By Kenneth E. Bentsen, Jr.
This morning, the Senate Finance Committee will consider Jack Lew’s nomination to be Treasury Secretary. As with any confirmation hearing, it is important that Senators ask probing questions of a nominee to determine how he or she will manage the department and its responsibilities they are being entrusted to run. As he is slated to occupy one of the most important cabinet positions in the Obama Administration, one topic Senators should ask of Mr. Lew is what his plans will be for chairing the Financial Stability Oversight Council (FSOC).
Created by the Dodd-Frank Act, FSOC is meant to be a coordinating body between the nearly dozen financial regulatory agencies to protect against systemic risks and ensure sufficient oversight of all markets and products within the industry.
Dodd-Frank grants the FSOC the responsibility to mediate and resolve differences and conflicts between regulatory agencies . With less than half of all of the rules required by Dodd-Frank completed, and many required to be promulgated by multiple agencies, it is critical that agencies do so in a coordinated fashion. Too often, this has not been the case and it is incumbent upon the FSOC to step up and ensure that these rules are better coordinated. Since the Treasury Secretary serves as the chair of the FSOC, ensuring cooperation and coordination should be a top priority for Mr. Lew.
In a series of papers commissioned by SIFMA last fall, Karen Shaw Petrou of Federal Financial Analytics analyzed the current state of the regulatory process and came to a concerning conclusion: that the lack of coordination in the regulatory process itself could create a systemic risk:
“There’s not a lot of [coordination] because agencies operate under different mandates, different objectives and thus often can’t agree even on desirable policy objectives, let alone all the details in their complicated rules. This not only delays rulemaking, but leads to widely differing rules within the U.S. that dramatically affect planning and compliance in diversified firms and exacerbate regulatory arbitrage.”
Indeed, a lack of coordination in several areas has already taken root. For example:
- Derivatives. With the CFTC and SEC sharing responsibility for rulemakings in the derivatives markets a noticeable lack of appropriate timing, sequencing and coordination between the regulators is creating uncertainty in the markets.
- Volcker. One of the most complicated rules mandated by Dodd-Frank, Volcker is in the process of being finalized by five different regulatory agencies (Fed, OCC, FDIC, SEC, and CFTC). Reports have already surfaced regarding the disagreements between prudential and market regulators. With such a complicated rule and its potential negative impact on markets, the FSOC is responsible for ensuring the final rule accomplishes the goals of Dodd-Frank, but does not harm market function or liquidity.
- Investor Protection. While the SEC has been authorized by Dodd-Frank to consider the implementation of a uniform fiduciary standard of care for individual retail investors, the Department of Labor continues to work on a proposal that could interfere and fundamentally be inconsistent with any SEC action.
The FSOC has the obligation, as deemed by Congress, to take charge and sort out conflicts, set priorities and move forward.
The Treasury Secretary has many critical responsibilities and priorities. Among those is serving as chair of the FSOC. This is an important topic worthy of discussion at a confirmation hearing.
Kenneth E. Bentsen, Jr.
Executive Vice President, Public Policy & Advocacy