Let’s Get Ready to Rumble – FSOC Designates Systemically Important Financial Market Utilities and Adopts Procedures to Contest Designations; Non-Bank SIFI Designations to Follow

in Bankruptcy & Liquidation, Financial Stability Oversight Council, Systemic Risk Management

By Sylvia Mayer and Conray Tseng

On May 22, 2012, the Financial Stability Oversight Council (“FSOC”) promulgated hearing procedures (“Procedures”) for, among others, non-bank financial companies and financial market utilities (“FMUs”) to contest the FSOC’s designation of such entities as systemically important.  In addition, the FSOC designated an initial list of FMUs.  The list of designated FMUs has not been disclosed.  Each of the FMUs will be notified of their designation and afforded an opportunity to contest it.  As a result, the Procedures were made effective immediately, but may be modified following a 60 day comment period. There is speculation that an initial list of non-bank financial companies is on the horizon, but timing is unknown.

By way of background, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the FSOC may designate certain non-bank financial companies and FMUs as systemically important, thus subjecting these entities to further regulatory oversight and reporting requirements.  The implementing rules for the designation process were finalized in July 2011 for FMUs and April 2012 for non-bank financial companies.  Our previous posts discussing the rules are available here (FMUs) and here (non-bank financial companies).

Pursuant to the Procedures:

  • Nothing in the designation process entitles the non-bank financial company or FMU to discovery or similar rights.
  • Following designation, the FSOC must provide written notice to a designated non-bank financial company or FMU, including setting a deadline by which the entity may petition, in writing, for a hearing to contest the designation.
  • Upon a timely submission of a hearing request, the petitioner (i.e., the contesting entity) will receive notice of the deadline for submission of its written memoranda and supporting materials explaining why it should not be designated as systemically important.  The written memoranda should address both legal and factual reasons and may include exhibits such as declarations, affidavits, appendices, graphs, charts or other data supporting its position.
  • Although the petitioner may request an oral hearing, granting such a request is in the FSOC’s sole discretion and requires an affirmative vote of a majority of voting members.  A request for oral hearing should specify why an oral hearing should be granted.
  • If an oral hearing is granted, the petitioner must submit a list of the individuals expected to appear and a description of their presentations.  To the extent that supplemental materials are required after an oral hearing, the petitioner has 7 days to submit supplemental written materials.
  • Written materials and the oral hearing, if any, will remain confidential subject to FSOC’s rule implementing the Freedom of Information Act.

Notably, the Procedures go into effect immediately, thus the recently designated FMUs will be the first to utilize the Procedures.  Given the 60 day comment period, it is unclear whether the initial FMUs will be required to file their hearing requests and written memoranda while the Procedures remain subject to public comment or if their deadlines will be deferred.  Regardless, the designation process has officially begun.  For many FMUs and non-bank financial companies alike, this was a significant but expected milestone.  With the die now having been cast, we will continue to monitor the designation process and other related developments and will report back periodically.

For more information regarding the Dodd-Frank Act, as well as recovery and resolution planning, please see the Weil Financial Regulatory Reform blog.

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