[Federal Register Volume 83, Number 218 (Friday, November 9, 2018)]
[Notices]
[Pages 56081-56085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24496]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1631]


Application of the RFI/C(D) Rating System to Savings and Loan 
Holding Companies

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Notice.

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SUMMARY: The Board has determined that it will apply the RFI/C(D) 
rating system to certain savings and loan holding companies (SLHCs). 
This is the same supervisory rating system that the Board currently 
applies to bank holding companies (BHCs). SLHCs that are engaged in 
significant commercial or insurance activities will continue to receive 
indicative supervisory ratings. SLHCs with $100 billion or more in 
assets will receive ratings under the RFI/C(D) rating system until the 
Board applies the Large Financial Institution Rating System to them.

DATES: The application of the supervisory rating system to SLHCs is 
effective February 1, 2019.

FOR FURTHER INFORMATION CONTACT: T. Kirk Odegard, Assistant Director 
and Chief of Staff, Policy Implementation and Effectiveness, (202) 530-
6225, Karen Caplan, Assistant Director, (202) 452-2710, Angela Knight-
Davis, Manager, (202) 475-6679, Division of Banking Supervision and 
Regulation; or Benjamin McDonough, Assistant General Counsel, (202) 
452-2036, Keisha Patrick, Senior Counsel, (202) 452-3559, Laura Bain, 
Senior Attorney, (202) 736-5546, Trevor Feigleson, Senior Attorney, 
(202) 452-3274, Legal Division, Board of Governors of the Federal 
Reserve System, 20th and C Streets NW, Washington, DC 20551.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
II. Summary of Comments
III. Applying the RFI Rating System to Certain SLHCS
IV. Implementation
V. Regulatory Analysis

I. Background

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) transferred responsibility for the supervision of 
SLHCs from the Office of Thrift Supervision (OTS) to the Federal 
Reserve in July 2011.\1\ Since 2011, the Board has applied the RFI/C(D) 
rating system (commonly referred to as the ``RFI rating system'') \2\ 
to SLHCs on an ``indicative'' basis as a way of providing feedback to 
SLHCs regarding supervisory expectations while Federal Reserve staff 
and SLHCs each became familiar with the newly established statutory 
framework for supervision. Federal Reserve supervisory staff have 
assigned to each SLHC an ``indicative rating,'' which describes how the 
SLHC would be rated under the RFI rating system if applied to the 
company. These indicative ratings

[[Page 56082]]

have not carried any supervisory or regulatory consequences.\3\
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    \1\ 12 U.S.C. 5412(b)(1).
    \2\ Under the RFI rating system, BHCs generally are assigned 
individual component ratings for risk management (R), financial 
condition (F), and impact (I) of nondepository entities on 
subsidiary depository institutions. The risk management component is 
supported by individual subcomponent ratings for board and senior 
management oversight; policies, procedures, and limits; risk 
monitoring and management and information systems; and internal 
controls. The financial condition rating is supported by individual 
subcomponent ratings for capital adequacy, asset quality, earnings, 
and liquidity. An additional component rating is assigned to 
generally reflect the condition of any depository institution 
subsidiaries (D), as determined by the primary supervisor(s) of 
those subsidiaries. An overall composite rating (C) is assigned 
based on an overall evaluation of a BHC's managerial and financial 
condition and an assessment of potential future risk to its 
subsidiary depository institution(s). A simplified version of the 
RFI rating system that includes only the risk management component 
and a composite rating is applied to noncomplex BHCs with assets of 
$3 billion or less. See infra note 16.
    \3\ All SLHCs that have been inspected have received at least 
one indicative rating.
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    Prior to the transfer of supervisory responsibility for SLHCs, the 
OTS assigned supervisory ratings for SLHCs under the CORE rating 
system.\4\ The CORE rating system and the RFI rating system 
substantially overlapped and generally included assessments of the same 
set of financial and non-financial factors and provided a summary 
evaluation of each holding company's condition.
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    \4\ See 72 FR 72442 (December 20, 2007). Under the CORE rating 
system, SLHCs generally were assigned individual component ratings 
for capital (C), organizational structure (O), risk management (R), 
and earnings (E), as well as a composite rating that reflected an 
overall assessment of the holding company as reflected by 
consolidated risk management and financial strength.
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    The Board did not adopt the CORE rating system upon taking over 
supervision of SLHCs. Instead, because the vast majority of SLHCs face 
similar risks and engage largely in the same activities as BHCs, the 
Board sought to apply the same RFI rating system to SLHCs as the Board 
currently applies to BHCs to promote consistency.
    After completing a number of supervisory cycles in which the RFI 
rating system has been applied to SLHCs on an indicative basis, the 
Board evaluated the information gained from that process, taking into 
account the differences between SLHCs engaged in traditional banking 
activities and those engaged in significant commercial or insurance 
activities. Experience with this process over the past seven years 
indicates that the RFI rating system is an effective approach to 
communicating supervisory expectations to most SLHCs. On December 13, 
2016, the Board published a notice in the Federal Register requesting 
comment on a proposal (proposal) to fully apply the RFI rating system 
to all SLHCs except those that are excluded from the definition of 
``covered savings and loan holding company'' \5\ in section 217.2 of 
the Board's Regulation Q.\6\
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    \5\ 12 CFR 217.2. Section 217.2 excludes the following SLHCs 
from the definition of ``covered savings and loan holding company'': 
(1) A top-tier SLHC that is (i) an institution that meets the 
requirements of section 10(c)(9)(C) of the Home Owners' Loan Act (12 
U.S.C. 1467a(c)(9)(C)) and (ii) as of June 30 of the previous 
calendar year, derived 50 percent or more of its total consolidated 
assets or 50 percent of its total revenues on an enterprise-wide 
basis (as calculated under GAAP) from activities that are not 
financial in nature under section 4(k) of the Bank Holding Company 
Act of 1956 (12 U.S.C. 1843(k)); (2) a top-tier SLHC that is an 
insurance company; or (3) a top-tier SLHC that, as of June 30 of the 
previous calendar year, held 25 percent or more of its total 
consolidated assets in subsidiaries that are insurance underwriting 
companies (other than assets associated with insurance for credit 
risk).
    \6\ 81 FR 89941 (December 13, 2016).
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II. Summary of Comments

    The comment period on the proposal closed on February 13, 2017. The 
Board received one comment from the Insurance Coalition,\7\ which 
expressed support for continuing to apply the RFI rating system on an 
indicative basis to insurance SLHCs. The commenter also generally 
supported the Board's proposed approach for assessing capital adequacy 
for SLHCs receiving indicative ratings, but suggested that such 
assessment also should explicitly consider (i) the unique risks in the 
insurance business model, (ii) an insurance SLHC's compliance with 
State capital rules, and (iii) the policyholder protection mandate. The 
commenter also requested that the Board delay imposing a formal rating 
system on insurance SLHCs until the insurance capital rules have been 
finalized, and that the rating system be tailored to the insurance 
business model and reflect the State regulatory capital framework. The 
commenter requested that this same approach be applied for insurers 
that have been designated systemically important financial institutions 
by the Financial Stability Oversight Council (FSOC) for supervision by 
the Federal Reserve.
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    \7\ The Insurance Coalition is a group of federally supervised 
insurance companies and interested parties.
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    In response to this comment and consistent with the proposal, the 
Board has determined that it will continue to apply the RFI rating 
system to insurance SLHCs on an indicative basis. In response to the 
commenter's request that the assessment of the capital adequacy for 
insurance SLHCs receiving indicative ratings should consider certain 
factors, the Board clarifies that its assessment of insurance SLHCs has 
taken and will continue to take into account (i) the unique risks in 
the insurance business model, (ii) an insurance SLHC's compliance with 
State capital rules, and (iii) the policyholder protection mandate. The 
commenter's other suggestions pertain to factors that would be 
considered in the development of any future rating system applicable to 
insurance SLHCs and any insurance companies that the FSOC has 
determined should be supervised by the Board.

III. Applying the RFI Rating System to Certain SLHCs

    After reviewing the comment on the proposal, the Board has 
determined that it will apply the RFI rating system to every SLHC that 
is depository in nature.\8\ SLHCs that are engaged in significant 
insurance or commercial activities will continue to receive indicative 
ratings under the RFI rating system. SLHCs that are depository in 
nature and have $100 billion or more in total consolidated assets will 
be rated under the RFI rating system only until the Board applies the 
new rating system for large financial institutions (LFI rating system) 
to them, which the Board is adopting concurrently through a separate 
rulemaking and is described below.
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    \8\ The RFI rating system will apply to every SLHC except an 
SLHC that is not a ``covered savings and loan holding company'' in 
section 217.2 of the Board's Regulation Q. 12 CFR 217.2.
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    Specifically, the Board will continue to assign indicative ratings 
under the RFI rating system to (i) SLHCs that derive 50 percent or more 
of their total consolidated assets or total revenues from activities 
that are not financial in nature under section 4(k) of the Bank Holding 
Company Act of 1956, as amended (12 U.S.C. 1843(k)) (commercial SLHCs), 
and (ii) SLHCs that are insurance companies or that hold 25 percent or 
more of their total consolidated assets in subsidiaries that are 
insurance companies (insurance SLHCs). The Board will continue to 
review whether a modified version of the RFI rating system or some 
other supervisory rating system is appropriate for commercial or 
insurance SLHCs on a permanent basis.
    Subsequent to the closing of the public comment period, on August 
17, 2017, the Board invited public comment on a separate notice of 
proposed rulemaking to adopt the LFI rating system,\9\ a supervisory 
ratings

[[Page 56083]]

framework designed in part to align with the supervisory programs and 
practices that the Federal Reserve implemented for large financial 
institutions following the 2007-2009 financial crisis. The LFI rating 
system would have applied to, among other entities, BHCs and non-
insurance, non-commercial SLHCs with total consolidated assets of $50 
billion or more, and U.S. intermediate holding companies (IHCs) of 
foreign banking organizations (FBOs) established under Regulation 
YY.\10\
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    \9\ 82 FR 39049 (August 17, 2017). Under the proposed LFI rating 
system, each large financial institution would have been assigned 
ratings for three separate components: Capital Planning and 
Positions; Liquidity Risk Management and Positions; and Governance 
and Controls. The ratings would have been assigned using a four-
point non-numeric scale (Satisfactory/Satisfactory Watch, Deficient-
1, and Deficient-2). A firm would need a ``Satisfactory'' or 
``Satisfactory Watch'' rating for each of the three component 
ratings to be considered ``well managed.'' The proposal would not 
have included the assignment of a standalone composite rating or any 
subcomponent ratings.
    \10\ 12 CFR 252.153.
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    In its final rulemaking regarding the LFI framework, which the 
Board is adopting concurrently with this notice, the Board has modified 
the scope of application of the LFI rating system to take into 
consideration statutory changes resulting from the enactment of the 
Economic Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA) on May 24, 2018.\11\ Section 401 of EGRRCPA amended section 
165 of the Dodd-Frank Act to raise the $50 billion minimum asset 
threshold for general application of enhanced prudential standards.\12\ 
Immediately on the date of enactment, BHCs with total consolidated 
assets of less than $100 billion were no longer subject to these 
standards. Accordingly, the final LFI rating system applies to BHCs and 
non-insurance, non-commercial SLHCs with total consolidated assets of 
$100 billion or more, and to all U.S. IHCs of FBOs. The Board will 
assign ratings to SLHCs with $100 billion or more in total consolidated 
assets under the final LFI rating system beginning in early 2020.
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    \11\ Pub. L. 115-174, 132 Stat. 1296-1368 (2018).
    \12\ EGRRCPA Sec.  401.
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    However, along with all other depository SLHCs, the RFI rating 
system will apply to SLHCs with $100 billion or more in total 
consolidated assets beginning on February 1, 2019. Once the Board 
applies the LFI rating system to SLHCs with $100 billion or more in 
total consolidated assets in early 2020, the Board will cease to use 
the RFI rating system to assign ratings to such large SLHCs. The Board 
believes it is important to assign ratings to all depository SLHCs at 
this time in order to promote consistent supervision and treatment of 
BHCs and SLHCs.
    All components of the RFI rating system (i.e., risk management, 
financial condition, and potential impact of the parent company and 
nondepository subsidiaries on subsidiary depository institution(s)) 
will apply to SLHCs that are depository in nature.\13\ Likewise, the 
depository institution rating, which generally mirrors the primary 
regulator's assessment of the subsidiary depository institution(s), 
will apply. A numeric rating of 1 indicates the highest rating, 
strongest performance and practices, and least degree of supervisory 
concern; a numeric rating of 5 indicates the lowest rating, weakest 
performance, and the highest degree of supervisory concern.
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    \13\ Consistent with the approach for BHCs, when assigning a 
rating to an SLHC, supervisory staff will take into account a 
company's size, complexity, and financial condition. For example, a 
noncomplex SLHC with total assets less than $3 billion will not be 
assigned all subcomponent ratings; rather, only a risk management 
component rating and composite rating generally will be assigned. 
These will equate, respectively, to the management component and 
composite rating under the CAMELS rating system for depository 
institutions, as assigned to the SLHC's subsidiary savings 
association by its primary regulator.
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    The financial condition component of the RFI rating includes a 
subcomponent that represents an assessment of capital adequacy. 
Compliance with minimum regulatory capital requirements is part of a 
broader qualitative and quantitative assessment of an SLHC's capital 
adequacy. As of January 1, 2015, certain SLHCs became subject to 
minimum capital requirements and overall capital adequacy 
standards.\14\ For SLHCs subject to minimum regulatory capital 
requirements, assessment of the SLHC's compliance with those 
requirements will be one element of a broader qualitative and 
quantitative assessment of capital adequacy.\15\
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    \14\ See 78 FR 62018, 62028 (October 11, 2013) (outlining the 
timeframe for implementation of Regulation Q for SLHCs and others).
    \15\ See Sections 4060 and 4061 of the Bank Holding Company 
Supervision Manual; Supervision and Regulation Letter 15-19 
(December 18, 2015), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1519.htm; Supervision and Regulation Letter 
15-6 (April 6, 2015), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1506.htm; Supervision and Regulation Letter 
09-04 (February 24, 2009, revised December 21, 2015), available at 
http://www.federalreserve.gov/boarddocs/srletters/2009/sr0904.htm.
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    Noncomplex SLHCs that are subject to the Board's Small Bank Holding 
Company and Savings and Loan Holding Company Policy Statement 
(Regulation Y, appendix C) (Policy Statement) \16\ will be assigned an 
abbreviated version of the RFI rating system consistent with the 
Board's practice for BHCs outlined in SR letter 13-21.\17\ An offsite 
review of the SLHC will be conducted upon receipt of the lead 
depository institution's report of examination. The supervisory cycle 
will be determined by the examination frequency of the lead depository 
institution and the SLHC will be assigned only a risk management rating 
and a composite rating.
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    \16\ 12 CFR part 225, Appendix C. The Board issued an interim 
final rule raising the asset size threshold for determining 
applicability of the Policy Statement from $1 billion to $3 billion 
of total consolidated assets. See 83 FR 44195 (August 30, 2018).
    \17\ Supervision and Regulation Letter 13-21 (December 17, 
2013), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1321.htm. Shortly after adoption of this notice, Board 
staff expects to update Supervision and Regulation Letter 13-21 to 
modify inspection frequency and scope of expectations for holding 
companies with total consolidated assets between $1 billion and $3 
billion to align with the Policy Statement's revised asset size 
threshold. See supra note 16.
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    Finally, elements of the RFI rating system that are codified in the 
Board's Bank Holding Company Supervision Manual \18\ will be revised to 
describe the application of the RFI rating system to certain SLHCs that 
are depository in nature.\19\
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    \18\ Available at http://www.federalreserve.gov/boarddocs/supmanual/supervision_bhc.htm.
    \19\ See Supervision and Regulation Letter 04-18 (December 6, 
2014), available at http://www.federalreserve.gov/boarddocs/srletters/2004/sr0418.htm.
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Assessment of Capital Adequacy and Supervisory Guidance for SLHCs That 
Receive Indicative Ratings

    For SLHCs that continue to receive an indicative rating under the 
RFI rating system, examiners will consider the risks inherent in the 
SLHC's activities and the ability of capital to absorb unanticipated 
losses, provide a base for growth, and support the level and 
composition of the parent company and subsidiaries' debt in the 
evaluation of the SLHC's capital adequacy. As discussed above in 
Supplementary Information Section II, for insurance SLHCs that receive 
an indicative rating, examiners will consider the unique risks in the 
insurance business model, an insurance SLHC's compliance with State 
capital rules, and the policyholder protection mandate.
    In 2013, Board staff published several supervisory letters 
extending the use of the RFI rating system for, and assignment of, 
indicative ratings to SLHCs and extending the scope and frequency 
requirements for supervised holding companies with total consolidated 
assets of $10 billion or less to SLHCs. Commercial SLHCs and insurance 
SLHCs may refer to these letters for staff-level guidance on the use of 
indicative ratings until such time as the Board adopts final guidance 
on the application of a rating system tailored to these SLHCs.

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IV. Implementation

    The Board will begin to apply the RFI rating system on February 1, 
2019 to all non-insurance and non-commercial SLHCs, including for any 
inspections commencing after that date. Federal Reserve staff will use 
the RFI rating system to assign ratings to non-commercial, non-
insurance SLHCs with $100 billion or more in total consolidated assets 
in 2019, and assign ratings to such SLHCs using the new LFI rating 
system beginning in early 2020. As noted, commercial SLHCs and 
insurance SLHCs will continue to receive RFI ratings on an indicative 
basis. The Federal Reserve's numeric ratings for SLHCs, which are 
confidential supervisory information, will be disclosed on a 
confidential basis, in accordance with current disclosure 
practices.\20\ Under no circumstances should an SLHC or any of its 
directors, officers, or employees disclose or make public any of the 
ratings.
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    \20\ 12 CFR 261.20.
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V. Regulatory Analysis

Paperwork Reduction Act

    There is no collection of information required by this notice that 
would be subject to the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 
et seq.

Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) requires that an agency 
publish an initial regulatory flexibility analysis (IRFA) in connection 
with a proposed rule or certify that the proposed rule will not have a 
significant economic impact on a substantial number of small 
entities.\21\ An IRFA was included in the proposal to fully apply the 
RFI rating system to SLHCs that are not insurance or commercial 
SLHCs.\22\ In the IRFA, the Board requested comment on the effect of 
the proposal on small entities and on any significant alternatives that 
would reduce the regulatory burden on small entities. The Board did not 
receive any comments on the IRFA.
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    \21\ 5 U.S.C. 601 et seq.
    \22\ 81 FR 89941 (December 13, 2016).
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    The RFA requires an agency to prepare a final regulatory 
flexibility analysis (FRFA) unless the agency certifies that the rule 
will not, if promulgated, have a significant economic impact on a 
substantial number of small entities. The FRFA must contain: (1) A 
statement of the need for, and objectives of, the rule; (2) a statement 
of the significant issues raised by the public comments in response to 
the IRFA, a statement of the agency's assessment of such issues, and a 
statement of any changes made in the proposed rule as a result of such 
comments; (3) the response of the agency to any comments filed by the 
Chief Counsel for Advocacy of the Small Business Administration in 
response to the proposed rule, and a detailed statement of any changes 
made to the proposed rule in the final rule as a result of the 
comments; (4) a description of an estimate of the number of small 
entities to which the rule will apply or an explanation of why no such 
estimate is available; (5) a description of the projected reporting, 
recordkeeping and other compliance requirements of the rule, including 
an estimate of the classes of small entities which will be subject to 
the requirement and type of professional skills necessary for 
preparation of the report or record; and (6) a description of the steps 
the agency has taken to minimize the significant economic impact on 
small entities, including a statement for selecting or rejecting the 
other significant alternatives to the rule considered by the agency. In 
accordance with section 604 of the RFA, the Board has reviewed the 
final rule.
    Under regulations issued by the Small Business Administration, a 
small entity includes an SLHC with assets of $550 million or less.\23\ 
Based on data as of September 11, 2018, there are approximately 132 
SLHCs that have total domestic assets of $550 million or less and are 
therefore considered small entities for purposes of the RFA. The final 
rule applies to all non-insurance and non-commercial SLHCs. Based on 
the Board's analysis, and for the reasons stated below, the Board 
believes the final rule will not have a significant economic impact on 
a substantial number of small entities.
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    \23\ See 13 CFR 121.201. Effective July 14, 2014, the Small 
Business Administration revised the size standards for banking 
organizations to $550 million in assets from $500 million in assets. 
79 FR 33647 (June 12, 2014).
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    1. Statement of the need for, and objectives of, the application of 
the final rule.
    As discussed, the Board is fully applying the RFI rating system to 
non-insurance and non-commercial SLHCs to further the Board's goal of 
ensuring that holding companies that control depository institutions 
are subject to consistent standards and supervisory programs. After a 
seven-year adjustment period in which the Board assigned RFI ratings to 
SLHCs on an indicative basis, the Board has determined that the RFI 
rating system is an effective approach to communicating supervisory 
expectations to all non-insurance and non-commercial SLHCs.
    2. Significant issues raised by the public comments in response to 
the IRFA, a statement of the Board's assessment of such issues, and a 
statement of any changes made in the rule as a result of such comments.
    As noted above, the Board did not receive any comments on the IRFA 
and only received one responsive comment on the proposal. The comment 
did not raise any issues regarding the application of the RFI rating 
system to small entities. Instead, the comment expressed support for 
continuing to apply the RFI rating system on an indicative basis to 
insurance SLHCs and requested the Board consider certain issues in 
developing any future rating system that may be applied to insurance 
SLHCs and to insurance companies that the FSOC has determined should be 
supervised by the Federal Reserve. Accordingly, no changes were made as 
a result of public comments.
    3. Response to any comments filed by the Chief Counsel for Advocacy 
of the Small Business Administration in response to the proposed rule, 
and detailed statement of any changes made to the proposed rule in the 
final rule as a result of the comments.
    The Chief Counsel for Advocacy of the Small Business Administration 
did not file any comments in response to the proposal.
    4. Description and estimate of the number of small entities to 
which the rule will apply.
    The application of the RFI rating system to non-insurance and non-
commercial SLHCs will apply to approximately 191 SLHCs, of which only 
132 SLHCs have $550 million or less in total consolidated assets. 
Moreover, as discussed, noncomplex SLHCs under $3 billion will be 
assigned an abbreviated version of the RFI rating system consistent 
with the Board's practice for BHCs outlined in SR 13-21.
    5. Description of the projected reporting, recordkeeping and other 
compliance requirements of the rule, including an estimate of small 
entities which will be subject to the requirement and the type of 
professional skills necessary for preparation of the report or record.
    The application of the RFI rating system does not impose any 
recordkeeping, reporting, or compliance requirements.
    6. Description of the steps taken to minimize the economic impact 
on small entities, including a statement for selecting or rejecting the 
other significant alternatives to the rule considered by the agency.
    As noted, noncomplex SLHCs under $3 billion will be assigned an

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abbreviated version of the RFI rating system consistent with the 
Board's practice for BHCs outlined in SR 13-21. An offsite review of 
the SLHC will be conducted upon receipt of the lead depository 
institution's report of examination. The supervisory cycle will be 
determined by the examination frequency of the lead depository 
institution and the SLHC will be assigned only a risk management rating 
and a composite rating.
    Moreover, SLHCs have been subject to the RFI rating system on 
indicative basis for the past seven years, which has provided SLHCs the 
opportunity to adjust to the RFI rating system. The full application of 
the RFI rating system to small non-commercial and non-insurance SLHCs 
will not create any new economic impact on small entities.
    In light of the foregoing, the Board does not believe that this 
final rule will have a significant economic impact on any small 
entities and therefore believes that there are no significant 
alternatives that would reduce the economic impact on small entities.

    By order of the Board of Governors of the Federal Reserve 
System, November 2, 2018.
Ann Misback,
Secretary of the Board.
[FR Doc. 2018-24496 Filed 11-8-18; 8:45 am]
 BILLING CODE 6210-01-P