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From Banking and Finance Law Daily, July 25, 2014

Lawmakers push ‘pragmatic’ bill to bolster financial stability oversight

By Katalina Bianco, J.D.

A bipartisan faction of legislators has introduced legislation intended to reform the Financial Stability Oversight Commission and Office of Financial Research, two of the regulatory agencies established under the Dodd-Frank Act to identify potential risks to financial stability, in part by designating institutions that pose a high systemic risk as systemically important financial institutions (SIFIs).

The legislation, the Financial Stability Oversight Council Improvement Act (H.R. 5180), was introduced by Reps. Dennis Ross (R-Fla), member of the House Financial Services Committee, John Delaney (D-Md), Spencer Bachus (R-Ala), Kyrsten Sinema (D-Ariz), Patrick Murphy (D-Fla), and Blaine Luetkemeyer (R-Mo). The legislators maintain the measure is necessary because of failings in the Dodd-Frank Act.

“Unfortunately, it has become increasingly evident that aspects of [Dodd-Frank] are not working as promised,” Ross said. “FSOC and OFR are agencies that were established to identify potential risks to our nation’s financial stability but they have been broadly criticized for their lack of transparency, flawed research, and inadequate designation process.”

Ross noted that decisions by the FSOC to designate a company as a SIFI affects not only the company but can increase costs for consumers. “For example, classifying an asset management company as a SIFI would likely raise the cost of investing and saving for American families, who use these services to save for their children’s education, retirement, and emergencies,” he said. Further, when a company is pegged as a SIFI, “it puts investors on the hook for a failing bank bailout,” added Ross. The lawmaker stressed that the legislation is intended to ensure that the FSOC determinations “are not laying the cost of extra red tape on the backs of American families.”

Bill particulars. H.R. 5180 would amend the Financial Stability Act of 2010 with the intention of improving FSOC/OFS transparency and agency processes. To that end, the measure would require that reports, studies, or analysis by FSOC and OFS be made public and an opportunity for comment provided before any revisions are made to final published analytic frameworks for making SIFI determinations. At each step of the determination process, notice to the institution being analyzed as a potentially serious threat, and therefore a possible SIFI, would be required and the institution be given the opportunity to rebut with written submissions. Two-thirds of the voting members would have to approve a resolution that identifies specific risks posed by the institution.

H.R. 5180 is “pragmatic legislation that clarifies agency processes, increases transparency and public accountability, improves communications between the industry and FSOC and creates additional paths to mitigate systemic risk,” said Delaney.

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