Proposed Rule2023-08964
Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies
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Published
April 28, 2023
Issuing agencies
Financial Stability Oversight Council
Abstract
This proposed interpretive guidance, which would replace the Financial Stability Oversight Council's existing interpretive guidance on nonbank financial company determinations, describes the process the Council intends to take in determining whether to subject a nonbank financial company to supervision and prudential standards by the Board of Governors of the Federal Reserve System.
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[Federal Register Volume 88, Number 82 (Friday, April 28, 2023)]
[Proposed Rules]
[Pages 26234-26244]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-08964]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 88, No. 82 / Friday, April 28, 2023 /
Proposed Rules
[[Page 26234]]
FINANCIAL STABILITY OVERSIGHT COUNCIL
12 CFR Part 1310
Authority To Require Supervision and Regulation of Certain
Nonbank Financial Companies
AGENCY: Financial Stability Oversight Council.
ACTION: Notification of proposed interpretive guidance; request for
public comment.
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SUMMARY: This proposed interpretive guidance, which would replace the
Financial Stability Oversight Council's existing interpretive guidance
on nonbank financial company determinations, describes the process the
Council intends to take in determining whether to subject a nonbank
financial company to supervision and prudential standards by the Board
of Governors of the Federal Reserve System.
DATES: Comment due date: June 27, 2023.
ADDRESSES: You may submit comments by either of the following methods.
All submissions must refer to the document title and RIN 4030-[XXXX].
Electronic Submission of Comments: You may submit comments
electronically through the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt, and enables the Council to make them available to the public.
Comments submitted electronically through the <a href="https://www.regulations.gov">https://www.regulations.gov</a> website can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Mail: Send comments to Financial Stability Oversight Council, Attn:
Eric Froman, 1500 Pennsylvania Avenue NW, Room 2308, Washington, DC
20220.
All properly submitted comments will be available for inspection
and downloading at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
In general, comments received, including attachments and other
supporting materials, are part of the public record and are available
to the public. Do not submit any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
FOR FURTHER INFORMATION CONTACT: Eric Froman, Office of the General
Counsel, Treasury, at (202) 622-1942; Devin Mauney, Office of the
General Counsel, Treasury, at (202) 622-2537; or Carol Rodrigues,
Office of the General Counsel, Treasury, at (202) 622-6127.
SUPPLEMENTARY INFORMATION:
I. Background
Section 111 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5321) (the ``Dodd-Frank Act'') established
the Financial Stability Oversight Council. The purposes of the Council
under section 112 of the Dodd-Frank Act (12 U.S.C. 5322) are ``(A) to
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 or nonbank
financial companies, or that could arise outside the financial services
marketplace; (B) to promote market discipline, by eliminating
expectations on the part of shareholders, creditors, and counterparties
of such companies that the Government will shield them from losses in
the event of failure; and (C) to respond to emerging threats to the
stability of the United States financial system.''
The Dodd-Frank Act gives the Council broad discretion to determine
how to respond to potential threats to U.S. financial stability, and
the Council uses each of its statutory authorities as appropriate. The
Council's duties under section 112 of the Dodd-Frank Act reflect the
range of approaches the Council may consider, including collecting
information from regulators, requesting data and analyses from the
Office of Financial Research, monitoring the financial services
marketplace and financial regulatory developments, facilitating
information sharing and coordination among regulators, recommending to
the Council member agencies general supervisory priorities and
principles, identifying regulatory gaps, making recommendations to the
Board of Governors of the Federal Reserve System (``Federal Reserve'')
or other primary financial regulatory agencies,\1\ and designating
certain entities or payment, clearing, and settlement activities for
additional regulation.
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\1\ ``Primary financial regulatory agency'' is defined in
section 2(12) of the Dodd-Frank Act, 12 U.S.C. 5301(12).
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Section 113 of the Dodd-Frank Act authorizes the Council to
determine that a nonbank financial company will be subject to
supervision by the Federal Reserve and prudential standards. Under
section 165 of the Dodd-Frank Act, the Federal Reserve is responsible
for establishing the prudential standards that will be applicable to a
nonbank financial company subject to a Council designation \2\ under
section 113. The Council has previously issued rules, guidance, and
other public statements regarding its process for evaluating nonbank
financial companies for a potential designation.\3\ On April 11, 2012,
the Council issued a final rule at 12 CFR 1310.1-23 (the ``2012 Rule'')
setting forth certain procedures related to designations under section
113 of the Dodd-Frank Act. Attached to the 2012 Rule as Appendix A was
interpretive guidance (the ``2012 Interpretive Guidance'') setting
forth additional information regarding the manner in which the Council
made determinations under section 113 (together with the 2012 Rule, the
``2012 Rule and Guidance''). On February 4, 2015, the Council adopted
supplemental procedures (the ``2015 Supplemental Procedures'') to the
2012 Rule and Guidance.\4\ On March 13, 2019, the
[[Page 26235]]
Council amended the 2012 Rule by adding a new provision at 12 CFR
1310.3.\5\ On December 30, 2019, the Council replaced the 2012
Interpretive Guidance with revised interpretive guidance (the ``2019
Interpretive Guidance'').\6\ In connection with the adoption of the
2019 Interpretive Guidance, the Council rescinded the 2015 Supplemental
Procedures.
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\2\ Section 113 of the Dodd-Frank Act, 12 U.S.C. 5323, refers to
a Council ``determination'' regarding a nonbank financial company.
This proposal refers to ``determination'' and ``designation''
interchangeably for ease of reading.
\3\ On May 22, 2012, the Council approved hearing procedures
relating to the conduct of hearings before the Council in connection
with proposed determinations regarding nonbank financial companies
and financial market utilities and related emergency waivers or
modifications under sections 113 and 804 of the Dodd-Frank Act, 12
U.S.C. 5323, 5463; 77 FR 31855 (May 30, 2012). The hearing
procedures were amended in 2013, 78 FR 22546 (April 16, 2013), and
2018, 83 FR 12010 (March 19, 2018). This proposed guidance would not
amend the Council's hearing procedures.
\4\ Financial Stability Oversight Council Supplemental
Procedures Relating to Nonbank Financial Company Determinations
(Feb. 4, 2015), available at <a href="https://home.treasury.gov/system/files/261/Supplemental%20Procedures%20Related%20to%20Nonbank%20Financial%20Company%20Determinations%20%20%28February%204%2C%202015%29.pdf">https://home.treasury.gov/system/files/261/Supplemental%20Procedures%20Related%20to%20Nonbank%20Financial%20Company%20Determinations%20%20%28February%204%2C%202015%29.pdf</a>. In
addition, in June 2015, the Council published staff guidance with
details regarding certain methodologies used in connection with the
determination process under section 113. See Council, Staff Guidance
Methodologies Relating to Stage 1 Thresholds (June 8, 2015),
available at <a href="https://home.treasury.gov/system/files/261/Staff%20Guidance%20Methodologies%20Relating%20to%20Stage%201%20Thresholds.pdf">https://home.treasury.gov/system/files/261/Staff%20Guidance%20Methodologies%20Relating%20to%20Stage%201%20Thresholds.pdf</a>.
\5\ 84 FR 8958 (March 13, 2019).
\6\ 84 FR 71740 (Dec. 30, 2019).
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The Council is proposing this interpretive guidance (the ``Proposed
Guidance'') to revise and update the 2019 Interpretive Guidance. If the
Council issues final interpretive guidance based on this proposal, the
final interpretive guidance will replace the 2019 Interpretive
Guidance, found at Appendix A to 12 CFR part 1310, in its entirety but
will not modify the rules at 12 CFR 1310.1-23.
The Council is concurrently issuing for public comment a separate
document (the Proposed Analytic Framework) explaining the Council's
broader approach to identifying, evaluating, and addressing potential
risks to U.S. financial stability. The Proposed Analytic Framework
describes the Council's analytic approach without regard to the origin
of a particular risk, including whether the risk arises from widely
conducted activities or from individual entities, and regardless of
which of the Council's authorities may be used to address the risk.
II. Overview of Proposed Guidance
A. Key Changes
The Proposed Guidance seeks to establish a durable process for the
Council's use of its authority to designate nonbank financial
companies. The 2012 Interpretive Guidance provided a crucial framework
for the Council's analyses, but because it was adopted before the
Council had designated any nonbank financial companies, it could not
reflect the lessons learned from engaging in such designations. The
2019 Interpretive Guidance provided additional clarity regarding the
Council's procedures but created inappropriate hurdles to the Council's
ability to use this authority. Congress created the designation
authority to fill a glaring regulatory gap that became apparent during
the financial crisis in 2007-09, when financial distress at large,
complex, highly interconnected, highly leveraged, and inadequately
regulated nonbank financial companies devastated the financial system.
The Council has used this authority sparingly, but to mitigate the
risks of future financial crises, the Council must be able to use each
of its statutory authorities as appropriate to address potential
threats to U.S. financial stability. The Proposed Guidance is intended
to make this authority available to the Council while maintaining
rigorous procedural protections for nonbank financial companies that
may be reviewed for potential designation.
The Proposed Guidance would make three key changes. First, the
Proposed Guidance would eliminate the statement, found in the 2019
Interpretive Guidance, that the Council would first rely on federal and
state regulators to address risks to financial stability before the
Council would begin to consider a nonbank financial company for
potential designation. The 2019 Interpretive Guidance refers to the
Council's reliance on existing regulators as an ``activities-based
approach,'' and provides that the Council will prioritize that approach
before considering designations.\7\ The Council constantly works with
federal and state financial regulatory agencies to identify, assess,
and respond to risks to financial stability. Nearly all the Council
members represent such agencies. Many of the Council's statutory duties
relate to promoting interagency collaboration, monitoring financial
market developments, facilitating information sharing, and recommending
that existing regulators address risks. These activities comprise the
foundation of all the Council's work, and under the Proposed Guidance
the Council would continue to monitor for activities that pose risks to
financial stability and to work with regulators to respond to those
risks. Under the Proposed Guidance, the Council would maintain its
previous commitment to engaging extensively with existing regulators.
The Council considers dozens of potential risks to financial stability
every year, as described in its annual reports, and the Council expects
that most potential risks to financial stability will continue to be
addressed by existing regulators rather than by use of the Council's
nonbank financial company designation authority. However, to enable the
Council to use its authorities as appropriate, the Proposed Guidance
would eliminate the statement in the 2019 Interpretive Guidance that
the Council would use an activities-based approach before considering a
designation under section 113.
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\7\ See 84 FR 71740, 71761 (Dec. 30, 2019).
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The second fundamental change under the Proposed Guidance is that
it is limited to the Council's procedures--rather than substantive
analyses--related to nonbank financial company designations. The
Council is issuing, for public comment, a separate document explaining
the Council's broader approach to identifying, evaluating, and
addressing potential risks to U.S. financial stability. The Proposed
Analytic Framework describes the Council's analytic approach without
regard to the origin of a particular risk, including whether the risk
arises from widely conducted activities or from individual entities. It
provides new public transparency into how the Council expects to
consider any type of risk to financial stability, regardless of which
of the Council's authorities may be used to address those risks.
Therefore, the Council proposes to rescind the description, set forth
in section III of the 2019 Interpretive Guidance, of the Council's
analytic approach to evaluating nonbank financial companies under
consideration for designation.
The third primary change under the Proposed Guidance, related to
its focus on the Council's procedures rather than substantive analyses,
is that the Proposed Guidance does not include language, found in the
2019 Interpretive Guidance, stating that the Council would conduct a
cost-benefit analysis and an assessment of the likelihood of a firm's
material financial distress prior to making a determination under
section 113. As explained in greater detail below, the Council believes
that these steps are not required by the Dodd-Frank Act, are not useful
or appropriate, and unduly hamper the Council's ability to use the
statutory authority Congress provided to it.
With respect to the Council's procedures for nonbank financial
company designations and annual reevaluations of designations, the
Proposed Guidance would make only minor changes. The revisions made in
the 2019 Interpretive Guidance related to the Council's procedures for
nonbank financial company designations largely reflected the rules and
guidance the Council had previously issued, including the 2015
Supplemental Procedures, as well as the Council's
[[Page 26236]]
practices in its previous designations. Among other things, the
Proposed Guidance continues to provide for significant engagement and
communication between the Council and a nonbank financial company under
review for potential designation, and with the company's primary
financial regulatory agency or home-country supervisor. In addition to
these existing features, the Proposed Guidance provides further detail
on how the Council would identify nonbank financial companies for
preliminary evaluation to assess the risks they could pose to U.S.
financial stability. The Council believes that under these procedures,
the designation process would be rigorous and transparent.\8\
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\8\ In accordance with the Council's bylaws, the Council may
delegate authority, including to its Deputies Committee, to
implement and take any actions under the guidance, except with
respect to actions that are expressly nondelegable under the Dodd-
Frank Act, the Council's bylaws, or the guidance.
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B. Basis for Nonbank Financial Company Determinations
Both the 2012 Interpretive Guidance and the 2019 Interpretive
Guidance discussed substantive analytic factors the Council applies in
its assessment of nonbank financial companies. The Proposed Guidance is
instead limited to the Council's procedures related to nonbank
financial company designations and does not include a discussion of the
Council's substantive analyses of nonbank financial companies, like the
description in section III of the 2019 Interpretive Guidance. The
Proposed Guidance does not include that type of discussion because the
Council is issuing a separate document--the Proposed Analytic
Framework--apart from its guidance on nonbank financial company
designations, regarding its approach for identifying and evaluating
potential risks to U.S. financial stability. That framework describes
the Council's planned analytic approach without regard to either the
origin of a particular risk, including whether the risk arises from
widely conducted activities or from individual entities, or any
potential application of the Council's authorities to mitigate such
risks.
In particular, the 2019 Interpretive Guidance describes channels
deemed most likely to facilitate the transmission of the negative
effects of a nonbank financial company's material financial distress,
or of the nature, scope, size, scale, concentration,
interconnectedness, or mix of the company's activities, to other
financial firms and markets; how the complexity and resolvability and
existing regulatory scrutiny of a company under consideration for
designation may affect the Council's evaluation of the relevant
statutory factors; and the Council's interpretation of several
statutory terms. For the reasons discussed below, these descriptions do
not appear in the Proposed Guidance and would not be included in
Appendix A to part 1310.
History illustrates that many factors, such as leverage, liquidity
risk, and operational risk, regularly recur in different forms and
under different conditions to generate risks to financial stability,
and the Proposed Analytic Framework describes vulnerabilities that
commonly generate or exacerbate risks to financial stability and the
mechanisms by which negative effects can be transmitted more broadly.
The Council may consider those risk factors and transmission channels
in activities-based reviews, entity-specific analyses, or other
work.\9\ Accordingly, the Council believes that describing these
substantive analytic approaches broadly, rather than in a context
limited to nonbank financial company designations, is most appropriate.
With respect to nonbank financial company designations specifically,
the Dodd-Frank Act sets forth the standard for designations and certain
specific considerations that the Council must take into account in
making any determination under section 113. The Council will apply the
statutory standard and considerations in any evaluation of a nonbank
financial company for potential designation.
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\9\ The Council has long noted that the identified transmission
channels are non-exhaustive. See 2019 Interpretive Guidance, 84 FR
71763 (December 30, 2019) (``The transmission channels . . . set
forth below are not exhaustive and may not apply to all nonbank
financial companies under evaluation. . . . The Council may also
consider other relevant channels through which risks could be
transmitted from a particular nonbank financial company and thereby
pose a threat to U.S. financial stability.''); see also 2012
Interpretive Guidance, 77 FR 21637, 21657 (April 11, 2012) (``The
Council intends to continue to evaluate additional transmission
channels and may, at its discretion, consider other channels through
which a nonbank financial company may transmit the negative effects
of its material financial distress or activities and thereby pose a
threat to U.S. financial stability.'').
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The 2019 Interpretive Guidance also provides the Council's
interpretation of several statutory terms not defined in the Dodd-Frank
Act, including ``company,'' ``nonbank financial company supervised by
the Board of Governors,'' and ``material financial distress''--that the
Council proposes to retain and has incorporated into the Proposed
Guidance. However, the Council believes the 2019 Interpretive
Guidance's interpretation of ``threat to the financial stability of the
United States'' as meaning ``the threat of an impairment of financial
intermediation or of financial market functioning that would be
sufficient to inflict severe damage on the broader economy'' \10\ is
inappropriate. That definition, which requires the Council to determine
that the economy ``would'' be severely damaged, contrasts sharply with
the statutory standard under section 113 of the Dodd-Frank Act, which
calls on the Council to determine whether there ``could'' be a threat
to financial stability.\11\ Moreover, the Council's statutory purpose
``to respond to emerging threats to the stability of the United States
financial system'' indicates that the Council must address threats that
may impair the financial system before they are realized. The nature of
financial crises is that the precise severity of harm posed by emerging
threats may not be apparent until it is too late. Accordingly, the
Proposed Guidance does not include this definition. For purposes of
analyses under section 113, the Council would expect to evaluate a
``threat to the financial stability of the United States'' with
reference to the description of financial stability provided in the
Proposed Analytic Framework.
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\10\ See 84 FR 71763 (December 30, 2019). The definition of this
term in the 2019 Interpretive Guidance imposed a higher threshold
than the Council's previous interpretation of this term under the
2012 Interpretive Guidance.
\11\ See also Dodd-Frank Act section 112(a)(2)(C) (setting forth
the Council's duty to ``require [enhanced] supervision . . . for
nonbank financial companies that may pose risks to . . . financial
stability'' (emphasis added)).
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Questions for Comment
1. Does the proposal described above not to include in the
interpretive guidance a description of the Council's substantive
analytic approach to evaluating nonbank financial companies in the
context of a designation under section 113 of the Dodd-Frank Act, in
favor of a separate framework that describes the Council's analytic
approach without regard to the origin of a particular risk or the
authority the Council may use to mitigate such risk, allow the Council
to achieve its statutory purposes? Should the Council's proposed
approach be modified for other considerations?
2. Are there additional statutory terms beyond ``company,''
``nonbank financial company supervised by the Board of Governors,'' and
``material financial distress'' for which the Council should set forth
its interpretation in the Proposed Guidance?
3. Would the Council's elimination of the 2019 Interpretive
Guidance's
[[Page 26237]]
interpretation of ``threat to the financial stability of the United
States'' as meaning ``the threat of an impairment of financial
intermediation or of financial market functioning that would be
sufficient to inflict severe damage on the broader economy'' enable it
to achieve its statutory purposes? When the Council interprets the
statutory phrase ``threat to the financial stability of the United
States,'' are there additional factors it should consider?
C. Activities-Based Approach
The 2019 Interpretive Guidance states that the Council will
prioritize its efforts to identify, assess, and address potential risks
and threats to U.S. financial stability through a process that begins
with an ``activities-based approach,'' and that the Council will pursue
entity-specific determinations under section 113 of the Dodd-Frank Act
only if a potential risk or threat cannot be adequately addressed
through an activities-based approach. As explained in the 2019
Interpretive Guidance, an activities-based approach means an approach
in which the Council seeks to address potential risks to financial
stability using an authority other than nonbank financial company
designations.
The Proposed Guidance removes this prioritization among the
Council's authorities, clarifying that the Council may use any of its
statutory authorities, as appropriate, to address risks and threats to
U.S. financial stability. As noted above, the Council will continue to
monitor for activities that pose risks to financial stability and work
with regulators to respond to those risks. Appropriate actions to
respond to a particular risk depend on the nature of the risk. For
example, vulnerabilities originating from activities that are widely
conducted in a particular sector or market may be well-suited for
activity-based or industry-wide regulation. In contrast, where distress
at one entity could threaten financial stability, or where risks
arising from a particular financial company could threaten financial
stability, entity-based regulation may be appropriate. The Dodd-Frank
Act gives the Council a range of authorities and broad discretion to
determine how to respond to potential threats to U.S. financial
stability. The Council stated in the 2019 Interpretive Guidance that it
intended to use a prioritization scheme found nowhere in the Dodd-Frank
Act, under which the Council would generally seek to use certain of its
authorities before others. Consistent with the Council's statutory
purpose to respond to emerging threats to U.S. financial stability, the
Proposed Guidance would remove this prioritization, allowing the
Council the flexibility to use the most appropriate tool for addressing
potential risks. For example, the Proposed Guidance makes clear that
the Council could consider using its section 113 designation authority
when material financial distress at a nonbank financial company, or the
nature, scope, size, scale, concentration, interconnectedness, or mix
of the activities of a nonbank financial company, could pose a threat
to U.S. financial stability, as appropriate, without first needing to
consider other approaches.
The Council's history provides instructive examples of the
Council's use of different authorities and approaches for different
types of risks. For example, the Council has taken an activities-based
approach in recommending actions to address risks relating to crypto-
assets, climate-related financial risks, and other topics. In 2012, the
Council used an activities-based approach in issuing for public comment
proposed recommendations for money market mutual fund reforms. Further,
all of the Council's annual reports have identified and recommended
actions regarding various risks to U.S. financial stability,\12\ many
in the form of an activities-based approach. The Council has also used
entity-specific approaches in designating eight financial market
utilities under Title VIII of the Dodd-Frank Act and in designating
four nonbank financial companies in 2013 and 2014 under section 113 of
the Dodd-Frank Act.
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\12\ See, e.g., FSOC, 2022 Annual Report (2022), available at
<a href="https://home.treasury.gov/system/files/261/FSOC2022AnnualReport.pdf">https://home.treasury.gov/system/files/261/FSOC2022AnnualReport.pdf</a>.
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Financial crises have illustrated the importance of ensuring that
the Council can exercise its authorities as needed. For example, the
2007-09 financial crisis showed that material financial distress at a
small number of large, interconnected, and highly leveraged nonbank
financial companies could threaten the stability of the U.S. financial
system. Based in part on that experience, Congress created the Council
and gave it a mandate to address risks that arise in the future. Under
the Proposed Guidance, the Council would retain flexibility to address
risks and threats to U.S. financial stability using whichever
authorities are appropriate for the circumstances.
Consistent with the modifications described above, the Proposed
Guidance provides additional detail on how the Council would identify
nonbank financial companies for preliminary evaluation to assess the
risks they could pose to U.S. financial stability (referred to as
``Stage 1''). The 2019 Interpretive Guidance, in accordance with the
activities-based approach, provided that the Council could evaluate a
company for designation if a company's primary financial regulatory
agency did not adequately address a potential risk identified by the
Council. The Proposed Guidance instead explains the process by which
the Council's staff-level committees would preliminarily identify and
assess potential risks to U.S. financial stability using the analytical
methods described in the Council's separately issued Proposed Analytic
Framework. This approach seeks to strengthen the Council's ability to
monitor, assess, and mitigate risks to U.S. financial stability,
regardless of whether those risks originate from individual companies
or widely conducted activities, while providing flexibility for the
Council to adapt to circumstances that may rapidly evolve.
Questions for Comment
4. Would removal of the prioritization of the ``activities-based
approach'' from the interpretive guidance enable the Council to achieve
its statutory purposes? Should the Council's proposed approach be
modified for other considerations?
5. Are there additional steps the Council should take to ensure all
of its authorities for addressing potential risks to U.S. financial
stability are equally available and appropriately exercised?
6. Would the proposed staff-level process for identifying nonbank
financial companies for preliminary evaluation enable the Council to
achieve its statutory purposes? Does the Proposed Guidance identify the
appropriate procedures the Council should follow as it considers a
company for potential designation? Are there other means of identifying
companies for preliminary review the Council should consider, such as
the application of specific metrics for different sectors of the
nonbank financial system?
7. If the Council were to establish a set of uniform quantitative
metrics to identify nonbank financial companies for further evaluation,
as it did through the Stage 1 thresholds in the 2012 Interpretive
Guidance, what metrics should the Council consider?
D. Cost-Benefit Analysis and Likelihood of Material Financial Distress
The 2019 Interpretive Guidance states, ``The Council will make a
determination under section 113 only if
[[Page 26238]]
the expected benefits to financial stability from Federal Reserve
supervision and prudential standards justify the expected costs that
the determination would impose. As part of this analysis, the Council
will assess the likelihood of a firm's material financial distress, in
order to assess the extent to which a determination may promote U.S.
financial stability.'' The Proposed Guidance does not include this
language, as discussed below.
Cost-Benefit Analysis. The Dodd-Frank Act does not require a cost-
benefit analysis prior to the designation of a nonbank financial
company under section 113. Rather, the statute instructs the Council to
designate a nonbank financial company if the Council ``determines that
material financial distress at the U.S. nonbank financial company, or
the nature, scope, size, scale, concentration, interconnectedness, or
mix of the activities of the U.S. nonbank financial company, could pose
a threat to the financial stability of the United States.'' \13\
Subsection 113(a)(2) of the Dodd-Frank Act lists 10 factors the Council
must consider when making a determination, such as the company's
leverage, transactions with other financial companies, assets under
management, and existing regulation.\14\
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\13\ 12 U.S.C. 5323(a)(1).
\14\ Id. 5323(a)(2).
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The costs and benefits of a designation are not listed
considerations in the statute and are not similar to any of the listed
considerations. The statute is clear that the only required
considerations are related to the potential impact the company's
material financial distress or activities could pose to U.S. financial
stability. While Congress granted the Council discretion to consider
other factors it ``deems appropriate,'' these too must be ``risk-
related.'' \15\ The Council acknowledges that there may be costs
associated with a designation or the resulting Federal Reserve
supervision; however the Council does not consider the potential cost
of a designation or of the resulting Federal Reserve supervision and
prudential standards to be a ``risk-related factor.'' The Council
believes that the statutory reference to a ``risk-related factor''
instead should be interpreted, consistent with the statutory standard
for designation and the expressly enumerated considerations, as meaning
a factor related to the risk to U.S. financial stability posed by the
company or the company's activities.\16\ Moreover, costs incurred by a
designated nonbank financial company to comply with prudential
standards established by the Federal Reserve would not increase the
risk posed by the company or its activities because they are incurred
for the purpose of increasing the safety and soundness of the company.
For example, risk-based capital requirements, leverage limits, or
liquidity requirements would reduce the risk the company poses to the
financial system.
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\15\ Dodd-Frank Act section 113(a)(2)(K), 12 U.S.C.
5323(a)(2)(K).
\16\ The U.S. District Court for the District of Columbia held
that the Council should have considered the potential costs of
designation before designating MetLife, Inc. under section 113, but
the Court's reasoning assumes that a company's likelihood of
material financial distress is itself a required consideration under
the Council's guidance in effect at that time. See MetLife Inc. v.
Financial Stability Oversight Council (MetLife), 177 F. Supp. 3d
219, 239-42 (D.D.C. 2016) (discussing company's argument that
``imposing billions of dollars in cost could actually make MetLife
more vulnerable to distress''). The government appealed the district
court's decision in 2016, but agreed to dismiss its appeal in 2018.
In the final settlement agreement between the Council and MetLife,
the Council maintained that its designation of MetLife complied with
applicable law. In the agreement MetLife expressly waived any right
to argue that the cost-benefit portion of the district court's
opinion had any preclusive effect in any future proceeding before
the Council or in any subsequent litigation. Under the Proposed
Guidance, the likelihood of a company's material financial distress
would not be a consideration in a designation under section 113.
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The text of section 113 indicates that Congress itself determined
that the potential costs of designation are outweighed by the
benefits--mitigating risks to financial stability--if the company meets
the statutory standard, based on the considerations Congress
identified. That is, Congress's legislative judgment was that if, based
on the Council's consideration of the factors listed in section 113, a
nonbank financial company ``could pose a threat to the financial
stability of the United States,'' then the benefits of a designation
outweigh the costs.\17\
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\17\ See also Dodd-Frank Act section 112, 12 U.S.C.
5322(a)(2)(H) (providing that ``[t]he Council shall . . . require
supervision by the Board of Governors for nonbank financial
companies that may pose risks to the financial stability of the
United States in the event of their material financial distress or
failure, or because of their activities . . .'' (emphasis added)).
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Further, even if the potential cost of designation were a ``risk-
related factor,'' the Council does not believe that prescribing a cost-
benefit analysis prior to a determination under section 113 is useful
or appropriate. This is in part because it is not feasible to estimate
with any certainty the likelihood, magnitude, or timing of a future
financial crisis. The costs imposed by the potential failure of a
nonbank financial company will depend on the state of the economy and
financial system at the time. The benefits of designation are
potentially enormous and, in many respects, incalculable, representing
the tangible and intangible gains that come from averting a financial
crisis and economic catastrophe. The costs of any particular future
financial crisis, and thus the benefits of its prevention through
designation or other measures, cannot be predicted. Even estimates of
the costs of past crises, in terms of reductions in gross domestic
product, greater government expenses, increases in unemployment, or
other factors, vary widely but can be measured in the trillions of
dollars. Moreover, the Dodd-Frank Act directs the Federal Reserve to
adopt regulatory requirements applicable to a designated nonbank
financial company. The cost to a company of designation will depend
critically on the applicable regulatory regime. Generally, specific
regulatory requirements for designated nonbank financial companies have
been determined after the designation, in order to enable the
requirements to be appropriately tailored to risks posed by the
company. As such, evaluating the potential costs and benefits of a
designation with reasonable specificity is not possible before a
designation, and it is unlikely that performing a cost-benefit analysis
for a nonbank financial company would yield a balanced picture.
Likelihood of Material Financial Distress. Under the Proposed
Guidance, the Council would not assess the likelihood of a company's
material financial distress in considering a nonbank financial company
under section 113. Similar to the language regarding a cost-benefit
analysis, the Council does not believe an assessment of the likelihood
of a company's material financial distress is required or
appropriate.\18\
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\18\ In its MetLife decision, the U.S. District Court for the
District of Columbia held that the Council's failure to assess the
likelihood of MetLife's material financial distress was contrary to
the 2012 Interpretive Guidance. 177 F. Supp. 3d at 233-39. This
prong of the District Court's holding would not apply under the
Proposed Guidance, which does not require any such assessment.
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The Dodd-Frank Act charges the Council with designating a company
under section 113 if it ``determines that material financial distress
at the U.S. nonbank financial company . . . could pose a threat to the
financial stability of the United States.'' \19\ Under this first prong
of the statutory determination standard, the Council is instructed to
determine whether material financial
[[Page 26239]]
distress at the company could pose a threat to U.S. financial
stability. Thus, pursuant to section 113, the Council presupposes a
company's material financial distress, and then evaluates what
consequences could follow for U.S. financial stability. The first
determination standard, by its terms, does not require the Council
first to analyze the likelihood of a company experiencing material
financial distress before determining whether such distress could
threaten U.S. financial stability. Section 112 of the Dodd-Frank Act
further underscores the statutory standard, making clear that the
Council's duty is to designate nonbank financial companies that could
threaten U.S. financial stability ``in the event of their material
financial distress or failure''--not based on the Council's estimation
of the likelihood of such distress or failure.\20\ Therefore, the
language in the 2019 Interpretive Guidance regarding this factor fits
poorly with the statutory standard.\21\
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\19\ 12 U.S.C. 5323(a)(1).
\20\ 12 U.S.C. 5322(a)(2)(H).
\21\ The Council for many years consistently expressed the view
that the 2012 Interpretive Guidance did not contemplate the
consideration of the likelihood of a nonbank financial company's
material financial distress. The 2019 Interpretive Guidance altered
the Council's approach. The Proposed Guidance would conform to the
Council's original understanding that this factor should not be
taken into account.
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Further, the designation authority in section 113 is preventative
and is meant to ``respond to emerging threats to the stability of the
United States financial system,'' consistent with the Council's
purpose.\22\ Waiting to act until there is a reasonable likelihood of a
company's failure would negate the purpose of the Council's designation
authority, which is to mitigate risks before they threaten financial
stability. The designation process under the Proposed Guidance would be
a time-intensive exercise, and even once a company is designated, the
Federal Reserve may then need to develop and implement prudential
standards for the company. Such prudential standards, which may include
capital and liquidity requirements, risk-management standards, and the
development of resolution plans, are intended to prevent or mitigate
risks to financial stability. For these tools to be most effective,
they must be in place well before material financial distress appears
to be likely.
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\22\ See Dodd-Frank Act section 112(a)(1)(c), 12 U.S.C.
5322(a)(1)(c).
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There are good reasons that Congress chose not to require the
Council to determine the likelihood of a nonbank financial company's
material financial distress. A financial company can go from seemingly
healthy to in danger of imminent collapse in a matter of months, weeks,
or even days. For example, at the end of August 2008, Lehman Brothers
had reported shareholder equity--which is a measure of solvency--of $28
billion.\23\ On September 12, 2008 ``experts from the country's biggest
commercial investment banks . . . could not agree whether or not''
Lehman Brothers was solvent.\24\ Only two days later, on Monday,
September 14, 2008, Lehman Brothers declared bankruptcy. The failures
of Silicon Valley Bank and Signature Bank in March 2023 further
underscored how quickly and unexpectedly an institution can become
insolvent. For designation to strengthen the financial system, it must
be deployed early enough that companies have time to take actions to
bolster their safety and soundness, which in turn supports financial
stability--something that can take several years.
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\23\ Financial Crisis Inquiry Commission, The Financial Crisis
Inquiry Report at 324 (2011), available at <a href="https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf">https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf</a>.
\24\ Id.
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Finally, if designation requires an assessment of the likelihood of
material financial distress at the company, public awareness of
designation (or its mere possibility) could create a run on the company
by its creditors and counterparties. This is an important reason why
bank supervisory ratings are confidential, in acknowledgement of the
risk that disclosure of material issues at a company could trigger a
run on the company. Thus, a designation that includes an assessment of
the likelihood of material financial distress at the company could
accelerate the company's demise and thereby threaten financial
stability and undermine the purpose of the designation.
Questions for Comment
8. Does the Council's proposal described above to remove from the
interpretive guidance provisions the discussion of the Council
conducting a cost-benefit analysis and assessing the likelihood of a
company's material financial distress allow the Council to achieve its
statutory purposes? Should the Council's proposed approach be modified
for other considerations?
9. Are there additional points the Council should consider
regarding the usefulness, practicality, or feasibility of conducting a
cost-benefit analysis regarding the designation of a company under
section 113?
10. What data or factors should the Council consider in evaluating
the potential risk to U.S. financial stability that could be posed by
the failure of a company, should that company experience material
financial distress?
11. If the Council were to identify a nonbank financial company as
likely to experience material financial distress, what, if any, effects
would such identification have when it became public knowledge?
III. Legal Authority of Council and Status of the Proposed Guidance
The Council has numerous authorities and tools under the Dodd-Frank
Act to carry out its statutory purposes.\25\ The Council expects that
its response to any potential risk or threat to U.S. financial
stability will be based on an assessment of the circumstances. As the
agency charged by Congress with broad-ranging responsibilities under
sections 112 and 113 of the Dodd-Frank Act, the Council has the
inherent authority to promulgate interpretive guidance under those
provisions that explains and interprets the steps the Council will take
when undertaking the determination process.\26\ The Council also has
authority to issue procedural rules \27\ and policy statements.\28\ The
Proposed Guidance provides transparency to the public as to how the
Council intends to exercise its statutory grant of discretionary
authority. Except to the extent that the Proposed Guidance sets forth
rules of agency organization, procedure, or practice, the Council has
concluded that the Proposed Guidance does not have binding effect; does
not impose duties on, or alter the rights or interests of, any person;
does not change the statutory standards for the Council's decision
making; and does not relieve the Council of the need to make entity-
specific determinations in accordance with section 113 of the Dodd-
Frank Act. The Proposed Guidance also does not limit the ability of the
Council to take emergency action under section 113(f) of the Dodd-Frank
Act if the Council determines that such action is necessary
[[Page 26240]]
or appropriate to prevent or mitigate threats posed by a nonbank
financial company to U.S. financial stability. As a result, the Council
has concluded that the notice and comment requirements of the
Administrative Procedure Act would not apply.\29\ However, under the
Council's rule in 12 CFR 1310.3, the Council voluntarily committed that
it would not amend or rescind Appendix A to part 1310 without providing
the public with notice and an opportunity to comment in accordance with
the procedures applicable to legislative rules under 5 U.S.C. 553.\30\
Consequently, the Council invites interested persons to submit comments
regarding the Proposed Guidance.
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\25\ See, for example, Dodd-Frank Act sections 112(a)(2), 113,
115, 120, 804, 12 U.S.C. 5322(a)(2), 5323, 5325, 5330, 5463.
\26\ Courts have recognized that ``an agency charged with a duty
to enforce or administer a statute has inherent authority to issue
interpretive rules informing the public of the procedures and
standards it intends to apply in exercising its discretion.'' See,
for example, Production Tool v. Employment & Training
Administration, 688 F.2d 1161, 1166 (7th Cir. 1982). The Supreme
Court has acknowledged that ``whether or not they enjoy any express
delegation of authority on a particular question, agencies charged
with applying a statute necessarily make all sorts of interpretive
choices.'' See U.S. v. Mead, 533 U.S. 218, 227 (2001).
\27\ See Dodd-Frank Act section 111(e)(2), 12 U.S.C. 5321(e)(2).
\28\ See Association of Flight Attendants-CWA, AFL-CIO v.
Huerta, 785 F.3d 710 (D.C. Cir. 2015).
\29\ See 5 U.S.C. 553(b)(A); 12 CFR 1310.3.
\30\ Section 1310.3 does not apply to the Council's issuance of
rules, guidance, procedures, or other documents that do not amend or
rescind Appendix A. Thus, other Council materials, and documents
that are referred to in but are not a part of the Proposed Guidance,
such as the Council's separately issued Proposed Analytic Framework,
hearing procedures, bylaws, and committee charters, are not subject
to section 1310.3's requirements.
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IV. Paperwork Reduction Act
The Proposed Guidance is not expected to alter the collections of
information previously reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control number 1505-0244. Nonetheless,
the Council provides the estimated burdens of the information
collections associated with the Proposed Guidance and invites comments
below. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number assigned by the Office of Management and Budget.
The collection of information under the Proposed Guidance is found
in 12 CFR 1310.20-23.
The hours and costs associated with preparing data, information,
and reports for submission to the Council constitute reporting and cost
burdens imposed by the collection of information. The estimated total
annual reporting burden associated with the collection of information
in the Proposed Guidance is 20 hours, based on an estimate of 1
respondent. We estimate the cost associated with this information
collection to be $9,000.
In making this estimate, the Council estimates that due to the
nature of the information likely to be requested, approximately 75
percent of the burden in hours will be carried by financial companies
internally at an average cost of $400 per hour, and the remainder will
be carried by outside professionals retained by financial companies at
an average cost of $600 per hour. In addition, in determining these
estimates, the Council considered its obligation under 12 CFR
1310.20(b) to, whenever possible, rely on information available from
the Office of Financial Research or any Council member agency or
primary financial regulatory agency that regulates a nonbank financial
company before requiring the submission of reports from such nonbank
financial company. The Council expects that its collection of
information under the Proposed Guidance would be performed in a manner
that attempts to minimize burdens for affected financial companies. The
aggregate burden will be subject to the number of financial companies
that are evaluated in the determination process, the extent of
information regarding such companies that is available to the Council
through existing public and regulatory sources, and the amount and
types of information that financial companies provide to the Council.
Interested persons are invited to submit comments regarding the
estimates provided in this section. Comments on the collection of
information should be sent to the Office of Management and Budget,
Attn: Desk Officer for the Financial Stability Oversight Council,
Office of Information and Regulatory Affairs, Washington, DC 20503,
with copies to Samantha MacInnis, Department of the Treasury,
Washington, DC 20220. Comments on the collection of information must be
received by June 27, 2023.
Comments are specifically requested concerning:
(1) Whether the proposed collection of information is necessary for
the proper performance of the functions of the Council, including
whether the information will have practical utility;
(2) The accuracy of the estimated burden associated with the
proposed collection of information;
(3) How the quality, utility, and clarity of the information to be
collected may be enhanced;
(4) How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
V. Executive Orders 12866, 13563, and 14094
Executive Orders 12866, 13563 and 14094 direct certain agencies to
assess costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Pursuant
to section 3(f) of Executive Order 12866, the Office of Information and
Regulatory Affairs within the Office of Management and Budget has
determined that the Proposed Guidance is a ``significant regulatory
action''. Accordingly, the Proposed Guidance has been reviewed by the
Office of Management and Budget.
List of Subjects in 12 CFR Part 1310
Brokers, Investments, Securities.
The Financial Stability Oversight Council proposes to amend 12 CFR
part 1310 as follows:
PART 1310--AUTHORITY TO REQUIRE SUPERVISION AND REGULATION OF
CERTAIN NONBANK FINANCIAL COMPANIES
0
1. The authority citation for part 1310 continues to read as follows:
Authority: 12 U.S.C. 5321; 12 U.S.C. 5322; 12 U.S.C. 5323.
0
2. Appendix A is revised to read as follows:
Appendix A to Part 1310--Financial Stability Oversight Council Guidance
for Nonbank Financial Company Determinations
I. Introduction
Section 113 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act) \31\ authorizes the Financial
Stability Oversight Council (the Council) to determine that a
nonbank financial company will be supervised by the Board of
Governors of the Federal Reserve System (the Federal Reserve Board)
and be subject to prudential standards, in accordance with Title I
of the Dodd-Frank Act, if either (1) the Council determines that
material financial distress at the nonbank financial company could
pose a threat to U.S. financial stability, or (2) the nature, scope,
size, scale, concentration, interconnectedness, or mix of the
activities of the nonbank financial company could pose a threat to
U.S. financial stability. Section 113 of the Dodd-Frank Act lists
the considerations that the Council must take into account in making
a determination. This guidance supplements the Council's rule
[[Page 26241]]
regarding nonbank financial company determinations.\32\
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\31\ See Dodd-Frank Act section 113, 12 U.S.C. 5323.
\32\ See 12 CFR part 1310.
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Section II of this appendix outlines a two-stage process that
the Council generally expects to follow when determining whether to
subject a nonbank financial company to Federal Reserve Board
supervision and prudential standards.\33\ Section III sets forth the
process the Council expects to follow in conducting reevaluations of
its previous determinations.
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\33\ The Council may waive or modify this process in its
discretion if it determines that emergency circumstances exist,
including if necessary or appropriate to prevent or mitigate threats
posed by a nonbank financial company to U.S. financial stability in
accordance with section 113(f) of the Dodd-Frank Act.
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II. Process for Nonbank Financial Company Determinations
Under section 113 of the Dodd-Frank Act, the Council may
evaluate a nonbank financial company \34\ for an entity-specific
determination. This section describes the process the Council
expects to follow in general for those reviews.
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\34\ The Council intends to interpret the term ``company'' to
include any corporation, limited liability company, partnership,
business trust, association, or similar organization. See Dodd-Frank
Act section 102(a)(4), 12 U.S.C. 5311(a)(4). In addition, the
Council intends to consider any nonbank financial company to be
subject to a final determination of the Council if the company
acquires, directly or indirectly, a majority of the assets or
liabilities of a company that is subject to a final determination of
the Council. As a result, if a nonbank financial company subject to
a final determination of the Council sells or otherwise transfers a
majority of its assets or liabilities, the acquirer will succeed to,
and become subject to, the Council's determination. As discussed in
section III below, a nonbank financial company that is subject to a
final determination of the Council may request a reevaluation of the
determination before the next required annual reevaluation, in an
appropriate case. Such an acquirer can use this reevaluation process
to seek a rescission of the determination upon consummation of its
transaction.
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a. Overview of the Determination Process
As described in detail below, the Council expects generally to
follow a two-stage process of evaluation and analysis when
evaluating a nonbank financial company under section 113 of the
Dodd-Frank Act. During the first stage of the process (Stage 1), a
nonbank financial company identified for review will be notified and
subject to a preliminary analysis, based on quantitative and
qualitative information available to the Council primarily through
public and regulatory sources. During Stage 1, the Council will
permit, but not require, the company to submit relevant information.
The Council will also consult with the company's primary financial
regulatory agency \35\ or home country supervisor, as appropriate.
This approach will enable the Council to fulfill its statutory
obligation to rely whenever possible on information available
through the Office of Financial Research (the OFR), Council member
agencies, or the nonbank financial company's primary financial
regulatory agencies before requiring the submission of reports from
any nonbank financial company.\36\
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\35\ See Dodd-Frank Act section 2(12), 12 U.S.C. 5301(12). In
each stage of the Council's process under section 113 of the Dodd-
Frank Act, the Council may also consult with, solicit information
from, or coordinate with other state or federal financial regulatory
agencies that have jurisdiction over the nonbank financial company
or its activities.
\36\ See Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
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Following Stage 1, any nonbank financial company that is
selected for additional review will receive notice that it is being
considered for a proposed determination that the company will be
supervised by the Federal Reserve Board and be subject to prudential
standards under Title I of the Dodd-Frank Act (a Proposed
Determination) and that the company will be subject to in-depth
evaluation during the second stage of review (Stage 2). Stage 2 will
also involve the evaluation of additional information collected
directly from the nonbank financial company. At the end of Stage 2,
the Council may consider whether to make a Proposed Determination
with respect to the nonbank financial company. If the Council makes
a Proposed Determination, the nonbank financial company may request
a hearing in accordance with section 113(e) of the Dodd-Frank Act
and Sec. 1310.21(c) of the Council's rule regarding nonbank
financial company determinations.\37\ After making a Proposed
Determination and holding any written or oral hearing if requested,
the Council may vote to make a final determination (a Final
Determination).
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\37\ See 12 CFR 1310.21(c).
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b. Stage 1: Preliminary Evaluation of Nonbank Financial Companies
Stage 1 involves a preliminary analysis of nonbank financial
companies to assess the risks they could pose to U.S. financial
stability. In light of the preliminary nature of a review in Stage
1, the Council expects that not all companies reviewed in Stage 1
will proceed to Stage 2 or a Final Determination.
Identification of Company for Review in Stage 1
The Council may evaluate one or more individual nonbank
financial companies for an entity-specific determination under
section 113 of the Dodd-Frank Act. The Council's staff-level
committees are responsible for monitoring and analyzing financial
markets, financial companies, the financial system, and issues
related to financial stability. These committees monitor a broad
range of asset classes, institutions, and activities, as described
in the Council's Framework for Financial Stability Risk
Identification, Assessment, and Response (the Analytic Framework),
and as reflected in the Council's annual reports. In assessing
potential risks, these committees consider the vulnerabilities and
types of metrics described in the Analytic Framework. These
committees, in the course of their duties, will monitor each sector
of the financial system at least annually and will report to the
Deputies Committee \38\ regarding potential risks to U.S. financial
stability that they identify. With respect to these monitoring and
reporting activities, the Council's Systemic Risk Committee is
responsible for monitoring and reporting on each financial sector,
including information on identified firms and activities that may
pose risks that merit further review, unless another Council
committee or working group provides such updates to the Deputies
Committee on a particular sector. The updates to the Deputies
Committee will use applicable metrics as described in the Analytic
Framework. The Deputies Committee is responsible for directing,
coordinating, and overseeing the work of the Systemic Risk Committee
and all of the Council's other staff-level committees and working
groups in accordance with this guidance. If an identified risk
relates to one or more financial companies that may merit review in
the context of a potential determination under section 113, the
Council may review those companies in Stage 1. Alternatively, the
Deputies Committee may direct a staff-level committee or working
group to further assess the identified risks, including
consideration of whether the risks could be addressed by a
designation under section 113 or by use of a different Council
authority, such as recommendations to existing regulators. The
Deputies Committee may also direct the Council's Nonbank Financial
Companies Designations Committee (the Nonbank Designations
Committee) \39\ to conduct an initial analysis of the companies
based on the risk-assessment approach described in the Analytic
Framework. The purpose of such an analysis by the Nonbank
Designations Committee would be to further inform the determination
regarding whether one or more companies should be reviewed in Stage
1, if needed. Following any such analysis by the Nonbank
Designations Committee, the Council may review one or more companies
in Stage 1. Any Council committee's identification, reporting,
direction, analysis, or recommendation described in this paragraph
will be made in accordance with such committee's bylaws or charter.
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\38\ The Council's Deputies Committee is composed of senior
officials from each Council member and member agency. See Bylaws of
the Deputies Committee of the Financial Stability Oversight Council,
available at <a href="https://fsoc.gov">https://fsoc.gov</a>.
\39\ The Nonbank Designations Committee supports the Council in
fulfilling the Council's responsibilities to consider, make, and
review Council determinations regarding nonbank financial companies
under section 113 of the Dodd-Frank Act. See Charter of the Nonbank
Financial Companies Designations Committee of the Financial
Stability Oversight Council, available at <a href="https://fsoc.gov">https://fsoc.gov</a>.
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When evaluating the potential risks associated with a nonbank
financial company, the Council may consider the company and its
subsidiaries separately or together. This approach enables the
Council to consider potential risks arising across the entire
organization, while retaining the ability to make a determination
regarding either the parent or any individual nonbank financial
company subsidiary (or neither), depending on which entity the
Council determines could pose a threat to financial stability.
[[Page 26242]]
Engagement With Company and Regulators in Stage 1
The Council will provide a notice to any nonbank financial
company under review in Stage 1 no later than 60 days before the
Council votes on whether to evaluate the company in Stage 2. In
Stage 1, the Council will consider available public and regulatory
information. In order to reduce the burdens of review on the
company, the Council will not require the company to submit
information during Stage 1; however, a company under review in Stage
1 may submit to the Council any information relevant to the
Council's evaluation and may, upon request, meet with staff of
Council members and member agencies who are leading the Council's
analysis. The Council may request a page-limited summary of the
company's submissions. In addition, staff representing the Council
will, upon request, provide the company with a list of the primary
public sources of information being considered during the Stage 1
analysis, so that the company has an opportunity to understand the
information the Council may rely upon during Stage 1. In addition,
during discussions in Stage 1 with the company, the Council intends
for representatives of the Council to indicate to the company
potential risks that have been identified in the analysis. However,
any potential risks identified at this stage are preliminary and may
continue to develop until the Council makes a Final Determination.
Through this engagement, the Council seeks to provide the company
under review an opportunity to understand the focus of the Council's
analysis.
The Council will also consider in Stage 1 information available
from relevant existing regulators of the company. Under the Dodd-
Frank Act, the Council is required to consult with the primary
financial regulatory agency, if any, for each nonbank financial
company or subsidiary of a nonbank financial company that is being
considered for a determination before the Council makes any Final
Determination with respect to such company.\40\ For any company
under review in Stage 1 that is regulated by a primary financial
regulatory agency or home country supervisor, the Council will
notify the regulator or supervisor that the company is under review
no later than the time the company is notified. The Council will
also consult with the primary financial regulatory agency, if any,
of each significant subsidiary of the nonbank financial company, to
the extent the Council deems appropriate in Stage 1. The Council
will actively solicit the regulator's views regarding risks at the
company and potential mitigants or aggravating factors. In order to
enable the regulator to provide relevant information, the Council
will share its preliminary views regarding potential risks at the
company, if any and to the extent practicable, and request that the
regulator provide information regarding those specific risks,
including the extent to which the risks are adequately mitigated by
factors such as existing regulation or the company's business
practices. During the determination process, the Council will
encourage the regulator to address any risks to U.S. financial
stability using the regulator's existing authorities; if the Council
believes regulators' or the company's actions have adequately
addressed the potential risks to U.S. financial stability the
Council has identified, the Council may discontinue its
consideration of the company for a potential determination under
section 113 of the Dodd-Frank Act.
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\40\ Dodd-Frank Act section 113(g), 12 U.S.C. 5323(g).
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Based on the preliminary evaluation in Stage 1, the Council, on
a nondelegable basis, may vote to commence a more detailed analysis
of the company by advancing the company to Stage 2, or it may decide
not to evaluate the company further. If the Council votes not to
advance a company that has been reviewed in Stage 1 to Stage 2, the
Council will notify the company in writing of the Council's
decision. The notice will clarify that a decision not to advance the
company from Stage 1 to Stage 2 at that time does not preclude the
Council from reinitiating review of the company in Stage 1.
c. Stage 2: In-Depth Evaluation
Stage 2 involves an in-depth evaluation of a nonbank financial
company that the Council has determined merits additional review.
In Stage 2, the Council will review a nonbank financial company
using information collected directly from the company, through the
OFR, as well as public and regulatory information. The review will
focus on whether material financial distress \41\ at the nonbank
financial company, or the nature, scope, size, scale, concentration,
interconnectedness, or mix of the activities of the company, could
pose a threat to U.S. financial stability. The Analytic Framework
describes the Council's approach to evaluating potential risks to
U.S. financial stability, including in the context of a review under
section 113 of the Dodd-Frank Act.
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\41\ The Council intends to interpret the term ``material
financial distress'' as a nonbank financial company being in
imminent danger of insolvency or defaulting on its financial
obligations.
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Engagement With Company and Regulators in Stage 2
A nonbank financial company to be evaluated in Stage 2 will
receive a notice (a Notice of Consideration) that the company is
under consideration for a Proposed Determination. The Council also
will submit to the company a request that the company provide
information that the Council deems relevant to the Council's
evaluation, and the nonbank financial company will be provided an
opportunity to submit written materials to the Council.\42\ This
information will generally be collected by the OFR.\43\ Before
requiring the submission of reports from any nonbank financial
company that is regulated by a Council member agency or a primary
financial regulatory agency, the Council, acting through the OFR,
will coordinate with such agencies and will, whenever possible, rely
on information available from the OFR or such agencies. Council
members and their agencies and staffs will maintain the
confidentiality of such information in accordance with applicable
law. During Stage 2, the company may also submit any other
information that it deems relevant to the Council's evaluation.
Information that may be considered by the Council includes details
regarding the company's financial activities, legal structure,
liabilities, counterparty exposures, resolvability, and existing
regulatory oversight. Information requests likely will involve both
qualitative and quantitative information. Information relevant to
the Council's analysis may include confidential business information
such as detailed information regarding financial assets, terms of
funding arrangements, counterparty exposure or position data,
strategic plans, and interaffiliate transactions.
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\42\ See 12 CFR 1310.21(a).
\43\ See Dodd-Frank Act section 112(d), 12 U.S.C. 5322(d).
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The Council will make staff representing Council members
available to meet with the representatives of any company that
enters Stage 2, to explain the evaluation process and the framework
for the Council's analysis. In addition, the Council expects that
its Deputies Committee will grant a request to meet with a company
in Stage 2 to allow the company to present any information or
arguments it deems relevant to the Council's evaluation. If the
analysis in Stage 1 has identified specific aspects of the company's
operations or activities as the primary focus for the evaluation,
staff will notify the company of those specific aspects, although
the areas of analytic focus may change based on the ongoing
analysis.
During Stage 2 the Council will also seek to continue its
consultation with the company's primary financial regulatory agency
or home country supervisor in a timely manner before the Council
makes a Proposed or Final Determination with respect to the company.
The Council will continue to encourage the regulator during the
determination process to address any risks to U.S. financial
stability using the regulator's existing authorities; as noted
above, if the Council believes regulators' or the company's actions
adequately address the potential risks to U.S. financial stability
the Council has identified, the Council may discontinue its
consideration of the company for a potential determination under
section 113 of the Dodd-Frank Act.
Before making a Proposed Determination regarding a nonbank
financial company, the Council will notify the company when the
Council believes that the evidentiary record regarding the company
is complete. The Council will notify any nonbank financial company
in Stage 2 if the company ceases to be considered for a
determination. Any nonbank financial company that ceases to be
considered at any time in the Council's determination process may be
considered for a Proposed Determination in the future at the
Council's discretion, consistent with the processes described above.
d. Proposed and Final Determination
Proposed Determination
Based on the analysis performed in Stage 2, a nonbank financial
company may be considered for a Proposed Determination. A Proposed
Determination requires a vote, on a
[[Page 26243]]
nondelegable basis, of two-thirds of the voting members of the
Council then serving, including an affirmative vote by the
Chairperson of the Council.\44\ Following a Proposed Determination,
the Council will issue a written notice of the Proposed
Determination to the nonbank financial company, which will include
an explanation of the basis of the Proposed Determination.\45\
Promptly after the Council votes to make a Proposed Determination
regarding a company, the Council will provide the company's primary
financial regulatory agency or home country supervisor with the
nonpublic written explanation of the basis of the Council's Proposed
Determination (subject to appropriate protections for confidential
information).
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\44\ 12 CFR 1310.10(b).
\45\ Dodd-Frank Act section 113(e)(1), 12 U.S.C. 5323(e)(1).
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Hearing
A nonbank financial company that is subject to a Proposed
Determination may request a nonpublic hearing to contest the
Proposed Determination in accordance with section 113(e) of the
Dodd-Frank Act. If the nonbank financial company requests a hearing
in accordance with the procedures set forth in Sec. 1310.21(c) of
the Council's rule,\46\ the Council will set a time and place for
such hearing. The Council has published hearing procedures on its
website.\47\ In light of the statutory timeframe for conducting a
hearing, and the fact that the purpose of the hearing is to benefit
the company, if a company requests that the Council waive the
statutory deadline for conducting the hearing, the Council may do so
in appropriate circumstances.
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\46\ See 12 CFR 1310.21(c).
\47\ Financial Stability Oversight Council Hearing Procedures
for Proceedings Under Title I or Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, available at <a href="https://fsoc.gov">https://fsoc.gov</a>.
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Final Determination
After making a Proposed Determination and holding any requested
written or oral hearing, the Council, on a nondelegable basis, may,
by a vote of not fewer than two-thirds of the voting members of the
Council then serving (including an affirmative vote by the
Chairperson of the Council), make a Final Determination that the
company will be subject to supervision by the Federal Reserve Board
and prudential standards. If the Council makes a Final
Determination, it will provide the company with a written notice of
the Council's Final Determination, including an explanation of the
basis for the Council's decision.\48\ The Council will also provide
the company's primary financial regulatory agency or home country
supervisor with the nonpublic written explanation of the basis of
the Council's Final Determination (subject to appropriate
protections for confidential information). The Council expects that
its explanation of the basis for any Final Determination will
highlight the key risks that led to the determination and include
guidance regarding the factors that were important in the Council's
determination. When practicable and consistent with the purposes of
the determination process, the Council will provide a nonbank
financial company with notice of a Final Determination at least one
business day before publicly announcing the determination pursuant
to Sec. 1310.21, paragraphs (d)(3), (e)(3), or (d)(3) of the
Council's rule.\49\ In accordance with the Dodd-Frank Act, a nonbank
financial company that is subject to a Final Determination may bring
an action in U.S. district court for an order requiring that the
determination be rescinded.\50\
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\48\ Dodd-Frank Act section 113(e)(3), 12 U.S.C. 5323(e)(3); see
also 12 CFR 1310.21(d)(2) and (e)(2).
\49\ See 12 CFR 1310.21(d)(3) and (e)(3) and 1310.22(d)(3).
\50\ See Dodd-Frank Act section 113(h), 12 U.S.C. 5323(h).
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The Council does not intend to publicly announce the name of any
nonbank financial company that is under evaluation prior to a Final
Determination with respect to such company. However, if a company
that is under review in Stage 1 or Stage 2 publicly announces the
status of its review by the Council, the Council intends, upon the
request of a third party, to confirm the status of the company's
review. In addition, the Council will publicly release the
explanation of the Council's basis for any Final Determination or
rescission of a determination, following such an action by the
Council. The Council is subject to statutory and regulatory
requirements to maintain the confidentiality of certain information
submitted to it by a nonbank financial company or its
regulators.\51\ In light of these confidentiality obligations, such
confidential information will be redacted from the materials that
the Council makes publicly available, although the Council does not
expect to restrict a company's ability to disclose such information.
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\51\ See Dodd-Frank Act section 112(d)(5), 12 U.S.C. 5322(d)(5);
see also 12 CFR 1310.20(e).
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III. Annual Reevaluations of Nonbank Financial Company Determinations
After the Council makes a Final Determination regarding a
nonbank financial company, the Council intends to encourage the
company or its regulators to take steps to mitigate the potential
risks identified in the Council's written explanation of the basis
for its Final Determination. Except in cases where new material
risks arise over time, if the potential risks identified in writing
by the Council at the time of the Final Determination and in
subsequent reevaluations have been adequately addressed, generally
the Council would expect to rescind its determination regarding the
company.
For any nonbank financial company that is subject to a Final
Determination, the Council is required to reevaluate the
determination at least annually, and to rescind the determination if
the Council determines that the company no longer meets the
statutory standards for a determination. The Council may also
consider a request from a company for a reevaluation before the next
required annual reevaluation, in the case of an extraordinary change
that materially affects the Council's analysis.\52\
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\52\ See note 3 above.
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The Council will apply the same standards of review in its
annual reevaluations as the standards for an initial determination
regarding a nonbank financial company: either material financial
distress at the company, or the nature, scope, size, scale,
concentration, interconnectedness, or the mix of the company's
activities, could pose a threat to U.S. financial stability. If the
Council determines that the company does not meet either of those
standards, the Council will rescind its determination.
The Council's annual reevaluations will generally assess whether
any material changes since the previous reevaluation and since the
Final Determination justify a rescission of the determination. The
Council expects that its reevaluation process will focus on whether
any material changes that have taken effect--including changes at
the company, changes in its markets or its regulation, changes in
the impact of relevant factors, or otherwise--result in the company
no longer meeting the standards for a determination. In light of the
frequent reevaluations, the Council's analyses will generally focus
on material changes since the Council's previous review, but the
ultimate question the Council will seek to assess is whether changes
in the aggregate since the Council's Final Determination regarding
the company have caused the company to cease meeting either of the
statutory standards for a determination.
During the Council's annual reevaluation of a determination
regarding a nonbank financial company, the Council will provide the
company with an opportunity to meet with representatives of the
Council to discuss the scope and process for the review and to
present information regarding any change that may be relevant to the
threat the company could pose to financial stability. In addition,
during an annual reevaluation, the company may submit any written
information to the Council the company considers relevant to the
Council's analysis. During annual reevaluations, a company is
encouraged to submit information regarding any changes related to
the company's risk profile that mitigate the potential risks
previously identified by the Council. Such changes could include
updates regarding company restructurings, regulatory developments,
market changes, or other factors. If the company or its regulators
have taken steps to address the potential risks previously
identified by the Council, the Council will assess whether the risks
have been adequately mitigated to merit a rescission of the
determination regarding the company. If the company explains in
detail and in a timely manner potential changes it could make to its
business to address the potential risks previously identified by the
Council, representatives of the Council will endeavor to provide
their feedback on the extent to which those changes may address the
potential risks.
If a company contests the Council's determination during the
Council's annual reevaluation, the Council will vote on
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whether to rescind the determination and provide the company, its
primary financial regulatory agency or home country supervisor, and
the primary financial regulatory agency of its significant
subsidiaries with a notice explaining the primary basis for any
decision not to rescind the determination. If the Council does not
rescind the determination, the written notice provided to the
company will address the most material factors raised by the company
in its submissions to the Council contesting the determination
during the annual reevaluation. The written notice from the Council
will also explain why the Council did not find that the company no
longer met the standard for a determination under section 113 of the
Dodd-Frank Act. In general, due to the sensitive, company-specific
nature of its analyses in annual reevaluations, the Council
generally would not publicly release the written findings that it
provides to the company, although the Council does not expect to
restrict a company's ability to disclose such information.
Finally, the Council will provide each nonbank financial company
subject to a Council determination an opportunity for an oral
hearing before the Council once every five years at which the
company can contest the determination.
Kayla Arslanian,
Executive Secretary.
[FR Doc. 2023-08964 Filed 4-27-23; 8:45 am]
BILLING CODE 4810-AK-P-P
</pre></body>
</html>Indexed from Federal Register on April 28, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.