On November 3, the Financial Stability Oversight Council (FSOC) voted unanimously to finalize the procedures for designating a nonbank financial company for Federal Reserve supervision. FSOC’s Interpretive Guidance aims to establish a “durable” process for using its nonbank financial company designation authority, maintain rigorous procedural protections for companies reviewed for potential designation, and remove “unwarranted hurdles” to designation imposed by the 2019 Interpretive Guidance. FSOC had issued a proposed Interpretive Guidance in April 2023, which received 47 comments. The final version takes into account those comments.
Established under the Dodd-Frank Act, FSOC is chaired by Treasury Secretary Yellen, and its members include the heads of financial agencies, such as the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. FSOC is tasked with identifying emerging threats to the country’s financial security and organizing a coordinated response across U.S. financial regulators.
According to the U.S. Department of the Treasury’s press release, when FSOC identifies a potential risk to financial stability by a nonbank financial institution, it will evaluate the risk to determine whether it merits further review or action. FSOC has identified eight vulnerabilities that most commonly contribute to risks to financial stability, including leverage, liquidity risk and maturity mismatch, interconnections, operational risks, complexity or opacity, inadequate risk management, concentration, and destabilizing activities. When a potential risk to financial stability is identified, FSOC may consider using any of its authorities, including working with relevant federal and state financial regulatory agencies to seek the implementation of appropriate actions to ensure a potential risk is adequately addressed and making formal, nonbinding recommendations to primary financial regulators to apply new or heightened standards for a financial activity or practice. In certain cases, FSOC may evaluate a nonbank financial company to determine whether to designate the company for Federal Reserve supervision and prudential standards.
FSOC expects to follow a two-stage process for determining whether a nonbank financial company should be subject to Federal Reserve supervision.
- Stage One — a nonbank financial company would be subject to a preliminary analysis, based on information available to FSOC through public and regulatory sources. FSOC would notify the company at least 60 days before the vote on whether to proceed to stage two and provide the company with an opportunity to voluntarily submit relevant information and meet with staff who are leading the analysis.
- Stage Two — the company under review will have significant engagement with its primary financial regulator. FSOC will submit a request for information, and the company will have the opportunity to submit information it deems relevant. At the end of stage two, FSOC may consider whether to make a proposed designation of the nonbank financial company. A proposed designation requires a vote of two-thirds of FSOC, including an affirmative vote by the chairperson. If FSOC makes a proposed designation, it will provide the company with a written explanation of the proposed determination, and the company may request a written or oral hearing. After any requested hearing, FSOC may vote to make a final designation, which again requires a vote of two-thirds of the voting members, including an affirmative vote by the chairperson. FSOC will publicly release a written explanation of any final designation.
FSOC will reevaluate the designation at least annually and rescind the designation if it determines that the company no longer meets the statutory standards.