Financial Stability Oversight Council:

Further Actions Could Improve the Nonbank Designation Process

GAO-15-51: Published: Nov 20, 2014. Publicly Released: Nov 20, 2014.

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What GAO Found

The Financial Stability Oversight Council (FSOC) uses committees comprising staff from member agencies to help it evaluate nonbank financial companies and determine if they will receive enhanced supervision. FSOC has developed and followed a process for making determination decisions that is, in part, systematic and transparent. FSOC published a final rule and guidance that establish a three-stage process and an analytical framework for evaluating whether nonbank financial companies meet a statutory determination standard and for proposing and finalizing determinations. Generally, companies told GAO they were satisfied with FSOC's communication with them during the evaluation process.

Financial Stability Oversight Council's (FSOC) Designation Process

Financial Stability Oversight Council's (FSOC) Designation Process

However, GAO identified key areas in which FSOC could enhance the accountability and transparency of the designation process.

Tracking and monitoring. Federal internal control standards call for clear documentation of transactions and monitoring to assess the quality of performance over time. FSOC has not centrally recorded key processing dates, tracked the duration of evaluation stages, or collected information on staff conducting evaluations, such as the number or type of staff contributed by member agencies. Without such data, FSOC's ability to effectively monitor the progress and evaluate the quality and efficiency of determination evaluations is limited.

Disclosure and transparency. FSOC's transparency policy states its commitment to operating transparently, but its documentation has not always included certain details. For example, FSOC's public documents have not always fully disclosed the rationales for its determination decisions. The lack of full transparency has resulted in questions about the process and may hinder accountability and public and market confidence in the process.

Scope of evaluation procedures. FSOC has evaluated how companies might pose a threat to financial stability using only one of two statutory determination standards (a company's financial distress, not its activities). By not using both standards when appropriate, FSOC may not be able to comprehensively ensure that it has identified and designated all companies that may pose a threat to U.S. financial stability.

Making FSOC's designation process more systematic and transparent could bolster public and market confidence in the process and also help FSOC achieve its intended goals.

Why GAO Did This Study

FSOC has authority to designate systemically important nonbank financial companies for enhanced supervision by the Board of Governors of the Federal Reserve System. GAO was asked to review these designations because they may have significant implications for the companies as well as the stability of the financial system. This report examines how FSOC has managed the designation process to date and the extent to which FSOC's process has been transparent and systematic, among other objectives.

GAO analyzed FSOC documents, including the final rule and guidance on the designation process, bylaws, and nonpublic documentation supporting determination decisions. GAO also collected data about FSOC members' participation in determination evaluations and interviewed FSOC staff, FSOC members and their staffs, officials of evaluated companies, and external stakeholders, including industry groups.

What GAO Recommends

GAO makes several recommendations to help enhance the accountability and transparency of FSOC's determination process, such as tracking key evaluation information, including additional details in public documentation about the rationale for determination decisions, and establishing procedures to evaluate companies under both statutory determination standards. Treasury neither agreed nor disagreed with the recommendations but said (in its capacity as Council chair) that FSOC would consider the recommendations.

For more information, contact Lawrance L. Evans, Jr. at (202) 512-8678 or EvansL@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: FSOC has created a document to track agencies participating in evaluations and has said that it will record and monitor information as new companies are evaluated. Although FSOC has created a template to record agency participation, FSOC still needs to collect and monitor such information including information on the agency staff participating in determination evaluations.

    Recommendation: To improve FSOC's control activities and help ensure that it better manages its determination process and achieves intended results, the Secretary of the Treasury, in his capacity as the Chairperson of FSOC and in consultation with FSOC members, should systematically record the staff contributing to determination evaluations, and monitor such information to help assess the progress and efficiency of determination evaluations..

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  2. Status: Closed - Implemented

    Comments: In February 2015, FSOC issued supplemental procedures for nonbank financial company designations that identified FSOC's practices for engaging with companies during evaluations for potential determination and during annual reevaluations. The procedures describe the opportunities that exist for companies to meet with Council members and staff. Specifically, the procedures state that (1) analytical team staff will now meet with the company's representatives at the start of Stage 3, (2) the Council's Deputies Committee will grant a request to meet with a company in Stage 3, and (3) the Council intends to grant any timely request for an oral hearing from a company subject to a proposed determination and for any such hearing to be conducted by the Council members. These clarified procedures will address our recommendation to enhance disclosure and strengthen transparency of the designation process.

    Recommendation: To enhance disclosure and strengthen transparency, the Secretary of the Treasury, in consultation with FSOC members, should document and publicly disclose FSOC's practices regarding the circumstances under which companies undergoing Stage 3 evaluations can interact with FSOC deputies or principals. For example, FSOC's practices could be documented in writing, such as in its bylaws, notices to companies, or in the Nonbank Designations FAQ section on FSOC's website, and include whether, when, and on what terms companies can access deputies and principals beyond the formal hearing process.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  3. Status: Open

    Comments: FSOC stated that it intends to include more detail in its public basis document while meeting its legal obligations to protect confidential information. In February 2015, FSOC issued supplemental procedures for nonbank financial company designations that stated its commitment to continuing to set forth sufficient information in its public bases to provide the public with an understanding of the Council's analysis while protecting sensitive, confidential information submitted by the company to the Council. FSOC's public basis document for its most recent designation, issued on December 18, 2014, included additional information compared to prior basis documents. However, the recent basis document did not fully explain how FSOC concluded that the company's characteristics were sufficiently large or significant enough, or had other attributes, to meet a determination standard.

    Recommendation: To enhance disclosure and strengthen transparency, the Secretary of the Treasury, in consultation with FSOC members, for future determinations, to the maximum extent possible, should include additional details in its public basis documentation about why FSOC determined that the company met one or both of the statutory determination standards. Specifically, in addition to identifying that the size, significance, or other attributes of the company's characteristics could pose a threat to U.S. financial stability, FSOC should explain--without revealing sensitive information--how it concluded that the characteristics were sufficiently large or significant enough, or had other attributes, to meet one or both of the statutory determination standards.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  4. Status: Open

    Comments: FSOC conducted a review of its nonbank designation procedures, including consideration of this recommendation, which resulted in issuance of supplemental procedures in February 2015. FSOC stated that it has not adopted formal changes to implement this recommendation but noted that the Council will continue to work to identify and evaluate potential changes to its practices and procedures and will revisit this recommendation in mid-2016.

    Recommendation: To help ensure that FSOC is comprehensively identifying and considering companies, the Secretary of the Treasury in consultation with FSOC members, should establish procedures to evaluate companies in Stage 2 and Stage 3 under both statutory determination standards when an evaluation in either stage concludes that a company does not meet one of the standards, or document--on a company-specific or more general basis--why the second determination standard is not relevant for determination evaluations.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  5. Status: Open

    Comments: FSOC staff are currently reviewing potential ways to supplement the existing public and regulatory information available to identify companies for evaluation in Stage 1. FSOC stated that it will revisit this recommendation in mid-2016.

    Recommendation: To help ensure that FSOC is comprehensively identifying and considering companies, the Secretary of the Treasury in consultation with FSOC members, should develop a process to collect information necessary for Stage 1 analysis, as appropriate, from certain nonbank financial companies for which public or regulatory information is otherwise unavailable. For example, FSOC could have companies for which such information is unavailable and that meet certain characteristics (such as quantitative thresholds similar to those used in Stage 1) report necessary information to the Office of Financial Research.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

  6. Status: Open

    Comments: FSOC has created a document to centrally track key dates in each evaluation and has said that it will record and monitor the information as new companies are evaluated. However, FSOC has not yet recorded these dates in the document that it has created for this purpose.

    Recommendation: To improve FSOC's control activities and help ensure that it better manages its determination process and achieves intended results, the Secretary of the Treasury, in his capacity as the Chairperson of FSOC and in consultation with FSOC members, should systematically record the dates of key process steps.

    Agency Affected: Department of the Treasury: Financial Stability Oversight Council

 

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