Financial Stability Oversight Council: Further Actions Could Improve the Nonbank Designation Process
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
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.
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.
Recommendations for Executive Action
|Financial Stability Oversight Council||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..||
Although FSOC has not reviewed any companies in Stage 2 or 3 since GAO issued its report, in February 2018 FSOC staff stated that FSOC was committed to tracking information on agencies participating in evaluations. They provided us with a document they created that they intend to use to record and monitor this information as new companies are evaluated. The use of this document should strengthen FSOC's control activities and management of the evaluation process.
|Financial Stability Oversight Council||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.||
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.
|Financial Stability Oversight Council||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.||
FSOC has taken several actions to include more detail in its public basis documents while also protecting 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 confidential information submitted by the company to the Council. FSOC has increased the amount of information in its public disclosures regarding designation-related decisions. Specifically, in September 2017, FSOC released a comprehensive basis statement explaining FSOC's determination to rescind a company's designation. The document had minimal redactions that FSOC staff said were made to protect the confidentiality of sensitive business information. In addition, FSOC's public basis for an earlier designation rescission (June 2016) included significantly more detail than the public basis for designating the firm. Also, FSOC's public basis document for its most recent designation (December 2014) included additional information compared to prior basis documents.
|Financial Stability Oversight Council||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.||
In December 2019, FSOC adopted final interpretive guidance that revises its approach to evaluating and determining whether to designate nonbank financial companies. The final revised guidance prioritizes an activities-based approach to identifying and addressing potential risks to financial stability and states that FSOC will pursue company-specific determinations only if the activities-based approach is not sufficient. The guidance further states that if FSOC does consider a company-specific determination, its evaluation will focus primarily on the first determination standard. The guidance does not indicate the establishment of procedures to evaluate companies under both determination standards for the purpose of comprehensively identifying and considering companies or to document why the other standard is not relevant. We will continue to monitor FSOC's implementation of the guidance and any additional actions that may be responsive to our recommendation.
|Financial Stability Oversight Council||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.||
In December 2019, FSOC adopted final interpretive guidance that revises its approach to evaluating and determining whether to designate nonbank financial companies. The final revised guidance introduces a new stage 1 of the designation process in which FSOC would notify a nonbank financial company under review and consider available public and regulatory information. While the guidance states that a company under review in stage 1 may submit information it deems relevant to the evaluation, FSOC would not require the company to submit information during stage 1. We will continue to monitor FSOC's implementation of the revised guidance and any additional actions that may be responsive to our recommendation.
|Financial Stability Oversight Council||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.||
Although FSOC has not reviewed any companies in Stage 2 or 3 since GAO issued its report, in February 2018, FSOC staff stated that FSOC was committed to tracking key dates in each evaluation. In addition, FSOC staff created a document to centrally collect this information and said that FSOC will record and monitor the information as new companies are evaluated. The use of this document should strengthen FSOC's control activities and management of the evaluation process.