Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 64264-64283 [2011-26783]
Download as PDF
<![CDATA[
64264
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
for withdrawal not later than the banking day
after the business day on which such funds
are received (12 U.S.C. 4002(a)). That act also
preempts any provision of state law that was
not effective on September 1, 1989, that is
inconsistent with that act or its implementing
Regulation CC (12 CFR 229). Accordingly, the
Expedited Funds Availability Act and
Regulation CC may preempt section 4A–
404(a) as enacted in any state. In order to
ensure that section 4A–404(a), or other
provisions of article 4A, as incorporated in
subpart B of this part, do not take precedence
over provisions of the Expedited Funds
Availability Act, this section provides that
where subpart B of this part establishes rights
or obligations that are also governed by the
Expedited Funds Availability Act or
Regulation CC, the Expedited Funds
Availability Act or Regulation CC provision
shall apply and subpart B of this part shall
not apply.
*
*
*
*
*
Section 210.26—Definitions
srobinson on DSK4SPTVN1PROD with PROPOSALS
*
*
*
*
*
(i) Payment Order. (1) The definition of
‘‘payment order’’ in subpart B of this part
differs from the section 4A–103(a)(1)
definition. The subpart B definition clarifies
that, for the purposes of Subpart B of this
part, automated clearinghouse transfers and
certain messages that are transmitted through
Fedwire are not payment orders. Federal
Reserve Banks and banks participating in
Fedwire send various types of messages
relating to payment orders or to other
matters, through Fedwire, that are not
intended to be payment orders. Under the
subpart B definition, these messages, and
messages involved with automated
clearinghouse transfers, are not ‘‘payment
orders’’ and therefore are not governed by
this subpart. The operating circulars of the
Federal Reserve Banks specify those
messages that may be transmitted through
Fedwire but that are not payment orders.
(2) In some cases, messages sent through
Fedwire, such as certain requests for credit
transfer, may be payment orders under article
4A, but are not treated as payment orders
under subpart B because they are not an
instruction to a Federal Reserve Bank to pay
money.
(3) This subpart and article 4A govern a
payment order even though the originator’s
or beneficiary’s account may be a consumer
account established primarily for personal,
family, or household purposes. Under section
4A–108, article 4A does not apply to a funds
transfer any part of which is governed by the
Electronic Fund Transfer Act. That act, and
Regulation E implementing it, do not apply
to funds transfers through Fedwire (see 15
U.S.C. 1693a(6)(B) and 12 CFR 205.3(b)),
except that section 919 of the Electronic
Fund Transfer Act may govern a Fedwire
funds transfer that is a ‘‘remittance transfer.’’
Such remittance transfers that are Fedwire
funds transfers continue to be governed by
this subpart. Thus, this subpart applies to all
funds transfers through Fedwire even though
some such transfers involve originators or
beneficiaries that are consumers. (See also
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
section 210.25(b) and accompanying
commentary.)
*
*
*
*
*
Section 210.32—Federal Reserve Bank
Liability; Payment of Interest
*
*
*
*
*
(b) Payment of interest. (1) Under article
4A, a Federal Reserve Bank may be required
to pay compensation in the form of interest
to another party in connection with its
handling of a funds transfer. For example,
payment of compensation in the form of
interest is required in certain situations
pursuant to sections 4A–204 (relating to
refund of payment and duty of customer to
report with respect to unauthorized payment
order), 4A–209 (relating to acceptance of
payment order), 4A–210 (relating to rejection
of payment order), 4A–304 (relating to duty
of sender to report erroneously executed
payment order), 4A–305 (relating to liability
for late or improper execution or failure to
execute a payment order), 4A–402 (relating to
obligation of sender to pay receiving bank),
and 4A–404 (relating to obligation of
beneficiary’s bank to pay and give notice to
beneficiary). Under section 4A–506(a), the
amount of such interest may be determined
by agreement between the sender and
receiving bank or by funds-transfer system
rule. If there is no such agreement, under
section 4A–506(b), the amount of interest is
based on the federal funds rate. Section
210.32(b) requires Federal Reserve Banks to
provide compensation through an explicit
interest payment.
(2) Interest would be calculated in
accordance with the procedures specified in
section 4A–506(b). Similarly, compensation
in the form of explicit interest will be paid
to government senders, receiving banks, or
beneficiaries described in section 210.25(d) if
they are entitled to interest under this
subpart. A Federal Reserve Bank may also, in
its discretion, pay explicit interest directly to
a remote party to a Fedwire funds transfer
that is entitled to interest, rather than
providing compensation to its direct sender
or receiving bank.
(3) If a bank that received an explicit
interest payment is not the party entitled to
interest compensation under article 4A, the
bank must pass the benefit of the explicit
interest payment made to it to the party that
is entitled to compensation in the form of
interest from a Federal Reserve Bank. The
benefit may be passed on either in the form
of a direct payment of interest or in the form
of a compensating balance, if the party
entitled to interest agrees to accept the other
form of compensation, and the value of the
compensating balance is at least equivalent to
the value of the explicit interest that
otherwise would have been provided.
By order of the Board of Governors of the
Federal Reserve System, October 7, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011–26811 Filed 10–17–11; 8:45 am]
BILLING CODE 6210–01–P
PO 00000
Frm 00015
Fmt 4702
Sfmt 4702
FINANCIAL STABILITY OVERSIGHT
COUNCIL
12 CFR Part 1310
RIN 4030–AA00
Authority to Require Supervision and
Regulation of Certain Nonbank
Financial Companies
Financial Stability Oversight
Council.
ACTION: Second notice of proposed
rulemaking and proposed interpretive
guidance.
AGENCY:
Section 113 of the DoddFrank Wall Street Reform and Consumer
Protection Act (the ‘‘Dodd-Frank Act’’)
authorizes the Financial Stability
Oversight Council (the ‘‘Council’’) to
require a nonbank financial company to
be supervised by the Board of Governors
of the Federal Reserve System (the
‘‘Board of Governors’’) and be subject to
prudential standards in accordance with
Title I of the Dodd-Frank Act if the
Council determines that material
financial distress at the nonbank
financial company, or the nature, scope,
size, scale, concentration,
interconnectedness, or mix of the
activities of the nonbank financial
company, could pose a threat to the
financial stability of the United States.
The proposed rule and attached
guidance describe the manner in which
the Council intends to apply the
statutory standards and considerations,
and the processes and procedures that
the Council intends to follow, in making
determinations under section 113 of the
Dodd-Frank Act. The Council issued an
advance notice of proposed rulemaking
on October 6, 2010, and a notice of
proposed rulemaking on January 26,
2011, regarding determinations under
section 113.
DATES: Comment due date: December
19, 2011.
ADDRESSES: Interested persons are
invited to submit comments regarding
this notice of proposed rulemaking
according to the instructions below. All
submissions must refer to the document
title. The Council encourages the early
submission of comments.
Electronic Submission of Comments:
Interested persons may submit
comments electronically through the
Federal eRulemaking Portal at https://
www.regulations.gov. 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
SUMMARY:
E:\FR\FM\18OCP1.SGM
18OCP1
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
https://www.regulations.gov 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: Lance
Auer, 1500 Pennsylvania Avenue, NW.,
Washington, DC 20220.
Note: To receive consideration as public
comments, comments must be submitted
through the method specified.
srobinson on DSK4SPTVN1PROD with PROPOSALS
Public Inspection of Public
Comments: All properly submitted
comments will be available for
inspection and downloading at https://
www.regulations.gov.
Additional Instructions: 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:
Lance Auer, Office of Domestic Finance,
Treasury, at (202) 622–1262, or Eric
Froman, Office of the General Counsel,
Treasury, at (202) 622–1942. All
responses to this notice should be
submitted via https://
www.regulations.gov to ensure
consideration.
SUPPLEMENTARY INFORMATION:
I. Background
Section 111 of the Dodd-Frank Act (12
U.S.C. 5321) established the Financial
Stability Oversight Council. Among 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.’’
In the recent financial crisis, financial
distress at certain nonbank financial
companies contributed to a broad
seizing up of financial markets, stress at
other financial firms, and a deep global
recession with a considerable drop in
employment, the classic symptoms of
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
financial instability. These nonbank
financial companies were not subject to
the type of regulation and consolidated
supervision applied to bank holding
companies, nor were there effective
mechanisms in place to resolve the
largest and most interconnected of these
nonbank financial companies without
causing further instability. To address
any potential risks posed to U.S.
financial stability by these companies,
the Dodd-Frank Act authorizes the
Council to determine that certain
nonbank financial companies will be
subject to supervision by the Board of
Governors and prudential standards.
Title I of the Dodd-Frank Act defines a
‘‘nonbank financial company’’ as a
domestic or foreign company that is
‘‘predominantly engaged in financial
activities’’ in the United States, other
than bank holding companies and
certain other types of firms.1 The
Council intends to interpret the term
‘‘company’’ broadly with respect to
nonbank financial companies and other
companies in connection with section
113 of the Dodd-Frank Act, to include
any corporation, limited liability
company, partnership, business trust,
association (incorporated or
unincorporated), or similar
organization. The Dodd-Frank Act
provides that a company is
‘‘predominantly engaged’’ in financial
activities if either (i) the annual gross
revenues derived by the company and
all of its subsidiaries from financial
activities, as well as from the ownership
or control of insured depository
institutions, represent 85 percent or
more of the consolidated annual gross
revenues of the company; or (ii) the
consolidated assets of the company and
all of its subsidiaries related to financial
activities, as well as related to the
ownership or control of insured
depository institutions, represent 85
percent or more of the consolidated
assets of the company. The Dodd-Frank
Act requires the Board of Governors to
establish the requirements for
determining whether a company is
‘‘predominantly engaged in financial
activities’’ for this purpose.2
The Council issued an advance notice
of proposed rulemaking (the ‘‘ANPR’’)
1 See
12 U.S.C. 5311(a)(4).
12 U.S.C. 5311(b). The Board of Governors
has requested comment on a proposed rule that
would establish these requirements. See 76 FR 7731
(February 11, 2011). The Board of Governors’
proposed rule would establish a process by which
a company may request a determination by the
Board of Governors as to whether a particular
activity is financial in nature. In addition, the
proposed rule would provide the Board of
Governors the authority to determine that a
company is predominantly engaged in financial
activities based on all the facts and circumstances.
2 See
PO 00000
Frm 00016
Fmt 4702
Sfmt 4702
64265
on October 6, 2010 (75 FR 61653), in
which it requested public comment on
the statutory factors that the Dodd-Frank
Act requires the Council to consider in
determining whether a nonbank
financial company should be supervised
by the Board of Governors and subject
to prudential standards. The ANPR
posed 15 questions, all of which
addressed the application of the
statutory considerations that the
Council must take into account in the
process of determining whether a
nonbank financial company should be
subject to supervision by the Board of
Governors and be subject to prudential
standards (the ‘‘Determination
Process’’).
On January 26, 2011, the Council
issued a notice of proposed rulemaking
(the ‘‘NPR’’) (76 FR 4555) through
which it sought public comment
regarding the specific criteria and
analytic framework that the Council
intends to apply in the Determination
Process. The comment period for the
NPR closed on February 25, 2011.
In response to comments that the
Council received on the NPR, the
Council is issuing a second notice of
proposed rulemaking (the ‘‘Proposed
Rule’’) and proposed interpretive
guidance (the ‘‘Proposed Guidance’’) to
provide (i) additional details regarding
the framework that the Council intends
to use in the process of assessing
whether a nonbank financial company
could pose a threat to U.S. financial
stability, and (ii) further opportunity for
public comment on the Council’s
proposed approach to the Determination
Process.
II. Overview of Comments
The Council received 35 comments in
response to the NPR, of which 11 were
from trade associations or advocacy
groups, 10 were from the insurance
industry, eight were from entities in the
asset management industry, two were
from law firms, two were from
individuals, one was from a think tank,
and one was from a specialty finance
company. (Comment letters are
available online at: https://
www.regulations.gov.) In addition to
issuing the ANPR and the NPR for
public comment, staff of Council
member agencies met with financial
industry representatives to discuss the
proposals. Meeting participants
generally reiterated the views expressed
in their comment submissions. Many
commenters responding to the NPR
referred to comments that they
previously had submitted in response to
the ANPR. While this preamble
describes many of the comments
submitted in response to the ANPR and
E:\FR\FM\18OCP1.SGM
18OCP1
64266
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
the NPR, and describes how the
Proposed Rule and Proposed Guidance
address certain of those comments, the
Council expects to provide a more
complete discussion of the comments
submitted in response to the Proposed
Rule and Proposed Guidance after
considering the comments received
during the comment period on the
Proposed Rule and Proposed Guidance.
The comments addressed various
aspects of the NPR, but the majority of
comments addressed one or more of the
following three broad issues: the
substantive content of the NPR, the
scope of the Council’s Constitutional or
statutory authority, and the Council’s
compliance with the Administrative
Procedure Act (the ‘‘APA’’).
srobinson on DSK4SPTVN1PROD with PROPOSALS
A. Substantive Content of the NPR
The majority of commenters asserted
that the NPR lacked the necessary level
of specificity and detail needed to
provide meaningful guidance regarding
the manner in which the Council
intends to exercise its determination
authority under section 113 of the
Dodd-Frank Act.3
Some commenters asserted that the
Council should include the proposed
six-category framework in the rule text,
rather than in the preamble, so as to
require the Council to apply the
framework in the Determination
Process. The majority of commenters
requested that the Council issue specific
metrics to measure the six categories,
and any relative weighting that the
Council may assign to one or more of
the six categories, for public comment.
Other commenters suggested that the
Council define the terms ‘‘financial
stability’’ and ‘‘material financial
distress’’ before establishing any
specific metrics, as the Council should
consider such definitions when
identifying appropriate metrics.
3 Many commenters stated that the NPR did not
adequately define each of the 10 statutory
considerations that the Council must consider when
determining whether a nonbank financial company
could pose a threat to the financial stability of the
United States. Some commenters asserted that they
were unable to provide substantive input regarding
the determination framework set forth in the NPR,
because the Council failed to explain its rationale
for selecting the six framework categories. Other
commenters stated that the Council’s NPR failed to
provide nonbank financial companies any basis on
which to make informed business decisions in
anticipation of a potential determination, such as
decisions related to potential expansion into new
lines of business, mergers, acquisitions, financial
investments, and hiring plans, as companies may
delay or avoid business pursuits in light of the
uncertainty surrounding the Determination Process.
Other commenters stated that the lack of clarity in
the NPR failed to provide nonbank financial
companies with a basis on which to consider
actions that could reduce the company’s potential
to pose a threat to U.S. financial stability, and
thereby lessen the need for determination.
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
Many commenters asserted that the
Council provided an insufficient level of
detail regarding the Determination
Process. Specifically, commenters
suggested that the initial notice of
consideration should provide a detailed
explanation of the basis of the Council’s
consideration of the nonbank financial
company for a proposed determination,
including an outline of the specific
statutory considerations on which the
Council based its decision.
Some commenters, the majority of
whom represented the insurance
industry, noted that two insurancerelated positions on the Council were
vacant: (1) An independent insurance
expert (to be appointed by the
President) and (2) the Director of the
Federal Insurance Office (to be
appointed by the Secretary of the
Treasury). These commenters requested
that the Council delay issuing a final
rule until those Council positions are
filled.4
Comments on the Six-Factor Framework
A majority of commenters addressed
various aspects of the proposed sixcategory framework that the Council set
forth in the NPR. Several commenters
praised the six framework categories as
useful tools to assess a nonbank
financial company’s potential to pose a
threat to U.S. financial stability. One
commenter expressed concern that the
Council intended to use the six-category
framework as a proxy for the 10 specific
statutory considerations that the
Council is required to consider when
determining whether a nonbank
financial company could pose a threat
to U.S. financial stability.
Commenters also asked for
clarification regarding the manner in
which the Council intends to assess a
nonbank financial company within each
category and provided suggestions
regarding the manner in which the
Council should do so. Some of these
comments are described below.
Interconnectedness
Many commenters expressed the view
that interconnectedness with the
broader financial system is the most
important indicator of a nonbank
financial company’s potential to pose a
threat to U.S. financial stability. Some
commenters suggested that the Council
should assess whether failure of a
nonbank financial company would
threaten the financial condition and
competitive position of other significant
financial companies when evaluating a
4 S. Roy Woodall has been appointed by President
Obama as the independent insurance expert on the
Council. Michael McRaith has been appointed as
the Director of the Federal Insurance Office.
PO 00000
Frm 00017
Fmt 4702
Sfmt 4702
nonbank financial company under this
category. Commenters from the asset
management industry and the insurance
industry provided comments on how
interconnectedness should be measured
within those industries.
Substitutability
Many commenters stated that the
substitutability of a nonbank financial
company’s goods or services that are
important to the overall financial system
is an important factor that the Council
should consider in the Determination
Process. Commenters from the asset
management and insurance industries
noted that there is little concentration in
the asset management and insurance
industries.
Size
Commenters generally noted that size
is an important factor that the Council
should consider in the Determination
Process, but that size alone should not
provide a sufficient basis on which to
make a determination with respect to a
nonbank financial company, absent
other considerations, such as the
nonbank financial company’s
interconnectedness or contagion risk.
Many commenters expressed concern
that the Council had not sufficiently
disclosed how it would measure size
across different industries.
Leverage
Some commenters asserted that
leverage is an important factor that the
Council should consider in the
Determination Process, while others
suggested that different considerations,
such as reliance on debt financing,
would provide a more meaningful
assessment of the potential of a nonbank
financial company to pose a threat to
U.S. financial stability. In addition,
commenters asked that the Council
clarify the manner in which it intends
to calculate a nonbank financial
company’s leverage.
Liquidity Risk and Maturity Mismatch
Commenters generally agreed that
liquidity risk and maturity mismatch are
important criteria for assessing the
likelihood that material financial
distress at a nonbank financial company
could pose a threat to U.S. financial
stability, but certain commenters asked
the Council to clarify the manner in
which it intends to measure this
category. Commenters from the asset
management industry expressed the
view that firms within the asset
management industry are not vulnerable
to significant liquidity risk or maturity
mismatches. Commenters from the
insurance industry noted that the
E:\FR\FM\18OCP1.SGM
18OCP1
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
insurance industry has had very little
liquidity risk traditionally.
Existing Regulatory Scrutiny
Many commenters stated that an
assessment of existing regulatory
scrutiny is an important consideration
for purposes of determining whether a
nonbank financial company could pose
a threat to U.S. financial stability. Some
commenters suggested that the Council
consider not only the degree to which
regulatory requirements are already
applicable to a particular nonbank
financial company, but also any new
regulatory requirements to which the
nonbank financial company will
become subject pursuant to new
requirements imposed by the DoddFrank Act.
B. The Council’s Authority
Some commenters asserted that the
Council does not have the authority to
issue rules and regulations setting forth
the process and standards it will follow
in fulfilling the Council’s statutory
functions related to nonbank financial
company determinations under section
113 of the Dodd-Frank Act. In
particular, commenters noted that while
the Dodd-Frank Act authorizes the
Council to issue such rules as may be
necessary for the conduct of the
business of the Council, the Dodd-Frank
Act does not specifically authorize the
Council to issue rules or regulations
regarding matters related to
determinations regarding nonbank
financial companies.
C. Compliance With the APA
Commenters stated that the rule is too
vague to satisfy the ‘‘notice and
comment’’ requirements under the APA,
the requirement in Presidential
Executive Order 13563, ‘‘Improving
Regulation and Regulatory Review’’ 5
that the rule contain clear, specific
regulatory criteria and a cost/benefit
analysis, or the due process
requirements of the United States
Constitution.
srobinson on DSK4SPTVN1PROD with PROPOSALS
III. Overview of the Proposed Rule and
the Proposed Guidance
In developing the Proposed Rule, the
Council has carefully considered the
comments received on the ANPR and
the NPR, as well as the language and
legislative history of the Dodd-Frank
Act. After this review, the Council has
determined to propose a rule that has
been modified to provide additional
details about the processes and
procedures through which the Council
5 Available at https://www.gpo.gov/fdsys/pkg/FR2011-01-21/pdf/2011-1385.pdf.
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
may make a determination under
section 113 of the Dodd-Frank Act, and
the manner in which a nonbank
financial company may respond to and
contest a proposed determination.
In addition, the Council is issuing,
with a request for comment, as an
appendix to the Proposed Rule, the
Proposed Guidance. Among other
aspects of the Proposed Guidance, the
Council invites interested parties to
comment on—
• Key terms and concepts related to
the Council’s determination authority,
including ‘‘material financial distress’’
and ‘‘threat to financial stability’’;
• The six-category framework that the
Council intends to use to determine
whether a nonbank financial company
could pose a threat to the financial
stability of the United States, including
examples of quantitative metrics for
assessing each category;
• The six uniform quantitative
thresholds that the Council intends to
use to identify those nonbank financial
companies that will be subject to further
evaluation by the Council; and
• The process that the Council
intends to follow when considering
whether to subject a nonbank financial
company to supervision by the Board of
Governors and prudential standards.
The Council’s ultimate determination
will be based on an evaluation of each
of the statutory considerations taking
into account facts and circumstances
relevant to each nonbank financial
company.
The Proposed Rule and Proposed
Guidance, as well as the Council’s
responses to the comments received, are
discussed in greater detail below.
As noted above under ‘‘Overview of
Comments,’’ the Council received
comments that addressed virtually all
aspects of the Council’s authority to
make a determination with respect to
nonbank financial companies under
section 113 of the Dodd-Frank Act. The
Council is committed to fostering
transparency with respect to the
Determination Process, and the
Proposed Rule and Proposed Guidance
are intended to address such concerns
by providing a detailed description of:
(i) The profile of those nonbank
financial companies that the Council
likely will evaluate for potential
determination so as to minimize the
uncertainty to which many commenters
referred regarding the Determination
Process, and (ii) the metrics that the
Council intends to use when analyzing
companies at various stages of the
Determination Process, including
examples of the metrics that the Council
intends to use when evaluating a
PO 00000
Frm 00018
Fmt 4702
Sfmt 4702
64267
nonbank financial company using the
six-category framework.
The Council has numerous authorities
and tools to carry out its statutory duty
to monitor the financial stability of the
United States. In addition to the
Council’s determination authority under
section 113 of the Dodd-Frank Act, the
Council has the authority to make
recommendations to primary financial
regulatory agencies to apply new or
heightened standards and safeguards for
a financial activity or practice
conducted by bank holding companies
or nonbank financial companies under
the jurisdiction of such agencies if the
Council determines that the conduct,
scope, nature, size, scale, concentration,
or interconnectedness of such activity or
practice could create or increase the risk
of significant liquidity, credit, or other
problems spreading among bank
holding companies and nonbank
financial companies, U.S. financial
markets, or low-income, minority, or
underserved communities.6 In addition,
the Council may designate financial
market utilities and payment, clearing
and settlement activities that the
Council determines are, or are likely to
become, systemically important.7 The
Council expects that its response to any
potential threat to financial stability will
be based on an assessment of the
circumstances.
Pursuant to section 115(a) of the
Dodd-Frank Act, the Council may also
make recommendations to the Board of
Governors concerning the establishment
and refinement of prudential standards
and reporting and disclosure standards
applicable to nonbank financial
companies supervised by the Board of
Governors pursuant to section 113 of the
Dodd-Frank Act. In making such
recommendations, the Dodd-Frank Act
also authorizes the Council to
differentiate among companies on an
individual basis or by category, taking
into consideration their capital
structure, riskiness, complexity,
financial activities (including the
financial activities of their subsidiaries),
size, and any other risk-related factors
that the Council deems appropriate. In
addition, section 165 of the Dodd-Frank
Act gives the Board of Governors the
ability to tailor the application of the
prudential standards on its own.
Commenters are encouraged to
provide comment on the Proposed Rule
and Proposed Guidance. The Council
will consider comments received on the
Proposed Rule and Proposed Guidance
as the Council continues to develop the
6 See
7 See
E:\FR\FM\18OCP1.SGM
12 U.S.C. 5330(a).
12 U.S.C. 5463(a)(1).
18OCP1
64268
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
srobinson on DSK4SPTVN1PROD with PROPOSALS
approach that the Council intends to
take in the Determination Process.
A. Statutory Considerations for
Determinations
Section 113 of the Dodd-Frank Act
authorizes the Council to subject a
nonbank financial company to
supervision by the Board of Governors
and prudential standards if the Council
determines that (i) material financial
distress at the nonbank financial
company could pose a threat to the
financial stability of the United States
(the ‘‘First Determination Standard’’), or
(ii) the nature, scope, size, scale,
concentration, interconnectedness, or
mix of the activities of the nonbank
financial company could pose a threat
to the financial stability of the United
States (the ‘‘Second Determination
Standard’’).
Pursuant to the provisions of the
Dodd-Frank Act, the Council is required
to consider the following statutory
considerations when evaluating whether
to make this determination with respect
to a nonbank financial company: 8
(A) The extent of the leverage of the
company;
(B) The extent and nature of the off–
balance-sheet exposures of the
company;
(C) The extent and nature of the
transactions and relationships of the
company with other significant nonbank
financial companies and significant
bank holding companies;
(D) The importance of the company as
a source of credit for households,
businesses, and State and local
governments and as a source of liquidity
for the U.S. financial system;
(E) The importance of the company as
a source of credit for low-income,
minority, or underserved communities,
and the impact that the failure of such
company would have on the availability
of credit in such communities;
(F) The extent to which assets are
managed rather than owned by the
company, and the extent to which
ownership of assets under management
is diffuse;
(G) The nature, scope, size, scale,
concentration, interconnectedness, and
mix of the activities of the company;
(H) The degree to which the company
is already regulated by one or more
primary financial regulatory agencies;
(I) The amount and nature of the
financial assets of the company;
(J) The amount and types of the
liabilities of the company, including the
8 This list reflects the statutory considerations
applicable to a determination with respect to a U.S.
nonbank financial company. The Council is
required to consider similar factors in making a
determination with respect to a foreign nonbank
financial company.
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
degree of reliance on short-term
funding; and
(K) Any other risk-related factors that
the Council deems appropriate.
The Council intends to take into
account each of the 10 statutory
considerations when determining
whether one of the statutory standards
for determination has been met. The
Council included each of the statutory
considerations in the rule text in the
NPR and has retained this rule text in
the Proposed Rule. The Council has
provided additional detail in the
Proposed Guidance regarding the
manner in which the Council intends to
assess nonbank financial companies
under the First and Second
Determination Standards. The Council
has set forth proposed definitions of the
terms ‘‘material financial distress,’’
which is relevant to the First
Determination Standard, and ‘‘threat to
U.S. financial stability,’’ which is
relevant to both determination
standards. The Proposed Guidance also
describes the channels the Council
believes are most likely to facilitate the
transmission of the negative effects of a
nonbank financial company’s material
financial distress or activities to other
firms and markets, thereby posing a
threat to U.S. financial stability.
In exercising its anti-evasion authority
with respect to a U.S. nonbank financial
company or foreign nonbank financial
company, the Council must consider the
relevant statutory factors applicable to a
U.S. or foreign nonbank financial
company, respectively. The Proposed
Rule retains the process for making antievasion determinations that was set
forth in the NPR. The Council may make
such a determination either on its own
initiative or at the request of the Board
of Governors.
B. Process for Identifying Nonbank
Financial Companies for Further
Evaluation
In response to comments requesting
more detail regarding the Determination
Process, the Proposed Guidance
provides a detailed description of the
manner in which the Council intends to
conduct the Determination Process. For
example, the Proposed Guidance
provides a description of the manner in
which the Council intends to identify
nonbank financial companies for further
evaluation. The Council intends to
evaluate a broad group of nonbank
financial companies by applying
uniform quantitative thresholds
representing the framework categories
that are more readily quantified, namely
size, interconnectedness, leverage, and
liquidity risk and maturity mismatch. A
nonbank financial company would be
PO 00000
Frm 00019
Fmt 4702
Sfmt 4702
subject to additional review if it meets
both the size threshold and any one of
the other quantitative thresholds. The
Council believes that this set of
thresholds will help a nonbank financial
company predict whether such
company will likely be subject to
additional review by the Council.
In addition to a discussion of the
analytic framework, the Proposed
Guidance describes the manner in
which the Council intends to analyze
the companies included in each
subsequent stage in the Determination
Process to determine whether any
nonbank financial company initially
identified could pose a threat to U.S.
financial stability.
The Council expects that the detailed
description of the Determination
Process contained in the Proposed
Guidance, including the discussion of
the analytic framework, will mitigate
many of the potential negative effects
that could result from the perceived
uncertainty regarding the Determination
Process. However, as discussed in the
Proposed Guidance, the Council does
not believe that a determination
decision can be reduced to a formula.
Each determination will be made on a
firm-specific basis, taking into account
qualitative, as well as quantitative,
information that the Council deems
relevant to a particular nonbank
financial company.
C. Analytic Framework for
Determinations
As set forth in the NPR, the Council
proposes to use a six-category
framework that is designed to
incorporate each of the 10 statutory
considerations for evaluating whether a
nonbank financial company meets one
of the two Determination Standards.
The Council has incorporated the
statutory considerations into the
following six factors: (1) Size, (2)
interconnectedness, (3) substitutability,
(4) leverage, (5) liquidity risk and
maturity mismatch, and (6) existing
regulatory scrutiny. Three of the six
categories seek to assess the potential
impact of a nonbank financial
company’s financial distress on the
broader economy: size, substitutability
and interconnectedness. The remaining
three categories seek to assess the
vulnerability of a nonbank financial
company to financial distress: leverage,
liquidity risk and maturity mismatch,
and existing regulatory scrutiny of the
nonbank financial company. The NPR
contained a table that illustrated the
relationship between the 10 statutory
considerations and the six framework
categories. The table is also included in
the Proposed Guidance. In response to
E:\FR\FM\18OCP1.SGM
18OCP1
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
srobinson on DSK4SPTVN1PROD with PROPOSALS
requests by commenters, the Proposed
Guidance provides further detail
regarding the Council’s rationale for
selecting the six framework categories
and provides additional clarity
regarding the manner in which the sixcategory analytic framework
incorporates each of the statutory
considerations. As requested by
commenters, the Proposed Guidance
also sets forth examples of metrics that
the Council intends to use when
evaluating a nonbank financial company
in each of the six categories. These
metrics include several metrics
proposed by commenters.
D. Additional Detail Regarding the
Determination Process
In response to the public comments
requesting more transparency and
clarity regarding the criteria that will
inform the Determination Process, the
Council has developed a three-stage
process the Council expects to apply for
determinations in non-emergency
situations. Each stage of the
Determination Process would involve an
analysis based on an increasing amount
of information to determine whether a
nonbank financial company meets
either Determination Standard. The
Proposed Guidance provides a detailed
discussion of the proposed three-stage
review process.
The first stage of the process (‘‘Stage
1’’) is designed to narrow the universe
of nonbank financial companies to a
smaller set of nonbank financial
companies using quantitative thresholds
that are broadly applicable across the
financial sector. Stage 1 is not intended
to indicate a determination by the
Council that the nonbank financial
companies identified during Stage 1
meet one of the Determination
Standards. Rather, Stage 1 is intended to
identify those nonbank financial
companies that should be subject to
further evaluation in subsequent stages
of review. In the second stage of the
process (‘‘Stage 2’’), the Council will
conduct a comprehensive analysis of the
potential for the identified nonbank
financial companies to pose a threat to
U.S. financial stability. In general, this
analysis will be based on a broad range
of quantitative and qualitative
information available to the Council
through existing public and regulatory
sources, including industry- and firmspecific metrics beyond those analyzed
in Stage 1, and information obtained
from the company voluntarily.
Based on the analysis conducted
during Stage 2, the Council intends to
contact those nonbank financial
companies that the Council believes
merit further review in the third stage
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
(‘‘Stage 3’’). Stage 3 will build on the
Stage 2 analysis using quantitative and
qualitative information collected
directly from the nonbank financial
company by the Office of Financial
Research (the ‘‘OFR’’) or the appropriate
regulatory agency in addition to the
otherwise available information
considered during Stages 1 and 2. The
Council will determine whether to
subject a nonbank financial company to
Board of Governors supervision and
prudential standards based on the
results of the analyses conducted during
each stage of review.
The Council considered several
alternative quantitative approaches in
developing a method to identify a subset
of companies for additional review
during Stage 1 and concluded that the
thresholds-based approach set forth in
the Proposed Guidance is the most
appropriate method to identify this
subset. In the Council’s view, the
thresholds-based approach provides the
maximum possible transparency to the
market, thereby reducing the likelihood
that uncertainty about the
Determination Process could negatively
affect financial markets. Furthermore,
the Council selected the particular Stage
1 quantitative thresholds due to their
applicability to nonbank financial
companies that operate in different
types of financial markets and
industries, and because the data
underlying these thresholds are
generally available from existing public
and regulatory sources. Thus, nonbank
financial companies should be able to
reproduce the Council’s initial
assessments of nonbank financial
companies.
The Council recognizes that the
quantitative thresholds it has identified
for application during Stage 1 may not
provide an appropriate means to
identify a subset of nonbank financial
companies for further review in all cases
across all financial industries and firms.
While the Council will apply the Stage
1 thresholds to all types of nonbank
financial companies, including financial
guarantors, asset management
companies, private equity firms, and
hedge funds, these companies may pose
risks that are not well-measured by the
quantitative thresholds approach.
With respect to hedge funds and
private equity firms in particular, the
Council intends to apply the Stage 1
thresholds, but recognizes that less data
is generally available about these
companies than about certain other
types of nonbank financial companies.
Beginning in 2012, advisers to hedge
funds and private equity firms and
commodity pool operators and
commodity trading advisors will be
PO 00000
Frm 00020
Fmt 4702
Sfmt 4702
64269
required to file Form PF with the
Securities and Exchange Commission or
the Commodity Futures Trading
Commission, as applicable, on which
form such companies will make certain
financial disclosures. Using these and
other data, the Council will consider
whether to establish an additional set of
metrics or thresholds tailored to
evaluate hedge funds and private equity
firms and their advisers.
In addition, the Council, its member
agencies, and the OFR will analyze the
extent to which there are potential
threats to U.S. financial stability arising
from asset management companies. This
analysis will consider what threats
exist, if any, and whether such threats
can be mitigated by subjecting such
companies to Board of Governors
supervision and prudential standards,
or whether they are better addressed
through other regulatory measures. The
Council may issue additional guidance
for public comment regarding potential
additional metrics and thresholds
relevant to asset manager
determinations.
Generally, as reporting requirements
evolve and new data about certain
industries and nonbank financial
companies become available, the
Council expects to review the
quantitative thresholds as appropriate
based on this new information. For
example, the Council’s analysis will be
informed by credit exposure data
proposed to be collected under section
165 of the Dodd-Frank Act by the
Federal Deposit Insurance Corporation
and the Board of Governors. Similarly,
pursuant to reporting and disclosure
requirements being implemented under
the Dodd-Frank Act, Council members
will gain access to additional
information through swap data
repositories.
The Council recognizes that the
proposed Stage 1 threshold to measure
a nonbank financial company’s
derivative liabilities captures only the
current exposure, rather than the
current and potential future exposure
created by the nonbank financial
company’s outstanding derivatives. The
SEC and CFTC have proposed rules to
define the terms ‘‘major swap
participant’’ (‘‘MSP’’) and ‘‘major
security-based swap participant’’
(‘‘MSBSP’’) that contain a methodology
to measure the potential future exposure
created by an entity’s outstanding
derivatives.
Once the final rules establishing the
MSP and MSBSP definitions have been
adopted, the rules regarding reporting of
data on swaps and security-based swaps
come into effect, and data have been
collected pursuant to those rules, the
E:\FR\FM\18OCP1.SGM
18OCP1
srobinson on DSK4SPTVN1PROD with PROPOSALS
64270
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
Council intends to establish a new Stage
1 threshold based on factors such as a
nonbank financial company’s current
and potential future exposure from its
outstanding derivatives for purposes of
determining whether some or all MSPs,
MSBSPs, or other firms will be subject
to further examination in Stage 2.
In all instances, the Council reserves
the right, in its discretion, to subject any
nonbank financial company,
irrespective of whether such company
was identified in Stage 1, to further
review, if the Council believes that
further analysis of the company is
warranted to determine if the company
could pose a threat to U.S. financial
stability.
After a subset of nonbank financial
companies has been identified in Stage
1, the Council intends to conduct a
robust analysis of the potential threat
that each of those nonbank financial
companies could pose to U.S. financial
stability based on information available
to the Council through existing public
and regulatory sources, including
information possessed by the company’s
primary financial regulatory agency or
home country supervisor, as
appropriate. In contrast to the
application of uniform quantitative
thresholds to a broad group of nonbank
financial companies in Stage 1, the
Council intends to evaluate the risk
profile and characteristics of each
individual nonbank financial company
in Stage 2 based on a wide range of
quantitative and qualitative industryand company-specific factors. This
analysis will use the six-category
analytic framework described in section
C above. In addition, the Stage 2
evaluation will include a review, based
on available data, of whether the
resolution of a nonbank financial
company could pose a threat to U.S.
financial stability.
Following Stage 2, nonbank financial
companies that are selected for
additional review will receive notice
that they are being considered for a
proposed determination and will be
subject to further evaluation during
Stage 3. As discussed in greater detail in
the Proposed Guidance during the Stage
3 review, the Council intends to
conduct an in-depth analysis of the
nonbank financial company’s potential
to pose a threat to financial stability
based on information obtained directly
from the nonbank financial company
and the information previously obtained
by the Council during prior stages of
review. The Council believes that in this
stage of the evaluation, the Council
likely will consider qualitative factors,
including considerations that could
mitigate or aggravate the potential of a
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
nonbank financial company to pose a
threat to U.S. financial stability, such as
the nonbank financial company’s
resolvability, the opacity of the nonbank
financial company’s operations, its
complexity, and the extent to which the
nonbank financial company is subject to
existing regulatory scrutiny and the
nature of such scrutiny.
Based on the analysis performed in
Stages 2 and 3, the Council may
consider whether to determine, by vote,
to subject any of the nonbank financial
companies to a proposed determination.
Prior to making a proposed
determination, the Council may (i)
consult with the nonbank financial
company’s primary financial regulatory
agency or home country supervisor, as
appropriate and (ii) consider the views
of such entities.9
Following a proposed determination,
the Council intends to issue a written
notice of the proposed determination to
the nonbank financial company that
would provide an explanation of the
basis of the proposed determination.
The nonbank financial company may
request a hearing to contest the
proposed determination in accordance
with section 113(e) of the Dodd-Frank
Act and section 1310.21(c) of the
Proposed Rule. The Council has
provided additional details regarding
the hearing process in the Proposed
Rule and in the Proposed Guidance.
introduces definitions not set forth in
the NPR, including definitions of
‘‘Federal Insurance Office,’’ ‘‘hearing
date,’’ ‘‘nonbank financial company,’’
and ‘‘Office of Financial Research.’’
E. Section-by-Section Analysis
This section sets forth the
considerations that the Council must
consider in making a proposed or final
determination with respect to a U.S.
nonbank financial company or foreign
nonbank financial company. These
considerations reflect the statutory
factors set forth in sections 113(a)(2) and
(b)(2) of the Dodd-Frank Act.
I. Subpart A
General
A. Section 1310.1 Authority and
purpose
This section sets forth the authority
for and purpose of the Proposed Rule.
B. Section 1310.2 Definitions
This section defines the terms
relevant to the Proposed Rule. It retains
the majority of the definitions proposed
in the NPR, with some technical
modifications. For instance, the
definition of ‘‘predominantly engaged in
financial activities’’ has been
incorporated into the definitions of
‘‘U.S. nonbank financial company’’ and
‘‘foreign nonbank financial company’’ to
clarify that such definition is relevant
for purposes of determining whether an
entity meets the definition of U.S.
nonbank financial company or foreign
nonbank financial company. It also
9 However, the Council does not believe that the
concurrence of the primary financial regulatory
agency is required prior to the Council’s subjecting
a nonbank financial company to a proposed
determination. The Council’s consultation with a
nonbank financial company’s primary financial
regulatory agency does not create any rights on the
part of the nonbank financial company under
consideration.
PO 00000
Frm 00021
Fmt 4702
Sfmt 4702
II. Subpart B
Determinations
A. Section 1310.10 Council
Determinations Regarding Nonbank
Financial Companies
This section sets forth the Council’s
authority to make proposed and final
determinations with respect to nonbank
financial companies, pursuant to
sections 113(a) and (b) of the DoddFrank Act. It sets forth the two
standards for determinations the
requirements for a Council vote with
respect to proposed and final
determinations and the Council’s ability
pursuant to section 112(d)(4) of the
Dodd-Frank Act to request that the
Board of Governors conduct an
examination to determine whether a
U.S. nonbank financial company should
be supervised by the Board of Governors
for purposes of Title I of the Dodd-Frank
Act. Certain provisions included in the
corresponding section in the NPR have
been moved to other sections of the
Proposed Rule for organizational
purposes.
B. Section 1310.11 Considerations in
Making Proposed and Final
Determinations
C. Section 1310.12
Provision
Anti-Evasion
This section sets forth the Council’s
authority to require that the financial
activities of a company that is not a
nonbank financial company be
supervised by the Board of Governors
and be subject to prudential standards,
if the Council determines that material
financial distress related to, or the
nature, scope, size, scale, concentration,
interconnectedness, or mix of, the
financial activities conducted directly or
indirectly by a company would pose a
threat to the financial stability of the
United States, and the company is
organized or operates in such a manner
as to evade the application of Title I of
the Dodd-Frank Act. This section
defines ‘‘financial activities’’ as that
term is defined in section 113(c)(5) of
the Dodd-Frank Act.
E:\FR\FM\18OCP1.SGM
18OCP1
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
This section is intended to clarify the
application of subpart C as previously
set forth in the NPR. This section
provides that, in accordance with
section 113(c)(4) of the Dodd-Frank Act,
the provisions of subpart C governing
information collection (including the
confidentiality provisions),
consultation, notice and opportunity for
an evidentiary hearing, emergency
waivers or modifications, and
reevaluation and rescission of
determinations would apply in the
context of the Council’s anti-evasion
authority. The information-collection
authority of the Council with respect to
companies in this context derives from
the authority of the Council to receive
information from the OFR, member
agencies, and the Federal Insurance
Office, and from the authority of the
OFR on behalf of the Council, to require
the submission of periodic and other
reports from any financial company
under sections 112(d)(1) and (2) and
154(b) of the Dodd-Frank Act,
respectively.
The provision in the corresponding
section in the NPR relating to the
establishment of an intermediate
holding company was deleted because it
related to authority of the Board of
Governors rather than of the Council.
srobinson on DSK4SPTVN1PROD with PROPOSALS
III. Subpart C Information Collection;
Proposed and Final Determinations;
Evidentiary Hearings
A. Section 1310.20 Council
Information Collection; Consultation;
Coordination; Confidentiality
This section sets forth the Council’s
authority to collect information with
respect to nonbank financial companies
and its responsibilities in consulting
and coordinating with regulators and
maintaining the confidentiality of
submitted information. Paragraph (a)
sets forth the Council’s ability to collect
information from the OFR, member
agencies, the Federal Insurance Office,
and other Federal and State financial
regulatory agencies, and paragraph (b)
sets forth the Council’s ability to collect
information from nonbank financial
companies. These two paragraphs
implement the provisions of section
112(d) of the Dodd-Frank Act relating to
the Council’s authority to obtain
information and collect financial data.
Paragraph (c) provides that the Council
will consult with a nonbank financial
company’s primary financial regulatory
agency in a timely manner, in
accordance with section 113(g) of the
Dodd-Frank Act. Paragraph (d) provides
that the Council will consult with
appropriate foreign regulatory
authorities, to the extent appropriate, in
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
accordance with section 113(i) of the
Dodd-Frank Act. The NPR included
provisions similar to paragraphs (c) and
(d) of the Proposed Rule that were
located elsewhere in the NPR. Paragraph
(e), which was not included in the NPR,
implements the confidentiality
requirements provided in section
112(d)(5) of the Dodd-Frank Act.
B. Section 1310.21 Notice and
Opportunity for an Evidentiary Hearing;
Proposed and Final Determinations
This section sets forth the procedural
rights of a nonbank financial company
being considered for a proposed or final
determination, the time period within
which the Council will act after it
notifies the nonbank financial company
that it is being considered for a
proposed determination, and the
nonbank financial company’s rights to a
hearing after a proposed determination.
Paragraph (a) provides that the Council
will deliver written notice to a nonbank
financial company that it is being
considered for a proposed
determination and will provide the
nonbank financial company an
opportunity to submit written materials
to contest the proposed determination.
Paragraph (a) clarifies that the nonbank
financial company may submit any
written materials to contest the
determination, including materials
concerning whether the nonbank
financial company meets the standards
for a determination. This broadens the
scope of materials that may be provided
to contest a determination from the
version proposed in the NPR. Paragraph
(b) provides that the Council will
provide a nonbank financial company
with written notice of a proposed
determination, including an explanation
of the basis of the proposed
determination. Paragraphs (c), (d), and
(e) set forth the procedures for an
evidentiary hearing following a
proposed determination, pursuant to
section 113(e) of the Dodd-Frank Act,
and provides the time period within
which the Council will make a final
determination. These paragraphs also
provide that the Council will make
public any final determination that it
makes.
Paragraph (f) sets forth the time
period within which the Council may
make a proposed determination with
respect to a nonbank financial company
that has received a notice of
consideration of determination. Under
paragraph (a)(3), the Council will notify
a nonbank financial company that is
being considered for a proposed
determination of the date on which the
Council deems its evidentiary record
regarding that nonbank financial
PO 00000
Frm 00022
Fmt 4702
Sfmt 4702
64271
company to be complete. If the Council
does not make a proposed
determination with respect to that
nonbank financial company within 180
days after that date, the Council will not
make a proposed determination unless
the Council issues a subsequent written
notice of consideration of determination
under paragraph (a) and thereafter
complies with the other procedures set
forth in that section. This paragraph was
added to the Proposed Rule to provide
clarity to a nonbank financial company
that is subject to a notice of
consideration of determination
regarding the timing of any potential
subsequent Council action.
C. Section 1310.22 Emergency
Exception to § 1310.21
This section sets forth the process by
which the Council may waive or modify
any of the notice or other procedural
requirements of the Proposed Rule if the
Council determines that the waiver or
modification is necessary or appropriate
to prevent or mitigate threats posed by
the nonbank financial company to the
financial stability of the United States,
pursuant to section 113(f) of the DoddFrank Act. This section provides that a
nonbank financial company will receive
notice of the waiver or modification and
an opportunity for a hearing to contest
the waiver or modification, and sets
forth the process by which the Council
will make and publicly announce its
final determination. This section
incorporates the statutory requirement
that the Council consult with the
appropriate home country supervisor, if
any, of a foreign nonbank financial
company considered for a determination
under this section. This section also
requires the Council to consult with the
primary financial regulatory agency, if
any, of a nonbank financial company in
making a determination under this
section. These consultations will be
conducted in such time and manner as
the Council may deem appropriate.
D. Section 1310.23 Council
Reevaluation and Rescission of
Determinations
This section sets forth the Council’s
statutory responsibility, pursuant to
section 113(d) of the Dodd-Frank Act, to
reevaluate currently effective
determinations and rescind any
determination if the Council determines
that the nonbank financial company no
longer meets the standards for
determination.
The section in the NPR relating to
judicial review of the Council’s final
determinations pursuant to section
113(h) of the Dodd-Frank Act was
removed because it did not serve to
E:\FR\FM\18OCP1.SGM
18OCP1
64272
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
implement the Council’s authority to
make determinations.
IV. Regulatory Flexibility Act
It is hereby certified that this rule will
not have a significant economic impact
on a substantial number of small
entities. The economic impact of this
rule is not expected to be significant.
The rule would apply only to nonbank
financial companies that could pose a
threat to the financial stability of the
United States. Size is an important
factor, although not the exclusive factor,
in assessing whether a company could
pose a threat to financial stability. The
Council expects that few, if any, small
companies (as defined for purposes of
the Small Business Act) could pose a
threat to financial stability. Therefore,
the Council does not expect the rule to
directly affect a substantial number of
small entities. Accordingly, a regulatory
flexibility analysis under the Regulatory
Flexibility Act (5 U.S.C. 601–612) is not
required.
srobinson on DSK4SPTVN1PROD with PROPOSALS
V. Paperwork Reduction Act
The collection of information
contained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)). 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 George A. Sacco,
Department of the Treasury,
Washington, DC 20220. Comments on
the collection of information must be
received by December 19, 2011.
Comments are specifically requested
concerning:
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;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
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
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
The collection of information in these
proposed regulations are found in
§ 1310.20 and § 1310.21.
Estimated total annual reporting
burden: 1,000 hours.
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.
VI. Executive Orders 12866 and 13563
Executive Orders 12866 and 13563
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). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility. This rule
has been designated a ‘‘significant
regulatory action’’ although not
economically significant, under section
3(f) of Executive Order 12866.
Accordingly, the rule has been reviewed
by the Office of Management and
Budget.
List of Subjects in 12 CFR Part 1310
Nonbank financial companies.
For the reasons set forth in the
preamble, the Financial Stability
Oversight Council proposes to add a
new part 1310 to chapter XIII of Title 12
of the Code of Federal Regulations, to
read as follows:
PART 1310—SUPERVISION AND
REGULATION OF CERTAIN NONBANK
FINANCIAL COMPANIES
Sec.
Subpart A—General
1310.1 Authority and purpose.
1310.2 Definitions.
Subpart B—Determinations
1310.10 Council determinations regarding
nonbank financial companies.
1310.11 Considerations in making proposed
and final determinations.
1310.12 Anti-evasion provision.
Subpart C—Information Collection;
Proposed and Final Determinations;
Evidentiary Hearings
1310.20 Council information collection;
consultation; coordination;
confidentiality.
1310.21 Notice and opportunity for an
evidentiary hearing; proposed and final
determinations.
1310.22 Emergency exception to § 1310.21.
PO 00000
Frm 00023
Fmt 4702
Sfmt 4702
1310.23 Council reevaluation and
rescission of determinations.
Appendix to Part 1310—Financial Stability
Oversight Council Guidance for Nonbank
Financial Company Determinations.
Authority: 12 U.S.C. 5321; 12 U.S.C. 5322;
12 U.S.C. 5323.
Subpart A—General
§ 1310.1
Authority and purpose.
(a) Authority. This part is issued by
the Financial Stability Oversight
Council (Council) under sections 111,
112 and 113 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (‘‘Dodd-Frank Act’’) (12 U.S.C.
5321, 5322 and 5323).
(b) Purpose. The principal purposes of
this part are to set forth the standards
and procedures governing Council
determinations under section 113 of the
Dodd-Frank Act (12 U.S.C. 5323),
including whether material financial
distress at a nonbank financial
company, or the nature, scope, size,
scale, concentration,
interconnectedness, or mix of the
activities of the nonbank financial
company, could pose a threat to the
financial stability of the United States,
and whether a nonbank financial
company shall be supervised by the
Board of Governors and shall be subject
to prudential standards in accordance
with Title I of the Dodd-Frank Act.
§ 1310.2
Definitions.
The terms used in this part have the
following meanings—
Board of Governors. The term ‘‘Board
of Governors’’ means the Board of
Governors of the Federal Reserve
System.
Commission. The term ‘‘Commission’’
means the Securities and Exchange
Commission, except in the context of
the Commodity Futures Trading
Commission.
Council. The term ‘‘Council’’ means
the Financial Stability Oversight
Council.
Federal Insurance Office. The term
‘‘Federal Insurance Office’’ means the
office established within the
Department of the Treasury by section
502(a) of the Dodd-Frank Act (31 U.S.C.
301 (note)).
Foreign nonbank financial company.
The term ‘‘foreign nonbank financial
company’’ means a company (other than
a company that is, or is treated in the
United States as, a bank holding
company) that is—
(1) Incorporated or organized in a
country other than the United States;
and
(2) ‘‘Predominantly engaged in
financial activities,’’ as that term is
defined in section 102(a)(6) of the Dodd-
E:\FR\FM\18OCP1.SGM
18OCP1
srobinson on DSK4SPTVN1PROD with PROPOSALS
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
Frank Act (12 U.S.C. 5311(a)(6)) and
pursuant to the requirements for
determining if a company is
predominantly engaged in financial
activities as established by regulation of
the Board of Governors pursuant to
section 102(b) of the Dodd-Frank Act
(12 U.S.C. 5311(b)), including through a
branch in the United States.
Hearing date. The term ‘‘hearing
date’’ means the latest of—
(1) The date on which the Council has
received all of the written materials
timely submitted by a nonbank financial
company for a hearing that is conducted
without oral testimony;
(2) The final date on which the
Council or its representatives convene
to hear oral testimony presented by a
nonbank financial company pursuant to
§ 1310.21 or § 1310.22, as applicable;
and
(3) The date on which the Council has
received all of the written materials
timely submitted by a nonbank financial
company to supplement any oral
testimony and materials presented by
the nonbank financial company
pursuant to § 1310.21 or § 1310.22, as
applicable.
Member agency. The term ‘‘member
agency’’ means an agency represented
by a voting member of the Council
under section 111(b)(1) of the DoddFrank Act (12 U.S.C. 5321).
Nonbank financial company. The
term ‘‘nonbank financial company’’
means a U.S. nonbank financial
company or a foreign nonbank financial
company.
Office of Financial Research. The
term ‘‘Office of Financial Research’’
means the office established within the
Department of the Treasury by section
152 of the Dodd-Frank Act (12 U.S.C.
5342).
Primary financial regulatory agency.
The term ‘‘primary financial regulatory
agency’’ means—
(1) The appropriate Federal banking
agency, with respect to institutions
described in section 3(q) of the Federal
Deposit Insurance Act (12 U.S.C.
1813(q)), except to the extent that an
institution is or the activities of an
institution are otherwise described in
paragraph (2), (3), (4), or (5) of this
definition;
(2) The Commission, with respect to—
(i) Any broker or dealer that is
registered with the Commission under
the Securities Exchange Act of 1934,
with respect to the activities of the
broker or dealer that require the broker
or dealer to be registered under that Act;
(ii) Any investment company that is
registered with the Commission under
the Investment Company Act of 1940,
with respect to the activities of the
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
investment company that require the
investment company to be registered
under that Act;
(iii) Any investment adviser that is
registered with the Commission under
the Investment Advisers Act of 1940,
with respect to the investment advisory
activities of such company and
activities that are incidental to such
advisory activities;
(iv) Any clearing agency registered
with the Commission under the
Securities Exchange Act of 1934, with
respect to the activities of the clearing
agency that require the agency to be
registered under such Act;
(v) Any nationally recognized
statistical rating organization registered
with the Commission under the
Securities Exchange Act of 1934;
(vi) Any transfer agent registered with
the Commission under the Securities
Exchange Act of 1934;
(vii) Any exchange registered as a
national securities exchange with the
Commission under the Securities
Exchange Act of 1934;
(viii) Any national securities
association registered with the
Commission under the Securities
Exchange Act of 1934;
(ix) Any securities information
processor registered with the
Commission under the Securities
Exchange Act of 1934;
(x) The Municipal Securities
Rulemaking Board established under the
Securities Exchange Act of 1934;
(xi) The Public Company Accounting
Oversight Board established under the
Sarbanes-Oxley Act of 2002 (15 U.S.C.
7210 et seq.);
(xii) The Securities Investor
Protection Corporation established
under the Securities Investor Protection
Act of 1970 (15 U.S.C. 78aaa et seq.);
and
(xiii) Any security-based swap
execution facility, security-based swap
data repository, security-based swap
dealer or major security-based swap
participant registered with the
Commission under the Securities
Exchange Act of 1934, with respect to
the security-based swap activities of the
person that require such person to be
registered under such Act;
(3) The Commodity Futures Trading
Commission, with respect to—
(i) Any futures commission merchant
registered with the Commodity Futures
Trading Commission under the
Commodity Exchange Act (7 U.S.C. 1 et
seq.), with respect to the activities of the
futures commission merchant that
require the futures commission
merchant to be registered under that
Act;
PO 00000
Frm 00024
Fmt 4702
Sfmt 4702
64273
(ii) Any commodity pool operator
registered with the Commodity Futures
Trading Commission under the
Commodity Exchange Act (7 U.S.C. 1 et
seq.), with respect to the activities of the
commodity pool operator that require
the commodity pool operator to be
registered under that Act, or a
commodity pool, as defined in that Act;
(iii) Any commodity trading advisor
or introducing broker registered with
the Commodity Futures Trading
Commission under the Commodity
Exchange Act (7 U.S.C. 1 et seq.), with
respect to the activities of the
commodity trading advisor or
introducing broker that require the
commodity trading advisor or
introducing broker to be registered
under that Act;
(iv) Any derivatives clearing
organization registered with the
Commodity Futures Trading
Commission under the Commodity
Exchange Act (7 U.S.C. 1 et seq.), with
respect to the activities of the
derivatives clearing organization that
require the derivatives clearing
organization to be registered under that
Act;
(v) Any board of trade designated as
a contract market by the Commodity
Futures Trading Commission under the
Commodity Exchange Act (7 U.S.C. 1 et
seq.);
(vi) Any futures association registered
with the Commodity Futures Trading
Commission under the Commodity
Exchange Act (7 U.S.C. 1 et seq.);
(vii) Any retail foreign exchange
dealer registered with the Commodity
Futures Trading Commission under the
Commodity Exchange Act (7 U.S.C. 1 et
seq.), with respect to the activities of the
retail foreign exchange dealer that
require the retail foreign exchange
dealer to be registered under that Act;
(viii) Any swap execution facility,
swap data repository, swap dealer, or
major swap participant registered with
the Commodity Futures Trading
Commission under the Commodity
Exchange Act (7 U.S.C. 1 et seq.) with
respect to the swap activities of the
person that require such person to be
registered under that Act; and
(ix) Any registered entity as defined
in section 1a of the Commodity
Exchange Act (7 U.S.C. 1a), with respect
to the activities of the registered entity
that require the registered entity to be
registered under that Act;
(4) The State insurance authority of
the State in which an insurance
company is domiciled, with respect to
the insurance activities and activities
that are incidental to such insurance
activities of an insurance company that
is subject to supervision by the State
E:\FR\FM\18OCP1.SGM
18OCP1
srobinson on DSK4SPTVN1PROD with PROPOSALS
64274
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
insurance authority under State
insurance law; and
(5) The Federal Housing Finance
Agency, with respect to Federal Home
Loan Banks or the Federal Home Loan
Bank System, and with respect to the
Federal National Mortgage Association
or the Federal Home Loan Mortgage
Corporation.
Prudential standards. The term
‘‘prudential standards’’ means enhanced
supervision and regulatory standards
established by the Board of Governors
under section 165 of the Dodd-Frank
Act (12 U.S.C. 5365).
Significant companies. The terms
‘‘significant nonbank financial
company’’ and ‘‘significant bank
holding company’’ have the meanings
ascribed to such terms by regulation of
the Board of Governors issued under
section 102(a)(7) of the Dodd-Frank Act
(12 U.S.C. 5311(a)(7)).
U.S. nonbank financial company. The
term ‘‘U.S. nonbank financial company’’
means a company (other than a bank
holding company; a Farm Credit System
institution chartered and subject to the
provisions of the Farm Credit Act of
1971 (12 U.S.C. 2001 et seq.); a national
securities exchange (or parent thereof),
clearing agency (or parent thereof,
unless the parent is a bank holding
company), security-based swap
execution facility, or security-based
swap data repository registered with the
Commission; a board of trade designated
as a contract market by the Commodity
Futures Trading Commission (or parent
thereof); or a derivatives clearing
organization (or parent thereof, unless
the parent is a bank holding company),
swap execution facility, or swap data
repository registered with the
Commodity Futures Trading
Commission), that is—
(1) Incorporated or organized under
the laws of the United States or any
State; and
(2) ‘‘Predominantly engaged in
financial activities,’’ as that term is
defined in section 102(a)(6) of the DoddFrank Act (12 U.S.C. 5311(a)(6)), and
pursuant to the requirements for
determining if a company is
predominantly engaged in financial
activities as established by regulation of
the Board of Governors pursuant to
section 102(b) of the Dodd-Frank Act
(12 U.S.C. 5311(b)).
Subpart B—Determinations
§ 1310.10 Council determinations
regarding nonbank financial companies.
(a) Determinations. The Council may
determine that a nonbank financial
company shall be supervised by the
Board of Governors and shall be subject
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
to prudential standards, in accordance
with Title I of the Dodd-Frank Act, if the
Council determines that material
financial distress at the nonbank
financial company, or the nature, scope,
size, scale, concentration,
interconnectedness, or mix of the
activities of the nonbank financial
company, could pose a threat to the
financial stability of the United States.
(b) Vote required. Any proposed or
final determination under paragraph (a)
of this section shall—
(1) Be made by the Council and shall
not be delegated by the Council; and
(2) Require the vote of not fewer than
two-thirds of the voting members of the
Council then serving, including the
affirmative vote of the Chairperson of
the Council.
(c) Back-up examination by the Board
of Governors.
(1) If the Council is unable to
determine whether the financial
activities of a U.S. nonbank financial
company, including a U.S. nonbank
financial company that is owned by a
foreign nonbank financial company,
pose a threat to the financial stability of
the United States, based on information
or reports obtained by the Council
under § 1310.20, including discussions
with management, and publicly
available information, the Council may
request the Board of Governors, and the
Board of Governors is authorized, to
conduct an examination of the U.S.
nonbank financial company and its
subsidiaries for the sole purpose of
determining whether the nonbank
financial company should be supervised
by the Board of Governors for purposes
of Title I of the Dodd-Frank Act (12
U.S.C. 5311–5374).
(2) The Council shall review the
results of the examination of a nonbank
financial company (including its
subsidiaries) conducted by the Board of
Governors under this paragraph (c) in
connection with any proposed or final
determination under paragraph (a) of
this section with respect to the nonbank
financial company.
§ 1310.11 Considerations in making
proposed and final determinations.
(a) Considerations for U.S. nonbank
financial companies. In making a
proposed or final determination under
§ 1310.10(a) with respect to a U.S.
nonbank financial company, the
Council shall consider—
(1) The extent of the leverage of the
U.S. nonbank financial company and its
subsidiaries;
(2) The extent and nature of the offbalance-sheet exposures of the U.S.
nonbank financial company and its
subsidiaries;
PO 00000
Frm 00025
Fmt 4702
Sfmt 4702
(3) The extent and nature of the
transactions and relationships of the
U.S. nonbank financial company and its
subsidiaries with other significant
nonbank financial companies and
significant bank holding companies;
(4) The importance of the U.S.
nonbank financial company and its
subsidiaries as a source of credit for
households, businesses, and State and
local governments and as a source of
liquidity for the United States financial
system;
(5) The importance of the U.S.
nonbank financial company and its
subsidiaries as a source of credit for
low-income, minority, or underserved
communities, and the impact that the
failure of such U.S. nonbank financial
company would have on the availability
of credit in such communities;
(6) The extent to which assets are
managed rather than owned by the U.S.
nonbank financial company and its
subsidiaries, and the extent to which
ownership of assets under management
is diffuse;
(7) The nature, scope, size, scale,
concentration, interconnectedness, and
mix of the activities of the U.S. nonbank
financial company and its subsidiaries;
(8) The degree to which the U.S.
nonbank financial company and its
subsidiaries are already regulated by 1
or more primary financial regulatory
agencies;
(9) The amount and nature of the
financial assets of the U.S. nonbank
financial company and its subsidiaries;
(10) The amount and types of the
liabilities of the U.S. nonbank financial
company and its subsidiaries, including
the degree of reliance on short-term
funding; and
(11) Any other risk-related factor that
the Council deems appropriate, either
by regulation or on a case-by-case basis.
(b) Considerations for foreign
nonbank financial companies. In
making a proposed or final
determination under § 1310.10(a) with
respect to a foreign nonbank financial
company, the Council shall consider—
(1) The extent of the leverage of the
foreign nonbank financial company and
its subsidiaries;
(2) The extent and nature of the
United States related off-balance-sheet
exposures of the foreign nonbank
financial company and its subsidiaries;
(3) The extent and nature of the
transactions and relationships of the
foreign nonbank financial company and
its subsidiaries with other significant
nonbank financial companies and
significant bank holding companies;
(4) The importance of the foreign
nonbank financial company and its
subsidiaries as a source of credit for
E:\FR\FM\18OCP1.SGM
18OCP1
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
United States households, businesses,
and State and local governments and as
a source of liquidity for the United
States financial system;
(5) The importance of the foreign
nonbank financial company and its
subsidiaries as a source of credit for
low-income, minority, or underserved
communities in the United States, and
the impact that the failure of such
foreign nonbank financial company
would have on the availability of credit
in such communities;
(6) The extent to which assets are
managed rather than owned by the
foreign nonbank financial company and
its subsidiaries and the extent to which
ownership of assets under management
is diffuse;
(7) The nature, scope, size, scale,
concentration, interconnectedness, and
mix of the activities of the foreign
nonbank financial company and its
subsidiaries;
(8) The extent to which the foreign
nonbank financial company and its
subsidiaries are subject to prudential
standards on a consolidated basis in the
foreign nonbank financial company’s
home country that are administered and
enforced by a comparable foreign
supervisory authority;
(9) The amount and nature of the
United States financial assets of the
foreign nonbank financial company and
its subsidiaries;
(10) The amount and nature of the
liabilities of the foreign nonbank
financial company and its subsidiaries
used to fund activities and operations in
the United States, including the degree
of reliance on short-term funding; and
(11) Any other risk-related factor that
the Council deems appropriate, either
by regulation or on a case-by-case basis.
srobinson on DSK4SPTVN1PROD with PROPOSALS
§ 1310.12
Anti-evasion provision.
(a) Determinations. In order to avoid
evasion of Title I of the Dodd-Frank Act
(12 U.S.C. 5311–5374) or this part, the
Council, on its own initiative or at the
request of the Board of Governors, may
require that the financial activities of a
company shall be supervised by the
Board of Governors and subject to
prudential standards if the Council
determines that—
(1) Material financial distress related
to, or the nature, scope, size, scale,
concentration, interconnectedness, or
mix of, the financial activities
conducted directly or indirectly by a
company incorporated or organized
under the laws of the United States or
any State or the financial activities in
the United States of a company
incorporated or organized in a country
other than the United States would pose
a threat to the financial stability of the
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
United States, based on consideration of
the factors in—
(i) § 1310.11(a) if the company is
incorporated or organized under the
laws of the United States or any State;
or
(ii) § 1310.11(b) if the company is
incorporated or organized in a country
other than the United States; and
(2) The company is organized or
operates in such a manner as to evade
the application of Title I of the DoddFrank Act (12 U.S.C. 5311–5374) or this
part.
(b) Vote required. Any proposed or
final determination under paragraph (a)
of this section shall—
(1) Be made by the Council and shall
not be delegated by the Council; and
(2) Require the vote of not fewer than
two-thirds of the voting members of the
Council then serving, including the
affirmative vote of the Chairperson of
the Council.
(c) Definition of covered financial
activities. For purposes of this section,
the term ‘‘financial activities’’—
(1) Means activities that are financial
in nature (as defined in section 4(k) of
the Bank Holding Company Act of
1956);
(2) Includes the ownership or control
of one or more insured depository
institutions; and
(3) Does not include internal financial
activities conducted for the company or
any affiliate thereof, including internal
treasury, investment, and employee
benefit functions.
(d) Application of other provisions.
Sections 1310.20(a), 1310.20(b),
1310.20(c), 1310.20(e), 1310.21,
1310.22, and 1310.23, and the
definitions referred to therein, shall
apply to proposed and final
determinations of the Council with
respect to the financial activities of a
company pursuant to this section in the
same manner as such sections apply to
proposed and final determinations of
the Council with respect to nonbank
financial companies.
Subpart C—Information Collection;
Proposed and Final Determinations;
Evidentiary Hearings
§ 1310.20 Council information collection;
consultation; coordination; confidentiality.
(a) Information collection from the
Office of Financial Research, member
agencies, the Federal Insurance Office,
and other Federal and State financial
regulatory agencies. The Council may
receive, and may request the submission
of, such data or information from the
Office of Financial Research, member
agencies, the Federal Insurance Office,
and other Federal and State financial
PO 00000
Frm 00026
Fmt 4702
Sfmt 4702
64275
regulatory agencies as the Council
deems necessary to carry out the
provisions of Title I of the Dodd-Frank
Act (12 U.S.C. 5311–5374) or this part.
(b) Information collection from
nonbank financial companies.
(1) The Council may, to the extent the
Council determines appropriate, direct
the Office of Financial Research to
require the submission of periodic and
other reports from any nonbank
financial company, including a nonbank
financial company that is being
considered for a proposed or final
determination under § 1310.10(a), for
the purpose of assessing the extent to
which a nonbank financial company
poses a threat to the financial stability
of the United States.
(2) Before requiring the submission of
reports under this paragraph (b) from
any nonbank financial company that is
regulated by a member agency or any
primary financial regulatory agency, the
Council, acting through the Office of
Financial Research, shall coordinate
with such agency or agencies and shall,
whenever possible, rely on information
available from the Office of Financial
Research or such agency or agencies.
(3) Before requiring the submission of
reports under this paragraph (b) from a
company that is a foreign nonbank
financial company, the Council shall,
acting through the Office of Financial
Research, to the extent appropriate,
consult with the appropriate foreign
regulator of such foreign nonbank
financial company and, whenever
possible, rely on information already
being collected by such foreign
regulator, with English translation.
(c) Consultation. The Council shall
consult with the primary financial
regulatory agency, if any, for each
nonbank financial company that is
being considered for supervision by the
Board of Governors under § 1310.10(a)
and with the primary financial
regulatory agency, if any, of any
subsidiary of such nonbank financial
company, in a timely manner before the
Council makes any final determination
under § 1310.10(a) with respect to such
nonbank financial company.
(d) International coordination. In
exercising its duties under this part with
respect to foreign nonbank financial
companies and cross-border activities
and markets, the Council, acting
through its Chairperson or other
authorized designee, shall consult with
appropriate foreign regulatory
authorities, to the extent appropriate.
(e) Confidentiality—(1) In general.
The Council shall maintain the
confidentiality of any data, information,
and reports submitted under this part.
E:\FR\FM\18OCP1.SGM
18OCP1
64276
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
(2) Retention of privilege. The
submission of any non–publicly
available data or information under this
part shall not constitute a waiver of, or
otherwise affect, any privilege arising
under Federal or State law (including
the rules of any Federal or State court)
to which the data or information is
otherwise subject.
(3) Freedom of Information Act.
Section 552 of Title 5, United States
Code, including the exceptions
thereunder, shall apply to any data or
information submitted under this part.
srobinson on DSK4SPTVN1PROD with PROPOSALS
§ 1310.21 Notice and opportunity for an
evidentiary hearing; proposed and final
determinations.
(a) Written notice of consideration of
determination; submission of materials.
Before providing a nonbank financial
company written notice of a proposed
determination pursuant to paragraph (b)
of this section, the Council shall provide
the nonbank financial company—
(1) Written notice that the Council is
considering whether to make a proposed
determination with respect to the
nonbank financial company under
§ 1310.10(a);
(2) An opportunity to submit written
materials, within such time as the
Council determines to be appropriate, to
the Council to contest the Council’s
consideration of the nonbank financial
company for a proposed determination,
including materials concerning whether,
in the nonbank financial company’s
view, material financial distress at the
nonbank financial company, or the
nature, scope, size, scale, concentration,
interconnectedness, or mix of the
activities of the nonbank financial
company, could pose a threat to the
financial stability of the United States;
and
(3) Notice when the Council deems its
evidentiary record regarding such
nonbank financial company to be
complete.
(b) Notice of proposed determination.
If the Council determines under
§ 1310.10(a) that a nonbank financial
company should be supervised by the
Board of Governors and be subject to
prudential standards, the Council shall
provide to the nonbank financial
company written notice of the proposed
determination, including an explanation
of the basis of the proposed
determination and the date by which an
evidentiary hearing may be requested by
the nonbank financial company under
paragraph (c) of this section.
(c) Evidentiary hearing.
(1) Not later than 30 days after the
date of receipt by a nonbank financial
company of the notice of proposed
determination under paragraph (b) of
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
this section, the nonbank financial
company may request, in writing, an
opportunity for a written or oral
evidentiary hearing before the Council
to contest the proposed determination
under § 1310.10(a).
(2) Upon receipt by the Council of a
timely request under paragraph (c)(1),
the Council shall fix a time (not later
than 30 days after the date of receipt by
the Council of the request) and place at
which such nonbank financial company
may appear, personally or through
counsel, for an evidentiary hearing at
which the nonbank financial company
may submit written materials (or, at the
sole discretion of the Council, oral
testimony and oral argument) to contest
the proposed determination under
§ 1310.10(a), including materials
concerning whether, in the nonbank
financial company’s view, material
financial distress at the nonbank
financial company, or the nature, scope,
size, scale, concentration,
interconnectedness, or mix of the
activities of the nonbank financial
company, could pose a threat to the
financial stability of the United States.
(d) Final determination after
evidentiary hearing. If the nonbank
financial company makes a timely
request for an evidentiary hearing under
paragraph (c) of this section, the Council
shall, not later than 60 days after the
hearing date—
(1) Make a final determination under
§ 1310.10(a);
(2) Notify the nonbank financial
company, in writing, of the final
determination of the Council, which
notice shall contain a statement of the
basis for the decision of the Council;
and
(3) Publicly announce the final
determination of the Council.
(e) No evidentiary hearing requested.
If a nonbank financial company does
not make a timely request for an
evidentiary hearing under paragraph (c)
of this section or notifies the Council in
writing that it is not requesting an
evidentiary hearing under paragraph (c)
of this section, the Council shall, not
later than 10 days after the date by
which the nonbank financial company
could have requested a hearing under
paragraph (c) of this section or 10 days
after the date on which the Council
receives notice from the nonbank
financial company that it is not
requesting an evidentiary hearing, as
applicable—
(1) Make a final determination under
§ 1310.10(a);
(2) Notify the nonbank financial
company, in writing, of the final
determination of the Council, which
notice shall contain a statement of the
PO 00000
Frm 00027
Fmt 4702
Sfmt 4702
basis for the decision of the Council;
and
(3) Publicly announce the final
determination of the Council.
(f) Time period for consideration.
(1) If the Council does not make a
proposed determination under
§ 1310.10(a) with respect to a nonbank
financial company within 180 days after
the date on which the nonbank financial
company receives the notice of
completion of the Council’s evidentiary
record described in paragraph (a)(3) of
this section, the nonbank financial
company shall not be eligible for a
proposed determination under
§ 1310.10(a) unless the Council issues a
subsequent written notice of
consideration of determination under
paragraph (a) of this section to such
nonbank financial company.
(2) This paragraph (f) shall not limit
the Council’s ability to issue a
subsequent written notice of
consideration of determination under
§ 1310.21(a) to any nonbank financial
company that, within 180 days after the
date on which such nonbank financial
company received a notice described in
paragraph (a)(3) of this section, does not
become subject to a proposed
determination under § 1310.10(a).
§ 1310.22 Emergency exception to
§ 1310.21.
(a) Exception to § 1310.21.
Notwithstanding anything to the
contrary in § 1310.21, the Council may
waive or modify any or all of the notice
and other procedural requirements of
§ 1310.21 with respect to a nonbank
financial company if—
(1) The Council determines that such
waiver or modification is necessary or
appropriate to prevent or mitigate
threats posed by the nonbank financial
company to the financial stability of the
United States; and
(2) The Council provides written
notice of the waiver or modification
under this section to the nonbank
financial company as soon as
practicable, but not later than 24 hours
after the waiver or modification is
granted. Any such notice shall set forth
the manner and form for transmitting a
request for an evidentiary hearing under
paragraph (c) of this section.
(b) Consultation.
(1) In making a determination under
paragraph (a) of this section with
respect to a nonbank financial company,
the Council shall consult with the
primary financial regulatory agency, if
any, for such nonbank financial
company, in such time and manner as
the Council may deem appropriate.
(2) In making a determination under
paragraph (a) of this section with
E:\FR\FM\18OCP1.SGM
18OCP1
srobinson on DSK4SPTVN1PROD with PROPOSALS
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
respect to a foreign nonbank financial
company, the Council shall consult with
the appropriate home country
supervisor, if any, of such foreign
nonbank financial company, in such
time and manner as the Council may
deem appropriate.
(c) Opportunity for evidentiary
hearing.
(1) If the Council, pursuant to
paragraph (a) of this section, waives or
modifies any of the notice or other
procedural requirements of § 1310.21
with respect to a nonbank financial
company, the nonbank financial
company may request, in writing, an
opportunity for a written or oral
evidentiary hearing before the Council
to contest such waiver or modification,
not later than 10 days after the date of
receipt by the nonbank financial
company of the notice described in
paragraph (a)(2) of this section.
(2) Upon receipt of a timely request
for an evidentiary hearing under
paragraph (c)(1), the Council shall fix a
time (not later than 15 days after the
date of receipt by the Council of the
request) and place at which the nonbank
financial company may appear,
personally or through counsel, to submit
written materials (or, at the sole
discretion of the Council, oral testimony
and oral argument) regarding the waiver
or modification under this section.
(d) Notice of final determination. If
the nonbank financial company makes a
timely request for an evidentiary
hearing under paragraph (c) of this
section, the Council shall, not later than
30 days after the hearing date—
(1) Notify the nonbank financial
company, in writing, of the final
determination of the Council regarding
the waiver or modification under this
§ 1310.22, which notice shall contain a
statement of the basis for the final
decision of the Council; and
(2) Publicly announce the final
determination of the Council.
(e) Vote required. Any determination
of the Council under paragraph (a)(1) of
this section to waive or modify any of
the notice or other procedural
requirements of § 1310.21 shall—
(1) Be made by the Council and shall
not be delegated by the Council; and
(2) Require the vote of not fewer than
two-thirds of the voting members of the
Council then serving, including the
affirmative vote of the Chairperson of
the Council.
§ 1310.23 Council reevaluation and
rescission of determinations.
(a) Reevaluation and rescission. The
Council shall, not less frequently than
annually—
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
(1) Reevaluate each currently effective
determination made under § 1310.10(a);
and
(2) Rescind any such determination, if
the Council determines that the
nonbank financial company no longer
meets the standard under § 1310.10(a),
taking into account the considerations
in § 1310.11(a) or § 1310.11(b), as
applicable.
(b) Vote required. Any determination
of the Council under paragraph (a)(2) of
this section to rescind a determination
made with respect to a nonbank
financial company shall—
(1) Be made by the Council and shall
not be delegated by the Council; and
(2) Require the vote of not fewer than
two-thirds of the voting members of the
Council then serving, including the
affirmative vote of the Chairperson of
the Council.
APPENDIX 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’’) 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
‘‘Board of Governors’’) and be subject to
prudential standards in accordance with
Title I of the Dodd-Frank Act if either of two
standards is met. Under the first standard,
the Council may subject a nonbank financial
company to supervision by the Board of
Governors and prudential standards if the
Council determines that ‘‘material financial
distress’’ at the nonbank financial company
could pose a threat to the financial stability
of the United States. Under the second
standard, the Council may determine that a
nonbank financial company will be
supervised by the Board of Governors and
subject to prudential standards if the nature,
scope, size, scale, concentration,
interconnectedness, or mix of the nonbank
financial company’s activities could pose a
threat to U.S. financial stability. Section 113
of the Dodd-Frank Act also lists 10
considerations that the Council must take
into account in making a determination.
Section II of this document describes the
manner in which the Council intends to
apply the statutory standards and
considerations in making determinations
under section 113 of the Dodd-Frank Act.
First, section II defines ‘‘threat to the
financial stability of the United States’’ and
describes channels through which a nonbank
financial company could pose such a threat.
Second, it discusses each of the two statutory
standards for determination. Third, it
describes the six-category framework that the
Council intends to use to evaluate nonbank
financial companies under each of the 10
statutory considerations. Section II also
PO 00000
Frm 00028
Fmt 4702
Sfmt 4700
64277
includes a list of sample metrics that may be
used to evaluate individual nonbank
financial companies under each of the six
categories.
Section III of this document outlines the
process that the Council intends to follow in
non-emergency situations when determining
whether to subject a nonbank financial
company to Board of Governors supervision
and prudential standards. Section III also
provides a detailed description of the
analysis that the Council intends to conduct
during each stage of its review. In the first
stage of the process, the Council will apply
six uniform quantitative thresholds to
nonbank financial companies to identify
those nonbank financial companies that will
be subject to further evaluation by the
Council. Because the Council is relying on
quantitative thresholds using publicly
available data in the first stage, nonbank
financial companies should be able to assess
whether they are likely to be subject to
further evaluation by the Council. During the
second stage of the evaluation process, the
Council will analyze the identified nonbank
financial companies using a broad range of
information available to the Council
primarily through existing public and
regulatory sources. The third stage of the
process will involve a comprehensive
analysis of those nonbank financial
companies using information collected
directly from the nonbank financial
company, as well as the information used in
the first two stages.
II. Council Determination Authority and
Proposed Framework
As noted above, the Council may
determine that a nonbank financial company
will be supervised by the Board of Governors
and be subject to prudential standards if the
Council determines that (i) material financial
distress at the nonbank financial company
could pose a threat to the financial stability
of the United States (the ‘‘First Determination
Standard’’) or (ii) the nature, scope, size,
scale, concentration, interconnectedness, or
mix of the activities of the nonbank financial
company, could pose a threat to the financial
stability of the United States (the ‘‘Second
Determination Standard,’’ and, together with
the First Determination Standard, the
‘‘Determination Standards’’).
This section provides definitions of the
terms ‘‘threat to the financial stability of the
United States’’ and ‘‘material financial
distress’’ and describes how the Council
expects to apply the Determination
Standards.
a. Threat to the Financial Stability of the
United States
The Determination Standards require the
Council to determine whether a nonbank
financial company could pose a threat to the
financial stability of the United States. The
Council will consider a ‘‘threat to the
financial stability of the United States’’ to
exist if there would be an impairment of
financial intermediation or of financial
market functioning that would be sufficiently
severe to inflict significant damage on the
broader economy.
An impairment of financial intermediation
and financial market functioning can occur
E:\FR\FM\18OCP1.SGM
18OCP1
srobinson on DSK4SPTVN1PROD with PROPOSALS
64278
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
through several channels. The Council has
identified the following channels as most
likely to facilitate the transmission of the
negative effects of a nonbank financial
company’s material financial distress or
activities to other financial firms and
markets:
• Exposure. A nonbank financial
company’s creditors, counterparties,
investors, or other market participants have
exposure to the nonbank financial company
that is significant enough to materially
impair those creditors, counterparties,
investors, or other market participants and
thereby pose a threat to U.S. financial
stability. In its initial analysis of nonbank
financial companies with respect to this
channel, the Council expects to consider
metrics including total consolidated assets,
credit default swaps outstanding, derivative
liabilities, loans and bonds outstanding, and
leverage ratio.
• Asset liquidation. A nonbank financial
company holds assets that, if liquidated
quickly, would significantly disrupt trading
or funding in key markets or cause significant
losses or funding problems for other firms
with similar holdings due to falling asset
prices. This channel would likely be most
relevant for a nonbank financial company
whose funding and liquid asset profile makes
it likely that it would be forced to liquidate
assets quickly when it comes under financial
pressure. For example, this could be the case
if a large nonbank financial company relies
heavily on short-term funding. In its initial
analysis of nonbank financial companies
with respect to this channel, the Council
expects to consider metrics including total
consolidated assets and short-term debt ratio.
• Critical function or service. A nonbank
financial company is no longer able or
willing to provide a critical function or
service that is relied upon by market
participants and for which there are no ready
substitutes. The analysis of this channel will
incorporate a review of the competitive
landscape for markets in which a nonbank
financial company participates and for the
services it provides (including the provision
of liquidity to the U.S. financial system, the
provision of credit to low-income, minority,
or underserved communities or the provision
of credit to households, businesses and state
and local governments), the nonbank
financial company’s market share, and the
ability of other firms to replace those
services. Due to the unique ways in which a
nonbank financial company may provide a
critical function or service to the market, the
Council expects to apply company-specific
analyses with respect to this channel, rather
than applying a broadly applicable
quantitative metric.
The Council believes that the threat a
nonbank financial company may pose to U.S.
financial stability through the impairment of
financial intermediation and financial market
functioning is likely to be exacerbated if the
nonbank financial company is sufficiently
complex, opaque, or difficult to resolve in
bankruptcy such that its resolution in
bankruptcy would disrupt key markets or
have a material adverse impact on other
financial firms or markets.
The Council intends to continue to
evaluate additional transmission channels,
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
and may, in 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.
b. First Determination Standard: Material
Financial Distress
Under the First Determination Standard,
the Council may subject a nonbank financial
company to supervision by the Board of
Governors and prudential standards if the
Council determines that ‘‘material financial
distress’’ at the nonbank financial company
could pose a threat to U.S. financial stability.
The Council believes that material financial
distress exists when a nonbank financial
company is in imminent danger of
insolvency or defaulting on its financial
obligations.
For purposes of considering whether a
nonbank financial company could pose a
threat to U.S. financial stability under this
Determination Standard, the Council intends
to assess the impact of the nonbank financial
company’s material financial distress in the
context of a period of overall stress in the
financial services industry and in a weak
macroeconomic environment. The Council
believes this is appropriate because in such
a context, a nonbank financial company’s
distress may have a greater effect on U.S.
financial stability.
c. Second Determination Standard: Nature,
Scope, Size, Scale, Concentration,
Interconnectedness, or Mix of Activities
Under the Second Determination Standard,
the Council may subject a nonbank financial
company to supervision by the Board of
Governors and prudential standards if the
Council determines that the nature, scope,
size, scale, concentration,
interconnectedness, or mix of the nonbank
financial company’s activities could pose a
threat to U.S. financial stability. The Council
believes that this Determination Standard
will be met if the Council determines that the
nature of a nonbank financial company’s
business practices, conduct, or operations
could pose a threat to U.S. financial stability,
regardless of whether the nonbank financial
company is experiencing financial distress.
The Council expects that there likely will be
significant overlap between the outcome of
an assessment of a nonbank financial
company under the First and Second
Determination Standards, because, in many
cases, a nonbank financial company that
could pose a threat to U.S. financial stability
because of the nature, scope, size, scale,
concentration, interconnectedness, or mix of
its activities could also pose a threat to U.S.
financial stability if it were to experience
material financial distress.
d. Analytic Framework for Statutory
Considerations
As required by section 113 of the DoddFrank Act, the Council’s determination will
be based on its judgment that a firm meets
one of the Determination Standards
described above. In evaluating whether a firm
meets one of the Determination Standards,
the Council will consider each of the
statutory considerations set forth in the
PO 00000
Frm 00029
Fmt 4702
Sfmt 4700
statute. The discussion below outlines the
analytic framework that the Council intends
to use to organize its evaluation of a nonbank
financial company under the statutory
considerations and provides additional detail
on the key data and analyses that the Council
intends to use to assess the considerations.
1. Grouping of Statutory Considerations Into
Six-Category Framework
The Dodd-Frank Act requires the Council
to consider 10 considerations (described
below) when evaluating the potential of a
nonbank financial company to pose a threat
to U.S. financial stability. The statute also
authorizes the Council to consider ‘‘any other
risk-related factors that the Council deems
appropriate.’’ These statutory considerations
will help the Council to evaluate whether
one of the Determination Standards, as
described in sections II.b and II.c above, has
been met. The Council has developed an
analytic framework that groups all relevant
factors, including the 10 statutory
considerations and any additional riskrelated factors, into six categories: size,
interconnectedness, lack of substitutes,
leverage, liquidity risk and maturity
mismatch, and existing regulatory scrutiny.
The Council expects to use these six
categories to guide its evaluation of whether
a particular nonbank financial company
meets either Determination Standard.
However, the Council’s ultimate
determination decision regarding a nonbank
financial company will not be based on a
formulaic application of the six categories.
Rather, the Council intends to analyze a
nonbank financial company using
quantitative and qualitative data relevant to
each of the six categories, as the Council
determines is appropriate with respect to a
particular nonbank financial company.
Each of the six categories reflects a
different dimension of a nonbank financial
company’s potential to pose a threat to U.S.
financial stability. Three of the six
categories—size, substitutability and
interconnectedness—seek to assess the
potential impact of the nonbank financial
company’s financial distress on the broader
economy. Material financial distress at
nonbank financial companies that are large,
provide critical financial services for which
there are few substitutes, or are highly
interconnected with other financial firms or
markets are more likely to have a financial
or operational impact on other companies,
markets, and consumers that could pose a
threat to the financial stability of the United
States. The remaining three categories—
leverage, liquidity risk and maturity
mismatch, and existing regulatory scrutiny of
the nonbank financial company—seek to
assess the vulnerability of a nonbank
financial company to financial distress.
Nonbank financial companies that are highly
leveraged, have a high degree of liquidity risk
or maturity mismatch, and are under little or
no regulatory scrutiny are more likely to be
more vulnerable to financial distress.
Each of the statutory considerations in
sections 113(a)(2) and (b)(2) of the DoddFrank Act would be considered as part of one
or more of the six categories. This is reflected
in the following table, using the
E:\FR\FM\18OCP1.SGM
18OCP1
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
64279
considerations relevant to a U.S. nonbank
financial company for illustrative purposes.10
Statutory considerations:
Category or categories in which this consideration would be addressed:
(A) The extent of the leverage of the company .......................................
(B) The extent and nature of the off-balance-sheet exposures of the
company.
(C) The extent and nature of the transactions and relationships of the
company with other significant nonbank financial companies and significant bank holding companies.
(D) The importance of the company as a source of credit for households, businesses, and State and local governments and as a source
of liquidity for the United States financial system.
(E) The importance of the company as a source of credit for low-income, minority, or underserved communities, and the impact that the
failure of such company would have on the availability of credit in
such communities.
(F) The extent to which assets are managed rather than owned by the
company, and the extent to which ownership of assets under management is diffuse.
(G) The nature, scope, size, scale, concentration, interconnectedness,
and mix of the activities of the company.
(H) The degree to which the company is already regulated by 1 or
more primary financial regulatory agencies.
(I) The amount and nature of the financial assets of the company .........
(J) The amount and types of the liabilities of the company, including
the degree of reliance on short-term funding.
(K) Any other risk-related factors that the Council deems appropriate ...
Leverage.
Size; interconnectedness.
Size; lack of substitutes.
Lack of substitutes.
Size; interconnectedness; lack of substitutes.
Size; interconnectedness; lack of substitutes.
Existing regulatory scrutiny.
Size; interconnectedness.
Liquidity risk and maturity mismatch; size; interconnectedness.
Appropriate category or categories based on the nature of the additional risk-related factor.
Interconnectedness captures direct or
indirect linkages between financial
companies that may be conduits for the
transmission of the effects resulting from a
nonbank financial company’s material
financial distress or activities. Examples of
the key conduits through which the effects
may travel are a nonbank financial
company’s direct or indirect exposures to
counterparties (including creditors, trading
and derivatives counterparties, investors,
borrowers, and other participants in the
financial markets). Interconnectedness
depends not only on the number of
counterparties that a nonbank financial
company has, but also on the importance of
that nonbank financial company to its
counterparties and the extent to which the
counterparties are interconnected with other
financial firms, the financial system and the
broader economy. The Council’s assessment
of interconnectedness is intended to
determine whether a nonbank financial
company’s exposure to its counterparties
would pose a threat to U.S. financial stability
if that company encountered material
financial distress.
For example, metrics that may be used to
assess interconnectedness include:
• Counterparties’ exposures to a nonbank
financial company, including derivatives,
reinsurance, loans, securities borrowing and
lending, and lines of credit that facilitate
settlement and clearing activities.
• Number, size, and financial strength of a
nonbank financial company’s counterparties,
including the proportion of its
counterparties’ exposure to the nonbank
financial company relative to the
counterparties’ capital.
• Identity of a nonbank financial
company’s principal contractual
counterparties, which reflects the
concentration of the nonbank financial
company’s assets financed by particular firms
and the importance of the nonbank financial
company’s counterparties to the market.
• Aggregate amounts of a nonbank
financial company’s gross or net derivatives
exposures and the number of its derivatives
counterparties.
• The amount of gross notional credit
default swaps outstanding for which a
nonbank financial company is the reference
entity.
• Outstanding loans borrowed and bonds
issued, which captures a nonbank financial
company’s sources of funding.
• Reinsurance obligations, which measure
the reinsurance risk assumed from nonaffiliates net of retrocession.
Substitutability
Substitutability captures the extent to
which other firms could provide similar
financial services in a timely manner at a
similar price and quantity if a nonbank
financial company withdraws from a
10 The corresponding statutory considerations for
a foreign nonbank financial company would be
particular market. Substitutability also
captures situations in which a nonbank
financial company is the primary or
dominant provider of services in a market
that the Council determines to be essential to
U.S. financial stability. An example of the
manner in which the Council may determine
a nonbank financial company’s
substitutability is to consider its market
share. The Council’s evaluation of a nonbank
financial company’s market share regarding a
particular product or service will include
assessments of the ability of the nonbank
financial company’s competitors to expand to
meet market needs; the costs that market
participants would incur if forced to switch
providers; the timeframe within which a
disruption in the provision of the product or
service would materially affect market
participants or market functioning; and the
economic implications of such a disruption.
Concern about a potential lack of
substitutability could be greater if a nonbank
financial company and its competitors are
likely to experience stress at the same time
because they are exposed to the same risks.
The Council may also analyze a nonbank
financial company’s core operations and
critical functions and the importance of those
operations and functions to the U.S. financial
system and assess how those operations and
functions would be performed by the
nonbank financial company or other market
participants in the event of the nonbank
financial company’s material financial
distress. The Council also intends to consider
substitutability with respect to any nonbank
financial company with global operations to
identify the substitutability of critical market
functions that the company provides in the
United States in the event of material
considered under the relevant categories indicated
in the table.
2. Six-Category Framework
The discussion below describes each of the
six categories and how these categories relate
to a firm’s likelihood to pose a threat to
financial stability. The sample metrics set
forth below under each category are
representative, not exhaustive, and may not
apply to all nonbank financial companies
under evaluation. The Council may apply the
sample metrics in the context of stressed
market conditions.
Interconnectedness
srobinson on DSK4SPTVN1PROD with PROPOSALS
Interconnectedness.
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
PO 00000
Frm 00030
Fmt 4702
Sfmt 4700
E:\FR\FM\18OCP1.SGM
18OCP1
srobinson on DSK4SPTVN1PROD with PROPOSALS
64280
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
financial distress of a foreign parent
company.
For example, metrics that may be used to
assess substitutability include:
• The market share, using the appropriate
quantitative measure (such as loans
originated, loans outstanding, and notional
transaction volume) of a nonbank financial
company and its competitors in the market
under consideration.
• The stability of market share across the
firms in the market over time.
• The market share of the company and its
competitors for products or services that
serve a substantially similar economic
function as the primary market under
consideration.
Size
Size captures the amount of financial
services or financial intermediation that a
nonbank financial company provides. Size
also may affect the extent to which the effects
of a nonbank financial company’s financial
distress are transmitted to other firms and to
the financial system. For example, financial
distress at an extremely large nonbank
financial company that is highly
interconnected likely would transmit risk on
a larger scale than would financial distress at
a smaller nonbank financial company that is
similarly interconnected. Size is
conventionally measured by the assets,
liabilities and capital of the firm. However,
such measures of size may not provide
complete or accurate assessments of the scale
of a nonbank financial company’s risk
potential. Thus, the Council also intends to
take into account off-balance sheet assets and
liabilities and assets under management in a
manner that recognizes the unique and
distinct nature of these classes. Other
measures of size, such as numbers of
customers and counterparties, may also be
relevant.
For example, metrics that may be used to
assess size include:
• Total consolidated assets or liabilities, as
determined under the applicable financial
reporting standards.
• Total risk-weighted assets, as appropriate
for different industry sectors.
• Off-balance sheet exposures where a
nonbank financial company has a risk of loss,
including, for example, lines of credit. For
foreign nonbank financial companies, this
would be evaluated based on the extent and
nature of U.S.-related off-balance sheet
exposures.
• The extent to which assets are managed
rather than owned by a nonbank financial
company and the extent to which ownership
of assets under management is diffuse.
• Direct written premiums, as reported by
insurance companies. This is the aggregate of
direct written premiums reported by
insurance entities under all lines of business
and serves as a proxy for the amount of
insurance underwritten by the insurance
entities.
• Risk in force, which is the aggregate risk
exposure from risk underwritten in insurance
related to certain financial risks, such as
mortgage insurance.
• Total loan originations, by loan type, in
number and dollar amount.
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
Leverage
Leverage captures a company’s exposure or
risk in relation to its equity capital. Leverage
amplifies a company’s risk of financial
distress in two ways. First, by increasing a
company’s exposure relative to capital,
leverage raises the likelihood that a company
will suffer losses exceeding its capital.
Second, by increasing the size of a company’s
liabilities, leverage raises a company’s
dependence on its creditors’ willingness and
ability to fund its balance sheet. Leverage can
also amplify the impact of a company’s
distress on other companies, both directly, by
increasing the amount of exposure that other
firms have to the company, and indirectly, by
increasing the size of any asset liquidation
that the company is forced to undertake as
it comes under financial pressure. Leverage
is typically measured by the ratio of debt to
capital, but it can also be defined in terms
of risk, as a measure of economic risk relative
to capital. The latter measurement can better
capture the effect of derivatives and other
products with embedded leverage on the risk
undertaken by a nonbank financial company.
For example, metrics that may be used to
assess leverage include:
• Total assets and total debt measured
relative to total equity, which is intended to
measure financial leverage.
• Gross notional exposure of derivatives
and off-balance sheet obligations relative to
total equity or net assets under management,
which is intended to show how much offbalance sheet leverage a nonbank financial
company may have.
• The ratio of risk to statutory capital,
which is relevant to certain insurance
companies and is intended to show how
much risk exposure a nonbank financial
company has in relation to its ability to
absorb loss.
• Changes in leverage ratios, which may
indicate that a nonbank financial company is
rapidly increasing its risk profile.
Liquidity Risk and Maturity Mismatch
Liquidity risk generally refers to the risk
that a company may not have sufficient
funding to satisfy its short-term needs, either
through its cash flows, maturing assets, or
assets salable at prices equivalent to book
value, or through its ability to access funding
markets. For example, if a company holds
assets that are illiquid or that are subject to
significant decreases in market value during
times of market stress, the company may be
unable to liquidate its assets effectively in
response to a loss of funding. In order to
assess liquidity, the Council may examine a
nonbank financial company’s assets to
determine if it possesses cash instruments or
readily marketable securities, such as
Treasury securities, which could reasonably
be expected to have a liquid market in times
of distress. The Council may also review a
nonbank financial company’s debt profile to
determine if it has adequate long-term
funding, or can otherwise mitigate liquidity
risk. Liquidity problems also can arise from
a company’s inability to roll maturing debt or
to satisfy margin calls, and from demands for
additional collateral, depositor withdrawals,
draws on committed lines, and other
potential draws on liquidity.
PO 00000
Frm 00031
Fmt 4702
Sfmt 4700
A maturity mismatch generally refers to the
difference between the maturities of a
company’s assets and liabilities. A maturity
mismatch affects a company’s ability to
survive a period of stress that may limit its
access to funding and to withstand shocks in
the yield curve. For example, if a company
relies on short-term funding to finance
longer-term positions, it will be subject to
significant refunding risk that may force it to
sell assets at low market prices or potentially
suffer through significant margin pressure.
However, maturity mismatches are not
confined to the use of short-term liabilities
and can exist at any point in the maturity
schedule of a nonbank financial company’s
assets and liabilities. For example, in the case
of a life insurance company, liabilities may
have maturities of 30 years or more, whereas
the market availability of equivalently longterm assets may be limited.
For example, metrics that may be used to
assess liquidity and maturity mismatch
include:
• Fraction of assets that are classified as
level 2 and level 3 under applicable
accounting standards, as a measure of how
much of a nonbank financial company’s
balance sheet is composed of hard-to-value
and potentially illiquid securities.
• Liquid asset ratios, which are intended
to indicate a nonbank financial company’s
ability to repay its short-term debt.
• The ratio of unencumbered and highly
liquid assets to the net cash outflows that a
nonbank financial company could encounter
in a short-term stress scenario.
• Callable debt as a fraction of total debt,
which provides one measure of a nonbank
financial company’s ability to manage its
funding position in response to changes in
interest rates.
• Asset-backed funding versus other
funding, to determine a nonbank financial
company’s susceptibility to distress in
particular credit markets.
• Asset-liability duration and gap analysis,
which is intended to indicate how well a
nonbank financial company is matching the
re-pricing and maturity of the nonbank
financial company’s assets and liabilities.
• Short-term debt as a percentage of total
debt and as a percentage of total assets,
which indicates a nonbank financial
company’s reliance on short-term debt
markets.
Existing Regulatory Scrutiny
The Council will consider the extent to
which nonbank financial companies are
already subject to regulation, including the
consistency of that regulation across nonbank
financial companies within a sector, across
different sectors, and providing similar
services, and the statutory authority of those
regulators. For example, the Council may
consider whether a nonbank financial
company is subject to consolidated
supervision.
For example, metrics that may be used to
assess existing regulatory scrutiny include:
• Existence of consolidated supervision, to
determine whether non-regulated entities
and groups within a nonbank financial
company are supervised on a group-wide
basis.
E:\FR\FM\18OCP1.SGM
18OCP1
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
srobinson on DSK4SPTVN1PROD with PROPOSALS
• For investment funds, whether the fund
or manager is registered with the Securities
and Exchange Commission, the Commodity
Futures Trading Commission, or a bank or
insurance regulator.
• For insurance companies, an assessment
of the number of primary financial regulatory
agencies and the number of ‘‘lead state’’
regulators.
• For entities based outside the United
States, the extent to which a nonbank
financial company is subject to prudential
standards on a consolidated basis in its home
country that are administered and enforced
by a comparable foreign supervisory
authority.
• Current regulatory bodies’ ability to
impose detailed and timely regulatory
reporting obligations, capital or liquidity
requirements, enforcement actions, and
resolutions.
III. The Determination Process
The Council expects generally to follow a
three-stage process of increasingly in-depth
evaluation and analysis leading up to a
proposed determination (a ‘‘Proposed
Determination’’) that a nonbank financial
company could pose a threat to the financial
stability of the United States. Quantitative
metrics, together with qualitative analysis,
will inform the judgment of the Council
when it is evaluating a nonbank financial
company for a Proposed Determination. The
purpose of this process is to help determine
whether a nonbank financial company could
pose a threat to the financial stability of the
United States.
In the first stage of the process (‘‘Stage 1’’),
a set of uniform quantitative metrics will be
applied to a broad group of nonbank
financial companies in order to identify
nonbank financial companies for further
evaluation and to provide clarity for nonbank
financial companies that likely will not be
subject to further evaluation. In Stage 1, the
Council will rely solely on information
available through existing public and
regulatory sources. The purpose of Stage 1 is
to enable the Council to identify a group of
nonbank financial companies that are most
likely to satisfy one of the Determination
Standards.
In the second stage (‘‘Stage 2’’), the
nonbank financial companies identified in
Stage 1 will be analyzed and prioritized,
based on a wide range of quantitative and
qualitative information available to the
Council primarily through public and
regulatory sources. The Council will also
begin the consultation process with the
primary financial regulatory agencies or
home country supervisors, as appropriate.
During Stage 2, the Council intends to fulfill
its statutory obligation to rely whenever
possible on information available through the
Office of Financial Research (the ‘‘OFR’’) or
primary financial regulatory agencies before
requiring the submission of reports from any
nonbank financial company.11
Following Stage 2, nonbank financial
companies that are selected for additional
review will receive notice that they are being
considered for a proposed determination and
11 See
12 U.S.C. 5322(d)(3).
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
will be subject to in-depth evaluation during
the third stage of review (‘‘Stage 3’’). Stage 3
will involve the evaluation of information
collected directly from the nonbank financial
company, in addition to the information
considered during Stages 1 and 2. At the end
of Stage 3, the Council may consider whether
to make a Proposed Determination with
respect to the nonbank financial company. If
a Proposed Determination is made by the
Council, the nonbank financial company may
request a hearing in accordance with section
113(e) of the Dodd-Frank Act and section
1310.21(c) of the proposed rule.
The Council expects to follow this threestage process and to consider the categories,
metrics, thresholds, and channels described
in this guidance to assess a nonbank financial
company’s potential to pose a threat to U.S.
financial stability. In addition to the
information described herein that the
Council generally expects to consider, the
Council also will consider quantitative and
qualitative information that it deems relevant
to a particular nonbank financial company,
as each determination will be made on a
company-specific basis. The Council may
consider any nonbank financial company for
a Proposed Determination at any point in the
three-stage evaluation process described in
this guidance if the Council believes such
company could pose a threat to U.S. financial
stability.
a. Stage 1: Initial Identification of Nonbank
Financial Companies for Evaluation
In Stage 1, the Council will seek to identify
a set of nonbank financial companies that
merit company-specific evaluation. In this
stage, the Council intends to apply
quantitative thresholds to a broad group of
nonbank financial companies. A nonbank
financial company that is selected for further
evaluation during Stage 1 will be further
assessed during Stage 2. During the Stage 1
process, the Council will evaluate nonbank
financial companies using data available to
the Council, such as publicly available
information and information member
agencies possess in their supervisory
capacities.
In the Stage 1 quantitative analysis, the
Council intends to apply thresholds that
relate to the framework categories of size,
interconnectedness, leverage, and liquidity
risk and maturity mismatch. These
thresholds were selected based on (1) their
applicability to nonbank financial companies
that operate in different types of financial
markets and industries, (2) the meaningful
initial assessment that such thresholds
provide regarding the potential for a nonbank
financial company to pose a threat to
financial stability in diverse financial
markets, and (3) the current availability of
data. These thresholds are intended to
measure both the susceptibility of a nonbank
financial company to financial distress and
the potential for that nonbank financial
company’s financial distress to spread
throughout the financial system. A nonbank
financial company will be evaluated further
in Stage 2 if it meets both the total
PO 00000
Frm 00032
Fmt 4702
Sfmt 4700
64281
consolidated assets threshold and any one of
the other thresholds.12 The thresholds are:
• Total Consolidated Assets. The Council
intends to apply a size threshold of $50
billion in global total consolidated assets for
U.S. nonbank financial companies or $50
billion in U.S. total consolidated assets for
foreign nonbank financial companies. This
threshold is consistent with the Dodd-Frank
Act threshold of $50 billion in assets for
subjecting bank holding companies to
enhanced prudential standards.
• Credit Default Swaps Outstanding. The
Council intends to apply a threshold of $30
billion in gross notional credit default swaps
(‘‘CDS’’) outstanding for which a nonbank
financial company is the reference entity.
Gross notional value equals the sum of CDS
contracts bought (or equivalently sold). If the
amount of CDS sold on a particular nonbank
financial company is greater than $30 billion,
this indicates that a large number of
institutions may be exposed to that nonbank
financial company and that if the nonbank
financial company fails, a significant number
of financial market participants may be
affected. This threshold was selected based
on an analysis of the distribution of
outstanding CDS data for nonbank financial
companies included in a list of the top 1,000
CDS reference entities.
• Derivative Liabilities. The Council
intends to apply a threshold of $3.5 billion
of derivative liabilities. In accordance with
Accounting Standards Codification 815,
derivative liabilities equals the fair value of
any derivatives contracts in a negative
position after taking into account the effects
of master netting agreements and cash
collateral held with the same counterparty on
a net basis, if elected. This threshold serves
as a proxy for interconnectedness, as a
nonbank financial company that has a greater
level of derivatives liabilities would have
higher counterparty exposure throughout the
financial system.
• Loans and Bonds Outstanding. The
Council intends to apply a threshold of $20
billion of outstanding loans borrowed and
bonds issued. This threshold serves as a
proxy for interconnectedness, as nonbank
financial companies with a large amount of
loans and bonds outstanding are generally
more interconnected with the broader
financial system, in part because financial
institutions are the largest source of loans
and hold a large proportion of bonds
outstanding. An analysis of the distribution
of total loans and bonds outstanding for a
sample of nonbank financial companies was
performed to determine the $20 billion
threshold. Historical testing of this threshold
demonstrated that it would have captured
many of the nonbank financial companies
that encountered material financial distress
during the recent financial crisis, including
Bear Stearns, Countrywide, and Lehman
Brothers.
• Leverage Ratio. The Council intends to
apply a threshold leverage ratio of total
consolidated assets (excluding separate
12 For purposes of applying these six thresholds
to investment funds managed by a nonbank
financial company, the Council may consider the
funds as a single entity if their investments are
identical or highly similar.
E:\FR\FM\18OCP1.SGM
18OCP1
64282
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
srobinson on DSK4SPTVN1PROD with PROPOSALS
accounts) to total equity of 15 to 1. The
Council intends to exclude separate accounts
from this calculation because separate
accounts are not available to claims by
general creditors of a nonbank financial
company. Measuring leverage in this manner
benefits from simplicity, availability and
comparability across industries. An analysis
of the distribution of the historical leverage
ratios of large financial institutions was used
to identify the 15 to 1 threshold. Historical
testing of this threshold demonstrated that it
would have captured the major nonbank
financial companies that encountered
material financial distress and posed a threat
to U.S. financial stability during the recent
financial crisis, including Bear Stearns,
Countrywide, IndyMac Bancorp, and Lehman
Brothers.
• Short-Term Debt Ratio. The Council
intends to apply a threshold ratio of debt
with a maturity of less than 12 months to
total consolidated assets (excluding separate
accounts) of 10 percent. An analysis of the
historical distribution of the short-term debt
ratios of large financial institutions was used
to determine the 10 percent threshold.
Historical testing of this threshold
demonstrated that it would have captured a
number of the nonbank financial companies
that faced short-term funding issues during
the recent financial crisis, including Bear
Stearns and Lehman Brothers.
In addition, because the uniform
quantitative thresholds may not capture all of
the potential ways in which a nonbank
financial company could pose a threat to
financial stability, the Council may, in
limited cases, initially evaluate nonbank
financial companies in Stage 1 based on
other firm-specific qualitative or quantitative
factors, such as substitutability and existing
regulatory scrutiny.
A nonbank financial company that is
identified for further evaluation in Stage 1
would be further assessed during Stage 2 (the
‘‘Stage 2 Pool’’).
b. Stage 2: Review and Prioritization of Stage
2 Pool
After the Stage 2 Pool has been identified,
the Council intends to conduct a robust
analysis of the potential threat that each of
those nonbank financial companies could
pose to U.S. financial stability. In general,
this analysis will be based on information
already available to the Council through
existing public and regulatory sources,
including information possessed by the
company’s primary financial regulatory
agency or home country supervisor, as
appropriate, and information obtained from
the company voluntarily. In contrast to the
application of uniform quantitative
thresholds to a broad group of nonbank
financial companies in Stage 1, the Council
intends to evaluate the risk profile and
characteristics of each individual nonbank
financial company in the Stage 2 Pool based
on a wide range of quantitative and
qualitative industry-specific and companyspecific factors. This analysis will use the
six-category analytic framework described in
section II.d above. In addition, the Stage 2
evaluation will include a review, based on
available data, of qualitative factors,
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
including whether the resolution of a
nonbank financial company, as described
below, could pose a threat to U.S. financial
stability, and the extent to which the
nonbank financial company is subject to
regulation.
Based on this analysis, the Council intends
to contact those nonbank financial
companies that the Council believes merit
further evaluation in Stage 3 (the ‘‘Stage 3
Pool’’).
c. Stage 3: Review of Stage 3 Pool
In Stage 3, the Council, working with the
OFR, will conduct a review of each nonbank
financial company in the Stage 3 Pool using
information collected directly from the
nonbank financial company, as well as the
information used in the first two stages. The
review will focus on whether the nonbank
financial company could pose a threat to U.S.
financial stability because of the company’s
material financial distress or the nature,
scope, size, scale, concentration,
interconnectedness, or mix of the company’s
activities. The transmission channels
discussed above, and other appropriate
factors, will be used to evaluate a nonbank
financial company’s potential to pose a threat
to U.S. financial stability. The analytic
framework consisting of the six categories set
forth above, and the metrics used to measure
each of the six categories, will assist the
Council in assessing the extent to which the
transmission of material financial distress is
likely to occur.
Each nonbank financial company in the
Stage 3 Pool will receive a notice (a ‘‘Notice
of Consideration’’) that the nonbank financial
company is under consideration for a
Proposed Determination. The Notice of
Consideration likely will include a request
that the nonbank financial 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.13 This information will be
collected by the OFR or the appropriate
regulatory agency.14 Before requiring the
submission of reports from any nonbank
financial company that is regulated by a
Council member agency or any 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. The Council and its
member agencies will maintain the
confidentiality of such information to the
fullest extent of applicable law.
Information requests likely will involve
both qualitative and quantitative data.
Information relevant to the Council’s analysis
may include confidential business
information such as internal assessments,
internal risk management procedures,
13 See
section 1310.21(a) of the proposed rule.
section 112(d) of the Dodd-Frank Act, if
the Council is unable to determine whether a U.S.
nonbank financial company poses a threat to U.S.
financial stability based on such information, the
Council may request that the Board of Governors
conduct an examination of the nonbank financial
company to determine whether it should be
supervised by the Board of Governors.
14 Under
PO 00000
Frm 00033
Fmt 4702
Sfmt 4700
funding details, counterparty exposure or
position data, strategic plans, resolvability,
potential acquisitions or dispositions, and
other anticipated changes to the nonbank
financial company’s business or structure
that could affect the threat to U.S. financial
stability posed by the nonbank financial
company.
In evaluating qualitative factors during
Stage 3, the Council expects to have access,
to a greater degree than during earlier stages
of review, to information relating to factors
that are not easily quantifiable or that may
not directly cause a company to pose a threat
to financial stability, but could mitigate or
aggravate the potential of a nonbank financial
company to pose a threat to the United
States. Such factors may include the nonbank
financial company’s resolvability, the opacity
of its operations, its complexity, and the
extent to which it is subject to existing
regulatory scrutiny and the nature of such
scrutiny.
The Stage 3 analysis will also include an
evaluation of a nonbank financial company’s
resolvability. An evaluation of a nonbank
financial company’s resolvability entails an
assessment of the complexity of the nonbank
financial company’s legal, funding, and
operational structure, and any obstacles to
the rapid and orderly resolution of a nonbank
financial company in a manner that would
mitigate the risk that the nonbank financial
company’s failure would have a material
adverse effect on financial stability. In
addition to the factors described above, a
nonbank financial company’s resolvability is
also a function of legal entity and crossborder operations issues. These factors
include the ability to separate functions and
spin off services or business lines, the
likelihood of preserving franchise value in a
recovery or resolution scenario, maintaining
continuity of critical services within the
existing or in a new legal entity or structure,
the degree of the nonbank financial
company’s intra-group dependency for
liquidity and funding, payment operation
and risk management needs, and the size and
nature of the nonbank financial company’s
intra-group transactions.
The Council anticipates that the
information necessary to conduct an in-depth
analysis of a particular nonbank financial
company may vary significantly based on the
nonbank financial company’s business and
activities and the information already
available to the Council from existing public
sources and domestic or foreign regulatory
authorities. The Council will also consult
with the primary financial regulatory agency,
if any, for each nonbank financial company
under consideration in a timely manner
before the Council makes any final
determination with respect to such nonbank
financial company, and with appropriate
foreign regulatory authorities, to the extent
appropriate.
Before making a Proposed Determination,
the Council intends to notify each nonbank
financial company in the Stage 3 Pool when
the Council believes that the evidentiary
record regarding such nonbank financial
company is complete.
Based on the analysis performed in Stages
2 and 3, a nonbank financial company will
E:\FR\FM\18OCP1.SGM
18OCP1
Federal Register / Vol. 76, No. 201 / Tuesday, October 18, 2011 / Proposed Rules
be considered for a Proposed Determination.
Before a vote of the Council with respect to
a particular nonbank financial company, the
Council members will review information
relevant to the consideration of the nonbank
financial company for a Proposed
Determination. After this review, the Council
may, by a vote of two-thirds of its members
(including an affirmative vote of the Council
Chairperson), make a Proposed
Determination with respect to the nonbank
financial company. Following a Proposed
Determination, the Council intends to 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.
The Council expects to notify any nonbank
financial company in the Stage 3 Pool if the
nonbank financial company, either before or
after a Proposed Determination of such
nonbank financial company, ceases to be
considered for determination. Any nonbank
financial company that ceases to be
considered at any time in the Council’s
determination process may be considered for
Proposed Determination in the future at the
Council’s discretion.
A nonbank financial company that is
subject to a Proposed Determination may
request a 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
section 1310.21(c) of the proposed rule, the
Council will set a time and place for such
hearing. The Council will (after a hearing, if
a hearing is requested), determine by a vote
of two-thirds of the voting members of the
Council (including the affirmative vote of the
Chairperson) whether to subject such
company to supervision by the Board of
Governors and prudential standards. The
Council will provide the nonbank financial
company with written notice of the Council’s
final determination, including an explanation
of the basis for the Council’s decision. In
accordance with section 113(h) of the DoddFrank 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.
Dated: October 11, 2011.
Alastair Fitzpayne,
Executive Secretary, Department of the
Treasury.
srobinson on DSK4SPTVN1PROD with PROPOSALS
[FR Doc. 2011–26783 Filed 10–17–11; 8:45 am]
BILLING CODE 4810–25–P–P
VerDate Mar<15>2010
16:08 Oct 17, 2011
Jkt 226001
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2007–28059; Directorate
Identifier 2007–NE–13–AD]
RIN 2120–AA64
Airworthiness Directives; Rolls-Royce
plc (RR) Turbofan Engines
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
We propose to supersede an
existing airworthiness directive (AD)
that applies to all RR RB211–Trent 553–
61, 553A2–61, 556–61, 556A2–61,
556B–61, 556B2–61, 560–61, 560A2–61,
768–60, 772–60, 772B–60, 875–17, 877–
17, 884–17, 884B–17, 892–17, 892B–17,
and 895–17 turbofan engines. The
existing AD currently requires
inspecting the intermediate-pressure
(IP) compressor rotor shaft rear balance
land for cracks. Since we issued that
AD, we received reports of one RB211–
Trent 700 and two additional RB211–
Trent 800 IP compressor rotor shafts
that have been found cracked. This
proposed AD would continue to require
initial inspections, add additional
inspections, and an optional terminating
action. The cracking identified above
could lead to IP compressor rotor shaft
failure, uncontained engine failure, and
damage to the airplane. We are
proposing this AD to correct the unsafe
condition on these products.
DATES: We must receive comments on
this proposed AD by December 2, 2011.
ADDRESSES: You may send comments,
using the procedures found in 14 CFR
11.43 and 11.45, by any of the following
methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: 202–493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations,
M–30, West Building Ground Floor,
Room W12–140, 1200 New Jersey
Avenue, SE., Washington, DC 20590.
• Hand Delivery: Deliver to Mail
address above between 9 a.m. and
5 p.m., Monday through Friday, except
Federal holidays.
For service information identified in
this AD, contact Rolls-Royce plc,
Corporate Communications, P.O. Box
31, Derby, England, DE248BJ; phone:
011–44–1332–242424; fax: 011–44–
1332–245418 or e-mail from https://
www.rolls-royce.com/contact/
SUMMARY:
PO 00000
Frm 00034
Fmt 4702
Sfmt 4702
64283
civil_team.jsp. You may review copies
of the referenced service information at
the FAA, Engine & Propeller Directorate,
12 New England Executive Park,
Burlington, MA 01803. For information
on the availability of this material at the
FAA, call 781–238–7125.
Examining the AD Docket
You may examine the AD docket on
the Internet at https://
www.regulations.gov; or in person at the
Docket Management Facility between
9 a.m. and 5 p.m., Monday through
Friday, except Federal holidays. The AD
docket contains this proposed AD, the
regulatory evaluation, any comments
received, and other information. The
street address for the Docket Office
(phone: 800–647–5527) is in the
ADDRESSES section. Comments will be
available in the AD docket shortly after
receipt.
FOR FURTHER INFORMATION CONTACT:
Alan Strom, Aerospace Engineer, Engine
Certification Office, FAA, 12 New
England Executive Park, Burlington,
MA; phone: 781–238–7143; fax: 781–
238–7199; e-mail: alan.strom@faa.gov.
SUPPLEMENTARY INFORMATION:
Comments Invited
We invite you to send any written
relevant data, views, or arguments about
this proposed AD. Send your comments
to an address listed under the
ADDRESSES section. Include ‘‘Docket No.
FAA–2007–28059; Directorate Identifier
2007–NE–13–AD’’ at the beginning of
your comments. We specifically invite
comments on the overall regulatory,
economic, environmental, and energy
aspects of this proposed AD. We will
consider all comments received by the
closing date and may amend this
proposed AD because of those
comments.
We will post all comments we
receive, without change, to https://
www.regulations.gov, including any
personal information you provide. We
will also post a report summarizing each
substantive verbal contact we receive
about this proposed AD.
Discussion
On August 25, 2008, we issued AD
2008–18–08, Amendment 39–15665 (73
FR 52201, September 9, 2008), for all
Rolls-Royce plc RB211–Trent 553–61,
553A2–61, 556–61, 556A2–61, 556B–61,
556B2–61, 560–61, 560A2–61, 768–60,
772–60, 772B–60, 875–17, 877–17, 884–
17, 884B–17, 892–17, 892B–17, and
895–17 turbofan engines. That AD
requires a onetime eddy current
inspection (ECI) of the rear balance land
of the IP compressor rotor shaft for
cracks. That AD resulted from reports of
E:\FR\FM\18OCP1.SGM
18OCP1
]]>Agencies
[Federal Register Volume 76, Number 201 (Tuesday, October 18, 2011)]
[Proposed Rules]
[Pages 64264-64283]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26783]
-----------------------------------------------------------------------
FINANCIAL STABILITY OVERSIGHT COUNCIL
12 CFR Part 1310
RIN 4030-AA00
Authority to Require Supervision and Regulation of Certain
Nonbank Financial Companies
AGENCY: Financial Stability Oversight Council.
ACTION: Second notice of proposed rulemaking and proposed interpretive
guidance.
-----------------------------------------------------------------------
SUMMARY: Section 113 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'') authorizes the Financial
Stability Oversight Council (the ``Council'') to require a nonbank
financial company to be supervised by the Board of Governors of the
Federal Reserve System (the ``Board of Governors'') and be subject to
prudential standards in accordance with Title I of the Dodd-Frank Act
if the Council determines that material financial distress at the
nonbank financial company, or the nature, scope, size, scale,
concentration, interconnectedness, or mix of the activities of the
nonbank financial company, could pose a threat to the financial
stability of the United States.
The proposed rule and attached guidance describe the manner in
which the Council intends to apply the statutory standards and
considerations, and the processes and procedures that the Council
intends to follow, in making determinations under section 113 of the
Dodd-Frank Act. The Council issued an advance notice of proposed
rulemaking on October 6, 2010, and a notice of proposed rulemaking on
January 26, 2011, regarding determinations under section 113.
DATES: Comment due date: December 19, 2011.
ADDRESSES: Interested persons are invited to submit comments regarding
this notice of proposed rulemaking according to the instructions below.
All submissions must refer to the document title. The Council
encourages the early submission of comments.
Electronic Submission of Comments: Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
https://www.regulations.gov. 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
[[Page 64265]]
https://www.regulations.gov 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:
Lance Auer, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.
Note: To receive consideration as public comments, comments must
be submitted through the method specified.
Public Inspection of Public Comments: All properly submitted
comments will be available for inspection and downloading at https://www.regulations.gov.
Additional Instructions: 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: Lance Auer, Office of Domestic
Finance, Treasury, at (202) 622-1262, or Eric Froman, Office of the
General Counsel, Treasury, at (202) 622-1942. All responses to this
notice should be submitted via https://www.regulations.gov to ensure
consideration.
SUPPLEMENTARY INFORMATION:
I. Background
Section 111 of the Dodd-Frank Act (12 U.S.C. 5321) established the
Financial Stability Oversight Council. Among 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.''
In the recent financial crisis, financial distress at certain
nonbank financial companies contributed to a broad seizing up of
financial markets, stress at other financial firms, and a deep global
recession with a considerable drop in employment, the classic symptoms
of financial instability. These nonbank financial companies were not
subject to the type of regulation and consolidated supervision applied
to bank holding companies, nor were there effective mechanisms in place
to resolve the largest and most interconnected of these nonbank
financial companies without causing further instability. To address any
potential risks posed to U.S. financial stability by these companies,
the Dodd-Frank Act authorizes the Council to determine that certain
nonbank financial companies will be subject to supervision by the Board
of Governors and prudential standards. Title I of the Dodd-Frank Act
defines a ``nonbank financial company'' as a domestic or foreign
company that is ``predominantly engaged in financial activities'' in
the United States, other than bank holding companies and certain other
types of firms.\1\ The Council intends to interpret the term
``company'' broadly with respect to nonbank financial companies and
other companies in connection with section 113 of the Dodd-Frank Act,
to include any corporation, limited liability company, partnership,
business trust, association (incorporated or unincorporated), or
similar organization. The Dodd-Frank Act provides that a company is
``predominantly engaged'' in financial activities if either (i) the
annual gross revenues derived by the company and all of its
subsidiaries from financial activities, as well as from the ownership
or control of insured depository institutions, represent 85 percent or
more of the consolidated annual gross revenues of the company; or (ii)
the consolidated assets of the company and all of its subsidiaries
related to financial activities, as well as related to the ownership or
control of insured depository institutions, represent 85 percent or
more of the consolidated assets of the company. The Dodd-Frank Act
requires the Board of Governors to establish the requirements for
determining whether a company is ``predominantly engaged in financial
activities'' for this purpose.\2\
---------------------------------------------------------------------------
\1\ See 12 U.S.C. 5311(a)(4).
\2\ See 12 U.S.C. 5311(b). The Board of Governors has requested
comment on a proposed rule that would establish these requirements.
See 76 FR 7731 (February 11, 2011). The Board of Governors' proposed
rule would establish a process by which a company may request a
determination by the Board of Governors as to whether a particular
activity is financial in nature. In addition, the proposed rule
would provide the Board of Governors the authority to determine that
a company is predominantly engaged in financial activities based on
all the facts and circumstances.
---------------------------------------------------------------------------
The Council issued an advance notice of proposed rulemaking (the
``ANPR'') on October 6, 2010 (75 FR 61653), in which it requested
public comment on the statutory factors that the Dodd-Frank Act
requires the Council to consider in determining whether a nonbank
financial company should be supervised by the Board of Governors and
subject to prudential standards. The ANPR posed 15 questions, all of
which addressed the application of the statutory considerations that
the Council must take into account in the process of determining
whether a nonbank financial company should be subject to supervision by
the Board of Governors and be subject to prudential standards (the
``Determination Process'').
On January 26, 2011, the Council issued a notice of proposed
rulemaking (the ``NPR'') (76 FR 4555) through which it sought public
comment regarding the specific criteria and analytic framework that the
Council intends to apply in the Determination Process. The comment
period for the NPR closed on February 25, 2011.
In response to comments that the Council received on the NPR, the
Council is issuing a second notice of proposed rulemaking (the
``Proposed Rule'') and proposed interpretive guidance (the ``Proposed
Guidance'') to provide (i) additional details regarding the framework
that the Council intends to use in the process of assessing whether a
nonbank financial company could pose a threat to U.S. financial
stability, and (ii) further opportunity for public comment on the
Council's proposed approach to the Determination Process.
II. Overview of Comments
The Council received 35 comments in response to the NPR, of which
11 were from trade associations or advocacy groups, 10 were from the
insurance industry, eight were from entities in the asset management
industry, two were from law firms, two were from individuals, one was
from a think tank, and one was from a specialty finance company.
(Comment letters are available online at: https://www.regulations.gov.)
In addition to issuing the ANPR and the NPR for public comment, staff
of Council member agencies met with financial industry representatives
to discuss the proposals. Meeting participants generally reiterated the
views expressed in their comment submissions. Many commenters
responding to the NPR referred to comments that they previously had
submitted in response to the ANPR. While this preamble describes many
of the comments submitted in response to the ANPR and
[[Page 64266]]
the NPR, and describes how the Proposed Rule and Proposed Guidance
address certain of those comments, the Council expects to provide a
more complete discussion of the comments submitted in response to the
Proposed Rule and Proposed Guidance after considering the comments
received during the comment period on the Proposed Rule and Proposed
Guidance.
The comments addressed various aspects of the NPR, but the majority
of comments addressed one or more of the following three broad issues:
the substantive content of the NPR, the scope of the Council's
Constitutional or statutory authority, and the Council's compliance
with the Administrative Procedure Act (the ``APA'').
A. Substantive Content of the NPR
The majority of commenters asserted that the NPR lacked the
necessary level of specificity and detail needed to provide meaningful
guidance regarding the manner in which the Council intends to exercise
its determination authority under section 113 of the Dodd-Frank Act.\3\
---------------------------------------------------------------------------
\3\ Many commenters stated that the NPR did not adequately
define each of the 10 statutory considerations that the Council must
consider when determining whether a nonbank financial company could
pose a threat to the financial stability of the United States. Some
commenters asserted that they were unable to provide substantive
input regarding the determination framework set forth in the NPR,
because the Council failed to explain its rationale for selecting
the six framework categories. Other commenters stated that the
Council's NPR failed to provide nonbank financial companies any
basis on which to make informed business decisions in anticipation
of a potential determination, such as decisions related to potential
expansion into new lines of business, mergers, acquisitions,
financial investments, and hiring plans, as companies may delay or
avoid business pursuits in light of the uncertainty surrounding the
Determination Process. Other commenters stated that the lack of
clarity in the NPR failed to provide nonbank financial companies
with a basis on which to consider actions that could reduce the
company's potential to pose a threat to U.S. financial stability,
and thereby lessen the need for determination.
---------------------------------------------------------------------------
Some commenters asserted that the Council should include the
proposed six-category framework in the rule text, rather than in the
preamble, so as to require the Council to apply the framework in the
Determination Process. The majority of commenters requested that the
Council issue specific metrics to measure the six categories, and any
relative weighting that the Council may assign to one or more of the
six categories, for public comment. Other commenters suggested that the
Council define the terms ``financial stability'' and ``material
financial distress'' before establishing any specific metrics, as the
Council should consider such definitions when identifying appropriate
metrics.
Many commenters asserted that the Council provided an insufficient
level of detail regarding the Determination Process. Specifically,
commenters suggested that the initial notice of consideration should
provide a detailed explanation of the basis of the Council's
consideration of the nonbank financial company for a proposed
determination, including an outline of the specific statutory
considerations on which the Council based its decision.
Some commenters, the majority of whom represented the insurance
industry, noted that two insurance-related positions on the Council
were vacant: (1) An independent insurance expert (to be appointed by
the President) and (2) the Director of the Federal Insurance Office (to
be appointed by the Secretary of the Treasury). These commenters
requested that the Council delay issuing a final rule until those
Council positions are filled.\4\
---------------------------------------------------------------------------
\4\ S. Roy Woodall has been appointed by President Obama as the
independent insurance expert on the Council. Michael McRaith has
been appointed as the Director of the Federal Insurance Office.
---------------------------------------------------------------------------
Comments on the Six-Factor Framework
A majority of commenters addressed various aspects of the proposed
six-category framework that the Council set forth in the NPR. Several
commenters praised the six framework categories as useful tools to
assess a nonbank financial company's potential to pose a threat to U.S.
financial stability. One commenter expressed concern that the Council
intended to use the six-category framework as a proxy for the 10
specific statutory considerations that the Council is required to
consider when determining whether a nonbank financial company could
pose a threat to U.S. financial stability.
Commenters also asked for clarification regarding the manner in
which the Council intends to assess a nonbank financial company within
each category and provided suggestions regarding the manner in which
the Council should do so. Some of these comments are described below.
Interconnectedness
Many commenters expressed the view that interconnectedness with the
broader financial system is the most important indicator of a nonbank
financial company's potential to pose a threat to U.S. financial
stability. Some commenters suggested that the Council should assess
whether failure of a nonbank financial company would threaten the
financial condition and competitive position of other significant
financial companies when evaluating a nonbank financial company under
this category. Commenters from the asset management industry and the
insurance industry provided comments on how interconnectedness should
be measured within those industries.
Substitutability
Many commenters stated that the substitutability of a nonbank
financial company's goods or services that are important to the overall
financial system is an important factor that the Council should
consider in the Determination Process. Commenters from the asset
management and insurance industries noted that there is little
concentration in the asset management and insurance industries.
Size
Commenters generally noted that size is an important factor that
the Council should consider in the Determination Process, but that size
alone should not provide a sufficient basis on which to make a
determination with respect to a nonbank financial company, absent other
considerations, such as the nonbank financial company's
interconnectedness or contagion risk. Many commenters expressed concern
that the Council had not sufficiently disclosed how it would measure
size across different industries.
Leverage
Some commenters asserted that leverage is an important factor that
the Council should consider in the Determination Process, while others
suggested that different considerations, such as reliance on debt
financing, would provide a more meaningful assessment of the potential
of a nonbank financial company to pose a threat to U.S. financial
stability. In addition, commenters asked that the Council clarify the
manner in which it intends to calculate a nonbank financial company's
leverage.
Liquidity Risk and Maturity Mismatch
Commenters generally agreed that liquidity risk and maturity
mismatch are important criteria for assessing the likelihood that
material financial distress at a nonbank financial company could pose a
threat to U.S. financial stability, but certain commenters asked the
Council to clarify the manner in which it intends to measure this
category. Commenters from the asset management industry expressed the
view that firms within the asset management industry are not vulnerable
to significant liquidity risk or maturity mismatches. Commenters from
the insurance industry noted that the
[[Page 64267]]
insurance industry has had very little liquidity risk traditionally.
Existing Regulatory Scrutiny
Many commenters stated that an assessment of existing regulatory
scrutiny is an important consideration for purposes of determining
whether a nonbank financial company could pose a threat to U.S.
financial stability. Some commenters suggested that the Council
consider not only the degree to which regulatory requirements are
already applicable to a particular nonbank financial company, but also
any new regulatory requirements to which the nonbank financial company
will become subject pursuant to new requirements imposed by the Dodd-
Frank Act.
B. The Council's Authority
Some commenters asserted that the Council does not have the
authority to issue rules and regulations setting forth the process and
standards it will follow in fulfilling the Council's statutory
functions related to nonbank financial company determinations under
section 113 of the Dodd-Frank Act. In particular, commenters noted that
while the Dodd-Frank Act authorizes the Council to issue such rules as
may be necessary for the conduct of the business of the Council, the
Dodd-Frank Act does not specifically authorize the Council to issue
rules or regulations regarding matters related to determinations
regarding nonbank financial companies.
C. Compliance With the APA
Commenters stated that the rule is too vague to satisfy the
``notice and comment'' requirements under the APA, the requirement in
Presidential Executive Order 13563, ``Improving Regulation and
Regulatory Review'' \5\ that the rule contain clear, specific
regulatory criteria and a cost/benefit analysis, or the due process
requirements of the United States Constitution.
---------------------------------------------------------------------------
\5\ Available at https://www.gpo.gov/fdsys/pkg/FR-2011-01-21/pdf/2011-1385.pdf.
---------------------------------------------------------------------------
III. Overview of the Proposed Rule and the Proposed Guidance
In developing the Proposed Rule, the Council has carefully
considered the comments received on the ANPR and the NPR, as well as
the language and legislative history of the Dodd-Frank Act. After this
review, the Council has determined to propose a rule that has been
modified to provide additional details about the processes and
procedures through which the Council may make a determination under
section 113 of the Dodd-Frank Act, and the manner in which a nonbank
financial company may respond to and contest a proposed determination.
In addition, the Council is issuing, with a request for comment, as
an appendix to the Proposed Rule, the Proposed Guidance. Among other
aspects of the Proposed Guidance, the Council invites interested
parties to comment on--
Key terms and concepts related to the Council's
determination authority, including ``material financial distress'' and
``threat to financial stability'';
The six-category framework that the Council intends to use
to determine whether a nonbank financial company could pose a threat to
the financial stability of the United States, including examples of
quantitative metrics for assessing each category;
The six uniform quantitative thresholds that the Council
intends to use to identify those nonbank financial companies that will
be subject to further evaluation by the Council; and
The process that the Council intends to follow when
considering whether to subject a nonbank financial company to
supervision by the Board of Governors and prudential standards.
The Council's ultimate determination will be based on an evaluation
of each of the statutory considerations taking into account facts and
circumstances relevant to each nonbank financial company.
The Proposed Rule and Proposed Guidance, as well as the Council's
responses to the comments received, are discussed in greater detail
below.
As noted above under ``Overview of Comments,'' the Council received
comments that addressed virtually all aspects of the Council's
authority to make a determination with respect to nonbank financial
companies under section 113 of the Dodd-Frank Act. The Council is
committed to fostering transparency with respect to the Determination
Process, and the Proposed Rule and Proposed Guidance are intended to
address such concerns by providing a detailed description of: (i) The
profile of those nonbank financial companies that the Council likely
will evaluate for potential determination so as to minimize the
uncertainty to which many commenters referred regarding the
Determination Process, and (ii) the metrics that the Council intends to
use when analyzing companies at various stages of the Determination
Process, including examples of the metrics that the Council intends to
use when evaluating a nonbank financial company using the six-category
framework.
The Council has numerous authorities and tools to carry out its
statutory duty to monitor the financial stability of the United States.
In addition to the Council's determination authority under section 113
of the Dodd-Frank Act, the Council has the authority to make
recommendations to primary financial regulatory agencies to apply new
or heightened standards and safeguards for a financial activity or
practice conducted by bank holding companies or nonbank financial
companies under the jurisdiction of such agencies if the Council
determines that the conduct, scope, nature, size, scale, concentration,
or interconnectedness of such activity or practice could create or
increase the risk of significant liquidity, credit, or other problems
spreading among bank holding companies and nonbank financial companies,
U.S. financial markets, or low-income, minority, or underserved
communities.\6\ In addition, the Council may designate financial market
utilities and payment, clearing and settlement activities that the
Council determines are, or are likely to become, systemically
important.\7\ The Council expects that its response to any potential
threat to financial stability will be based on an assessment of the
circumstances.
---------------------------------------------------------------------------
\6\ See 12 U.S.C. 5330(a).
\7\ See 12 U.S.C. 5463(a)(1).
---------------------------------------------------------------------------
Pursuant to section 115(a) of the Dodd-Frank Act, the Council may
also make recommendations to the Board of Governors concerning the
establishment and refinement of prudential standards and reporting and
disclosure standards applicable to nonbank financial companies
supervised by the Board of Governors pursuant to section 113 of the
Dodd-Frank Act. In making such recommendations, the Dodd-Frank Act also
authorizes the Council to differentiate among companies on an
individual basis or by category, taking into consideration their
capital structure, riskiness, complexity, financial activities
(including the financial activities of their subsidiaries), size, and
any other risk-related factors that the Council deems appropriate. In
addition, section 165 of the Dodd-Frank Act gives the Board of
Governors the ability to tailor the application of the prudential
standards on its own.
Commenters are encouraged to provide comment on the Proposed Rule
and Proposed Guidance. The Council will consider comments received on
the Proposed Rule and Proposed Guidance as the Council continues to
develop the
[[Page 64268]]
approach that the Council intends to take in the Determination Process.
A. Statutory Considerations for Determinations
Section 113 of the Dodd-Frank Act authorizes the Council to subject
a nonbank financial company to supervision by the Board of Governors
and prudential standards if the Council determines that (i) material
financial distress at the nonbank financial company could pose a threat
to the financial stability of the United States (the ``First
Determination Standard''), or (ii) the nature, scope, size, scale,
concentration, interconnectedness, or mix of the activities of the
nonbank financial company could pose a threat to the financial
stability of the United States (the ``Second Determination Standard'').
Pursuant to the provisions of the Dodd-Frank Act, the Council is
required to consider the following statutory considerations when
evaluating whether to make this determination with respect to a nonbank
financial company: \8\
---------------------------------------------------------------------------
\8\ This list reflects the statutory considerations applicable
to a determination with respect to a U.S. nonbank financial company.
The Council is required to consider similar factors in making a
determination with respect to a foreign nonbank financial company.
---------------------------------------------------------------------------
(A) The extent of the leverage of the company;
(B) The extent and nature of the off-balance-sheet exposures of the
company;
(C) The extent and nature of the transactions and relationships of
the company with other significant nonbank financial companies and
significant bank holding companies;
(D) The importance of the company as a source of credit for
households, businesses, and State and local governments and as a source
of liquidity for the U.S. financial system;
(E) The importance of the company as a source of credit for low-
income, minority, or underserved communities, and the impact that the
failure of such company would have on the availability of credit in
such communities;
(F) The extent to which assets are managed rather than owned by the
company, and the extent to which ownership of assets under management
is diffuse;
(G) The nature, scope, size, scale, concentration,
interconnectedness, and mix of the activities of the company;
(H) The degree to which the company is already regulated by one or
more primary financial regulatory agencies;
(I) The amount and nature of the financial assets of the company;
(J) The amount and types of the liabilities of the company,
including the degree of reliance on short-term funding; and
(K) Any other risk-related factors that the Council deems
appropriate.
The Council intends to take into account each of the 10 statutory
considerations when determining whether one of the statutory standards
for determination has been met. The Council included each of the
statutory considerations in the rule text in the NPR and has retained
this rule text in the Proposed Rule. The Council has provided
additional detail in the Proposed Guidance regarding the manner in
which the Council intends to assess nonbank financial companies under
the First and Second Determination Standards. The Council has set forth
proposed definitions of the terms ``material financial distress,''
which is relevant to the First Determination Standard, and ``threat to
U.S. financial stability,'' which is relevant to both determination
standards. The Proposed Guidance also describes the channels the
Council believes are most likely to facilitate the transmission of the
negative effects of a nonbank financial company's material financial
distress or activities to other firms and markets, thereby posing a
threat to U.S. financial stability.
In exercising its anti-evasion authority with respect to a U.S.
nonbank financial company or foreign nonbank financial company, the
Council must consider the relevant statutory factors applicable to a
U.S. or foreign nonbank financial company, respectively. The Proposed
Rule retains the process for making anti-evasion determinations that
was set forth in the NPR. The Council may make such a determination
either on its own initiative or at the request of the Board of
Governors.
B. Process for Identifying Nonbank Financial Companies for Further
Evaluation
In response to comments requesting more detail regarding the
Determination Process, the Proposed Guidance provides a detailed
description of the manner in which the Council intends to conduct the
Determination Process. For example, the Proposed Guidance provides a
description of the manner in which the Council intends to identify
nonbank financial companies for further evaluation. The Council intends
to evaluate a broad group of nonbank financial companies by applying
uniform quantitative thresholds representing the framework categories
that are more readily quantified, namely size, interconnectedness,
leverage, and liquidity risk and maturity mismatch. A nonbank financial
company would be subject to additional review if it meets both the size
threshold and any one of the other quantitative thresholds. The Council
believes that this set of thresholds will help a nonbank financial
company predict whether such company will likely be subject to
additional review by the Council.
In addition to a discussion of the analytic framework, the Proposed
Guidance describes the manner in which the Council intends to analyze
the companies included in each subsequent stage in the Determination
Process to determine whether any nonbank financial company initially
identified could pose a threat to U.S. financial stability.
The Council expects that the detailed description of the
Determination Process contained in the Proposed Guidance, including the
discussion of the analytic framework, will mitigate many of the
potential negative effects that could result from the perceived
uncertainty regarding the Determination Process. However, as discussed
in the Proposed Guidance, the Council does not believe that a
determination decision can be reduced to a formula. Each determination
will be made on a firm-specific basis, taking into account qualitative,
as well as quantitative, information that the Council deems relevant to
a particular nonbank financial company.
C. Analytic Framework for Determinations
As set forth in the NPR, the Council proposes to use a six-category
framework that is designed to incorporate each of the 10 statutory
considerations for evaluating whether a nonbank financial company meets
one of the two Determination Standards. The Council has incorporated
the statutory considerations into the following six factors: (1) Size,
(2) interconnectedness, (3) substitutability, (4) leverage, (5)
liquidity risk and maturity mismatch, and (6) existing regulatory
scrutiny. Three of the six categories seek to assess the potential
impact of a nonbank financial company's financial distress on the
broader economy: size, substitutability and interconnectedness. The
remaining three categories seek to assess the vulnerability of a
nonbank financial company to financial distress: leverage, liquidity
risk and maturity mismatch, and existing regulatory scrutiny of the
nonbank financial company. The NPR contained a table that illustrated
the relationship between the 10 statutory considerations and the six
framework categories. The table is also included in the Proposed
Guidance. In response to
[[Page 64269]]
requests by commenters, the Proposed Guidance provides further detail
regarding the Council's rationale for selecting the six framework
categories and provides additional clarity regarding the manner in
which the six-category analytic framework incorporates each of the
statutory considerations. As requested by commenters, the Proposed
Guidance also sets forth examples of metrics that the Council intends
to use when evaluating a nonbank financial company in each of the six
categories. These metrics include several metrics proposed by
commenters.
D. Additional Detail Regarding the Determination Process
In response to the public comments requesting more transparency and
clarity regarding the criteria that will inform the Determination
Process, the Council has developed a three-stage process the Council
expects to apply for determinations in non-emergency situations. Each
stage of the Determination Process would involve an analysis based on
an increasing amount of information to determine whether a nonbank
financial company meets either Determination Standard. The Proposed
Guidance provides a detailed discussion of the proposed three-stage
review process.
The first stage of the process (``Stage 1'') is designed to narrow
the universe of nonbank financial companies to a smaller set of nonbank
financial companies using quantitative thresholds that are broadly
applicable across the financial sector. Stage 1 is not intended to
indicate a determination by the Council that the nonbank financial
companies identified during Stage 1 meet one of the Determination
Standards. Rather, Stage 1 is intended to identify those nonbank
financial companies that should be subject to further evaluation in
subsequent stages of review. In the second stage of the process
(``Stage 2''), the Council will conduct a comprehensive analysis of the
potential for the identified nonbank financial companies to pose a
threat to U.S. financial stability. In general, this analysis will be
based on a broad range of quantitative and qualitative information
available to the Council through existing public and regulatory
sources, including industry- and firm-specific metrics beyond those
analyzed in Stage 1, and information obtained from the company
voluntarily.
Based on the analysis conducted during Stage 2, the Council intends
to contact those nonbank financial companies that the Council believes
merit further review in the third stage (``Stage 3''). Stage 3 will
build on the Stage 2 analysis using quantitative and qualitative
information collected directly from the nonbank financial company by
the Office of Financial Research (the ``OFR'') or the appropriate
regulatory agency in addition to the otherwise available information
considered during Stages 1 and 2. The Council will determine whether to
subject a nonbank financial company to Board of Governors supervision
and prudential standards based on the results of the analyses conducted
during each stage of review.
The Council considered several alternative quantitative approaches
in developing a method to identify a subset of companies for additional
review during Stage 1 and concluded that the thresholds-based approach
set forth in the Proposed Guidance is the most appropriate method to
identify this subset. In the Council's view, the thresholds-based
approach provides the maximum possible transparency to the market,
thereby reducing the likelihood that uncertainty about the
Determination Process could negatively affect financial markets.
Furthermore, the Council selected the particular Stage 1 quantitative
thresholds due to their applicability to nonbank financial companies
that operate in different types of financial markets and industries,
and because the data underlying these thresholds are generally
available from existing public and regulatory sources. Thus, nonbank
financial companies should be able to reproduce the Council's initial
assessments of nonbank financial companies.
The Council recognizes that the quantitative thresholds it has
identified for application during Stage 1 may not provide an
appropriate means to identify a subset of nonbank financial companies
for further review in all cases across all financial industries and
firms. While the Council will apply the Stage 1 thresholds to all types
of nonbank financial companies, including financial guarantors, asset
management companies, private equity firms, and hedge funds, these
companies may pose risks that are not well-measured by the quantitative
thresholds approach.
With respect to hedge funds and private equity firms in particular,
the Council intends to apply the Stage 1 thresholds, but recognizes
that less data is generally available about these companies than about
certain other types of nonbank financial companies. Beginning in 2012,
advisers to hedge funds and private equity firms and commodity pool
operators and commodity trading advisors will be required to file Form
PF with the Securities and Exchange Commission or the Commodity Futures
Trading Commission, as applicable, on which form such companies will
make certain financial disclosures. Using these and other data, the
Council will consider whether to establish an additional set of metrics
or thresholds tailored to evaluate hedge funds and private equity firms
and their advisers.
In addition, the Council, its member agencies, and the OFR will
analyze the extent to which there are potential threats to U.S.
financial stability arising from asset management companies. This
analysis will consider what threats exist, if any, and whether such
threats can be mitigated by subjecting such companies to Board of
Governors supervision and prudential standards, or whether they are
better addressed through other regulatory measures. The Council may
issue additional guidance for public comment regarding potential
additional metrics and thresholds relevant to asset manager
determinations.
Generally, as reporting requirements evolve and new data about
certain industries and nonbank financial companies become available,
the Council expects to review the quantitative thresholds as
appropriate based on this new information. For example, the Council's
analysis will be informed by credit exposure data proposed to be
collected under section 165 of the Dodd-Frank Act by the Federal
Deposit Insurance Corporation and the Board of Governors. Similarly,
pursuant to reporting and disclosure requirements being implemented
under the Dodd-Frank Act, Council members will gain access to
additional information through swap data repositories.
The Council recognizes that the proposed Stage 1 threshold to
measure a nonbank financial company's derivative liabilities captures
only the current exposure, rather than the current and potential future
exposure created by the nonbank financial company's outstanding
derivatives. The SEC and CFTC have proposed rules to define the terms
``major swap participant'' (``MSP'') and ``major security-based swap
participant'' (``MSBSP'') that contain a methodology to measure the
potential future exposure created by an entity's outstanding
derivatives.
Once the final rules establishing the MSP and MSBSP definitions
have been adopted, the rules regarding reporting of data on swaps and
security-based swaps come into effect, and data have been collected
pursuant to those rules, the
[[Page 64270]]
Council intends to establish a new Stage 1 threshold based on factors
such as a nonbank financial company's current and potential future
exposure from its outstanding derivatives for purposes of determining
whether some or all MSPs, MSBSPs, or other firms will be subject to
further examination in Stage 2.
In all instances, the Council reserves the right, in its
discretion, to subject any nonbank financial company, irrespective of
whether such company was identified in Stage 1, to further review, if
the Council believes that further analysis of the company is warranted
to determine if the company could pose a threat to U.S. financial
stability.
After a subset of nonbank financial companies has been identified
in Stage 1, the Council intends to conduct a robust analysis of the
potential threat that each of those nonbank financial companies could
pose to U.S. financial stability based on information available to the
Council through existing public and regulatory sources, including
information possessed by the company's primary financial regulatory
agency or home country supervisor, as appropriate. In contrast to the
application of uniform quantitative thresholds to a broad group of
nonbank financial companies in Stage 1, the Council intends to evaluate
the risk profile and characteristics of each individual nonbank
financial company in Stage 2 based on a wide range of quantitative and
qualitative industry- and company-specific factors. This analysis will
use the six-category analytic framework described in section C above.
In addition, the Stage 2 evaluation will include a review, based on
available data, of whether the resolution of a nonbank financial
company could pose a threat to U.S. financial stability.
Following Stage 2, nonbank financial companies that are selected
for additional review will receive notice that they are being
considered for a proposed determination and will be subject to further
evaluation during Stage 3. As discussed in greater detail in the
Proposed Guidance during the Stage 3 review, the Council intends to
conduct an in-depth analysis of the nonbank financial company's
potential to pose a threat to financial stability based on information
obtained directly from the nonbank financial company and the
information previously obtained by the Council during prior stages of
review. The Council believes that in this stage of the evaluation, the
Council likely will consider qualitative factors, including
considerations that could mitigate or aggravate the potential of a
nonbank financial company to pose a threat to U.S. financial stability,
such as the nonbank financial company's resolvability, the opacity of
the nonbank financial company's operations, its complexity, and the
extent to which the nonbank financial company is subject to existing
regulatory scrutiny and the nature of such scrutiny.
Based on the analysis performed in Stages 2 and 3, the Council may
consider whether to determine, by vote, to subject any of the nonbank
financial companies to a proposed determination. Prior to making a
proposed determination, the Council may (i) consult with the nonbank
financial company's primary financial regulatory agency or home country
supervisor, as appropriate and (ii) consider the views of such
entities.\9\
---------------------------------------------------------------------------
\9\ However, the Council does not believe that the concurrence
of the primary financial regulatory agency is required prior to the
Council's subjecting a nonbank financial company to a proposed
determination. The Council's consultation with a nonbank financial
company's primary financial regulatory agency does not create any
rights on the part of the nonbank financial company under
consideration.
---------------------------------------------------------------------------
Following a proposed determination, the Council intends to issue a
written notice of the proposed determination to the nonbank financial
company that would provide an explanation of the basis of the proposed
determination. The nonbank financial company may request a hearing to
contest the proposed determination in accordance with section 113(e) of
the Dodd-Frank Act and section 1310.21(c) of the Proposed Rule. The
Council has provided additional details regarding the hearing process
in the Proposed Rule and in the Proposed Guidance.
E. Section-by-Section Analysis
I. Subpart A General
A. Section 1310.1 Authority and purpose
This section sets forth the authority for and purpose of the
Proposed Rule.
B. Section 1310.2 Definitions
This section defines the terms relevant to the Proposed Rule. It
retains the majority of the definitions proposed in the NPR, with some
technical modifications. For instance, the definition of
``predominantly engaged in financial activities'' has been incorporated
into the definitions of ``U.S. nonbank financial company'' and
``foreign nonbank financial company'' to clarify that such definition
is relevant for purposes of determining whether an entity meets the
definition of U.S. nonbank financial company or foreign nonbank
financial company. It also introduces definitions not set forth in the
NPR, including definitions of ``Federal Insurance Office,'' ``hearing
date,'' ``nonbank financial company,'' and ``Office of Financial
Research.''
II. Subpart B Determinations
A. Section 1310.10 Council Determinations Regarding Nonbank Financial
Companies
This section sets forth the Council's authority to make proposed
and final determinations with respect to nonbank financial companies,
pursuant to sections 113(a) and (b) of the Dodd-Frank Act. It sets
forth the two standards for determinations the requirements for a
Council vote with respect to proposed and final determinations and the
Council's ability pursuant to section 112(d)(4) of the Dodd-Frank Act
to request that the Board of Governors conduct an examination to
determine whether a U.S. nonbank financial company should be supervised
by the Board of Governors for purposes of Title I of the Dodd-Frank
Act. Certain provisions included in the corresponding section in the
NPR have been moved to other sections of the Proposed Rule for
organizational purposes.
B. Section 1310.11 Considerations in Making Proposed and Final
Determinations
This section sets forth the considerations that the Council must
consider in making a proposed or final determination with respect to a
U.S. nonbank financial company or foreign nonbank financial company.
These considerations reflect the statutory factors set forth in
sections 113(a)(2) and (b)(2) of the Dodd-Frank Act.
C. Section 1310.12 Anti-Evasion Provision
This section sets forth the Council's authority to require that the
financial activities of a company that is not a nonbank financial
company be supervised by the Board of Governors and be subject to
prudential standards, if the Council determines that material financial
distress related to, or the nature, scope, size, scale, concentration,
interconnectedness, or mix of, the financial activities conducted
directly or indirectly by a company would pose a threat to the
financial stability of the United States, and the company is organized
or operates in such a manner as to evade the application of Title I of
the Dodd-Frank Act. This section defines ``financial activities'' as
that term is defined in section 113(c)(5) of the Dodd-Frank Act.
[[Page 64271]]
This section is intended to clarify the application of subpart C as
previously set forth in the NPR. This section provides that, in
accordance with section 113(c)(4) of the Dodd-Frank Act, the provisions
of subpart C governing information collection (including the
confidentiality provisions), consultation, notice and opportunity for
an evidentiary hearing, emergency waivers or modifications, and
reevaluation and rescission of determinations would apply in the
context of the Council's anti-evasion authority. The information-
collection authority of the Council with respect to companies in this
context derives from the authority of the Council to receive
information from the OFR, member agencies, and the Federal Insurance
Office, and from the authority of the OFR on behalf of the Council, to
require the submission of periodic and other reports from any financial
company under sections 112(d)(1) and (2) and 154(b) of the Dodd-Frank
Act, respectively.
The provision in the corresponding section in the NPR relating to
the establishment of an intermediate holding company was deleted
because it related to authority of the Board of Governors rather than
of the Council.
III. Subpart C Information Collection; Proposed and Final
Determinations; Evidentiary Hearings
A. Section 1310.20 Council Information Collection; Consultation;
Coordination; Confidentiality
This section sets forth the Council's authority to collect
information with respect to nonbank financial companies and its
responsibilities in consulting and coordinating with regulators and
maintaining the confidentiality of submitted information. Paragraph (a)
sets forth the Council's ability to collect information from the OFR,
member agencies, the Federal Insurance Office, and other Federal and
State financial regulatory agencies, and paragraph (b) sets forth the
Council's ability to collect information from nonbank financial
companies. These two paragraphs implement the provisions of section
112(d) of the Dodd-Frank Act relating to the Council's authority to
obtain information and collect financial data. Paragraph (c) provides
that the Council will consult with a nonbank financial company's
primary financial regulatory agency in a timely manner, in accordance
with section 113(g) of the Dodd-Frank Act. Paragraph (d) provides that
the Council will consult with appropriate foreign regulatory
authorities, to the extent appropriate, in accordance with section
113(i) of the Dodd-Frank Act. The NPR included provisions similar to
paragraphs (c) and (d) of the Proposed Rule that were located elsewhere
in the NPR. Paragraph (e), which was not included in the NPR,
implements the confidentiality requirements provided in section
112(d)(5) of the Dodd-Frank Act.
B. Section 1310.21 Notice and Opportunity for an Evidentiary Hearing;
Proposed and Final Determinations
This section sets forth the procedural rights of a nonbank
financial company being considered for a proposed or final
determination, the time period within which the Council will act after
it notifies the nonbank financial company that it is being considered
for a proposed determination, and the nonbank financial company's
rights to a hearing after a proposed determination. Paragraph (a)
provides that the Council will deliver written notice to a nonbank
financial company that it is being considered for a proposed
determination and will provide the nonbank financial company an
opportunity to submit written materials to contest the proposed
determination. Paragraph (a) clarifies that the nonbank financial
company may submit any written materials to contest the determination,
including materials concerning whether the nonbank financial company
meets the standards for a determination. This broadens the scope of
materials that may be provided to contest a determination from the
version proposed in the NPR. Paragraph (b) provides that the Council
will provide a nonbank financial company with written notice of a
proposed determination, including an explanation of the basis of the
proposed determination. Paragraphs (c), (d), and (e) set forth the
procedures for an evidentiary hearing following a proposed
determination, pursuant to section 113(e) of the Dodd-Frank Act, and
provides the time period within which the Council will make a final
determination. These paragraphs also provide that the Council will make
public any final determination that it makes.
Paragraph (f) sets forth the time period within which the Council
may make a proposed determination with respect to a nonbank financial
company that has received a notice of consideration of determination.
Under paragraph (a)(3), the Council will notify a nonbank financial
company that is being considered for a proposed determination of the
date on which the Council deems its evidentiary record regarding that
nonbank financial company to be complete. If the Council does not make
a proposed determination with respect to that nonbank financial company
within 180 days after that date, the Council will not make a proposed
determination unless the Council issues a subsequent written notice of
consideration of determination under paragraph (a) and thereafter
complies with the other procedures set forth in that section. This
paragraph was added to the Proposed Rule to provide clarity to a
nonbank financial company that is subject to a notice of consideration
of determination regarding the timing of any potential subsequent
Council action.
C. Section 1310.22 Emergency Exception to Sec. 1310.21
This section sets forth the process by which the Council may waive
or modify any of the notice or other procedural requirements of the
Proposed Rule if the Council determines that the waiver or modification
is necessary or appropriate to prevent or mitigate threats posed by the
nonbank financial company to the financial stability of the United
States, pursuant to section 113(f) of the Dodd-Frank Act. This section
provides that a nonbank financial company will receive notice of the
waiver or modification and an opportunity for a hearing to contest the
waiver or modification, and sets forth the process by which the Council
will make and publicly announce its final determination. This section
incorporates the statutory requirement that the Council consult with
the appropriate home country supervisor, if any, of a foreign nonbank
financial company considered for a determination under this section.
This section also requires the Council to consult with the primary
financial regulatory agency, if any, of a nonbank financial company in
making a determination under this section. These consultations will be
conducted in such time and manner as the Council may deem appropriate.
D. Section 1310.23 Council Reevaluation and Rescission of
Determinations
This section sets forth the Council's statutory responsibility,
pursuant to section 113(d) of the Dodd-Frank Act, to reevaluate
currently effective determinations and rescind any determination if the
Council determines that the nonbank financial company no longer meets
the standards for determination.
The section in the NPR relating to judicial review of the Council's
final determinations pursuant to section 113(h) of the Dodd-Frank Act
was removed because it did not serve to
[[Page 64272]]
implement the Council's authority to make determinations.
IV. Regulatory Flexibility Act
It is hereby certified that this rule will not have a significant
economic impact on a substantial number of small entities. The economic
impact of this rule is not expected to be significant. The rule would
apply only to nonbank financial companies that could pose a threat to
the financial stability of the United States. Size is an important
factor, although not the exclusive factor, in assessing whether a
company could pose a threat to financial stability. The Council expects
that few, if any, small companies (as defined for purposes of the Small
Business Act) could pose a threat to financial stability. Therefore,
the Council does not expect the rule to directly affect a substantial
number of small entities. Accordingly, a regulatory flexibility
analysis under the Regulatory Flexibility Act (5 U.S.C. 601-612) is not
required.
V. Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)). 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 George A.
Sacco, Department of the Treasury, Washington, DC 20220. Comments on
the collection of information must be received by December 19, 2011.
Comments are specifically requested concerning:
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;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
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
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collection of information in these proposed regulations are
found in Sec. 1310.20 and Sec. 1310.21.
Estimated total annual reporting burden: 1,000 hours.
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.
VI. Executive Orders 12866 and 13563
Executive Orders 12866 and 13563 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). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. This rule has been designated a ``significant regulatory
action'' although not economically significant, under section 3(f) of
Executive Order 12866. Accordingly, the rule has been reviewed by the
Office of Management and Budget.
List of Subjects in 12 CFR Part 1310
Nonbank financial companies.
For the reasons set forth in the preamble, the Financial Stability
Oversight Council proposes to add a new part 1310 to chapter XIII of
Title 12 of the Code of Federal Regulations, to read as follows:
PART 1310--SUPERVISION AND REGULATION OF CERTAIN NONBANK FINANCIAL
COMPANIES
Sec.
Subpart A--General
1310.1 Authority and purpose.
1310.2 Definitions.
Subpart B--Determinations
1310.10 Council determinations regarding nonbank financial
companies.
1310.11 Considerations in making proposed and final determinations.
1310.12 Anti-evasion provision.
Subpart C--Information Collection; Proposed and Final Determinations;
Evidentiary Hearings
1310.20 Council information collection; consultation; coordination;
confidentiality.
1310.21 Notice and opportunity for an evidentiary hearing; proposed
and final determinations.
1310.22 Emergency exception to Sec. 1310.21.
1310.23 Council reevaluation and rescission of determinations.
Appendix to Part 1310--Financial Stability Oversight Council
Guidance for Nonbank Financial Company Determinations.
Authority: 12 U.S.C. 5321; 12 U.S.C. 5322; 12 U.S.C. 5323.
Subpart A--General
Sec. 1310.1 Authority and purpose.
(a) Authority. This part is issued by the Financial Stability
Oversight Council (Council) under sections 111, 112 and 113 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act'') (12 U.S.C. 5321, 5322 and 5323).
(b) Purpose. The principal purposes of this part are to set forth
the standards and procedures governing Council determinations under
section 113 of the Dodd-Frank Act (12 U.S.C. 5323), including whether
material financial distress at a nonbank financial company, or the
nature, scope, size, scale, concentration, interconnectedness, or mix
of the activities of the nonbank financial company, could pose a threat
to the financial stability of the United States, and whether a nonbank
financial company shall be supervised by the Board of Governors and
shall be subject to prudential standards in accordance with Title I of
the Dodd-Frank Act.
Sec. 1310.2 Definitions.
The terms used in this part have the following meanings--
Board of Governors. The term ``Board of Governors'' means the Board
of Governors of the Federal Reserve System.
Commission. The term ``Commission'' means the Securities and
Exchange Commission, except in the context of the Commodity Futures
Trading Commission.
Council. The term ``Council'' means the Financial Stability
Oversight Council.
Federal Insurance Office. The term ``Federal Insurance Office''
means the office established within the Department of the Treasury by
section 502(a) of the Dodd-Frank Act (31 U.S.C. 301 (note)).
Foreign nonbank financial company. The term ``foreign nonbank
financial company'' means a company (other than a company that is, or
is treated in the United States as, a bank holding company) that is--
(1) Incorporated or organized in a country other than the United
States; and
(2) ``Predominantly engaged in financial activities,'' as that term
is defined in section 102(a)(6) of the Dodd-
[[Page 64273]]
Frank Act (12 U.S.C. 5311(a)(6)) and pursuant to the requirements for
determining if a company is predominantly engaged in financial
activities as established by regulation of the Board of Governors
pursuant to section 102(b) of the Dodd-Frank Act (12 U.S.C. 5311(b)),
including through a branch in the United States.
Hearing date. The term ``hearing date'' means the latest of--
(1) The date on which the Council has received all of the written
materials timely submitted by a nonbank financial company for a hearing
that is conducted without oral testimony;
(2) The final date on which the Council or its representatives
convene to hear oral testimony presented by a nonbank financial company
pursuant to Sec. 1310.21 or Sec. 1310.22, as applicable; and
(3) The date on which the Council has received all of the written
materials timely submitted by a nonbank financial company to supplement
any oral testimony and materials presented by the nonbank financial
company pursuant to Sec. 1310.21 or Sec. 1310.22, as applicable.
Member agency. The term ``member agency'' means an agency
represented by a voting member of the Council under section 111(b)(1)
of the Dodd-Frank Act (12 U.S.C. 5321).
Nonbank financial company. The term ``nonbank financial company''
means a U.S. nonbank financial company or a foreign nonbank financial
company.
Office of Financial Research. The term ``Office of Financial
Research'' means the office established within the Department of the
Treasury by section 152 of the Dodd-Frank Act (12 U.S.C. 5342).
Primary financial regulatory agency. The term ``primary financial
regulatory agency'' means--
(1) The appropriate Federal banking agency, with respect to
institutions described in section 3(q) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(q)), except to the extent that an institution is or
the activities of an institution are otherwise described in paragraph
(2), (3), (4), or (5) of this definition;
(2) The Commission, with respect to--
(i) Any broker or dealer that is registered with the Commission
under the Securities Exchange Act of 1934, with respect to the
activities of the broker or dealer that require the broker or dealer to
be registered under that Act;
(ii) Any investment company that is
