The Financial Stability Oversight Council has adopted a final rule to address the systemic risks associated with nonbank financial companies. Dodd-Frank Act Section 113 provides that the FSOC may determine that a U.S. nonbank financial company must be supervised by the Fed. The FSOC must find that subjecting a nonbank financial company to prudential standards is justified because material financial distress at the company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company, could pose a threat to U.S. financial stability. The FSOC has similar authority regarding foreign nonbank financial companies.
The final rule adds new Part 1310 to Title 12 of the Code of Federal Regulations. Subpart A contains definitions of key terms. Under Section 1310.2, a U.S. or foreign “nonbank financial company,” subject to stated exclusions, is a company that is incorporated in the U.S., any state, or in a foreign country, and is predominantly engaged in financial activities.
Dodd-Frank Act Section 102(a)(6) defines “primarily engaged in financial activities” to mean that annual gross revenues derived by a company and its subsidiaries from activities that are financial in nature (as defined in section 4(k) of the Bank Holding Company Act of 1956) and, if applicable, from the ownership or control of one or more insured depository institutions, represent 85 percent or more of the company’s consolidated annual gross revenues. Alternatively, a company is “primarily engaged in financial activities” if its consolidated assets and those of its subsidiaries related to activities that are financial in nature (as defined in section 4(k) of the Bank Holding Company Act of 1956) and, if applicable, related to the ownership or control of one or more insured depository institutions, represent 85 percent or more of the company’s consolidated assets.
Subpart B sets forth criteria for making the determination that a U.S. or foreign nonbank financial company should abide by prudential standards. Here, Section 1310.11(a) and (b) expand upon the considerations set forth in the Dodd-Frank Act Sections 113(a)(2) and (b)(2) by also looking to the activities of a nonbank financial company’s subsidiaries. Subpart C establishes procedural and evidentiary rules. An appendix to the rule provides interpretive guidance on how the FSOC will make determinations.
The rule is effective 30 days after publication in the Federal Register.