
local banks, community banks, over the last 5 or 6 years, and 
it has been pretty devastating to the economy. So that is why I 
am here today, and I want to thank our witness today also for 
taking time and answering our questions. I know sometimes it is 
a little uncomfortable, but it does help this process move 
forward. So thank you for being here today.
    I do have a few questions, and, again, it is along the line 
of everybody else, but I think this is important to the banking 
industry and the nonbanking industry to get clarification on 
some of these questions.
    I guess my first question is: Is it your belief that no 
firm should ever be undesignated as a SIFI?
    Mr. Pinschmidt. Oh, certainly not, no. There is a clear 
process in place. If a company decides to pursue a de-
designation strategy, that is available to that company.
    Senator Heller. See, that is the argument. The argument is 
that there is not a clear process, and so that is why I asked 
you that question. This is what these entities are coming to me 
saying, OK, if there is a designation, how can we avoid it? 
Again, this is the same question everybody else is asking, but 
I guess we are really trying to get down to the basic answers 
on this.
    You are saying that there is a clear path--a clear path--
that a company can come to you and be told specifically what it 
takes or an off ramp if, in fact, a SIFI designation were to 
occur?
    Mr. Pinschmidt. Yes. So, look, I will walk you through 
that. So after a designation is made, the Council subjects 
every company to an annual review process, and the basic--the 
process there is to evaluate what has changed at that company 
since the designation, and to the extent there have been 
changes, are those material that would warrant a potential 
rescission of the designation?
    As part of the supplemental procedures we put out in 
February, we put some more meat on the bone on this in terms of 
kind of letting companies know what their rights are and how we 
would expect to conduct the process, because bear in mind we 
have not really gone through this process a lot because we just 
had the first round of designations just 2 years ago.
    But the way it is set up now at the beginning of the 
process we will send a letter out to the company inviting them 
to come in, meet with Council member staff, and that is their 
opportunity to raise any questions they have, to highlight any 
changes in their business. Our view is that each company that 
has been designated, they receive a 200-, 300-page document 
from the Council outlining the key factors as to why they are 
designated. So our view is companies know why they are 
designated and what risks the Council is concerned with.
    But to the extent that they have questions on that, to the 
extent they have--well, you cited these factors, if we did this 
to that, what would that mean? This is a forum to allow that 
sort of dialogue.
    Senator Heller. Help me understand--I am sorry to interrupt 
because I do not have a lot of time, but help me understand 
what it means when you say that you are still going through the 
risk identification phase. Does that impact a company's ability 
to exit a SIFI designation?
    Mr. Pinschmidt. So I think the risk identification phase, 
what you are referring to, is in Stage 2, and that is kind of 
at the preliminary--the beginning of the process----
    Senator Heller. But you are still saying you are going 
through this process?
    Mr. Pinschmidt. Not in terms of the annual reevaluation. So 
the annual reevaluation reflects--comes after the designation. 
It comes after the company receives a lengthy 200-, 300-page 
document from the Council outlining the key risks and the 
concerns of the Council. So the company, in that position, 
comes into that meeting post their designation with a long 
document outlining the risks, and this is an opportunity for 
the company to talk to Council staff and say, look, this is 
what we are thinking, this is what we have been doing, these 
are potential other ideas. What were you thinking when you said 
this? What were you thinking about this? And just have that 
dialogue, because we feel it is important, to the extent a 
company wants to pursue an off ramp, there are many different 
ways to go about doing it. And the company is in the best 
position, the management team is in the best position to assess 
the relative pros and cons of those options, and we want to 
provide as much information.
    Senator Heller. Let me add one thing. I guess the confusion 
and the comments that I am receiving--there is a lot of 
dialogue. There is a lot of dialogue. But what they do fear is 
that there is not enough action. In other words, they talk and 
talk and talk, and very rarely are there instances where 
decisions are actually made. I do not know how you change that, 
but that is a concern and a reflection right now of what the 
Council is doing.
    Mr. Pinschmidt. So what I would say is, again, we have not 
been through this process a lot yet because just for the 
timeline in terms of when companies were designated. But, I 
think dialogue is a precursor to action, and to the extent a 
company is motivated to pursue a de-designation strategy, there 
is a pathway forward to do that. There is a mechanism and a 
process to allow it. And to the extent a company wants to 
contest their designation, if the Council votes not to rescind 
that designation, the Council will respond in writing, giving a 
rationale and reasons. And that is very valuable information to 
the company, and ultimately if a company--again, this is part 
of our supplemental procedures. If a company feels that they 
are still not being heard, there is an opportunity for an oral 
hearing with the entire Council regarding that designation.
    Senator Heller. Mr. Pinschmidt, thank you.
    Mr. Chairman, thank you for allowing me to be here today.
    Chairman Crapo. You are welcome. Thank you.
    We will do one more round for those who want to ask 
questions. We are going to try to wrap up here by half past the 
hour. I think we can do that.
    Mr. Pinschmidt, as you can see, there is some frustration 
up here, and the frustration, the way I would describe it is 
that we consistently hear that there just does not seem to be a 
way to get specifics from the FSOC process when a company is 
being evaluated so that the company can know what specific 
activities is it or are they that are creating the risk concern 
that could result in a designation. And as you give your 
answers, I do not seem to see the answer to that question.
    There is obviously a lot of document production. There are 
opportunities to get together and sit down between the FSOC 
staff and the staff of the company that is being evaluated. But 
in that process, is there ever a time at which the FSOC says 
these are the activities that this company is engaging in that 
we believe present potential risk to the system?
    Mr. Pinschmidt. Yes, I would say there is, and I think 
obviously it is an analytical process. The information and the 
Council's understanding and views of the risks evolve over time 
as there is more information, particularly in Stage 3 when you 
are dealing with nonpublic information and you are actually 
having meetings with the management team on a regular basis.
    But what I would say is that the new process, when we did 
the supplemental procedures in February, we talked to a lot of 
people. We talked to the companies that were previously 
designated. We talked to industry groups. We talked to the GAO. 
We talked to congressional staff. And we heard a lot of 
different things, and it made sense for us to assess what 
improvements we can make in the process that allow for that 
engagement, allow for that back and forth. And that is what 
precipitated the 17 changes in February. One of those areas, 
again, to your point in terms of knowing earlier in the process 
where they stand, Stage 2 is no longer an internal FSOC 
process. It is open to the company. The company is notified. 
They have the opportunity to come and present. They have the 
opportunity to ask what information the Council is considering. 
And at the end of that process, should the company--and, again, 
this is just based on preliminary information, publicly 
available information. At the end of Stage 2, if the Council 
should decide to move a company to Stage 3, the Council will 
let that company know, well, hey, these are the factors we are 
kind of looking in on, you can expect questions on this, 
questions on that, this is what we want to explore and drill 
down with you in the next year as we do a Stage 3 evaluation. 
And then as we move through Stage 3, if there is a decision to 
make a proposed designation to a company, so before a final 
vote by the Council, the company under consideration--again, 
before a final vote on designation--they are given a 200-, 300-
page basis for a proposed determination which outlines in very 
specific detail the Council's view, the Council's concerns, and 
the rationale for a proposed decision on designation.
    Chairman Crapo. And at that point, do you agree that there 
should be an opportunity for an off ramp? In other words, if at 
that point when the decision apparently has been made and the 
risks have been identified, the activities have been 
identified, should not the company at that point have an 
opportunity to evaluate its business model and structure and 
determine whether to adjust it?
    Mr. Pinschmidt. Well, what I would say is if there was one 
specific area that the Council was focusing on, they would know 
long before that proposed designation document was given to the 
company. So, I mean, there would be an opportunity for 
dialogue. But, again, there has not ever been in the cases of 
the four companies designated where there was one specific 
thing that could be addressed in sort of an expedited manner.
    Chairman Crapo. Well, let us take a case of one of the four 
companies or a hypothetical fifth company that does get 
designated. So the process is finished. The company is 
designated. Should there be an off ramp?
    Mr. Pinschmidt. Absolutely, absolutely. And that is why the 
supplemental procedures made it very clear that, to the extent 
companies have questions, to the extent a company is determined 
to pursue an off-ramp strategy, there is a path there. And it 
is, you know, not a simple endeavor, because as I noted before, 
there is never really one or two things or there has not been 
in the past----
    Chairman Crapo. But in that case--and I am interrupting 
because we are running a long time, but in that case, should 
not the FSOC have a responsibility to work with the company to 
help them identify what the proper elements of an off ramp 
should be?
    Mr. Pinschmidt. Absolutely. I think it is very important 
that companies--I mean, this is a big decision for a company. 
They need to have the best information. There are pros and cons 
to weigh. The key point here is there is an off ramp; there are 
multiple different lanes. The company should be able to choose 
which lane they want to pursue based on the best available 
information. We have a process in place to allow companies to 
do that.
    Chairman Crapo. All right. Thank you.
    Senator Warner.
    Senator Warner. Well, thank you, Mr. Chairman, and I want 
to, frankly, continue this line of questioning.
    The Chairman and I work very closely together. We may not 
come at this from exactly the same direction. I actually think 
FSOC has improved its performance. I think there clearly are 
cases of nonbank financials who are systemically important. But 
I really urge, Mr. Pinschmidt, that you kind of be more 
collaborative with us because there does still seem to be this 
transparency issue.
    One of the things just this week with the Fed setting some 
of these new capital rules, having a company being able to more 
fully evaluate the cost of designation is important. So that is 
a step in the right direction as well. And I think all of us 
will be watching very closely GE's process to see whether the 
off ramp works.
    But what I do not hear is a disagreement that 
predesignation, at some point along the way, there ought to be 
enough clarity for a company to make the decision to spin off 
whatever component of its business that causes the systemic 
risk.
    Senator Corker and I worked deeply on Title 5 years ago, 
and we always envisioned that there would be this off ramp. And 
I guess what my question is, we need your help working through 
this, or I think you are going to end up seeing Congress 
without the full amount of information and experience that you 
have gone through, learning this process in 5 years, 
potentially take action, and that might not be the right--this 
would be much better done collaboratively. I do not think there 
is a difference of opinion that there ought to be an off ramp 
predesignation and there ought to be even after designation, 
then the ability on the annual review to have an off ramp. If 
we want to send the signal that for those on the Committee on 
both sides who think we have not ended too big to fail in 
whatever connotation, bank or nonbank, I think we would like 
nothing more than the ability to show, now, look, this is the 
way out.
    Can you just speak to that a little bit? And why can't we 
get to a common place here that either is codified in law or 
codified in rules? Because who can predict what the next 
Secretary--I think Secretary Lew has moved appropriately and 
aggressively to try to work through this, and I think the 
process has improved. But if it is all left with this lack of 
clarity, a future Secretary from either party could veer 
dramatically off the course that has been set.
    Mr. Pinschmidt. Thank you. I guess what I would say is I 
think it is important to allow the supplemental process changes 
that the Council approved in February to work through. I mean, 
we are just now beginning the first round of annual 
reevaluations post the supplemental procedures.
    But that being said, in terms of kind of the predesignation 
off ramp that you were referring to, the Council will consider 
any proposal from any company at any stage of the process. So 
while it is not formally in the current process for 
designations before a decision is made on designations, that is 
not to preclude down the road a company presenting a proposal, 
a regulator presenting a proposal, and having a mechanism to 
discuss that within the Council.
    So what I would say in terms of, I think, the legislation 
before this Committee, what it creates is it effectively 
creates a situation that would essentially double the length of 
a designation.
    Senator Warner. I do not support that component.
    Mr. Pinschmidt. OK. So we go from 2 years to 4 years, and I 
think when you are thinking about a 4-year analysis, that 
essentially becomes unworkable, and it would just basically 
hamper the Council's ability to identify and respond to risks. 
But I think, certainly to the extent that there are other 
proposals out there that work within our current process, if we 
can do a better job sort of making clear how this will work, we 
are certainly happy to do that and work with you.
    Senator Warner. Let me just interrupt you for 1 second 
because, again, I want to be sensitive and let Senator Donnelly 
get his question in. I simply want to say it has gotten better 
since some of the changes, but when we hear company after 
company say we are not being told how to get off, what to do, 
and you understand when we say we have to continue to protect 
the confidentiality of the process, we are only getting one 
side of the story. And that is troubling.
    Mr. Pinschmidt. If I could just answer that question real 
quickly, I think one thing to keep in mind here is that these--
the supplemental procedures were approved in February. We have 
not really entered in the post-supplemental procedures annual 
reevaluation phase yet. So I think some of what you may be 
hearing is based on the view of the process previously. We have 
made some changes. I think they are very good changes, and they 
are going to dramatically improve the level of engagement and I 
think get the information to companies that they need to make 
decisions regarding a potential off ramp. And I think we need 
time to let that work out, and then to the extent that there 
are concerns or things to address, we are very happy to do 
that.
    Chairman Crapo. Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman.
    I used to serve in the House. I served on the House 
Financial Services Committee, and Barney Frank was my Chairman. 
I was there during the time that Dodd-Frank passed, and 
Chairman Frank helped write the bill. And, I do not want to put 
words in Barney's mouth. I am just following what he was quoted 
as saying. His quote was--Frank did not believe that asset 
managers or insurance companies that just sell insurance are 
systemically important and should not be labeled as 
systemically important financial institutions. And when Mr. 
Scott asked you about that, you said, well, that was 5 years 
ago, and so we have to determine what threats have evolved over 
time in that space.
    So if you could tell me what threats have evolved in 
insurance companies who just sell insurance or something like a 
mutual fund that just gets in a dollar and sends out a dollar, 
I would like to know what those additional threats are.
    Mr. Pinschmidt. Yeah, so let me clarify my comment. I was 
not--the Council has not designated any companies based on--any 
insurance companies based on straightforward insurance 
products.
    Senator Donnelly. Barney was the Chairman of the Committee 
that helped write the legislation.
    Mr. Pinschmidt. Yeah, but what I would say, you know, 
pointing to the three designations for insurance companies, 
none of those designations were made based on straightforward 
insurance activities.
    Senator Donnelly. OK. I am just saying when you look at 
this, the hard part to understand is: How can you avoid a 
systemically important designation, how can you make sure you 
do not wind up with that if they do not know what the rules 
are, if you do not know what the judgment is going to be of how 
these are determined? And so if you are running a business, you 
cannot make decisions unless you know what the rules of the 
road are. And for the FSOC not to let them know, it just makes 
no sense to me.
    Mr. Pinschmidt. Look, I agree with you that it is very 
important to let companies and let industries know how they are 
being evaluated. And I think certainly the nonbank designations 
rulemaking that was done in 2012 reflected three rounds of 
public comment, including comments by industry folks about the 
standards the Council is looking at in Stage 1, Stage 2, and 
Stage 3. And that process worked for the companies the Council 
designated, but it was only natural to sort of step back and 
say, well, look, we have gone through this process with a few 
companies, there are areas to improve it, to improve the 
information flow from the Council to companies, and that is why 
the Council----
    Senator Donnelly. I just want to make two other points. 
This is not just about mutual fund companies or insurance 
companies. What happens is so you run a small business, and you 
set up a 401(k), and you send your money to the mutual fund 
company, and you hope that you get a decent return so you can 
retire and you can have a nice little condo, have a chance to 
go fishing on the dock, and enjoy life and see your grandkids. 
Your annual return is going to be less each year if a portion 
of the money you send in to that mutual fund company has to be 
set aside because they have been designated as systemically 
important, and all of a sudden there is less money. This is 
about the ultimate family at the end of the day. It is not so 
much just about the mutual fund company. It is about their 
customers, the millions and millions and millions of Americans 
that our job is not make it so that their return winds up to be 
lower at the end of the day. If it is just as safe and they can 
get a higher return, what are we doing?
    Mr. Pinschmidt. So I think two things on that point. The 
Council is not focused on individual mutual funds in terms of 
the designation, and I think there is also--I do not think 
anybody would want to see, if there was an issue with a 
designation, that bank-like standards would be imposed on 
certain nonbank companies that do not have bank 
characteristics. So I think some of the studies out there that 
sort of hypothesize as to what the consequences of designation 
would be are based on faulty data and I think, frankly, just do 
not reflect the record in terms of where the Council is 
focusing. They are focusing on products and activities, not 
individual entities within the mutual fund space.
    Senator Donnelly. And then the last question I will ask is 
this: If you are company and you do not know what the rules 
are, and then the rules finally come out and you get told, OK, 
you are now going to be designated as systemically important, 
do they have a grace period to try and get a fix so that the 
areas that you do not want them in they can get out of?
    Mr. Pinschmidt. So I think----
    Senator Donnelly. Because if you do not know the rules and 
then you are told, well, this part is what does not work for 
us, if I was running a business, I would say, OK, give me a 
month or two, let me get that squared away so I will not be in 
it anymore.
    Mr. Pinschmidt. Look, the Council endeavors to be very 
transparent regarding the factors that it is looking at. I 
mean, a lot of it is spelled out in terms of the nonbanks 
process, and it has been improved upon by the supplemental 
procedures in February.
    To the extent companies are not aware of what they are 
being looked at, there is an opportunity for them to engage in 
a dialogue and answer questions.
    Senator Donnelly. But wouldn't it also be incumbent on you 
to let them know these are the areas we are looking at, to make 
it public to everybody?
    Mr. Pinschmidt. There should be no surprises in terms of 
what the factors are and how the Council is looking at 
individual industries or more generally specific companies. But 
the framework for that--a lot of that is public.
    Senator Donnelly. OK. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Donnelly, and thank you 
for being here with us, Mr. Pinschmidt. As you can see, there 
is a lot of interest on the Committee about getting this right, 
and I know you have given us a lot of assurances that the 
process needs to be given a chance to play out and see how it 
works, that we will be focusing on it very carefully.
    It just seems to me that at Stage 2, which is now open and 
publicly engaged in, we ought to be able to very quickly see 
the companies and the FSOC be able to come to an understanding 
of what the issues and activities and risks are that are being 
evaluated and be able to engage in analysis and discussion 
about how to deal--first of all, how to analyze those risks and 
those activities to determine whether there is a systemic risk; 
and, B, understand what the FSOC's conclusions are as they move 
along so that options for addressing it can be engaged in. It 
seems to me that would be a much more positive outcome for the 
economy, for the ultimate consumer, and, frankly, for the 
country and the individual companies.
    So I encourage you to take these concerns back to the FSOC 
folks and let them know that there really is a high level of 
concern here about whether we have got it right. And most 
importantly, we want to get to the transparency and to the 
right outcomes. And if it takes more legislation to do that, 
then we want to know how to get it right.
    In any event, we appreciate you taking the time to be here 
with us today. I am sure there will be follow-up from Members 
of the Committee. I would appreciate it if you and your office 
would respond promptly if there are follow-up questions.
    Mr. Pinschmidt. Absolutely. Thank you.
    Chairman Crapo. Thank you. This hearing is adjourned.
    [Whereupon, at 11:28 a.m., the hearing was adjourned.]
    [Prepared statement supplied for the record follows:]
                PREPARED STATEMENT OF PATRICK PINSCHMIDT
  Deputy Assistant Secretary, Financial Stability Oversight Council, 
                       Department of the Treasury
                             July 22, 2015
    Chairman Crapo, Ranking Member Warner, and Members of the 
Subcommittee, thank you for inviting me here today to discuss the 
Financial Stability Oversight Council's (Council) process for nonbank 
financial company designations.
    The financial crisis taught us that we need clear accountability 
for the overall stability of the financial system. Five years ago this 
month, Congress responded with the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Wall Street Reform), which established the 
Council. The creation of the Council brought together, for the first 
time, the entire financial regulatory community with a collective 
responsibility to work together to identify and respond to potential 
threats to financial stability. This new mission required regulators to 
break out of their silos to strengthen the stability of the U.S. 
financial system.
    Over the past 5 years, the Council has demonstrated a sustained 
commitment to working collaboratively to fulfill its statutory mission 
in a transparent and accountable manner. We built a new organization 
and developed strong working relationships among Council members and 
their staffs to provide a forum for candid conversations; share 
confidential, market-sensitive information; and ask tough questions 
that will help make our financial system safer.
    Today, the Council convenes regularly to monitor market 
developments, to consider a wide range of potential risks to financial 
stability, and, when necessary, to take action to protect the American 
people against potential threats to the financial system. Our approach 
from day one has been data-driven and deliberative, while providing the 
public with considerable information regarding the Council's actions 
and views. The Council fosters interagency engagement on a daily basis, 
including through staff-level committees that discuss financial market 
developments, regulatory policy developments, and emerging risk topics. 
The Council has published five annual reports that describe its past 
work and future priorities in great detail; regularly opened its 
meetings to the public; published minutes of all of its meetings that 
include a record of every vote the Council has ever taken; and 
solicited public input both on areas of potential risk and on its 
procedures for evaluating potential risks.
    As Secretary Lew has made clear, Council members recognize that the 
Council should be open to adapting its procedures when stakeholders 
raise good ideas. Just since last year, the Council has demonstrated 
this commitment by enhancing its transparency policy, strengthening its 
internal governance, adopting supplemental procedures to its nonbank 
financial company designations process, and soliciting public comment 
on potential risks from asset management products and activities.
    One of the duties Wall Street Reform gave to the Council is to 
designate a nonbank financial company for enhanced prudential standards 
and supervision by the Board of Governors of the Federal Reserve System 
(Federal Reserve), if the Council determines that the company's 
material financial distress or activities could pose a threat to U.S. 
financial stability. The Council's nonbank designations address a key 
weakness brought to light by the financial crisis: that large, complex, 
and interconnected nonbank financial companies, without appropriate 
supervision, could contribute to bringing our financial system to a 
halt.
    Since Wall Street Reform was enacted, the Council has designated 
four nonbank financial companies following a thorough, rigorous, and 
fact-based process with extensive engagement directly with each company 
and its regulators. Before considering any company for designation, the 
Council voluntarily adopted a rule and interpretive guidance in 2012, 
after soliciting three separate rounds of public comment, to provide as 
much transparency as possible regarding how the Council would evaluate 
companies. That guidance explains both the process that the Council 
follows for designations and the substantive framework for how it 
assesses risks.
    As a result of these efforts, each designated company had extensive 
opportunities to engage with the Council and its staff during the 
process and the opportunity to understand and respond to the factors 
underpinning the Council's analysis before the Council's vote on a 
final designation. These designated companies are now subject to 
consolidated supervision by the Federal Reserve, which is currently 
working to develop enhanced prudential standards for these companies, 
taking into account their specific businesses, risks, and existing 
regulation.
    Designating a firm is not a decision the Council takes lightly. 
Before making a final decision about any designation, the Council goes 
through a lengthy, multistage, in-depth analysis, during which it 
reviews every aspect of a company--including a company's financial 
statements, business activities, market dynamics, and existing 
regulation--and works with the company and its regulators to understand 
how the firm's financial distress could affect the broader financial 
system. The most recent designation followed a year and a half of 
engagement with the company. Most of the companies the Council has 
considered so far have not met the standard for designation. But in 
four cases, after considerable and thoughtful deliberation, the Council 
has found that a firm needs to be held to a higher standard to protect 
the U.S. financial system. Of the four firms the Council has 
designated, none were designated for a single reason--they are all 
large, interconnected, and complex firms.
    The Council's recent adoption of changes to the nonbank financial 
company designations process is a prime example of the way the Council 
should go about supplementing its processes without compromising its 
fundamental ability to conduct its work. Last year, before making any 
changes, the Council conducted extensive outreach with a wide range of 
stakeholders. The Council's Deputies Committee--senior staff who 
coordinate the Council's activities--hosted a series of meetings in 
November with more than 20 trade groups, companies, consumer advocates, 
and public interest organizations. The Council also solicited input 
from each of the three companies then subject to a designation. The 
Council discussed the findings from this outreach and proposed changes 
during a public meeting in January before subsequently adopting the 
procedures in February. Having the administrative flexibility for the 
Council to adapt its own procedures allowed us to respond quickly to 
stakeholder feedback.
    The supplemental procedures address the areas that stakeholders 
were most interested in and formalize a number of existing Council 
practices regarding engagement with companies. Under the new 
procedures, companies will now know early in the process where they 
stand, and they will have earlier opportunities to engage with and 
provide input to the Council. For example, the Council will notify a 
company when it first comes under active review and provide it with the 
opportunity to meet with staff, review the Council's primary sources of 
public information regarding the company, and provide information 
relevant to the Council's review. If a company advances to the next 
stage of review, staff will meet with the company to explain the 
evaluation process and the framework for the Council's analysis, as 
well as any specific issues identified.
    Regarding transparency, the changes will provide the public with 
more information about the process, while still allowing the Council to 
meet its obligation to protect sensitive, nonpublic company 
information. First, if a company publicly announces that it is under 
review by the Council, the Council intends, upon the request of a third 
party, to confirm the status of the company's review. Second, the 
Council will continue its recent practice of including more information 
in its public bases for designations, to provide the public with a 
deeper understanding of the Council's analysis. Third, the Council has 
started to publish more information in its annual reports about its 
designations work, including the numbers of companies in each stage of 
the review process. And fourth, the Council last month published 
further details explaining how staff calculate the quantitative 
thresholds that the Council applies as a screening mechanism to 
identify companies for consideration.
    The Council is also providing companies with a clearer and more 
robust annual review process. Company representatives are now provided 
an opportunity to discuss the scope and process for the review, and 
they can present information regarding any change that may be relevant, 
including a company restructuring, regulatory developments, market 
changes, or other factors.
    If a company contests its designation in an annual review, the 
Council will vote and provide the company with a written explanation of 
any decision not to rescind the designation. In addition, the Council 
will provide each designated company an opportunity for an oral hearing 
to contest its designation every 5 years. These changes open the door 
to more engagement with the Council following a designation to make 
sure there is ample opportunity to discuss and address any issues that 
a company wants to put before the Council.
    Altogether, the changes that the Council has made strengthen the 
Council while also addressing many of the suggestions made by 
stakeholders.
    As Congress contemplates additional changes to the designations 
process, it is important that such changes do not compromise the 
Council's fundamental ability to conduct its work. We are particularly 
concerned with legislative proposals that would dramatically lengthen 
an already long and deliberative designation process, impose 
insurmountable practical hurdles on the Council's work, and prevent the 
Council from taking action to address potential threats to financial 
stability that it has identified. Such proposals ignore the lessons of 
the financial crisis and would impede the Council's ability to fulfill 
the duties Congress gave it. As the President and Secretary Lew have 
made clear, we will not support legislation that weakens the important 
taxpayer, investor, and consumer protections by impeding the ability of 
regulators to identify and respond to threats to financial stability. 
U.S. markets and financial institutions are constantly evolving, and we 
must remain alert and responsive to new challenges in our dynamic 
system, toward the ultimate goal of maintaining the safety, soundness, 
and resiliency of our financial system.
    I thank the Subcommittee for the opportunity to discuss the 
Council's process for nonbank financial company designations and look 
forward to answering your questions.



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