Republican and Democratic lawmakers both criticized efforts by regulators to determine which large firms could pose a risk to the financial system.
The Financial Stability Oversight Council, created by Congress last year as part of the financial-regulatory-overhaul law, is deciding which nonbank financial firms could have "systemic" effects if they got into trouble and possibly need a government bailout in a crisis. Such firms would be subject to stricter capital standards and regulation than before.
The authors of the law wanted to prevent a repeat of American International Group Inc. (AIG), the loosely regulated insurance firm that needed a bailout in 2008 after its risky bets threatened to imperil the entire financial system. Large, nonbank firms that could potentially be designated "systemic" include hedge funds, private-equity shops, insurers and mutual funds.
Regulators testifying last week at the House Financial Services subcommittee hearing said financial firms and their trade groups are lobbying to avoid the "systemic" label.
Republican and Democratic lawmakers said the council, which is overseen by the Treasury Department, hasn't been forthcoming enough about the criteria being used to decide which firms pose systemic risk.
"I think it's absurd that we are going to issue a rule as important as this and we do not have specifics of what criteria are going to be used until after you've already decided ... without everybody at the table," said Rep. Randy Neugebauer (R., Texas).
In January, the oversight council released a broad proposal for designating firms but didn't include many specifics of the criteria it would consider. In February, the Federal Reserve proposed a rule that included some criteria, including a requirement that firms must get 85% or more of their revenue from financial-related activities.
Jeffrey Goldstein, the Treasury Department's under secretary for domestic finance, said the council will "provide greater clarity" when it issues a final rule on the designation criteria, but he also acknowledged companies won't have the opportunity to comment once the rule is finalized.
"I don't like that answer, and I don't like that situation," said Rep. Michael Capuano (D., Mass).
Both parties were critical of the oversight council's efforts, but their arguments were fundamentally different. Republicans worried the criteria would capture too many firms, saying the designation would provide an implicit government guarantee and give companies funding and other marketplace advantages. Democrats urged regulators to cast a wide net, saying they need to keep an eye on as many firms as possible.
"It's absolutely essential that you have a big list of other people that you keep your eye on," said Mr. Capuano.
Lawmakers also raised concerns about the insurance industry's participation on the oversight council. John Huff, Missouri's insurance director, who serves on the council, said it was operating with inadequate insurance expertise and said his attempts to solicit outside help had been rebuffed.
The council comprises 10 voting members, including those from the Fed, Treasury and Securities and Exchange Commission and an independent insurance expert. There are also five nonvoting members, including the director of the Federal Insurance Office and a state insurance commissioner.
"While FSOC engages in work that could impact insurers, two of our three insurance representatives are absent from the table, and I have been prohibited from utilizing available state regulatory resources, including engaging other state regulators, some of whom are active in very similar work in the international arena," Mr. Huff said.
Rep. Barney Frank (D., Mass.) said Congress intended to have the insurance industry fairly represented on the oversight council. He asked whether Mr. Huff could solicit outside help. Mr. Goldstein said the council was trying to balance the need for insurance expertise with the need for the group's participants to keep their proceedings confidentia