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GAO Releases Report on Nonbank Designation Process

The Government Accountability Office released a report (summary) suggesting further actions that the FSOC could take to improve the nonbank designation process. The GAO suggested that the FSOC should better track and record data so that it can better analyze the performance of the designation process. The GAO further indicated that the current tracking and record keeping methods do not comport with federal internal control standards. For example, the report noted that the FSOC does not have data on which staff participated in each particular company’s evaluation.

The report also suggested that the FSOC improve transparency in the designation process by disclosing more information in public documents and by including additional detail in non-public documents. The GAO noted that in the public documentation “included only a small portion of the information and analysis in its nonpublic documentation” for each of the three final determinations released thus far, and that the nonpublic versions included publicly available information that was not released in the public versions. However, Treasury officials responded that they sought to include key issues in the public versions of documentation while avoiding giving the public the opinion that the public data represented the entirety of the information considered in the designation process.

The FSOC has the authority to designate a nonbank financial company where it finds that “(i) material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States . . . or (ii) the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company could pose a threat to the financial stability of the United States.” However, the GAO found that, even in the case of companies that were not advanced to Stage 3, the FSOC has only evaluated companies using the material financial distress standard, and not whether the companies’ activities could pose systemic risks. The report suggested that by utilizing only one method, the “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.” Citing another potential gap, the GAO noted that the Office of Financial Research’s analysis of companies in Stage 1 only utilizes public information, leading to the omission of at least two private companies from consideration and only allowing examination of information of certain subsidiaries of a parent company in other cases. In response, the OFR noted that it is working to integrate the SEC’s newly required data on private funds into its Stage 1 analysis, though the GAO noted that the additional data would not alleviate its concerns for other types of nonbank companies.

The report also provided insight into the staffing provided by constituent agencies for the designation process. The report showed and indicated that the Federal Reserve contributed the most staffers (25 individuals or 28% of staff in 2014, down from 37% in 2012) to the analytical work of the Nonbank Designations Committee, a staff level functional committee that conducts the evaluations of nonbank entities. The SEC increased its contribution of staffers to the analytical work in 2014 with 12, up from zero in 2012. The report notes that the evaluations were typically co-led, and that staffers from the Federal Reserve, the Treasury, the Federal Insurance Office, and staff associated with the FSOC’s independent member with insurance expertise had led Stage 3 evaluations as of July 2014. The GAO’s data shows that the SEC led four Stage 2 evaluations, though the names of the evaluated companies are not listed in accordance with FSOC policy to refrain from announcing the names of companies under evaluation prior to a final determination.

The GAO reported that, in June 2012, FSOC used public and regulatory data to determine that fewer than 50 nonbank financial companies met qualifications for Stage 2 of the designation process. Subsequently the FSOC initiated further evaluations on 14 of those 50 companies and completed the Stage 2 evaluation for 8 of those companies. Three of the 8 advanced to Stage 3 and were subsequently designated strategically important (AIG, GE Capital, and Prudential), while the FSOC determined that 5 of the companies did not warrant further evaluation. The report notes that the FSOC is still evaluating 5 companies, one of which has received a proposed designation (MetLife).

The GAO released another report in September that suggested changes in the FSOC’s processes related to “emerging threats and risks identification, transparency and accountability, and collaboration and coordination.”