FSOC’s three primary purposes under the Dodd-Frank Act are to  1.  identify 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 bank holding companies and  nonbank financial companies, as well as risks that could arise outside  the financial services marketplace;  2.  promote market discipline by eliminating expectations on the part of  shareholders, creditors, and counterparties of these large companies  that the U.S. government will shield them from losses in the event of  failure; and  3.  respond to emerging threats to the stability of the U.S. financial  system. To achieve these purposes, the Dodd-Frank Act gave FSOC a number of  important authorities that allow it to  collect information across the financial system so that regulators will  be better prepared to address emerging threats; designate for supervision by the Federal Reserve those nonbank  financial companies that pose risks to the financial system as defined  by the act; designate as systemically important certain financial market utilities  (FMU) and payment, clearing, or settlement activities, requiring them  to meet prescribed risk management standards, and subjecting them  to enhanced regulatory oversight;  recommend stricter standards for the large, interconnected bank  holding companies and nonbank financial companies designated for  enhanced supervision;  vote on determination by the Federal Reserve that action should be  taken to break up institutions that pose a “grave threat” to U.S.  financial stability; and  facilitate information sharing and coordination among the member  agencies to eliminate gaps in the regulatory structure. FSOC and OFR Face Challenges Achieving Their Missions

Key FSOC missions—to identify risks to U.S. financial stability and  respond to emerging threats to stability—are inherently challenging. Further, such threats do not develop in precisely the same way in  successive crises, making them harder to identify. OFR also faces the challenge of trying to build a world-class research  organization from the ground up while meeting shorter term goals and  responsibilities. FSOC’s and OFR’s Management Structures and Mechanisms Could Be Enhanced to Provide Greater Accountability and Transparency

FSOC and OFR have taken steps toward meeting the challenges they  face, including setting up their management structures, communicating  their mission and goals, and hiring staff. Additionally, while FSOC and  OFR have developed web pages on Treasury’s website and taken other  steps to provide information to the public, these efforts have limitations  and do not always fully inform Congress or the public about their activities  and progress. Without taking additional steps to improve accountability  and transparency, FSOC and OFR are missing the opportunity to  demonstrate their progress in carrying out their missions. FSOC has established seven standing committees generally composed  of staff of its members and member agencies to carry out the business of  the council including developing the information the members need to  make decisions effectively. OFR has  also adopted policies and procedures for its operations. In addition, FSOC has some planning under way and OFR has taken  some actions and planned others that are consistent with legal  requirements or leading practices for new organizations relative to  strategic planning and performance management. OFR issued a strategic framework in  March 2012 to cover fiscal years 2012-2014. In  the 2012 Annual Report, FSOC also more clearly identifies  recommendations starting each one with “the council recommends,” but it  still does not consistently designate an FSOC member or members to  monitor or implement the recommendations nor does it establish time  frames for certain actions such as reporting to the council on the status of  the recommendation. FSOC and OFR Have Taken Steps to Build Mechanisms to Identify Potential Threats to Financial Stability, but More Work Is Needed to Realize This Goal

FSOC has taken steps to meet its statutory responsibilities related to  identifying risks and potential emerging threats to U.S. financial stability,  but has not yet developed comprehensive and systematic mechanisms to  realize these goals. Although FSOC and OFR have adopted communication methods to  provide information to the public and Congress on their activities, some of  their methods could be strengthened. Through the committee structure, FSOC members’ staffs also noted that  agencies had leveraged their joint expertise and resources to carry out  FSOC’s statutory responsibilities, including rulemakings. OFR officials also noted that they play a key role on  FSOC’s Data Committee, which supports coordination of and consultation  on issues related to FSOC data collection and sharing. Leveraging resources. Such  persons could be those from the industry and academics. Both the 2011 and 2012 Annual Reports identify a  number of threats, but they do not use a systematic forward-looking  process for doing so. Individual benefits. However, FSOC has not set up processes to conduct a comprehensive  assessment of the overall impact of designations. Doing a comprehensive analysis to assess whether designations are  having their intended impact of providing greater financial stability and the  extent of any other impacts will be challenging. FSOC Has Issued Mandated Reports, but Does Not Have Sufficient Processes for Identifying or Prioritizing Emerging Threats

As table 2 shows, the Dodd-Frank Act mandated that FSOC issue a  number of reports, including five one-time studies and ongoing annual  reports. However, FSOC has not  developed a structure that supports having a systematic or  comprehensive process for identifying potential emerging threats. The 2011 report  includes over 30 threats without explicitly specifying which are most  important. Successfully implementing their mandates will require FSOC members to  actively work together and with external stakeholders. Potential threats to financial stability are discussed at FSOC meetings  and FSOC has established a Systemic Risk Committee to facilitate  coordination among members’ staffs, including member agencies that  often have their own groups devoted to risk analysis. However, more needs to be done to  promote collaboration—both among FSOC members and between  FSOC and external stakeholders. Thus, some threats  may not be identified consistently or at all. Moreover,  addressing these issues can help FSOC and OFR to further promote  collaboration among FSOC’s members and with external stakeholders,  which is critical to their ability to achieve their missions. We recommend that FSOC and OFR clarify responsibility for  implementing requirements to monitor threats to financial stability across  FSOC and OFR, including FSOC members and member agencies, to  better ensure that the monitoring and analysis of the financial system are  comprehensive and not unnecessarily duplicative. As FSOC continues to develop approaches for monitoring threats to  financial stability, we recommend that FSOC develop an approach that  includes systematic sharing of key financial risk indicators across FSOC  members and member agencies to assist in identifying potential threats  for further monitoring or analysis. To improve the transparency of FSOC and OFR operations, we  recommend that FSOC and OFR each develop a communication strategy  to improve communications with the public. Establish formal collaboration and coordination policies that clarify  issues such as when collaboration or coordination should occur and  what role FSOC should play in facilitating that coordination. More fully incorporate key practices for successful collaboration that  we have previously identified. Develop more systematic forward-looking approaches for reporting on  potential emerging threats to financial stability in annual reports. Make recommendations in the annual report more specific by  identifying which FSOC member agency or agencies, as appropriate,  are recommended to monitor or implement such actions within  specified time frames. Second, Treasury states that it expects FSOC will consider the effects on  the financial system resulting from designation in its periodic  assessments in response to our recommendation that FSOC develop a  framework for assessing the impact of its decisions for designating FMUs  and nonbank financial companies on the wider economy and those  entities. We  acknowledge OFR’s efforts in continuing to develop the elements  required for a strategic plan and performance management system and  will review this information when it is publicly released. Appendix I: Objectives, Scope, and Methodology

The objectives of this report are to examine the Financial Stability  Oversight Council’s (FSOC) and Office of Financial Research’s (OFR) (1)  challenges in fulfilling their missions; (2) efforts in establishing  management structures and mechanisms to carry out their missions and  attain their goals; and (3) activities for supporting collaboration among  members and external stakeholders, including international bodies and  regulators; as well as (4) FSOC’s processes used to issue rules and  reports. To examine FSOC’s and OFR’s efforts in establishing management  structures and mechanisms to carry out their missions, we reviewed the  Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act), FSOC’s bylaws and organizational structure (including its  committee structure), and OFR’s strategic framework.
Why GAO Did This Study

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created FSOC to identify and address threats to the stability of the U.S. financial system and OFR to support FSOC and Congress by providing financial research and data. GAO was asked to examine (1) any challenges FSOC and OFR face in fulfilling their missions (2) FSOC and OFR's efforts to establish management structures and mechanisms to carry out their missions, (3) FSOC and OFR's activities for supporting collaboration among their members and external stakeholders, and (4) the processes FSOC used to issue rules and reports. GAO reviewed FSOC documents related to the annual reports, rulemakings, and committee procedures, as well as documents on OFR's budget, staffing, and strategic planning. GAO also interviewed FSOC and OFR staff, FSOC member and member agency staff, and external stakeholders, including foreign officials, industry trade groups, and academics.

What GAO Found

These new organizations--the Financial Stability Oversight Council (FSOC) and Office of Financial Research (OFR)--face challenges in achieving their missions. Key FSOC missions--to identify risks and respond to emerging threats to financial stability--are inherently challenging, in part, because risks to financial stability do not develop in precisely the same way in successive crises. Collaboration among FSOC members can also be challenging at times, as almost all of them represent independent agencies that retained existing authorities. OFR faces the challenge of trying to establish and build a world-class research organization while meeting shorter-term goals and responsibilities.
FSOC's and OFR's management mechanisms to carry out their missions could be enhanced to provide greater accountability and transparency. FSOC and OFR have taken steps toward establishing such mechanisms. FSOC has established seven standing committees generally composed of staff of its members and member agencies to support the council in carrying out its business and provide information to the council for decision making and adopted a memorandum of understanding on information sharing to help govern its activities. FSOC and OFR have also issued annual reports on their activities and created web pages that provide some information to the public. However, certain mechanisms could be strengthened. For instance:
FSOC's Systemic Risk Committee, which is responsible for identifying risks to financial stability, has procedures to facilitate analysis of risks raised by staff. However, without a more systematic approach and comprehensive information, FSOC member agencies, on their own, may not be well positioned to judge which potential threats will benefit from interagency discussions. GAO recommends that FSOC collect and share key financial risk indicators as part of a systematic approach to help identify potential threats to financial stability.
Public information on FSOC's and OFR's decision making and activities is limited, which makes assessing their progress in carrying out their missions difficult. GAO recommends that (1) FSOC keep detailed records of closeddoor sessions and (2) both entities develop a communication strategy to improve communications with the public.
FSOC's annual reports--which serve as its key accountability documents--do not consistently identify which entities should monitor or implement the identified recommendations or give time frames for specific actions. To hold FSOC accountable for its recommendations, GAO recommends that FSOC recommend a lead agency or agencies to monitor or implement each recommendation within specified time frames.
OFR issued a strategic framework in March 2012 as an important first step in adopting a strategic planning and performance management system. However, that document lacked some leading practices such as linking activities to strategic goals and performance measurement systems. GAO recommends that OFR further develop a strategic planning and performance management system that includes these elements and will allow it to be held accountable.
Although FSOC and OFR have taken steps to promote collaboration among FSOC members and external stakeholders, FSOC could further adopt key practices. FSOC member agency staff noted that agencies have leveraged their joint expertise and resources to produce FSOCs mandated reports and rules. OFR has also taken steps to collaborate with external stakeholders by initiating a working paper series, moving to form an advisory committee, and coordinating U.S. efforts at the international level to help create a legal entity identifier for financial entities that could enable regulators to identify parties to financial transactions. However, FSOC could do more to promote collaboration. For instance, FSOC, and OFR are required to monitor risks to financial stability, but they have not yet clarified agency responsibilities for implementationcreating the potential for regulatory gaps or duplication of effort. In addition, FSOC could take better advantage of statutory mechanisms to leverage external resources, including developing advisory committees. To improve collaboration and coordination among its member agencies and with external stakeholders, GAO recommends that FSOC (1) develop policies to clarify when formal collaboration or coordination should occur and FSOCs role in such efforts, (2) more fully incorporate key practices for successful collaboration that GAO has previously identified, and (3) clarify roles and responsibilities for implementing requirements to monitor risks to the financial system.
FSOC has issued rules that improve the transparency of its processes, and statutorily mandated reports but has not established processes to help ensure that these will have their intended results. While FSOC has issued rules on processes for designating nonbank financial entities for additional oversight and intends to review certain aspects of those rules, it has not developed plans for comprehensively evaluating whether designations are having their intended impactreducing threats to financial stability. The impact of the designations on the economy and the financial entities will depend, in part, on a number of rules being issued by independent FSOC member agencies that will be applied to those being designated. Without a comprehensive assessment of the impact of these rules that will require the cooperation of individual FSOC members, understanding whether the designations are having their intended impact will be difficult. GAO recommends that FSOC develop a comprehensive framework for assessing the impact of its designation decisions. In addition, FSOC has not developed a systematic forward-looking process for identifying potential emerging threats in its mandated annual reporting process. In particular, FSOC does not have processes for consistently identifying such threats, separating them from more current threats, or prioritizing them. Identifying a large number of threatsthe 2011 report identified over 30without prioritizing them makes focusing on those that are most important difficult for decisionmakers. The 2012 report also included many threats, and neither report separates current threats from those that are potentially emerging. To improve FSOCs annual reporting on potential emerging threats, GAO recommends that FSOC develop more systematic approaches that are forward looking and help to prioritize the threats.

What GAO Recommends

GAO makes 10 recommendations to strengthen the accountability and transparency of FSOC and OFR's decisions and activities as well as to enhance collaboration among FSOC members and with external stakeholders. Treasury said, as Chairperson, that the council and OFR would consider the recommendations, but questioned the need for FSOC and OFR to clarify responsibilities for monitoring threats to financial stability and stated that OFR expects to share some risk indicators. However, stronger and more systematic actions are still needed in these areas.