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House Committee Votes to Block SIFI Designations

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The House Financial Services Committee today reported to the House floor along party lines two bills that would effectively shut down the operations of the Federal Stability Oversight Council (FSOC) for at least the next year.

The bills were passed by a 32-27 party line vote today.

However, analysts give long odds that these bills will become law.

It responds to concerns by MetLife specifically, and the money management and mutual fund industries in general, that designation of firms in their sectors as systemically important would be harmful and could make these companies uncompetitive.

They were pushed through the committee by conservative members who believe in less regulation, led by Rep. Jeb Hensarling, R-Texas, chairman of the committee, and Rep. Scott Garrett, R-N.J., who heads the panel’s Capital Markets Subcommittee.

One bill, H.R. 4881, would bar the FSOC from designating any systemically significant financial institutions for a year.

The chief sponsor of that bill, Rep. Randy Neugebauer, R-Texas, chairman of the Housing and Insurance Subcommittee, said in support of it Thursday that “I strongly believe that FSOC’s structure and its process for designating systemically important firms are fatally flawed.”

He said that, “Rather than using data, history, and economic analysis to justify SIFI designations, FSOC has used far-fetched, highly speculative ‘worst-case scenarios’ to justify an aggressive expansion of regulatory power from Washington.”

And, Neugebauer added, recent evidence shows that rather than making its own determinations about the systemic significance of large U.S. non-bank financial institutions, the FSOC has instead rubber-stamped decisions made by the G-20’s Financial Stability Board.”

Rep. Maxine Waters, D-Calif., ranking minority member of the committee, railed against it during Thursday’s debate.

“Under the guise of concerns about transparency, Republicans want the FSOC to halt its work, even if it has identified a firm that poses a risk to the economy, a threat to my constituents who want to buy a house, a car, or simply purchase groceries at the store.  “No, this is not a good-faith effort to increase transparency, because ultimately my colleagues on the other side of the aisle want to end the FSOC altogether,” Waters added. 

The other bill, H.R. 4387, would allow all members of the commissions and boards represented on the FSOC — such as the Securities and Exchange Commission, the Federal Reserve, the Commodity Futures Trading Commission, and the National Credit Union Administration — to attend and participate in the FSOC’s meetings.

The bill also requires that before the principal of a Commission or Board represented on the FSOC votes as an FSOC member on an issue before the FSOC, the Commission or Board must vote on the issue, and the principal must follow that vote at the FSOC meeting.

The bill permits Members of the Committee on Financial Services and the Committee on Banking, Housing and Urban Affairs to attend all FSOC meetings, whether or not the meeting is open to the public.

In introducing the bill, Garrett said that, “The council meets in secret, refuses to disclose substantive transcripts, and blocks any requests by other regulators or Members of Congress for a more open and transparent process.” In April, Garrett was denied access to an FSOC meeting.

He noted the “tremendous changes” that the FSOC is considering in the way capital and credit are allocated and said “it is imperative these changes are not carried out in secret or behind closed doors.”

In debate on the bills Thursday, Waters said that Garrett’s bill politicizes membership by adding regulators’ commissioners and board members into the mix and that giving the committee members access to closed-door meetings on systemic risk might be unconstitutional. 

“We are not dealing with a good-faith effort to address many of the transparency concerns a bipartisan group of members have raised,” Waters said. “Rather, this is an effort by Republicans to make the FSOC decision-making impossibly difficult.”  

The bill’s immediate impact would likely be on the designation of MetLife as a systemically significant financial institution or SIFI. MetLife is in Stage III or the final stage, of the SIFI designation process. MetLife has been lobbying against designation as a SIFI for more than a year, and the FSOC has responded by slowing its decision-making process on MetLife to ensure it has all its ducks in a row before making a decision.

But, it would also impact money market mutual funds and money managers, who have been notified they are under scrutiny for possible designation as SIFIs.

The FSOC report noted that mortgage servicers and mortgage REITs are also being eyed for possible designation as SIFIs.

The FSOC already has designated three non-banks — American International Group, General Electric Capital Corp. and Prudential Financial, Inc. — as SIFIs.

The spotlight turned on money managers last September when an FSOC report prepared by the Treasury Department’s Office of Financial Research identified activities of 20 of the largest U.S. money managers as possible sources of risk.

And, at the annual meeting of the Investment Company Institute May 21, Paul Schott Stevens, president and CEO, said that designating mutual funds as SIFIs “would impair the single best tool available to average Americans for retirement saving and individual investment — as well as a key source of financing in our economy.”

Treasury Secretary Jacob Lew heads the FSOC, which was created by the Dodd-Frank financial services reform law. A spokesman for the Treasury Department declined to comment.