[Federal Register Volume 76, Number 201 (Tuesday, October 18, 2011)]
[Proposed Rules]
[Pages 64264-64283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-26783]


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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.

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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 
http://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]]

http://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 http://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 http://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\
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    \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.
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    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: http://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\
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    \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.
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    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\
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    \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.
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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.
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    \5\ Available at http://www.gpo.gov/fdsys/pkg/FR-2011-01-21/pdf/2011-1385.pdf.
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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.
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    \6\ See 12 U.S.C. 5330(a).
    \7\ See 12 U.S.C. 5463(a)(1).
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    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\
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    \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.
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    (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 registered with the Commission 
under the Investment Company Act of 1940, with respect to the 
activities of the 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;
    (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

[[Page 64274]]

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 Dodd-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)).

Subpart B--Determinations


Sec.  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 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 Sec.  
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.


Sec.  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 Sec.  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 off-balance-sheet exposures of the 
U.S. nonbank financial company and its subsidiaries;
    (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 Sec.  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

[[Page 64275]]

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.


Sec.  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 United States, 
based on consideration of the factors in--
    (i) Sec.  1310.11(a) if the company is incorporated or organized 
under the laws of the United States or any State; or
    (ii) Sec.  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 Dodd-Frank 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


Sec.  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 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 Sec.  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 Sec.  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 
Sec.  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.

[[Page 64276]]

    (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.


Sec.  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 Sec.  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 Sec.  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 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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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.
    (f) Time period for consideration.
    (1) If the Council does not make a proposed determination under 
Sec.  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 Sec.  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 Sec.  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 Sec.  1310.10(a).


Sec.  1310.22  Emergency exception to Sec.  1310.21.

    (a) Exception to Sec.  1310.21. Notwithstanding anything to the 
contrary in Sec.  1310.21, the Council may waive or modify any or all 
of the notice and other procedural requirements of Sec.  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

[[Page 64277]]

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 Sec.  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 Sec.  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 Sec.  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.


Sec.  1310.23  Council reevaluation and rescission of determinations.

    (a) Reevaluation and rescission. The Council shall, not less 
frequently than annually--
    (1) Reevaluate each currently effective determination made under 
Sec.  1310.10(a); and
    (2) Rescind any such determination, if the Council determines that 
the nonbank financial company no longer meets the standard under Sec.  
1310.10(a), taking into account the considerations in Sec.  1310.11(a) 
or Sec.  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 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

[[Page 64278]]

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, 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 Dodd-Frank 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 
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 risk-related 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 Dodd-Frank Act would be considered as part of one or 
more of the six categories. This is reflected in the following 
table, using the

[[Page 64279]]

considerations relevant to a U.S. nonbank financial company for 
illustrative purposes.\10\
---------------------------------------------------------------------------

    \10\ The corresponding statutory considerations for a foreign 
nonbank financial company would be considered under the relevant 
categories indicated in the table.

------------------------------------------------------------------------
                                         Category or categories in which
       Statutory considerations:           this consideration would be
                                                    addressed:
------------------------------------------------------------------------
(A) The extent of the leverage of the    Leverage.
 company.
(B) The extent and nature of the off-    Size; interconnectedness.
 balance-sheet exposures of the company.
(C) The extent and nature of the         Interconnectedness.
 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   Size; lack of substitutes.
 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   Lack of substitutes.
 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       Size; interconnectedness; lack
 managed rather than owned by the         of substitutes.
 company, and the extent to which
 ownership of assets under management
 is diffuse.
(G) The nature, scope, size, scale,      Size; interconnectedness; lack
 concentration, interconnectedness, and   of substitutes.
 mix of the activities of the company.
(H) The degree to which the company is   Existing regulatory scrutiny.
 already regulated by 1 or more primary
 financial regulatory agencies.
(I) The amount and nature of the         Size; interconnectedness.
 financial assets of the company.
(J) The amount and types of the          Liquidity risk and maturity
 liabilities of the company, including    mismatch; size;
 the degree of reliance on short-term     interconnectedness.
 funding.
(K) Any other risk-related factors that  Appropriate category or
 the Council deems appropriate.           categories based on the nature
                                          of the additional risk-related
                                          factor.
------------------------------------------------------------------------

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

    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 non-affiliates 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 
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

[[Page 64280]]

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.

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 off-balance 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.
    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 long-term 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.

[[Page 64281]]

     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\
---------------------------------------------------------------------------

    \11\ See 12 U.S.C. 5322(d)(3).
---------------------------------------------------------------------------

    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 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 three-stage 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 consolidated assets threshold and 
any one of the other thresholds.\12\ The thresholds are:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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

[[Page 64282]]

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 
company-specific 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, 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.
---------------------------------------------------------------------------

    \13\ See section 1310.21(a) of the proposed rule.
    \14\ Under 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.
---------------------------------------------------------------------------

    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, 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 
cross-border 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

[[Page 64283]]

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 Dodd-
Frank 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.

[FR Doc. 2011-26783 Filed 10-17-11; 8:45 am]
BILLING CODE 4810-25-P-P