By Heath Tarbert, Sylvia Mayer and Derrick Cephas
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Click here for a PDF of the related article A SIFI in Three Easy Steps? FSOC Approves Final Rule for Nonbank SIFI Designations appearing in The Banking Law Journal, May 2012
On April 3, 2012, the Financial Stability Oversight Council (“FSOC”) voted to approve its long-awaited Final Rule implementing Section 113 of the Dodd-Frank Act, the controversial provision that directs the federal government to identify systemically important financial institutions (“SIFIs”) outside the traditional banking sector that could pose a threat to the U.S. financial system. Once designated by a two-thirds majority of the FSOC (including an affirmative vote of the Treasury Secretary), each “nonbank financial company,” often referred to in short-hand as a “nonbank SIFI,” would be placed under Federal Reserve Board (“Fed”) supervision, as well as become subject to a host of enhanced prudential measures—including capital, liquidity, leverage, stress testing, resolution planning, and risk management requirements. The FSOC’s recent approval of the Final Rule—as well as its accompanying interpretive Guidance—marks the start of an important first step in the application of enhanced SIFI regulation beyond large bank holding companies with assets of $50 billion or greater.
The FSOC issued its Final Rule following consideration of over forty public comments to its Notice of Proposed Rulemaking (the “Proposed Rule”), released in October, 2011.
The Final Rule establishes a three-step process comprising three individual “stages” by which the FSOC will apply two “Determination Standards” (one based on actual or potential material financial distress and the other based on the nature, scope, size, scale, concentration, interconnectedness or mix of activities) to analyze whether a company may pose a threat to the financial stability of the U.S., along with a six-category analytic framework to determine whether a company should be deemed a nonbank SIFI. In an effort to increase the transparency of the process, the FSOC issued accompanying Guidance providing additional [click to continue…]