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Remarks at AEI Conference on Financial Stability

Commissioner Michael S. Piwowar

Washington, DC

July 15, 2014

Thank you, Alex [Pollock], for that gracious introduction.  Your fine scholarship, and that of your colleagues at the American Enterprise Institute (“AEI”), has identified many of the fundamental problems with the Financial Stability Oversight Council (“FSOC”)[1] and has asked the insightful and imperative question of whether it actually can be effective in fostering financial stability in the United States.[2]  I appreciate that you are focusing attention today on that important topic, and I hope that my brief remarks will spur discussion that continues after we leave this room. 

I also want to thank Congressman Scott Garrett for his leadership in trying to bring accountability and transparency to the FSOC.  I will speak more about his efforts in a minute, but before I continue, I need to provide the standard disclaimer that the views I express today are my own and do not necessarily reflect those of the Commission or my fellow Commissioners. 

In preparing for this speech, I thought a lot about what moniker I could use to best describe the FSOC.  The Firing Squad On Capitalism.  The Vast Left Wing Conspiracy to Hinder Capital Formation.  The Bully Pulpit of Failed Prudential Regulators.  The Dodd-Frank Politburo.  The Modern-Day Star Chamber.  You get the point.  There are countless terms I could use that are appropriately pejorative and at the same time entirely accurate.  For the sake of clarity, I will stick with references to the two official nicknames of the FSOC – the “Council” or the “Unaccountable Capital Markets Death Panel.”

I note that the materials for this event describe the Dodd-Frank Act as “notorious.”  That is certainly true.  But we could use the same label for the Council, which has gained notoriety for, among other things, being unaccountable and non-transparent.  At least with the Dodd-Frank Act, however bad it is, what you see is what you get; unfortunately, the Council’s discussions and actions are being conducted largely in the dark.  Congressman Garrett, who you just heard from, has drafted a bill that would shine a light on the Council’s activities.[3]  I am wholly supportive of his bill, and I thank the Congressman for continuing to push the issue.  Within weeks of his bill being introduced, the Council “clarified” its transparency policy.[4]  That timing is surely no coincidence, and Congressman Garrett is to be congratulated for getting the Council to actually do what it had been representing for over a year was in the works.[5]  Nonetheless, the “enhancements,” which in actuality make only marginal changes to the Council’s processes, do not alleviate my concerns about the lack of visibility into the Council’s deliberations and decisions.  The policy still includes a non-exclusive list of reasons to close a Council meeting, which gives the Council members freedom to make subjective determinations of when it is not “possible” or “practicable” to keep a meeting open to the public.[6]

As many of you know, I have spent much of the last year trying to attend the Council’s meetings as a non-participating guest.[7]  I am very disappointed, but not surprised, that my requests have been rebuffed.  But the fact that Congressman Garrett, a Member of the House Financial Services Committee and Chairman of its Subcommittee on Capital Markets and Government-Sponsored Enterprises, is being shut out is shocking, appalling, and downright insubordinate.  Even if its proponents might act as if it is not the case, the Council is subject to Congressional oversight.[8]  In fact, Congress may be the only tempering force against the Council’s regulatory overreach.  I applaud the Congressman’s resolve in challenging the Council’s determination to remain unaccountable and potentially expand its jurisdiction to cover all financial actors.

I have far too many concerns about the Council to touch on all of them in the limited time we have.  In fact, compared to my list of concerns, the Colonists’ 27 grievances against King George III and Martin Luther’s 95 Theses protesting clerical abuses seem remarkably terse.  Today, I want to focus on two related issues – first, the outsized role the prudential regulators, and especially the Federal Reserve (“Fed”), play on the Council, and, second, the Council’s apparent disdain for non-banking subject matter expertise. 

A simple counting exercise shows that prudential regulators have four voting representatives on the Council, whereas the nonbank regulators each have one.[9]  To make matters worse, the Fed, on its own initiative, has expanded the prudential regulators’ four seats at the table to six.  In addition to the Fed Chairman, Fed Governor Daniel Tarullo and the President of the Federal Reserve Bank of New York (“New York Fed”), William Dudley, regularly participate in Council deliberations.[10]  That President Dudley contributes is particularly troubling, since the New York Fed is not even on the list of member agencies identified in the Dodd-Frank Act.[11]  No wonder Congressman Patrick McHenry called Governor Tarullo and the Fed the “alpha dog” of regulators working on the Volcker Rule at a recent Congressional hearing.[12]

I am particularly troubled by Governor Tarullo’s recent speech in which he unabashedly suggested that there is a “need to broaden the perimeter of prudential regulation, both to certain nonbank financial institutions and to certain activities by all financial actors.”[13]  Let me repeat that – all financial actors.  Governor Tarullo emphasizes the need for “macroprudential regulation,” which is a term that lends itself to bringing anything and everything into the prudential regulators’ scope.  Lest there be any confusion over the broad scope of “macroprudential regulation,” Governor Tarullo reiterated in a speech last month that “any firm whose failure could pose systemic risk is subject to prudential regulation, quite apart from its relationship with [insured depository institutions].”[14]  Governor Tarullo is clearly asserting the Fed’s “alpha-dog” role and issuing a call to action for the Council, which is the body that was formed to look at cross-sector threats to financial stability.  Ultimately, though, through a “macroprudential” approach the Fed would expand its reach by immediately pulling under its regulatory umbrella any firms designated as “systemically important financial institutions” (“SIFIs”).[15]

In its attempt to gain authority over capital market actors, the Fed, through the Council, has been ignoring the talent and skills of the hundreds of subject matter experts in each of the SEC’s rulemaking divisions – Investment Management, Corporation Finance, and Trading and Markets.  The prudential regulators on the Council have been proceeding as if they themselves are the ones who know securities markets and investment products best.  The most obvious example is the Council’s much-discussed hubris in releasing proposed recommendations regarding money market mutual fund reform.[16]  It would be comedic, if not in such a serious context, that it did so while publicly acknowledging that the SEC “is best positioned” to implement such reforms.[17]

Furthermore, at the direction of the Council, the Department of the Treasury’s Office of Financial Research (“OFR”) published a document last fall that laid the groundwork for subjecting the asset management industry to enhanced prudential standards and supervision.[18]  If the Council has done one good thing, it is that it took note of the public comments submitted to the SEC – the only agency to issue the study for comment[19] – which were overwhelmingly critical, and recently convened a conference that further explored the issues.[20]  If the Council was listening to the presentations at the conference, they will see what we at the SEC already knew and told the OFR (repeatedly) when reviewing drafts of the report – that asset managers are subject to an existing, robust regulatory regime that already imposes a measure of stability by providing strong investor protections and maintaining fair, orderly, and efficient markets. 

The SEC is not the only the Council member whose expert views are being dismissed.  The Council’s “independent member with insurance expertise”[21] voted against the designation of insurer Prudential Financial as a SIFI.[22]  One quote from his lengthy and sharply worded dissent most succinctly describes his position:  “[t]he underlying analysis utilizes scenarios that are antithetical to a fundamental and seasoned understanding of the business of insurance, the insurance regulatory environment, and the state insurance company resolution and guaranty fund systems.”[23]  This is yet another example of the Council refusing to rely on subject matter experts when making its decisions.  It turns out deference is not a word in the Council’s vocabulary. 

Let’s return to the role of the prudential regulators.  In the corporate realm, Governor Tarullo wants to consider how “special” corporate governance measures may contribute to an effective prudential regulatory system.[24]  They would be “special” indeed.  As one example, in a recent speech Governor Tarullo posits that we could supplement existing duties for financial firms and their directors to protect shareholders with “duties to further the public regulatory objective.”[25]  This would require amendments to the state corporate laws or the federal securities laws, which he acknowledges, but only as an afterthought.   

The SEC’s trading and markets expertise also is being marginalized.  In 2012, the Council made a recommendation regarding error control and risk-management standards for exchanges, clearing firms, and other market participants in a high-speed trading environment.[26]  More recently, the Federal Reserve Bank of Chicago published a senior policy advisor’s working policy discussion paper, which makes recommendations for equitable trade allocation in a high-speed trading environment.[27]  Equity market structure is an incredibly important issue, and I have been a champion of a comprehensive review of market structure.[28]  But that effort should be led by the SEC.  In fact, Chair White has asked the SEC Staff to consider whether changes to our regulatory structure for equity markets are needed, and to make recommendations for Commission action.[29]  If the Council or the Fed has any views, I encourage them to submit letters to any public comment files the Commission may open on particular market structure initiatives.  I assure you that we will give their comments the consideration they deserve. 

With the Council’s steady march, led by its self-appointed “alpha dog” – the Fed – into areas that are solely within the SEC’s jurisdiction, I am concerned that our mission to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation is being compromised.[30]  I am resolved to defend our jurisdiction from the prudential regulators’ Council-enabled turf war, but the prudential regulators are mounting a coordinated behind-closed-doors assault that is currently six times the size of our defensive team.  That is why I will continue to fight for more SEC representation – and less prudential regulator representation – in deliberations of the Council.  That is why I will continue to support Congressman Garrett’s determined efforts to make the Council accountable and transparent.  That is why I am extremely delighted to be here today as part of AEI’s continued efforts to shine a light on the Unaccountable Capital Markets Death Panel’s activities.

I could say a lot more, but I will stop here and thank you for your attention.  I understand we have a few minutes for questions, and I am happy to answer as many as time will allow.

[1] The Financial Stability Oversight Council was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act ( “Dodd-Frank Act”).  Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[2] See, e.g., Alex J. Pollock, The Financial Stability Oversight Council’s Fatal Flaw, The American Magazine (Oct. 27, 2012), available at; Peter J. Wallison, What the FSOC’s Prudential Decision Tells Us About SIFI Designation, AEI Financial Services Outlook (Mar. 2014), available at  The Pollock article also identifies the Federal Reserve as the biggest Systemically Important Financial Institution (“SIFI”) in the world, which is a sentiment that I echoed last fall.  See Commissioner Michael S. Piwowar, Remarks before the U.S. Chamber of Commerce, Advancing and Defending the SEC’s Core Mission (Jan. 27, 2014), available at        

[3] Financial Stability Oversight Council (FSOC) Transparency and Accountability Act, H.R. 4387, 113th Congress (2013-2014) (introduced Apr. 3, 2014 and approved by the House Committee on Financial Services on June 20, 2014).  The bill also would make improvements to other aspects of the Council construct.  In the Senate, there have been additional calls for FSOC transparency.  For example, Senator Mike Crapo has argued that the Council’s SIFI designation process should be more clear and measurable.  See, e.g., Executive Session to Vote on Nominations, and the Financial Stability Oversight Council Annual Report to Congress: Hearing Before the Senate Committee on Banking, Housing, and Urban Affairs (June 25, 2014) (Senator Crapo Opening Statement), Hearing Webcast available at   See also Letter from Senator Mike Crapo to The Honorable Gene L. Dodaro, Comptroller General, Government Accountability Office (July 15, 2013) (requesting that the GAO examine FSOC’s designation process), available at

[4] Transparency Policy for the Financial Stability Oversight Council (amendments approved on May 7, 2014), available at

[5] An amendment to the transparency policy was being considered in early 2013, yet it had clearly gone nowhere.  See GAO Assessment of the FSOC and the OFR:  Hearing Before the House Committee on Financial Services, Subcommittee on Oversight and Investigations (Mar. 15, 2013) (written testimony of Deputy Assistant Secretary for the FSOC Amias Gerety, indicating that the Council’s Deputies Committee was going to consider recommending changes to the transparency policy), available at

[6] See supra note 4. 

[7] See Piwowar Remarks before the U.S. Chamber of Commerce, supra note 2. 

[8] FSOC’s website acknowledges certain, but not wholesale, accountability to Congress.  Specifically, the Council “is held accountable to Congress through the publication of an annual report and testimony provided by the Chairperson on the FSOC’s activities and emerging threats to financial stability.  Moreover, the Council reports to Congress as appropriate on particular topics.”  (emphasis added)  See

[9] The Dodd-Frank Act designates the following representatives of prudential regulators as voting members of the Council: the Chairman of the Board of Governors of the Federal Reserve System (“Fed”), the Comptroller of the Currency, the Chairman of the Federal Deposit Insurance Corporation, and the Chairman of the National Credit Union Administration Board.  The other voting members of the Council are the Secretary of the Treasury (as Chairman of the Council), the Director of the Consumer Financial Protection Bureau, the Chair of the Securities and Exchange Commission (“SEC” or “Commission”), the Chairman of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency, and an independent member with insurance experience.  See Dodd-Frank Act §111(b). 

[10] Of the last ten Council meetings, Governor Tarullo attended all ten, and President Dudley attended (sometimes telephonically) nine.  See FSOC Meeting Minutes, available at  

[11] See Dodd-Frank Act §111(b).  See also Letter from Congressman Scott Garrett to William Dudley, President of the Federal Reserve Bank of New York (July 9, 2014) (expressing concern that a non-member of the Council may be exerting undue influence on SIFI designations), available at

[12] See The Impact of the Volcker Rule on Job Creators, Part II: Hearing Before the House Committee on Financial Services (Feb. 5, 2014) (Congressman Patrick McHenry’s statements included:  “In previous hearings I have asked who the lead regulator is when it comes to Volcker, and I just figured it out today – Governor Tarullo, it is you and it is the Federal Reserve. … I guess when you have five big regulators – independent regulators – sitting on the same panel, there ends up being an ‘alpha dog,’ and Governor Tarullo, today that is you.”), Hearing Webcast available at

[13] See Governor Daniel K. Tarullo, Speech at the Federal Reserve Bank of Chicago Bank Structure Conference, Chicago, Illinois (May 8, 2014) (emphasis added), available at

[14] See Governor Daniel K. Tarullo, Remarks at Association of American Law Schools Midyear Meeting, Corporate Governance and Prudential Regulation (June 9, 2014), available at

[15] Pursuant to Section 113 of the Dodd-Frank Act, a nonbank financial institution designated as a SIFI shall be supervised by the Fed and shall be subject to prudential standards.

[17] See Five Questions on the FSOC’s Proposed Recommendations for Money Market Mutual Fund Reform (Nov. 27, 2012), available at

[18] See OFR, Asset Management and Financial Stability (Sept. 2013), available at

[19] See Press Release, Public Feedback on OFR Study on Asset Management Issues, available at  Comments are available at

[20] See Press Release, FSOC, FSOC Hosts Public Conference on Asset Management on Monday, May 19 (May 13, 2014), available at

[21] There is no federal agency with a primary focus on regulating insurance companies.

[22] The Council issued a Resolution Approving Final Determination Regarding Prudential Financial, Inc. by a vote of seven to two, with the Acting Director of the Federal Housing Finance Agency and the independent member with insurance expertise dissenting.  See  A State Insurance Commissioner who is a non-voting member of the Council also issued a statement critical of the designation.  See id.

[23] Id.  The non-voting State Insurance Commissioner made a similar point:  “The analysis contained in the basis for the final determination in large part relies on nothing more than speculation.  It gives little weight, if any, to evidence in the record, the historical experience of the insurance sector, and the expertise and experience of insurance regulators, and, in particular, [those of the states] that are primarily responsible for regulating Prudential.”  Id.

[24] See Tarullo Remarks at Association of American Law Schools Midyear Meeting, supra note 14.

[25] Id.

[27] See John McPartland, Recommendations for Equitable Allocation of Trades in High Frequency Trading Environments (July 10, 2014), available at

[28] Commissioner Michael S. Piwowar, The Benefit of Hindsight and the Promise of Foresight: A Proposal for a Comprehensive Review of Equity Market Structure (Dec. 9, 2013), available at

[29] See Chair Mary Jo White, Remarks before the Sandler O’Neill & Partners, L.P. Global Exchange and Brokerage Conference, Enhancing Our Equity Market Structure (June 5, 2014), available at

[30] Academic studies have shown that economies financed primarily by the capital markets outperform economies where bank financing dominates.  See e.g., Christoph Kaserer & Marc Steffen Rapp, Capital Markets and Economic Growth: Long-Term Trends and Policy Challenges (Mar. 2014), available at       

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