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FSOC- Failing Stability and Oversight Completely

The FSOC has recently suffered a barrage of criticism from both sides of the political divide. The agency was established by Section 111 of Dodd-Frank, to distil the alphabet soup of agencies into a consistent policy sentence on systemic risk. Aided by its OFR research arm, the FSOC assigns “systemically important” status to firms whose “failure would threaten the financial stability of the United States”, then subjects them to enhanced controls and requirements including detailed resolution planning. Systemically-important status is a slightly more complimentary version of TBTF, a problem which only the terminally optimistic could regard as being within sight of a solution. The young agency has suffered from an ill-defined remit, and a multi-partisan voting structure that lends itself too readily to turf war tussles and the impotence consequent upon epic-scale bureaucratic infighting. Although it clearly failed the initial tests set by the recent MF Global and London Whale scandals, criticism had been relatively sporadic until recently.

Bi-partisan criticism was triggered by the OFR’s September 20113 publication of a controversial report on the systemic importance of asset managers. Five Democratic and Republican Senators signed a damning letter on January 2014. “The OFR Study mischaracterizes the asset management industry and the risks asset managers pose, makes speculative assertions with little or no empirical evidence, and in some places, predicates claims on misused or faulty information”, they go on to cite a lack of transparency and accountability, pointing to the report’s “”alarming dearth of accurate data”. The letter notes that the SIFI designation is “bank-centric” and “”ill-suited and unnecessary for funds and asset managers”.

On 2nd April 2014 SEC Commissioner Luis Aguilar widened the attack beyond the OFR to the FSOC itself. He described the report as subject to “near universal criticism”, noting that “the concerns voiced by commenters and lawmakers raise serious questions about whether the OFR’s report provides (an) adequate basis for the FSOC to designate asset managers as systemically important … and whether OFR is up to the tasks called for by its statutory mandate.” He states that the SEC “has no input or influence into” FSOC decisions and that the expertise of traditional regulators is routinely ignored. Commissioner Aguilar’s criticism is notable as being the first from a Democrat-aligned senior regulator, a group who generally remain silent on Dodd-Frank failings.

On 3rd April, Representative Scott Garrett introduced the FSOC Transparency and Accountability Act, stating that since its inception, “it has become increasingly apparent that the Financial Stability Oversight Council (FSOC), created by the Dodd-Frank Act, is in serious need of reform.  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.”  The Act’s intention is to remedy “some of the most egregious and indefensible concerns about transparency and accountability of this body” by subjecting the agency to: the (charmingly-named) Government in the Sunshine Act, to the Federal Advisory Committee Act and by widening its membership and voting structure.

Although “one ring to rule them all” may look good in theory, in reality it suffers from a severe check and balance shortage. The FSOC is both opaque and autocratic, lacks democracy and accountability and, at least to date, none of these failings has been redeemed by obvious competence.

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