	Background

FSOC has 10 voting and 5 nonvoting members (fig. The 10 voting  members include 9 federal regulators and an independent insurance  expert. FSOC Has Made Some Progress in Responding to GAO’s 2012 Recommendations

FSOC has taken steps to address some of our recommendations, such  as those related to communication. Monitoring Systemic Risks and Identifying Emerging Threats

In September 2012, we made two recommendations to FSOC that were  designed to improve its efforts to identify and report on sources of  systemic risk and emerging threats to financial stability. We reported that FSOC had taken steps to meet  its statutory responsibilities related to identifying risks and potential  emerging threats to U.S. financial stability, including by setting up a  Systemic Risk Committee—one of the seven standing FSOC  committees—that is responsible for systemic risk monitoring and plays a  key role in reviewing sources of systemic risk. As we noted in 2012 this approach may facilitate analysis of  risks that could benefit from interagency discussions and responses, but  may not help to identify new risks or threats that FSOC member agencies  have not already identified on their own. However, the Markets Monitor does not appear to  be focused on risks to the financial system, and the Financial Stability  Monitor remains in a prototype phase—and neither yet reflect the  systematic sharing of key financial risk indicators to assist in identifying  potential threats to financial stability. Since then, FSOC made some progress in addressing  this recommendation but could do more. Transparency and Accountability

Although FSOC had adopted communication methods to provide  information on their activities to the public and taken steps to be  transparent and accountable, we reported in 2012 that some of these  efforts could be strengthened and made four recommendations. FSOC  should develop a communication strategy to improve communications with  the public;  keep detailed records of closed door sessions of principals meetings  and to the extent possible make them publicly available after an  amount of time has passed; make recommendations in its annual report more specific by  identifying which member agency or agencies, as appropriate, are  recommended to monitor or implement such actions within specified  time frames; and establish a collaborative and comprehensive framework for assessing  the impact of decisions for designating financial market utilities (FMU)  and nonbank financial companies on those entities and the wider  economy. In May 2014, FSOC  updated its transparency policy. FSOC staff said that this effort was the  result of a review of other entities’ governance practices and that the  policy reflected a commitment to improve communication with the public. FSOC has said it will provide more information in its minutes but  has also argued that some of the information discussed is protected. The Dodd-Frank Act transferred the oversight of these  companies from the Office of Thrift Supervision to the Federal Reserve. However, FSOC is uniquely positioned to address  According to FSOC staff, the recurring study required under Section 123  of the Dodd-Frank Act (next required no later than January 2016) is the  appropriate mechanism for evaluating the overall impact of the  designations process. FSOC staff said that they had not begun planning for  a study and did not know when planning for it would begin. We noted in  our 2012 report that such an evaluation would require collaboration  among several members of FSOC and emphasized the importance of  advance planning for retrospective studies so that needed data are  collected. Collaboration and Coordination

In our September 2012 report, we also made three recommendations to  improve FSOC’s collaboration and coordination. We recommended that it establish formal collaboration and  coordination policies that clarify issues such as when collaboration or  coordination should occur and FSOC’s role in facilitating that  coordination. GAO-12-151. The Deputies Committee’s bylaws and  the ongoing effort to review FSOC’s governance structures are positive  developments in providing additional clarification on the roles and  responsibilities of FSOC committees. FSOC  staff told us that the statute did not give FSOC the authority to direct  actions of individual members including requiring members to coordinate  rulemakings. Finally, we recommended in our September 2012 report that FSOC and  OFR clarify responsibility for implementing requirements to monitor  threats to financial stability across FSOC and OFR, including among  FSOC members and member agencies. We  maintain that actions to address these recommendations are needed. Our  past work has shown that the lack of clear roles and coordination can  lead to duplication, confusion, and regulatory gaps.
Why GAO Did This Study

The 2007-2009 financial crisis focused attention on weaknesses in the U.S. regulatory structure, including the lack of an agency or mechanism responsible for monitoring and addressing risks across the financial system. To address this weakness, the Dodd-Frank Wall Street Reform and Consumer Protection Act created FSOC to identify and address threats to financial stability. Among other statutorily defined authorities, FSOC may designate nonbank financial companies for heightened supervision by the Board of Governors of the Federal Reserve System. FSOC consists of 10 voting members and 5 nonvoting members. The 10 voting members include 9 federal regulators and an independent insurance expert.
In September 2012, GAO issued a report on FSOC's challenges, efforts to establish management mechanisms, activities for supporting collaboration among its members and external stakeholders, and processes for issuing reports and rules. GAO made nine recommendations to FSOC to improve the transparency and accountability of its decisionmaking, among other things.
This testimony is based on GAO's September 2012 report ( GAO-12-886 ). It discusses FSOC's efforts to respond to GAO's 2012 recommendations. From June through September 2014, GAO obtained updated information from FSOC staff and reviewed documents related to GAO's recommendations.

What GAO Found

The Financial Stability Oversight Council's (FSOC) has taken steps to address some of GAO's September 2012 recommendations, but additional efforts are needed. GAO made nine recommendations to FSOC in three areas: emerging threats and risks identification, transparency and accountability, and collaboration and coordination. GAO recommended, among other things, that FSOC:
develop a systematic approach that includes collecting and sharing key financial risk indicators to help identify potential threats to financial stability;
develop a strategy to improve communications with the public;
keep detailed records of closed-door sessions;
create a framework for assessing the impact of its decisions to designate nonbanks for enhanced supervision;
develop policies to clarify when collaboration or coordination should occur;
adopt leading practices, such as joint strategies, for collaboration; and
clarify roles and responsibilities for monitoring threats to the financial system.
FSOC still lacks a comprehensive, systematic approach to identify emerging threats to financial stability. In 2012, GAO reported that FSOC's approach might not help identify new risks or threats that member agencies had not already identified. The Office of Financial Research (OFR) has made some progress in developing data tools to support FSOC since the 2012 report, but GAO's observations of two of these tools suggest that one tool does not focus on risks to the financial system, while another remains in a prototype phase.
FSOC has taken steps to improve its communication with the public but could do more to improve transparency and accountability. In May 2014, FSOC approved a revised transparency policy, and FSOC staff said they had attempted to provide more information in the minutes of meetings. But FSOC staff said that they did not intend to keep detailed minutes because of the confidential information discussed. Also, FSOC staff also said that the impact of designating nonbanks for enhanced supervision would be assessed as part of a mandated January 2016 study. However, FSOC has not begun to prepare for this study. GAO has reported on the importance of advance planning for retrospective studies so that needed data are collected.
FSOC has taken steps to improve collaboration and coordination among member agencies but does not plan to act on some of GAO's recommendations on coordination. In May 2014, FSOC approved one formal mechanism that supported coordination—bylaws for the Deputies Committee of senior officials from member agencies that describe its role in coordinating FSOC activities. FSOC staff said they did not plan to clarify the roles and responsibilities of FSOC, OFR, and member agencies because the overlapping responsibilities for monitoring systemic risk had not been problematic. Officials also said that FSOC would not adopt practices to coordinate rulemaking across member agencies, as it does not have the authority to direct independent agencies. GAO maintains that action is needed as its past work has shown that the lack of clear roles and coordination can lead to duplication, confusion, and regulatory gaps.