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Chamber of Commerce seeks changes to financial risk council

An American flag hangs over the exterior of the New York Stock Exchange in New York, October 9, 2008. REUTERS/Mike Segar
An American flag hangs over the exterior of the New York Stock Exchange in New York, October 9, 2008. REUTERS/Mike Segar

By Sarah N. Lynch

WASHINGTON (Reuters) - The U.S. Chamber of Commerce on Monday called for changes to the U.S. financial risk council that could slow the process by which it designates large financial firms as "systemic," subjecting them to tougher supervision.

In a five-page list of proposed reforms, the Chamber criticized the Financial Stability Oversight Council's governance structure, saying it lacks transparency and does not give enough deference to the FSOC-member regulators who have the most expertise.

The Chamber plans to host a panel discussion on the subject on Wednesday, where several experts who have been critical in the past of the FSOC's operations will speak about systemic risk regulation.

"Structural shortcomings have been exposed," the Chamber wrote in its list of proposed reforms. "We believe important changes must be made."

The FSOC is a council of regulators created by the 2010 Dodd-Frank Wall Street reform law that is chaired by the Treasury Secretary and composed of the heads of other banking and market regulators, including the Federal Reserve and the Securities and Exchange Commission.

The FSOC has the power to designate firms whose collapse could pose widespread market disruption as "systemically important financial institutions," or SIFIs. Any firm designated faces tougher capital rules and oversight by the Federal Reserve.

Each member of the council casts a vote in deciding which firms should face designation.

Earlier this year, the FSOC voted to designate General Electric Co's GE Capital, American International Group and Prudential Financial Inc.

The FSOC has also started looking into whether large asset managers like BlackRock could be next in line.

For the vote on Prudential, the FSOC's independent insurance member Roy Woodall and Federal Housing Financial Agency Acting Director Edward DeMarco both dissented.

The Chamber did not explicitly discuss the FSOC's decision-making on the designation of Prudential.

However, it was critical of the FSOC's current voting threshold, and called for changes that would empower those who vote against designation.

"We have been dismayed to see regulators with the most expertise in a particular area ignored during the critical designation votes," said David Hirschmann, the chief executive of the Chamber's Center for Capital Markets Competitiveness, in a call with reporters.

If a primary or independent council member disagrees with a designation during a vote, the Chamber is proposing to require the FSOC to conduct a second vote within 45 days.

Within 30 days of the initial vote, the dissenting member would then be able to submit a report explaining his or her rationale.

In order to designate a company, the Chamber is also proposing to require three-quarters of the FSOC to agree, instead of the current two-thirds.

In addition to changing the voting threshold, the Chamber suggested a slew of other reforms.

One proposal would allow the primary regulator of a designated non-bank SIFI to oversee the firm, rather than the Federal Reserve.

Another proposal calls for expanding representation on the FSOC.

Currently, the FSOC is only composed of the heads of each regulatory agency, even though many of the agencies like the SEC are governed by multi-member commissions.

The views of these other regulators are not represented at the FSOC - a fact that led to some controversy last year after the FSOC and the SEC butted heads over whether to propose a new round of reforms for money market funds.

During that time, the Chamber was among the most vocal in lobbying against any intervention by the FSOC into the SEC's regulations of money funds.

Hirschmann told reporters Monday that while some of the potential reforms in the Chamber's agenda could be enacted by Congress, many of them can simply be addressed internally by the FSOC.

The heads of the SEC or the Commodity Futures Trading Commission, for instance, he said, "could certainly avail themselves of the expertise" from other commissioners.

Aside from the proposed governance changes, the Chamber also called for the FSOC to establish "clear rules of due process" for the designation process itself.

Such changes could include giving companies a clear heads up about what sorts of activities could be considered unduly risky, so that they might curtail them to avoid designation.

When asked to respond to some of the Chamber's suggestions, a Treasury spokesperson said the criteria for designation is laid out in the Dodd-Frank law and was vetted through a public comment process.

(Reporting by Sarah N. Lynch; Editing by Andrea Ricci and Phil Berlowitz)

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