In November, FSOC finalized its guidance, originally proposed in April, that changes the process for designating nonbanks, which could include digital asset companies, asset managers and other types of financial institutions, as systemically important financial institutions, or SIFIs, and therefore placing them under Federal Reserve supervision. The guidance was finalized in tandem with a new framework for identifying, assessing and addressing risks to financial stability.
The new guidance will replace previous guidance, promulgated by the Trump administration in 2019, which focused on exhausting all alternatives before moving toward a SIFI designation. Those alternatives included an "activities-based approach" to addressing risk in the financial system — meaning FSOC often worked with other federal and state regulators to determine certain activities that might pose risks and took action to address them — and conducting a cost-benefit analysis to assess a company's likelihood of financial distress before turning to designation.
The new guidance will no longer take those steps, which some GOP lawmakers said is evidence of FSOC overstepping its authority.
In his questioning, Rep. Frank Lucas, R-Okla., specifically asked one of the witnesses to "outline the deviation between FSOC's new designation guidance with the statutory authority granted under the Dodd-Frank (Wall Street Reform and Consumer Protection) Act."
The new guidance "fails to emphasize the vulnerability of a company to material financial distress and instead simply emphasizes that a company might be significant or large," replied Bill Hulse, senior vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness.
Under the new guidance, the council has some "mandatory considerations" it must consider before making a SIFI designation, including "a company's leverage, off-balance-sheet exposures and importance as a source of credit," the final guidance states.
FSOC must also conduct a primary analysis, based on quantitative and qualitative information, to determine companies that may be subject to SIFI designation and give those companies a chance to respond. If the council moves forward with its process, then the selected company would discuss the issue with its primary regulator and FSOC, and an official designation would require a two-thirds vote from FSOC's 10 voting members.
"FSOC needs to tread very carefully when entertaining the idea of sidestepping Congress and congressional intent," Hill said. "FSOC designations here in my view are not the proper approach — a legislative fix is."
Some in the asset management industry have also pushed back on FSOC's new guidance, as they say the move toward easing SIFI designation was unwarranted.
House Majority Whip Tom Emmer, R-Minn., was adamant that FSOC "has morphed into a political weapon for the administrative state, circumventing congressional oversight and stifling American innovation."
As Emmer pointed out, FSOC is made up of several federal officials held accountable by Congress, such as Treasury Secretary Janet L. Yellen, who chairs the council; Federal Reserve Chair Jerome Powell; SEC Chair Gary Gensler; and Rostin Behnam, chair of the Commodity Futures Trading Commission. However, the council itself is "effectively immune to congressional oversight," Emmer said.
On Jan. 10, Emmer announced he reintroduced legislation that would subject FSOC to the annual appropriations process, giving Congress the authority to approve the budget for the council and its Office of Financial Research. The Financial Stability Oversight Council Reform Act, first introduced in 2015, would also create quarterly reporting requirements for OFR and mandate the office provide a 90-day comment period before issuing a report, rule or regulation.