On November 19, Robert Hockett, the Edward Cornell Professor of Law at Cornell Law School, testified before the U.S. House Financial Services Committee's Subcommittee on Investigations. Appearing with Professor Hockett were Professor Jon Macy of Yale Law School, Professor Hal Scott of Harvard Law School, and Adam White of the Hoover Institution of Stanford University. The subject of the hearings was "Oversight of the Financial Stability Oversight Council: Due Process and Transparency in Non-Bank SIFI Designations."
The Financial Stability Oversight Council, or "FSOC," is one of the signature creations of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It brings together the heads of all of the nation's principal financial regulators, along with the secretary of the treasury, the chairman of the Federal Reserve Board, and representatives of some state regulators. Among its functions are to identify risks to the systemic financial stability of the United States, as well as certain systemically important financial institutions ("SIFIs") that it finds will raise such risks unless made subject to enhanced prudential regulation.
In recent years, the FSOC has singled out several nonbank financial companies for SIFI designation, three of them insurance companies - American Insurance Group, Prudential, and MetLife. MetLife has objected to its SIFI designation and brought suit against the FSOC in federal court. The resulting litigation has drawn the attention of some members of Congress, who have shown sympathy for MetLife's claims that the FSOC's SIFI designation process violates constitutional due process rights and separation of powers.
Professor Hockett was the one witness invited to defend the constitutional and administrative propriety of FSOC's SIFI-designation procedures. FSOC, he maintained, represents a pragmatic, incrementalist, and entirely familiar solution to two dilemmas posed by the project of financial regulation.
The first dilemma is how to reconcile the need for responsive and efficient governance with constitutional constraints. This dilemma, Hockett noted, is anything but new; it has been with us since the late 19th century, when the nation's economy began to grow much too complex, far-flung, and dynamic to be adequately managed by the Congress, courts, and president alone. The solution that we reached through court decisions, he went on, is now embodied in the Administrative Procedure Act, to which all FSOC actions clearly conform.
The second dilemma facing financial regulation, Hockett noted, is of much more recent vintage than the first. This is how to reconcile what he called "regulatory depth" with "regulatory breadth."
Since the 1980s, Hockett noted, national and global financial markets have undergone dramatic forms of convergence-functional and institutional alike. Functional convergence has seen once categorically distinct kinds of financial institutions (e.g., commercial banks and insurance companies) offering financial products and engaging in financial transactions that look more and more alike where their term structures and associated risks are concerned. Institutional convergence, for its part, has seen once regulatory segregated kinds of financial institutions (e.g., commercial banks and securities firms, or, once again, insurance companies) affiliate with one another under single holding company structures.
The problem posed by these forms of convergence, Hockett pointed out, was that our financial regulators continued to be "siloed" in ways that our financial institutions by 1999 no longer were, with insurance regulators competent to regulate only traditional insurance products, bank regulators not quite knowing what to make of "sweep accounts," and none of them attending to a financial system that is now much more than the sum of its parts. For this very reason, he continued, other jurisdictions had combined their finance regulators into single entities. The problem with this, however, was that these entities-Britain's Financial Services Authority being a case in point-sacrificed the specialized expertise that continued siloing like that in the United States enables.
The FSOC, Hockett argued, permits us to have things both ways. It allows for continued functional specialization among regulators on the one hand (for as long as functional distinctions remain between previously more radically distinct financial institution types), while also allowing for cooperative development of a single, coherent regulatory picture of the financial system as a whole on the other hand. The FSOC's SIFI designation process, Hockett observed, shows this synthesis in action. Within it, the nation's top financial regulators are able cooperatively to grapple with precisely what causes nonbank institutions to be bank like in their systemic risk profiles, and precisely what doesn't.
In sum, then, Hockett argued that in view of its new and still-experimental character, it would be surprising were the FSOC not to prove improvable in future years as it develops its capacities to fulfill its functions. "Its administrative modus operandi and constitutional legitimacy, on the other hand," he says "are altogether familiar and quite beyond cavil."