Democratic and Republican lawmakers are cooperating on legislation that would lift some of the secrecy around the U.S. council that decides which companies pose the biggest risks to the financial system.

The proposed legislation, drafted with help from the main lobbying group for mutual funds, would require the Financial Stability Oversight Council to give firms early notice that they could be designated systemically important—a status that puts them under Federal Reserve oversight in an effort to dispel any perception they are “too big to fail.”

The measure, which could be introduced as soon as this week, has raised concerns at the Treasury Department, in part because it is the first bipartisan drive to limit the powers of the council, a centerpiece of the 2010 Dodd-Frank Act. Top agency officials have been working to tamp down the effort, people familiar with the matter said.

“Decisions by the Financial Stability Oversight Council dramatically affect the operations of companies that are designated as systemically important financial institutions,” said Representative Dennis Ross, a Florida Republican, who is introducing the legislation along with Representative John Delaney, a Democrat from Maryland.

The FSOC, an umbrella group of U.S. regulators, was established by Dodd-Frank to avoid a repeat of the 2008 financial crisis when the government stepped in to bail out large firms whose collapse would destabilize the financial system. The law automatically put banks with $50 billion or more in assets under Fed supervision and established the FSOC to decide which other financial firms needed similar oversight.

BlackRock, Fidelity

The council began debating the fates of asset managers BlackRock Inc. and Fidelity Investments in October, and the industry has complained that the board’s deliberations are too secretive. Treasury officials say the council can’t publicly discuss confidential information about specific companies.

Democratic lawmakers supporting the changes say the council could be more transparent and still fulfill its mission.

“There are some tweaks that might actually allow FSOC to achieve its objectives even better,” Delaney said in an interview. “That’s what we’re trying to do. We’re not coming at it that FSOC is a poorly conceived idea.”

The bill is unlikely to become law this year because it lacks support in the Democrat-controlled Senate. It will, however, increase pressure on the Treasury Department to revisit how the council operates. Similar bills have been introduced earlier this year by Republicans.

‘Serious Momentum’

“When you see two or three different legislative proposals, then you think there might be some more serious momentum here,” said Joseph Engelhard, a former Treasury and congressional aide who is now senior vice president at Washington consultant Capital Alpha Partners LLC. Engelhard said significant changes to the FSOC could only pass Congress if Republicans win a Senate majority in upcoming elections.

Treasury Secretary Jacob J. Lew is chairman of the council, whose 10 voting members also include the chairmen of the Fed, the Securities and Exchange Commission and the Federal Deposit Insurance Corp. At a June 24 hearing before the House Financial Services Committee, Lew asserted that the FSOC is as open as it can be and said critics who call it opaque are “simply wrong.”

“The council has voluntarily adopted a robust transparency policy and put in place a comprehensive, deliberative approach to its evaluation of risks,” Lew said. “It solicits public input and carefully considers all points of view.”

Demystifying FSOC

Seeking to demystify the FSOC and forestall the legislative drive, the department has held briefings in recent weeks with congressional staff, according to people familiar with the meetings who asked not to be identified because the meetings were private. Mary Miller, the top domestic finance official, has also been telephoning Democratic lawmakers to explain the council’s procedures for determining how it singles out companies for increased supervision, the people said.

Suzanne Elio, a Treasury Department spokeswoman, said she had no immediate comment.

Asset management firms have resisted the label, arguing that they are different from the large banks that are now considered systemically important. They don’t make big trades with their own money, for example, and the investment accounts they hold for clients aren’t guaranteed by the government, like bank accounts are. Individuals, the firms say, direct their own investments and can withdraw their funds at any time.

Early Notification

According to a summary, the Ross-Delaney bill would direct the FSOC to notify a company early in the process that it has been identified for possible designation. It also would require the council to identify specific risks to financial stability that the company poses and to provide firms a chance to avoid the designation by fixing the problems.

The legislation also would subject the FSOC to provisions of the government in the Sunshine Act and the Administrative Procedure Act—laws that other regulators must follow.

The measure was written with the assistance of the Investment Company Institute, the mutual fund industry’s main trade association, according to two people familiar with its drafting.

“We certainly support the goals of the bill,” said Mike McNamee, a spokesman for the ICI, who declined to say whether the organization helped draft the proposed legislation.

Asset Managers

The first two asset managers under FSOC review are among the largest—BlackRock, which manages $3.8 trillion worldwide, and Fidelity Investments with $1.9 trillion. The council has already pinned the “systemically important” label on three firms: insurers American International Group Inc. and Prudential Financial Inc. as well as General Electric Co.’s finance unit. The council is currently considering whether to add MetLife Inc.

House Republicans have pursued other legislation to change the FSOC. Representative Randy Neugebauer of Texas, a Republican, introduced a bill seeking a one-year moratorium on further designations. Another bill, sponsored by Representative Scott Garrett, a New Jersey Republican, would allow members of Congress to attend the council’s meetings.

“If the Treasury Department staff and other FSOC member agencies spent as much time making their designation process transparent and objective as they do lobbying against making commonsense changes, Congress wouldn’t have to be spending as much time on these legislative efforts,” Garrett said Tuesday in remarks at the American Enterprise Institute.

Garrett’s efforts were praised by a Republican SEC commissioner at the same event, Michael Piwowar, who dubbed FSOC the “Unaccountable Capital Markets Death Panel.”

“Congress may be the only tempering force against the council’s regulatory overreach,” Piwowar said.