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Financial Planning > Behavioral Finance

House panel passes bill blocking FSOC actions

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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 the 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 would be harmful and could make these companies noncompetitive.

They were pushed through the committee by a leadership of 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 financial institution as systemically significant for a year.

The chief sponsor of that bill, Rep. Randy Neugebauer, R-Texas, chairman of the Housing and Insurance Subcommittee of the House FSOC, 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 (systemically significant financial institutions) 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 in all of the regulators’ commissioners and board members, and, in what may be considered unconstitutional, gives each member of this committee as well as our colleagues on the Senate Banking Committee a right to participate in closed door meetings related to systemic risk. 

“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.”  

At the same time, Rep. Bill Huizenga, R-Mich., offered and then withdrew an amendment Treasury that would require federal officials “to halt” negotiating European-centric, bank-like capital standards for internationally active U.S. insurers. This is consistent with a letter recently sent by 49 members of the House signed a letter demanding legislative and report language in a financial services appropriation bill that would require federal officials to stop negotiating any such agreements with international regulators.

Hensarling has twice called on the FSOC to “cease and desist” on SIFI designations until Congress learns more about the process.

The FSOC’s justification for its inquiries is contained in its 2014 annual report. It highlights the risks to the financial system posed by several nonbank financial services companies, which have continually drawn scrutiny from federal regulators

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


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