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FSOC to Consider New Transparency and Process Measures

By Aaron Klein, Justin Schardin

Thursday, January 22, 2015

The Financial Stability Oversight Council (FSOC) met Wednesday and discussed recommendations from its staff designed to improve the council’s process for potentially designating financial institutions as systemically important financial institutions (SIFIs). The measures are aimed at increasing the transparency of FSOC’s communications and engagement with the firms under review and the broader public, as well as improving the clarity and substance of the designation process.

The FSOC is expected to consider adopting the proposed measures on or before its next meeting. FSOC Chairman and Treasury Secretary Jacob Lew, Federal Reserve Board Chair Janet Yellen and Securities and Exchange Commission Chair Mary Jo White all spoke in favor of the staff’s recommendations, particularly the ones designed to improve public transparency.

Although they only cover a portion of the concerns about FSOC, the proposed changes appear to be important steps in the right direction. Increased communication with companies under consideration should lead to more informed decision-making. Enhanced public transparency will increase the council’s credibility and give market participants more information on which to make decisions. The changes are also a sign that FSOC is listening to its critics. The measures result from a months-long review process in which FSOC engaged internally and externally with various stakeholders, including the Bipartisan Policy Center (BPC). The proposed changes include:

Improving engagement with companies being considered for designation: FSOC would notify companies when they reached “Stage 2” of the evaluation process, provide a list of information being considered by the council and allow those companies to directly engage with FSOC and staff of FSOC member agencies. Enhanced engagement would continue into the “Stage 3” portion of the evaluation process and would also increase engagement with a company’s current primary regulator. If a company is proposed for designation or designated, the council would grant any request for a hearing the company made.

Enhancing public transparency: FSOC would make public how its thresholds for “Stage 1” evaluation are calculated. In addition, FSOC would publicly release greater detail on its reasoning for any future SIFI designations. This continues a trend in which FSOC has given a more expansive public accounting of its public rationale for its successive designation of companies. If a company publicly states that it is being evaluated by FSOC for possible designation, the council would be able to confirm that. Previously, FSOC had refused to announce or confirm any company was at any stage until final designation had occurred.

Making the annual review process more meaningful:  FSOC would improve its engagement with an existing SIFI for its annual review to assess whether its SIFI status should be rescinded or not. If a company unsuccessfully appeals a decision in an annual review, FSOC would provide a detailed explanation of why it was rejected.

Taken together, the changes attempt to address many of the criticisms that FSOC has faced from Congress, industry and even some financial regulatory reform advocates. This includes BPC, which last fall in a report recommended that the council notify companies of when they have reached new stages of the designation process and increase its engagement with companies under review.

In fact, there has been no shortage of ideas of how to improve things. Over the last few months, BPC analyzed and summarized 56 core recommendations taken from 16 stakeholder proposals from regulatory reform advocates to financial industry groups. There were also five legislative proposals introduced during the 113th Congress. (View BPC’s overview and comparison of those proposals.) Those proposals address more issues than just FSOC transparency and process on non-bank SIFI designations and may be a guide to what issues will continue to be raised throughout the year.

Wednesday’s meeting is a sign that FSOC is both listening and responding to specific proposals to improve its process. Last fall, FSOC Chairman Lew publicly announced that the council was “committed to improving its effectiveness and engaging with the public” and that it “had asked council staff to continue its outreach to stakeholders and to report back to the council in the coming months so that the council can consider possible changes to its [designation] process.” Indeed, FSOC had begun examining potential reforms back in May 2014 when FSOC updated its transparency policy and released more detailed minutes, part of its stated commitment to conduct “its business in an open and transparent manner.” On Wednesday, the minutes released from FSOC’s December 18 meeting revealed even more detail – a welcome improvement that mirrored BPC’s recommendation for enhanced FSOC minutes in an earlier report.

Then, in July, FSOC staff began a listening tour with key stakeholders to better understand their concerns and ideas for improvements. In mid-November, FSOC’s Deputies Committee followed up by hosting a series of panel discussions at the Treasury Department with experts from industry, consumer advocacy groups and think tanks—including BPC—and actively soliciting their suggestions. The ideas generally fell into three main categories: improving public transparency; improving and strengthening engagement with companies during the designation process; and more clearly defining the de-designation process. Today’s decision to increase focus and add more process on SIFI de-designation is an important step as it remains unclear whether SIFI designation is a two-way street or a “Hotel California” process.

Overall, the changes represent significant improvements on the existing process, but they are unlikely to solve every problem or mollify all of FSOC’s critics. It is unclear if any of the measures will be modified before the Council adopts them, though they appear to be on a fast track for a vote. FSOC Chairman Lew said he hoped to do so at the council’s next meeting. That meeting has not yet been scheduled, but if history is a guide, FSOC is likely to meet again next month.

Aaron Klein can be reached at aklein@bipartisanpolicy.org and Justin Schardin can be reached at jschardin@bipartisanpolicy.org for additional comment.

KEYWORDS: CONGRESS, FEDERAL OPEN MARKET COMMITTEE, FEDERAL RESERVE BOARD, FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC), JACK LEW, JANET YELLEN, SECURITIES AND EXCHANGE COMMISSION (SEC), SIFIS