[House Report 115-601]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-601
======================================================================
ALLEVIATING STRESS TEST BURDENS TO HELP INVESTORS ACT
_______
March 15, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4566]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4566) to amend the Dodd-Frank Wall Street Reform
and Consumer Protection Act to provide relief to nonbanks from
certain stress test requirements under such Act, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Alleviating Stress Test Burdens to
Help Investors Act''.
SEC. 2. STRESS TEST RELIEF FOR NONBANKS.
Section 165(i) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5365(i)) is amended--
(1) in paragraph (1)(B)(ii), by striking ``and nonbank
financial companies''; and
(2) in paragraph (2)--
(A) in subparagraph (A), by striking ``are regulated
by a primary Federal financial regulatory agency'' and
inserting: ``whose primary financial regulatory agency
is a Federal banking agency or the Federal Housing
Finance Agency'';
(B) in subparagraph (C), by striking ``Each Federal
primary financial regulatory agency'' and inserting
``Each Federal banking agency and the Federal Housing
Finance Agency''; and
(C) by adding at the end the following:
``(D) SEC and cftc.--The Securities and Exchange
Commission and the Commodity Futures Trading Commission
may each issue regulations requiring financial
companies with respect to which they are the primary
financial regulatory agency and that have total
consolidated assets of more than $10,000,000,000 to
conduct periodic analyses of the financial condition,
including available liquidity, of such companies under
adverse economic conditions.''.
SEC. 3. RULE OF CONSTRUCTION.
Nothing in this Act shall be construed to limit the authority of the
Financial Stability Oversight Council under section 120 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5330).
Purpose and Summary
On December 6, 2017, Representative Bruce Poliquin
introduced H.R. 4566, the ``Alleviating Stress Test Burdens to
Help Investors Act'', which amends Title I of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
to exempt nonbank financial institutions not under the
supervision by the Board of Governors of the Federal Reserve
System (Federal Reserve) from the Dodd-Frank Act's stress-
testing requirements. Additionally, the bill allows the
Securities and Exchange Commission (SEC) and the Commodity
Futures Trading Commission (CFTC) to issue regulations to
require entities subject to their respective jurisdictions,
referred to as ``financial companies'' in Title I of the Dodd-
Frank Act, that have total consolidated assets of more than $10
billion to conduct periodic analysis of the financial condition
of such entities under adverse economic conditions.
Background and Need for Legislation
The goal of H.R. 4566 is to eliminate burdensome costs for
nonbank financial companies by eliminating stress testing
requirements that are structured and designed for banks and do
not appropriately reflect risks to nonbanks. Ultimately, these
stress testing requirements impose high costs on nonbanks,
which would include the asset management industry that
ultimately will be borne by investors.
The financial crisis led to questions--domestically and
internationally--about how to address financial stability and
create a regulatory framework to mitigate systemic risk.
Section 165 of the Dodd-Frank Act confers a host of powerful
new supervisory tools upon the Federal Reserve to oversee the
activities of bank holding companies with total consolidated
assets of $50 billion or more and nonbank financial companies
designated by the Financial Stability Oversight Council for
heightened prudential supervision by the Federal Reserve. Two
of these new authorities--living wills and stress tests--have
been particularly controversial. First, Living wills and stress
tests effectively put government bureaucrats in the position to
dictate the business models and operational objectives of
private businesses. Second, the Federal Reserve failed to
implement its Section 165 statutory authorities with complete
transparency and the Federal Reserve did not provide clear
guidance about the conduct of the stress tests to market
participants.
With respect to stress tests, under Section 165(i)(1)(A) of
the Dodd-Frank Act, requires the Federal Reserve to conduct
annual stress tests of large bank holding companies and nonbank
systemically important financial institutions (SIFIs). By
statute, the purpose of these tests is to allow the Federal
Reserve to evaluate ``whether such companies have the capital
necessary to absorb losses as a result of adverse economic
conditions.'' Section 165(i)(1)(B)(ii) gives the Federal
Reserve Board full discretion to require the same tests as
nonbank financial companies that are not systemically
important, which thus could include registered funds and
investment advisers.
In addition to bank holding companies, Section 165(i)(2) of
the Dodd-Frank Act requires ``financial companies'' with total
consolidated assets of more than $10 billion, and that have a
primary federal financial regulatory agency, to conduct annual
stress tests in accordance with regulations issued by the
relevant agency. The term ``financial company'' is defined
broadly and sweeps in registered investment companies (e.g.,
mutual funds) and registered investment advisers. According to
information provided by the Investment Company Institute, more
than 400 funds had $10 billion in assets or more as of July 31,
2017.
The Dodd-Frank Act's red tape does not stop there, but it
also requires the primary financial regulatory agency--in this
case, the SEC--to issue implementing regulations for the
financial companies under its jurisdiction. To fulfill this
requirement, the SEC must coordinate with the Federal Reserve
and Federal Insurance Office and issue regulations that are
``consistent and comparable'' with those the Federal Reserve
and other banking regulators have adopted for banking
organizations. As with bank stress tests, the methodologies the
SEC establishes must include three sets of conditions: (1)
baseline, (2) adverse, and (3) severely adverse scenarios.
Results are required to be reported to both the SEC and the
Federal Reserve, and the company is required to publish a
summary of the results. To date, though, the SEC has yet to
propose a stress-testing rule under Section 165(i)(2).
The statutory requirement for stress tests of large
investment advisers and mutual funds came about, in part,
because of the success of the initial supervisory stress test
exercise led by the Federal Reserve for the largest bank
holding companies in the midst of the financial crisis. Stress
testing in the context of banking organizations is designed to
test for capital adequacy in stressed conditions. The concept
of ``capital adequacy'' is entirely appropriate in the banking
context. If a bank does not have adequate capital, it risks
being unable to meet its obligations to depositors. In times of
market stress, inadequate bank capital could have broader
implications for financial stability.
But in reality the concept of capital adequacy does not
have the same application when it comes to nonbanks. For
example, asset management is an agency-based business model, as
opposed to the principal-based business model of banks. This
means that asset managers manage funds on behalf of clients,
but they do not generally own the investments themselves.
Furthermore, asset managers are legally separated from the
funds--e.g., the assets and liabilities of the manager are
distinct from assets and liabilities of the funds. On the other
hand, the bank business model directly subjects the bank to the
risks and obligations of its assets and liabilities. In short,
to the extent that systemic risks arise from the asset
management industry, prudential regulation of asset management
is unlikely to be the most effective regulatory approach for
mitigating these risks.
After all, asset managers and investment funds, in contrast
to banks, generally are not highly leveraged and do not engage
in maturity and liquidity transformation to the same degree
that banks do through the use of bank deposits and other forms
of credit. Any decline in the value of a fund's assets results
is a corresponding reduction in the investor's investment,
whereas a bank's obligation to its depositors and creditors
remains the same even if the bank suffers losses on its asset
exposures. For example, registered funds do not guarantee any
return to investors or even promise that investors will see the
return of their principal. Fund investors know that any gains
or losses belong to them on a pro rata basis. Further, fund
assets are not on the adviser's balance sheet. Gains or losses
are borne solely by funds or other client accounts and do not
flow through to the adviser. These characteristics of both
registered funds and advisers hold true in both normal and
stress periods. They help explain why, even in times of severe
market stress, registered stock and bond funds and fund
advisers routinely exit the market in an orderly fashion, with
no effect on the broader financial system or need for
government intervention.
Not only does the prudential stress-testing regime fail to
fit the nonbank model, prudential stress testing for asset
management raises significant implementation challenges,
including how to engage in such testing when fluctuations in
asset values are passed through to fund investors by design.
While the SEC has implemented stress testing rules for some
situations, these are tailored to the specific industry. In
2016, then-SEC Chief Economist Mark Flannery stated that the
Dodd-Frank Act requires stress tests for large banks, but there
is a ``false parallel'' for stress testing asset managers:
``The parallel to bank stress tests is really extremely
misleading. It's as if Dodd-Frank said `stress test the big
banks, and, oh, you might as well go ahead and do the asset
management companies.'''
In its Asset Management and Insurance Report issued on
November 15, 2017 pursuant in response to President Trump's
February 3, 2017 Executive Order 13772 on ``Core Principles for
Regulating the United States Financial System'', the U.S.
Department of Treasury said that:
entity-based systemic risk evaluations of asset
managers or their funds are generally not the best
approach for mitigating risks arising from asset
management. Instead, primary federal regulators should
focus on potential systemic risks arising from asset
management products and activities, and on implementing
regulations that strengthen the asset management
industry as a whole.
Further, the Treasury Department's November 15, 2017 report
supports legislative action to eliminate the stress-testing
requirement for investment advisers and investment companies:
Treasury rejects the need for stress testing of asset
management firms. Stress testing is a regulatory tool
that can be a part of systemic risk evaluation.
Treasury recognizes the possibility of liquidity risk
that may arise during mutual fund redemptions, but
believes a strong liquidity risk management framework
is a more effective approach to addressing the
concern.''
The misapplication of the stress-testing regime to non-SIFI
nonbanks is important because the U.S. asset management
industry is the global leader in promoting vibrant capital
markets and diverse investment and savings opportunities for
investors and businesses. An asset manager manages assets on
behalf of investors, businesses, and other institutions using
different types of funds and other investment structures. U.S.
asset managers range in size from a few million dollars to over
five trillion dollars in assets under management. In the United
States alone, registered investment companies, a type of
investment fund, held almost $20 trillion of assets under
management, representing the investments of more than 95
million individuals.
While assets under management have risen, so have costs.
One of the largest drivers of rising costs is the cost of
compliance with the increased regulatory burden since the
financial crisis. For example, in a recent study of global
asset managers, banks, and brokers, participants highlighted
perceptions that regulations are increasing costs and that
compliance spending at a typical firm is expected to double
over the next five years. Many of these costs are passed along
to individual retail investors in the form of expenses higher
than they would be if compliance costs had been the same.
The effect is felt on Main Street because registered funds
are the investment vehicles of choice for millions of Americans
seeking to buy a home, pay for college, or plan for financial
security in retirement. Application of unnecessary, ill-suited
stress-testing requirements to registered funds and advisers
will increase costs for these funds and advisers--and hence,
investors--without providing any corresponding benefits. As
discussed above, such stress testing requirements would do
nothing to promote public policy goals, such as financial
stability or investor protection, because their underlying
purpose is pegged to the business model, operations, and risks
of banks and is at odds with the distinct, defining attributes
of registered funds and advisers.
In short, H.R. 4566 would eliminate ineffectual costs for
nonbank financial institutions that have not been designated as
systemically important by removing Dodd Frank's bank-centric,
mandatory stress test requirement, which does not make sense
for the asset management industry and only adds costs that will
ultimately be borne by investors who rely on these funds.
Additionally, to the extent stress tests might be useful in
certain contexts, rather than apply the Federal Reserve's bank-
centric stress tests, H.R. 4566 provides that the SEC and CFTC
may issue regulations requiring financial companies for which
they are the primary financial regulatory agency and have total
assets of more than $10 billion to conduct periodic stress
tests.
Hearings
The Committee on Financial Services held a hearing
examining matters relating to H.R. 4566 on April 26, 2017, and
April 28, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
January 17, 2018, and January 18, 2018, and ordered H.R. 4566
to be reported favorably by a recorded vote of 47 yeas to 8
nays (Record vote no. FC-147), a quorum being present. Before
the motion to report was offered, an amendment in the nature of
a substitute offered by Mr. Poliquin was agreed to by a voice
vote and an amendment to the amendment in the nature of a
substitute offered by Mrs. Maloney was agreed to by a voice
vote.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House as amended. The motion
was agreed to by a recorded vote of 47 yeas to 8 nays (Record
vote no. FC-147), a quorum being present.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 4566
will reduce burdensome regulatory costs on nonbank financial
companies, that are ultimately passed down to investors, by
eliminating the requirement that they comply with the Dodd-
Frank Act stress testing requirements.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, March 14, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4566, the
Alleviating Stress Test Burdens to Help Investors Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Nathaniel
Frentz.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 4566--Alleviating Stress Test Burdens to Help Investors Act
H.R. 4566 would exempt certain nonbank financial firms from
requirements to conduct assessments of their ability to
withstand financial stress. It would also remove the Federal
Reserve's authority to conduct stress tests at nonbank
financial companies more often than once per year.
Because the Federal Reserve currently does not conduct
stress tests on nonbank financial firms, enacting the bill
would have a negligible effect on its spending in the near
term. Although some types of stress testing may begin under
current law at some point over the 2018-2027 period, CBO
anticipates that those activities probably would not be
affected by the restrictions in this bill. In addition, based
on information from the Federal Reserve, CBO estimates that
provisions in the bill that may exempt some financial companies
from certain capital planning requirements would have no
significant effect on the operating costs of the Federal
Reserve. As a result, CBO estimates that implementing the bill
would have no significant effect on Federal Reserve remittances
to the U.S. Treasury, which are recorded in the budget as
revenues.
Because enacting H.R. 4566 would affect revenues, pay-as-
you-go procedures apply. Enacting the bill would not affect
direct spending.
CBO estimates that enacting H.R. 4566 would not
significantly increase net direct spending or on-budget
deficits in any of the four consecutive 10-year periods
beginning in 2028.
H.R. 4566 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Nathaniel
Frentz. The estimate was approved by John McClelland, Assistant
Director for Tax Analysis, and Theresa Gullo, Assistant
Director for Budget Analysis.
Federal Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section cites H.R. 4566 as the ``Alleviating Stress
Test Burdens to Help Investors Act.''
Section 2. Stress test relief for nonbanks
This section amends section 165(i) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act to exempt nonbank
financial institutions that are not under the supervision by
the Federal Reserve from the Dodd-Frank Act's stress testing
requirements. Additionally, this section allows the Securities
and Exchange Commission and the Commodity Futures Trading
Commission to issue regulations to require financial companies
that have total consolidated assets of more than $10 billion to
conduct periodic analysis of the financial condition of such
companies under adverse economic conditions.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
* * * * * * *
TITLE I--FINANCIAL STABILITY
* * * * * * *
Subtitle C--Additional Board of Governors Authority for Certain Nonbank
Financial Companies and Bank Holding Companies
* * * * * * *
SEC. 165. ENHANCED SUPERVISION AND PRUDENTIAL STANDARDS FOR NONBANK
FINANCIAL COMPANIES SUPERVISED BY THE BOARD OF
GOVERNORS AND CERTAIN BANK HOLDING COMPANIES.
(a) In General.--
(1) Purpose.--In order to prevent or mitigate risks
to the financial stability of the United States that
could arise from the material financial distress or
failure, or ongoing activities, of large,
interconnected financial institutions, the Board of
Governors shall, on its own or pursuant to
recommendations by the Council under section 115,
establish prudential standards for nonbank financial
companies supervised by the Board of Governors and bank
holding companies with total consolidated assets equal
to or greater than $50,000,000,000 that--
(A) are more stringent than the standards and
requirements applicable to nonbank financial
companies and bank holding companies that do
not present similar risks to the financial
stability of the United States; and
(B) increase in stringency, based on the
considerations identified in subsection (b)(3).
(2) Tailored application.--
(A) In general.--In prescribing more
stringent prudential standards under this
section, the Board of Governors may, on its own
or pursuant to a recommendation by the Council
in accordance with section 115, differentiate
among companies on an individual basis or by
category, taking into consideration their
capital structure, riskiness, complexity,
financial activities (including the financial
activities of their subsidiaries), size, and
any other risk-related factors that the Board
of Governors deems appropriate.
(B) Adjustment of threshold for application
of certain standards.--The Board of Governors
may, pursuant to a recommendation by the
Council in accordance with section 115,
establish an asset threshold above
$50,000,000,000 for the application of any
standard established under subsections (c)
through (g).
(b) Development of Prudential Standards.--
(1) In general.--
(A) Required standards.--The Board of
Governors shall establish prudential standards
for nonbank financial companies supervised by
the Board of Governors and bank holding
companies described in subsection (a), that
shall include--
(i) risk-based capital requirements
and leverage limits, unless the Board
of Governors, in consultation with the
Council, determines that such
requirements are not appropriate for a
company subject to more stringent
prudential standards because of the
activities of such company (such as
investment company activities or assets
under management) or structure, in
which case, the Board of Governors
shall apply other standards that result
in similarly stringent risk controls;
(ii) liquidity requirements;
(iii) overall risk management
requirements;
(iv) resolution plan and credit
exposure report requirements; and
(v) concentration limits.
(B) Additional standards authorized.--The
Board of Governors may establish additional
prudential standards for nonbank financial
companies supervised by the Board of Governors
and bank holding companies described in
subsection (a), that include--
(i) a contingent capital requirement;
(ii) enhanced public disclosures;
(iii) short-term debt limits; and
(iv) such other prudential standards
as the Board or Governors, on its own
or pursuant to a recommendation made by
the Council in accordance with section
115, determines are appropriate.
(2) Standards for foreign financial companies.--In
applying the standards set forth in paragraph (1) to
any foreign nonbank financial company supervised by the
Board of Governors or foreign-based bank holding
company, the Board of Governors shall--
(A) give due regard to the principle of
national treatment and equality of competitive
opportunity; and
(B) take into account the extent to which the
foreign financial company is subject on a
consolidated basis to home country standards
that are comparable to those applied to
financial companies in the United States.
(3) Considerations.--In prescribing prudential
standards under paragraph (1), the Board of Governors
shall--
(A) take into account differences among
nonbank financial companies supervised by the
Board of Governors and bank holding companies
described in subsection (a), based on--
(i) the factors described in
subsections (a) and (b) of section 113;
(ii) whether the company owns an
insured depository institution;
(iii) nonfinancial activities and
affiliations of the company; and
(iv) any other risk-related factors
that the Board of Governors determines
appropriate;
(B) to the extent possible, ensure that small
changes in the factors listed in subsections
(a) and (b) of section 113 would not result in
sharp, discontinuous changes in the prudential
standards established under paragraph (1) of
this subsection;
(C) take into account any recommendations of
the Council under section 115; and
(D) adapt the required standards as
appropriate in light of any predominant line of
business of such company, including assets
under management or other activities for which
particular standards may not be appropriate.
(4) Consultation.--Before imposing prudential
standards or any other requirements pursuant to this
section, including notices of deficiencies in
resolution plans and more stringent requirements or
divestiture orders resulting from such notices, that
are likely to have a significant impact on a
functionally regulated subsidiary or depository
institution subsidiary of a nonbank financial company
supervised by the Board of Governors or a bank holding
company described in subsection (a), the Board of
Governors shall consult with each Council member that
primarily supervises any such subsidiary with respect
to any such standard or requirement.
(5) Report.--The Board of Governors shall submit an
annual report to Congress regarding the implementation
of the prudential standards required pursuant to
paragraph (1), including the use of such standards to
mitigate risks to the financial stability of the United
States.
(c) Contingent Capital.--
(1) In general.--Subsequent to submission by the
Council of a report to Congress under section 115(c),
the Board of Governors may issue regulations that
require each nonbank financial company supervised by
the Board of Governors and bank holding companies
described in subsection (a) to maintain a minimum
amount of contingent capital that is convertible to
equity in times of financial stress.
(2) Factors to consider.--In issuing regulations
under this subsection, the Board of Governors shall
consider--
(A) the results of the study undertaken by
the Council, and any recommendations of the
Council, under section 115(c);
(B) an appropriate transition period for
implementation of contingent capital under this
subsection;
(C) the factors described in subsection
(b)(3)(A);
(D) capital requirements applicable to the
nonbank financial company supervised by the
Board of Governors or a bank holding company
described in subsection (a), and subsidiaries
thereof; and
(E) any other factor that the Board of
Governors deems appropriate.
(d) Resolution Plan and Credit Exposure Reports.--
(1) Resolution plan.--The Board of Governors shall
require each nonbank financial company supervised by
the Board of Governors and bank holding companies
described in subsection (a) to report periodically to
the Board of Governors, the Council, and the
Corporation the plan of such company for rapid and
orderly resolution in the event of material financial
distress or failure, which shall include--
(A) information regarding the manner and
extent to which any insured depository
institution affiliated with the company is
adequately protected from risks arising from
the activities of any nonbank subsidiaries of
the company;
(B) full descriptions of the ownership
structure, assets, liabilities, and contractual
obligations of the company;
(C) identification of the cross-guarantees
tied to different securities, identification of
major counterparties, and a process for
determining to whom the collateral of the
company is pledged; and
(D) any other information that the Board of
Governors and the Corporation jointly require
by rule or order.
(2) Credit exposure report.--The Board of Governors
shall require each nonbank financial company supervised
by the Board of Governors and bank holding companies
described in subsection (a) to report periodically to
the Board of Governors, the Council, and the
Corporation on--
(A) the nature and extent to which the
company has credit exposure to other
significant nonbank financial companies and
significant bank holding companies; and
(B) the nature and extent to which other
significant nonbank financial companies and
significant bank holding companies have credit
exposure to that company.
(3) Review.--The Board of Governors and the
Corporation shall review the information provided in
accordance with this subsection by each nonbank
financial company supervised by the Board of Governors
and bank holding company described in subsection (a).
(4) Notice of deficiencies.--If the Board of
Governors and the Corporation jointly determine, based
on their review under paragraph (3), that the
resolution plan of a nonbank financial company
supervised by the Board of Governors or a bank holding
company described in subsection (a) is not credible or
would not facilitate an orderly resolution of the
company under title 11, United States Code--
(A) the Board of Governors and the
Corporation shall notify the company of the
deficiencies in the resolution plan; and
(B) the company shall resubmit the resolution
plan within a timeframe determined by the Board
of Governors and the Corporation, with
revisions demonstrating that the plan is
credible and would result in an orderly
resolution under title 11, United States Code,
including any proposed changes in business
operations and corporate structure to
facilitate implementation of the plan.
(5) Failure to resubmit credible plan.--
(A) In general.--If a nonbank financial
company supervised by the Board of Governors or
a bank holding company described in subsection
(a) fails to timely resubmit the resolution
plan as required under paragraph (4), with such
revisions as are required under subparagraph
(B), the Board of Governors and the Corporation
may jointly impose more stringent capital,
leverage, or liquidity requirements, or
restrictions on the growth, activities, or
operations of the company, or any subsidiary
thereof, until such time as the company
resubmits a plan that remedies the
deficiencies.
(B) Divestiture.--The Board of Governors and
the Corporation, in consultation with the
Council, may jointly direct a nonbank financial
company supervised by the Board of Governors or
a bank holding company described in subsection
(a), by order, to divest certain assets or
operations identified by the Board of Governors
and the Corporation, to facilitate an orderly
resolution of such company under title 11,
United States Code, in the event of the failure
of such company, in any case in which--
(i) the Board of Governors and the
Corporation have jointly imposed more
stringent requirements on the company
pursuant to subparagraph (A); and
(ii) the company has failed, within
the 2-year period beginning on the date
of the imposition of such requirements
under subparagraph (A), to resubmit the
resolution plan with such revisions as
were required under paragraph (4)(B).
(6) No limiting effect.--A resolution plan submitted
in accordance with this subsection shall not be binding
on a bankruptcy court, a receiver appointed under title
II, or any other authority that is authorized or
required to resolve the nonbank financial company
supervised by the Board, any bank holding company, or
any subsidiary or affiliate of the foregoing.
(7) No private right of action.--No private right of
action may be based on any resolution plan submitted in
accordance with this subsection.
(8) Rules.--Not later than 18 months after the date
of enactment of this Act, the Board of Governors and
the Corporation shall jointly issue final rules
implementing this subsection.
(e) Concentration Limits.--
(1) Standards.--In order to limit the risks that the
failure of any individual company could pose to a
nonbank financial company supervised by the Board of
Governors or a bank holding company described in
subsection (a), the Board of Governors, by regulation,
shall prescribe standards that limit such risks.
(2) Limitation on credit exposure.--The regulations
prescribed by the Board of Governors under paragraph
(1) shall prohibit each nonbank financial company
supervised by the Board of Governors and bank holding
company described in subsection (a) from having credit
exposure to any unaffiliated company that exceeds 25
percent of the capital stock and surplus (or such lower
amount as the Board of Governors may determine by
regulation to be necessary to mitigate risks to the
financial stability of the United States) of the
company.
(3) Credit exposure.--For purposes of paragraph (2),
``credit exposure'' to a company means--
(A) all extensions of credit to the company,
including loans, deposits, and lines of credit;
(B) all repurchase agreements and reverse
repurchase agreements with the company, and all
securities borrowing and lending transactions
with the company, to the extent that such
transactions create credit exposure for the
nonbank financial company supervised by the
Board of Governors or a bank holding company
described in subsection (a);
(C) all guarantees, acceptances, or letters
of credit (including endorsement or standby
letters of credit) issued on behalf of the
company;
(D) all purchases of or investment in
securities issued by the company;
(E) counterparty credit exposure to the
company in connection with a derivative
transaction between the nonbank financial
company supervised by the Board of Governors or
a bank holding company described in subsection
(a) and the company; and
(F) any other similar transactions that the
Board of Governors, by regulation, determines
to be a credit exposure for purposes of this
section.
(4) Attribution rule.--For purposes of this
subsection, any transaction by a nonbank financial
company supervised by the Board of Governors or a bank
holding company described in subsection (a) with any
person is a transaction with a company, to the extent
that the proceeds of the transaction are used for the
benefit of, or transferred to, that company.
(5) Rulemaking.--The Board of Governors may issue
such regulations and orders, including definitions
consistent with this section, as may be necessary to
administer and carry out this subsection.
(6) Exemptions.--This subsection shall not apply to
any Federal home loan bank. The Board of Governors may,
by regulation or order, exempt transactions, in whole
or in part, from the definition of the term ``credit
exposure'' for purposes of this subsection, if the
Board of Governors finds that the exemption is in the
public interest and is consistent with the purpose of
this subsection.
(7) Transition period.--
(A) In general.--This subsection and any
regulations and orders of the Board of
Governors under this subsection shall not be
effective until 3 years after the date of
enactment of this Act.
(B) Extension authorized.--The Board of
Governors may extend the period specified in
subparagraph (A) for not longer than an
additional 2 years.
(f) Enhanced Public Disclosures.--The Board of Governors may
prescribe, by regulation, periodic public disclosures by
nonbank financial companies supervised by the Board of
Governors and bank holding companies described in subsection
(a) in order to support market evaluation of the risk profile,
capital adequacy, and risk management capabilities thereof.
(g) Short-term Debt Limits.--
(1) In general.--In order to mitigate the risks that
an over-accumulation of short-term debt could pose to
financial companies and to the stability of the United
States financial system, the Board of Governors may, by
regulation, prescribe a limit on the amount of short-
term debt, including off-balance sheet exposures, that
may be accumulated by any bank holding company
described in subsection (a) and any nonbank financial
company supervised by the Board of Governors.
(2) Basis of limit.--Any limit prescribed under
paragraph (1) shall be based on the short-term debt of
the company described in paragraph (1) as a percentage
of capital stock and surplus of the company or on such
other measure as the Board of Governors considers
appropriate.
(3) Short-term debt defined.--For purposes of this
subsection, the term ``short-term debt'' means such
liabilities with short-dated maturity that the Board of
Governors identifies, by regulation, except that such
term does not include insured deposits.
(4) Rulemaking authority.--In addition to prescribing
regulations under paragraphs (1) and (3), the Board of
Governors may prescribe such regulations, including
definitions consistent with this subsection, and issue
such orders, as may be necessary to carry out this
subsection.
(5) Authority to issue exemptions and adjustments.--
Notwithstanding the Bank Holding Company Act of 1956
(12 U.S.C. 1841 et seq.), the Board of Governors may,
if it determines such action is necessary to ensure
appropriate heightened prudential supervision, with
respect to a company described in paragraph (1) that
does not control an insured depository institution,
issue to such company an exemption from or adjustment
to the limit prescribed under paragraph (1).
(h) Risk Committee.--
(1) Nonbank financial companies supervised by the
board of governors.--The Board of Governors shall
require each nonbank financial company supervised by
the Board of Governors that is a publicly traded
company to establish a risk committee, as set forth in
paragraph (3), not later than 1 year after the date of
receipt of a notice of final determination under
section 113(e)(3) with respect to such nonbank
financial company supervised by the Board of Governors.
(2) Certain bank holding companies.--
(A) Mandatory regulations.--The Board of
Governors shall issue regulations requiring
each bank holding company that is a publicly
traded company and that has total consolidated
assets of not less than $10,000,000,000 to
establish a risk committee, as set forth in
paragraph (3).
(B) Permissive regulations.--The Board of
Governors may require each bank holding company
that is a publicly traded company and that has
total consolidated assets of less than
$10,000,000,000 to establish a risk committee,
as set forth in paragraph (3), as determined
necessary or appropriate by the Board of
Governors to promote sound risk management
practices.
(3) Risk committee.--A risk committee required by
this subsection shall--
(A) be responsible for the oversight of the
enterprise-wide risk management practices of
the nonbank financial company supervised by the
Board of Governors or bank holding company
described in subsection (a), as applicable;
(B) include such number of independent
directors as the Board of Governors may
determine appropriate, based on the nature of
operations, size of assets, and other
appropriate criteria related to the nonbank
financial company supervised by the Board of
Governors or a bank holding company described
in subsection (a), as applicable; and
(C) include at least 1 risk management expert
having experience in identifying, assessing,
and managing risk exposures of large, complex
firms.
(4) Rulemaking.--The Board of Governors shall issue
final rules to carry out this subsection, not later
than 1 year after the transfer date, to take effect not
later than 15 months after the transfer date.
(i) Stress Tests.--
(1) By the board of governors.--
(A) Annual tests required.--The Board of
Governors, in coordination with the appropriate
primary financial regulatory agencies and the
Federal Insurance Office, shall conduct annual
analyses in which nonbank financial companies
supervised by the Board of Governors and bank
holding companies described in subsection (a)
are subject to evaluation of whether such
companies have the capital, on a total
consolidated basis, necessary to absorb losses
as a result of adverse economic conditions.
(B) Test parameters and consequences.--The
Board of Governors--
(i) shall provide for at least 3
different sets of conditions under
which the evaluation required by this
subsection shall be conducted,
including baseline, adverse, and
severely adverse;
(ii) may require the tests described
in subparagraph (A) at bank holding
companies [and nonbank financial
companies], in addition to those for
which annual tests are required under
subparagraph (A);
(iii) may develop and apply such
other analytic techniques as are
necessary to identify, measure, and
monitor risks to the financial
stability of the United States;
(iv) shall require the companies
described in subparagraph (A) to update
their resolution plans required under
subsection (d)(1), as the Board of
Governors determines appropriate, based
on the results of the analyses; and
(v) shall publish a summary of the
results of the tests required under
subparagraph (A) or clause (ii) of this
subparagraph.
(2) By the company.--
(A) Requirement.--A nonbank financial company
supervised by the Board of Governors and a bank
holding company described in subsection (a)
shall conduct semiannual stress tests. All
other financial companies that have total
consolidated assets of more than
$10,000,000,000 and [are regulated by a primary
Federal financial regulatory agency] whose
primary financial regulatory agency is a
Federal banking agency or the Federal Housing
Finance Agency shall conduct annual stress
tests. The tests required under this
subparagraph shall be conducted in accordance
with the regulations prescribed under
subparagraph (C).
(B) Report.--A company required to conduct
stress tests under subparagraph (A) shall
submit a report to the Board of Governors and
to its primary financial regulatory agency at
such time, in such form, and containing such
information as the primary financial regulatory
agency shall require.
(C) Regulations.--[Each Federal primary
financial regulatory agency] Each Federal
banking agency and the Federal Housing Finance
Agency, in coordination with the Board of
Governors and the Federal Insurance Office,
shall issue consistent and comparable
regulations to implement this paragraph that
shall--
(i) define the term ``stress test''
for purposes of this paragraph;
(ii) establish methodologies for the
conduct of stress tests required by
this paragraph that shall provide for
at least 3 different sets of
conditions, including baseline,
adverse, and severely adverse;
(iii) establish the form and content
of the report required by subparagraph
(B); and
(iv) require companies subject to
this paragraph to publish a summary of
the results of the required stress
tests.
(D) SEC and cftc.--The Securities and
Exchange Commission and the Commodity Futures
Trading Commission may each issue regulations
requiring financial companies with respect to
which they are the primary financial regulatory
agency and that have total consolidated assets
of more than $10,000,000,000 to conduct
periodic analyses of the financial condition,
including available liquidity, of such
companies under adverse economic conditions.
(j) Leverage Limitation.--
(1) Requirement.--The Board of Governors shall
require a bank holding company with total consolidated
assets equal to or greater than $50,000,000,000 or a
nonbank financial company supervised by the Board of
Governors to maintain a debt to equity ratio of no more
than 15 to 1, upon a determination by the Council that
such company poses a grave threat to the financial
stability of the United States and that the imposition
of such requirement is necessary to mitigate the risk
that such company poses to the financial stability of
the United States. Nothing in this paragraph shall
apply to a Federal home loan bank.
(2) Considerations.--In making a determination under
this subsection, the Council shall consider the factors
described in subsections (a) and (b) of section 113 and
any other risk-related factors that the Council deems
appropriate.
(3) Regulations.--The Board of Governors shall
promulgate regulations to establish procedures and
timelines for complying with the requirements of this
subsection.
(k) Inclusion of Off-balance-sheet Activities in Computing
Capital Requirements.--
(1) In general.--In the case of any bank holding
company described in subsection (a) or nonbank
financial company supervised by the Board of Governors,
the computation of capital for purposes of meeting
capital requirements shall take into account any off-
balance-sheet activities of the company.
(2) Exemptions.--If the Board of Governors determines
that an exemption from the requirement under paragraph
(1) is appropriate, the Board of Governors may exempt a
company, or any transaction or transactions engaged in
by such company, from the requirements of paragraph
(1).
(3) Off-balance-sheet activities defined.--For
purposes of this subsection, the term ``off-balance-
sheet activities'' means an existing liability of a
company that is not currently a balance sheet
liability, but may become one upon the happening of
some future event, including the following
transactions, to the extent that they may create a
liability:
(A) Direct credit substitutes in which a bank
substitutes its own credit for a third party,
including standby letters of credit.
(B) Irrevocable letters of credit that
guarantee repayment of commercial paper or tax-
exempt securities.
(C) Risk participations in bankers'
acceptances.
(D) Sale and repurchase agreements.
(E) Asset sales with recourse against the
seller.
(F) Interest rate swaps.
(G) Credit swaps.
(H) Commodities contracts.
(I) Forward contracts.
(J) Securities contracts.
(K) Such other activities or transactions as
the Board of Governors may, by rule, define.
* * * * * * *
MINORITY VIEWS
H.R. 4566, the so-called ``Alleviating Stress Test Burdens
to Help Investors Act'' would unwisely eliminate a commonsense
tool that gives financial companies and regulators an
opportunity to identify and correct problems before they could
lead to another financial crisis. Specifically, the bill, as
amended, would eliminate the Federal Reserve's discretion under
Dodd Frank to stress test any nonbank financial company that
the Financial Stability Oversight Council (``FSOC'') may be in
the process of designating as systemically important. As
amended, H.R. 4566 would also weaken the mandate in Dodd-Frank
that large firms regulated by the Securities and Exchange
Commission (``SEC'') and Commodity Futures Trading Commission
(``CFTC'') conduct annual company stress tests. The bill would
thus undermine a valuable early warning system for our nation's
economy.
One of the major policy achievements following the 2008
financial crisis was to require rigorous stress tests of the
nation's largest financial institutions. Importantly, the Dodd-
Frank stress testing regime allows regulators to reach beyond
banks to better monitor risks and vulnerabilities in other
parts of the financial system. If stress testing had been
conducted on firms like Lehman Brothers on an annual basis in
the years between 2006 through 2008, it might have revealed
significant problems before the failure of these institutions
led to the near-collapse of the global financial system.
As former SEC Chair Mary Jo White stated in a December 2014
speech, ``stress testing is an important tool routinely used by
banking regulators. Implementing this new mandate in asset
management, while relatively novel, will help market
participants and the Commission better understand the potential
impact of stress events.'' Members of the asset management
industry have also recognized that stress testing is critical
to effectively managing risk. In a 2015 letter to the SEC, the
Asset Management Group of the Securities Industry and Financial
Markets Association (``SIFMA AMG''), whose members manage more
than $30 trillion in assets, wrote, ``Stress testing is one
part of an effective and coherent risk management process for
asset managers . . . .'' Moreover, in a 2015 survey of SIFMA
AMG members, nearly two-thirds (62%) of the asset managers
surveyed reported that they already stress test their funds.
Nevertheless, H.R. 4566 would eliminate the Dodd-Frank
requirement that large financial institutions under the SEC's
purview that manage trillions of dollars of hardworking
Americans' retirement funds and other savings conduct an
internal evaluation of how the firm would fair in a stressed
economy. As stated by Americans for Financial Reform in a
letter to the Committee opposing H.R. 4566, ``large asset
managers such as Blackrock manage trillions of dollars and
their risk management procedures are essential to the health of
the financial markets. Such entities should be subject to
stress testing . . . .''
H.R. 4566 would make it harder for the Federal Reserve to
identify and mitigate future systemic risks before they have
catastrophic effects on our financial stability and would
remove the requirement that firms like asset managers conduct
annual stress tests.
For these reasons, we oppose H.R. 4566.
Maxine Waters.
Joyce Beatty.
Al Green.
Stephen F Lynch.
Keith Ellison.
[all]