[Federal Register Volume 84, Number 249 (Monday, December 30, 2019)]
[Rules and Regulations]
[Pages 71740-71770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27108]


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FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Part 1310

RIN 4030-ZA00


Authority To Require Supervision and Regulation of Certain 
Nonbank Financial Companies

AGENCY: Financial Stability Oversight Council.

ACTION: Final interpretive guidance.

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SUMMARY: This final interpretive guidance, which replaces the Financial 
Stability Oversight Council's existing interpretive guidance on nonbank 
financial company determinations, describes the approach the Council 
intends to take in prioritizing its work to identify and address 
potential risks to U.S. financial stability using an activities-based 
approach, and enhancing the analytical rigor and transparency in the 
processes the Council intends to follow if it were to consider making a 
determination to subject a nonbank financial company to supervision by 
the Board of Governors of the Federal Reserve System.

[[Page 71741]]


DATES: Effective Date: January 29, 2020.

FOR FURTHER INFORMATION CONTACT: Howard Adler, Office of Domestic 
Finance, Treasury, at (202) 622-2409; Eric Froman, Office of the 
General Counsel, Treasury, at (202) 622-1942; or Mark Schlegel, Office 
of the General Counsel, Treasury, at (202) 622-1027.

SUPPLEMENTARY INFORMATION: 

I. Background

    The statutory purposes of the Financial Stability Oversight Council 
(the ``Council'') are to identify risks to U.S. financial stability, 
promote market discipline, and respond to emerging threats to the 
stability of the U.S. financial system. The Council's authorities to 
accomplish these statutory purposes include authorities to facilitate 
information sharing and coordination among regulators, monitor the 
financial services marketplace, make recommendations to regulators, and 
require supervision by the Board of Governors of the Federal Reserve 
System (the ``Federal Reserve'') for nonbank financial companies that 
may pose risks to U.S. financial stability.
    Section 111 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5321) (the ``Dodd-Frank Act'') established 
the Council. 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.
    As a threshold matter, the Council emphasizes the importance of 
market discipline, rather than government intervention, as a mechanism 
for addressing potential risks to U.S. financial stability posed by 
financial companies. The Dodd-Frank Act gives the Council broad 
discretion to determine how to respond to potential threats to U.S. 
financial stability. The Council's duties under section 112 of the 
Dodd-Frank Act include monitoring the financial services marketplace in 
order to identify potential threats to U.S. financial stability, and 
recommending to the Council member agencies general supervisory 
priorities and principles reflecting the outcome of discussions among 
the member agencies. The Council's duties under section 112 also 
include making recommendations to primary financial regulatory agencies 
\1\ to apply new or heightened standards and safeguards for financial 
activities or practices that could create or increase risks of 
significant liquidity, credit, or other problems spreading among 
financial companies and markets. The Council intends to seek to 
identify, assess, and address potential risks and emerging threats on a 
system-wide basis by taking an activities-based approach to its work, 
as further explained below.
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    \1\ ``Primary financial regulatory agency'' is defined in 
section 2(12) of the Dodd-Frank Act, 12 U.S.C. 5301(12).
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    The Dodd-Frank Act also authorizes the Council to determine that 
certain nonbank financial companies will be subject to supervision by 
the Federal Reserve and prudential standards. The Federal Reserve is 
responsible for establishing the prudential standards that will be 
applicable, under section 165 of the Dodd-Frank Act, to nonbank 
financial companies subject to a Council determination \2\ under 
section 113 of the Dodd-Frank Act. The Council has previously issued 
rules, guidance, and other public statements regarding its process for 
evaluating nonbank financial companies for a potential determination. 
On April 11, 2012, the Council issued interpretive guidance (the ``2012 
Interpretive Guidance'') regarding the manner in which the Council 
makes determinations under section 113 of the Dodd-Frank Act, as an 
appendix to a final rule (together, the ``2012 Final Rule and 
Interpretive Guidance'').\3\ On May 22, 2012, the Council approved 
hearing procedures relating to the conduct of hearings before the 
Council in connection with proposed determinations regarding nonbank 
financial companies and financial market utilities and related 
emergency waivers or modifications under sections 113 and 804 of the 
Dodd-Frank Act (as amended in 2013 and 2018, the ``Hearing 
Procedures'').\4\ On February 4, 2015, the Council adopted supplemental 
procedures (the ``2015 Supplemental Procedures'') to the 2012 Final 
Rule and Interpretive Guidance.\5\ In June 2015, the Council published 
staff guidance with details regarding the methodologies used in Stage 1 
thresholds in connection with the determination process under section 
113.\6\ On November 17, 2017, the Department of the Treasury issued a 
report to the President in response to a Presidential Memorandum 
directing the Secretary of the Treasury to conduct a thorough review of 
the determination and designation processes of the Council.\7\
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    \2\ Section 113 of the Dodd-Frank Act, 12 U.S.C. 5323, refers to 
a Council ``determination'' regarding a nonbank financial company. 
This release refers to ``determination'' and ``designation'' 
interchangeably for ease of reading.
    \3\ The 2012 Final Rule and Interpretive Guidance added a new 
part 1310 to title 12 of the Code of Federal Regulations, consisting 
of final rules (12 CFR 1310.1-1310.23) and interpretive guidance 
(Appendix A to Part 1310-Financial Stability Oversight Council 
Guidance for Nonbank Financial Company Designations). See 12 CFR 
part 1310, app. A (2012).
    \4\ 77 FR 31855 (May 30, 2012); 78 FR 22546 (April 16, 2013); 83 
FR 12010 (March 19, 2018).
    \5\ Financial Stability Oversight Council Supplemental 
Procedures Relating to Nonbank Financial Company Determinations 
(February 4, 2015), available at https://www.treasury.gov/initiatives/fsoc/designations/Documents/Supplemental%20Procedures%20Related%20to%20Nonbank%20Financial%20Company%20Determinations%20-%20February%202015.pdf.
    \6\ See Council, Staff Guidance Methodologies Relating to Stage 
1 Thresholds (June 8, 2015), available at https://www.treasury.gov/initiatives/fsoc/designations/Documents/FSOC%20Staff%20Guidance%20-%20Stage%201%20Thresholds.pdf.
    \7\ Treasury, Report to the President of the United States in 
Response to the Presidential Memorandum Issued April 21, 2017: 
Financial Stability Oversight Council Designations (November 17, 
2017), available at https://www.treasury.gov/press-center/press-releases/documents/pm-fsoc-designations-memo-11-17.pdf.
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    On March 6, 2019, the Council approved proposed interpretive 
guidance (the ``Proposed Guidance''), which incorporated certain 
provisions of the 2015 Supplemental Procedures, to revise and update 
the 2012 Interpretive Guidance.\8\ The Proposed Guidance, which 
included a request for public comment and over 40 specific questions, 
was intended to enhance the Council's transparency, analytical rigor, 
and public engagement. The comment period for the Proposed Guidance 
closed on May 13, 2019.
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    \8\ 84 FR 9028 (March 13, 2019). On the same date, the Council 
adopted a final rule stating that the Council shall not amend or 
rescind its interpretive guidance on nonbank financial company 
determinations without providing the public with notice and an 
opportunity to comment in accordance with the procedures applicable 
to legislative rules under the Administrative Procedure Act. See 84 
FR 8958 (March 13, 2019).
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    The Council received 26 comment letters in response to the Proposed 
Guidance, of which nine were from companies or trade associations in 
the asset management industry, four were from trade associations in the 
insurance industry, three were from other trade associations, seven 
were from various advocacy groups, one was from two previous 
Chairpersons of the Council and two previous Chairmen of the Federal 
Reserve, one was from an association of state insurance regulators, and 
one was from a group of academics.

[[Page 71742]]

(Comment letters are available online at http://www.regulations.gov/docket?D=FSOC-2019-0001.) Twenty of the commenters were generally 
supportive of the proposal, including the primary focus on the 
activities-based approach and analytical enhancements to the Council's 
designation process. Six commenters were generally opposed to the 
proposal, arguing it unnecessarily limited the Council's tools for 
addressing systemic risk. Some of the commenters generally opposed to 
the proposal nonetheless stated that an activities-based approach may 
be appropriate in certain circumstances.
    This final interpretive guidance (the ``Final Guidance'') replaces 
in its entirety the 2012 Interpretive Guidance. In addition, in 
connection with the adoption of the Final Guidance, the Council has 
rescinded the 2015 Supplemental Procedures and the 2015 staff guidance 
regarding the Stage 1 thresholds. The Council's rules codified at 12 
CFR 1310.1 to 1310.23 and the Council's Hearing Procedures remain in 
effect.
    The Council expects that the Final Guidance will better enable the 
Council to:
    [cir] Leverage the expertise of financial regulatory agencies;
    [cir] Promote market discipline;
    [cir] Maintain competitive dynamics in affected markets;
    [cir] Appropriately tailor regulations to cost-effectively minimize 
burdens; and
    [cir] Ensure the Council's designation analyses are rigorous and 
transparent.

II. Overview of Final Guidance

    The Final Guidance revises the 2012 Interpretive Guidance to ensure 
that the Council's work is clear, transparent, and analytically 
rigorous, and to enhance the Council's engagement with companies, 
regulators, and other stakeholders. By issuing clear and transparent 
guidance, the Council seeks to provide the public with sufficient 
information to understand the Council's concerns regarding risks to 
financial stability, while appropriately protecting information 
submitted by companies and regulators to the Council.

A. Key Changes From 2012 Interpretive Guidance and Proposed Guidance

1. Key Changes From 2012 Interpretive Guidance
    The Final Guidance substantially transforms the Council's previous 
procedures. Following are high-level descriptions of several of the 
most important changes, which are explained in greater detail below.
    First, under the Final Guidance, the Council will prioritize its 
efforts to identify, assess, and address potential risks and threats to 
U.S. financial stability through a process that begins with an 
activities-based approach. This approach is consistent with the 
Council's priorities of identifying and addressing potential risks and 
emerging threats on a system-wide basis, in order to reduce the 
potential for competitive market distortions that could arise from 
entity-specific determinations, and allow relevant financial regulatory 
agencies to address identified potential risks. The Council will pursue 
entity-specific determinations under section 113 of the Dodd-Frank Act 
only if a potential risk or threat cannot be adequately addressed 
through an activities-based approach. This approach will enable the 
Council to effectively identify and address the underlying sources of 
risks to financial stability on a system-wide basis, rather than 
addressing risks only at a particular nonbank financial company that 
may be designated.
    Second, before issuing nonbinding recommendations to a primary 
financial regulatory agency under section 120 of the Dodd-Frank Act, 
the Council will ascertain whether the primary financial regulatory 
agency would be expected to perform a cost-benefit analysis of the 
actions it would take in response to the Council's contemplated 
recommendation. In cases where the primary financial regulatory agency 
would not be expected to conduct such an analysis, the Council itself 
will--prior to making a final recommendation--conduct an analysis, 
using empirical data, to the extent available, of the benefits and 
costs of the actions that the primary financial regulatory agency would 
be expected to take in response to the contemplated recommendation. 
When the Council conducts its own analysis, the Council will make a 
recommendation under section 120 only if it believes that the results 
of its assessment of benefits and costs support the recommendation.
    Third, in the event the Council considers a nonbank financial 
company for a potential determination under section 113, the Council 
will perform a cost-benefit analysis prior to making a determination. 
The Council will make a determination under section 113 only if the 
expected benefits to financial stability from the determination justify 
the expected costs that the determination would impose.
    Fourth, under the Final Guidance, the Council will assess the 
likelihood of a nonbank financial company's material financial distress 
when evaluating the firm for a potential determination, in order to 
evaluate the extent to which a determination may promote U.S. financial 
stability.
    Fifth, the Final Guidance condenses the prior three-stage process 
for a determination under section 113 into two stages, by eliminating 
prior stage 1 (as established by the 2012 Interpretive Guidance). Under 
prior stage 1, a set of uniform quantitative metrics was applied to a 
broad group of nonbank financial companies in order to identify nonbank 
financial companies for further evaluation and to provide clarity for 
other nonbank financial companies that likely would not be subject to 
evaluation for a potential determination. The Final Guidance eliminates 
prior stage 1, because it generated confusion among firms and members 
of the public and is not compatible with the prioritization of an 
activities-based approach.
    Sixth, the Final Guidance further enhances the new, two-stage 
determination process by making numerous procedural improvements and 
incorporating several provisions of the 2015 Supplemental Procedures, 
which were intended to facilitate the Council's engagement and 
transparency. The Final Guidance will increase the Council's engagement 
with companies and their existing regulators during the determination 
process. One of the goals of this enhanced engagement is to provide a 
company under review with greater visibility into the aspects of its 
business that may pose risks to U.S. financial stability. Enhanced 
engagement will also allow the company to provide the Council with 
relevant information, which will help to ensure that the Council is 
making decisions based on a broad set of data and a rigorous analysis. 
By making a company aware early in the review process of the potential 
risks the Council has identified, the Council seeks to give the company 
more information and tools to mitigate those risks prior to any Council 
designation, thereby providing a potential pre-designation ``off-
ramp.''
    The Final Guidance also includes procedures intended to clarify the 
post-designation ``off-ramp.'' The Final Guidance provides that in the 
event the Council makes a final determination regarding a company, the 
Council intends to encourage the company or its regulators to take 
steps to mitigate the potential risks identified in the Council's 
written explanation of the basis for its final determination. Except in 
cases where new material risks arise over time, if a company adequately 
addresses the potential risks identified in writing by the Council at 
the time of the final determination and in

[[Page 71743]]

subsequent reevaluations, the Council should generally be expected to 
rescind its determination regarding the company. By clarifying the 
``off-ramp'' to rescission, and taking other steps to promote 
designated nonbank financial companies' ability to reduce the threat 
they could pose to financial stability, the Council seeks to both 
protect the U.S. financial system and reduce the regulatory burden on 
the companies.
    Seventh, the Final Guidance eliminates the six-category framework 
described in the 2012 Interpretive Guidance. As noted in the 2012 
Interpretive Guidance, the Dodd-Frank Act requires the Council to take 
into account 10 considerations when evaluating a company for a 
potential determination, and authorizes the Council to consider ``any 
other risk-related factors that the Council deems appropriate.'' \9\ 
The 2012 Interpretive Guidance established an analytic framework that 
grouped all relevant factors, including the 10 statutory considerations 
\10\ and any additional risk-related factors, into six categories 
(size, interconnectedness, substitutability, leverage, liquidity risk 
and maturity mismatch, and existing regulatory scrutiny). The six-
category framework did not prove useful in guiding the Council's 
evaluations, and unnecessarily complicated the framework for the 
Council's analysis. As a result, the Final Guidance eliminates this 
six-category framework.
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    \9\ See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2).
    \10\ See section C(1) below for a list of the 10 statutory 
considerations.
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2. Key Changes From Proposed Guidance
    Following are high-level descriptions of several changes in this 
Final Guidance from the Proposed Guidance. These changes are explained 
in greater detail below.
    First, in response to comments that the Council should provide more 
detail on how it will conduct its analysis under the activities-based 
approach, the Final Guidance clarifies that the Council will consult 
with relevant financial regulatory agencies and will take into account 
existing laws and regulations that may mitigate a potential risk to 
U.S. financial stability. Among other factors, the Final Guidance 
provides that the Council will also take into account the risk profiles 
and business models of market participants engaging in the products, 
activities, or practices under evaluation.
    Second, the Final Guidance provides additional clarity on the 
process by which the Council may issue recommendations under section 
120, including the Council's analysis of the costs and benefits 
associated with such recommendations.
    Third, the Final Guidance has been revised in response to comments 
regarding the proposed interpretation of ``nonbank financial company'' 
as including any successor of a company that is subject to a final 
determination of the Council. In response to comments that the proposed 
interpretation was overly broad, the Final Guidance has been revised to 
state, more narrowly, that the Council intends to interpret the 
statutory term ``nonbank financial company supervised by the Board of 
Governors'' as including any nonbank financial company that acquires, 
directly or indirectly, a majority of the assets or liabilities of a 
company that is subject to a final determination of the Council. As a 
result, if a nonbank financial company subject to a final determination 
of the Council sells or otherwise transfers a majority of its assets or 
liabilities, the acquirer will succeed to, and become subject to, the 
Council's determination. As noted below and in section V of the Final 
Guidance, the Council may grant a designated nonbank financial 
company's request for a reevaluation of the determination before the 
next annual reevaluation, in appropriate cases.
    Fourth, the Final Guidance has been revised to add greater 
specificity regarding the Council's assessment of costs and benefits in 
connection with a determination under section 113 of the Dodd-Frank 
Act. For example, the Final Guidance states that when possible, the 
Council will quantify reasonably estimable benefits and costs, using 
ranges, as appropriate, and based on empirical data when available.
    Fifth, the description of the Council's analytic process for 
assessing the likelihood of a company's material financial distress has 
been revised. The Final Guidance provides that to conduct this 
assessment, the Council may consider factors such as leverage (both on 
and off balance sheet), potential risks associated with asset 
reevaluations (whether such reevaluations arise from market disruptions 
or severe macroeconomic conditions), reliance on short-term funding or 
other fragile funding markets, maturity transformation, and risks from 
exposures to counterparties or other market participants.
    Sixth, the Proposed Guidance stated that the Council or its 
Deputies Committee \11\ would vote to commence review of a nonbank 
financial company in Stage 1 of the determination process. In response 
to public comments, the Final Guidance provides that the Council will 
vote to commence any review of a nonbank financial company in Stage 1. 
The table below provides a summary of several key transition points 
under the Final Guidance:
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    \11\ The Council's Deputies Committee is composed of senior 
officials from each Council member and member agency. It coordinates 
and oversees the work of the Council's other interagency staff 
committees.

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        Transition point            Persons voting     Voting threshold
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Begin step one of ABA...........  No required vote..  N/A.
Begin step two of ABA...........  No required vote..  N/A.
Begin Stage 1 of Determination    Council member      Majority.
 Process.                          vote.
Begin Stage 2 of Determination    Council member      Majority.
 Process.                          vote.
Make Proposed Determination.....  Council member      Two-thirds.\12\
                                   vote.
Make Final Determination........  Council member      Two-thirds.
                                   vote.
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    The following sections provide detailed descriptions of (1) the 
activities-based approach (section B); (2) the analytic framework for 
the Council's evaluation of nonbank financial companies for a potential 
determination under section 113 of the Dodd-Frank Act (section C); and 
(3) the process that the Council will generally follow when determining 
whether to designate, or rescind the designation of, a nonbank 
financial company (section D).
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    \12\ Under 12 CFR 1310.10(b)(2), any proposed or final 
determination requires 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.

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[[Page 71744]]

B. Activities-Based Approach

1. Overview
    Under the Final Guidance, the Council will prioritize its efforts 
to identify, assess, and address potential risks and threats to U.S. 
financial stability through a process that begins with an activities-
based approach. The Council will pursue entity-specific determinations 
under section 113 of the Dodd-Frank Act only if a potential risk or 
threat cannot be adequately addressed through an activities-based 
approach. This approach reflects two priorities: (1) Identifying and 
addressing, in consultation with relevant financial regulatory 
agencies,\13\ potential risks and emerging threats on a system-wide 
basis, thereby reducing the potential for competitive distortions among 
financial companies and in markets that could arise from entity-
specific determinations, and (2) allowing relevant financial regulatory 
agencies, which generally possess greater information and expertise 
with respect to company, product, and market risks, to address 
potential risks, rather than subjecting the companies to new regulatory 
authorities. The 2012 Final Rule and Interpretive Guidance did not 
address the concept of an activities-based approach.
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    \13\ References in this preamble and guidance to ``relevant 
financial regulatory agencies'' may encompass a broader range of 
regulators than those included in the statutory definition of 
``primary financial regulatory agency.'' See Dodd-Frank Act section 
2(12), 12 U.S.C. 5301(12).
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    As part of its activities-based approach, the Council will examine 
a diverse range of financial products, activities, and practices that 
could pose risks to U.S. financial stability. The Council's annual 
reports highlight the types of activities the Council will evaluate, 
including activities related to the extension of credit, maturity and 
liquidity transformation, market making and trading, and other key 
functions critical to support the functioning of financial markets.\14\
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    \14\ For example, the Council's 2018 annual report noted risks 
such as cybersecurity events associated with the increased use of 
information technology, the concentrations of activities and 
exposures in central counterparties, and transition issues related 
to the move away from LIBOR to an alternative, sustainable reference 
rate.
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    Most commenters supported the activities-based approach, stating 
that it is the most effective means to address potential risks that may 
arise in particular industries and would avoid competitive distortions 
from the entity-specific approach. Some commenters supportive of 
alternatives to the entity-specific approach stated that designating 
individual nonbank financial companies could create inefficiencies and 
competitive disadvantages in capital markets. One commenter stated that 
primary regulators should tailor their regulations based on the unique 
attributes of each company and consider the cumulative effects of 
regulations on companies. By relying on the experience and expertise of 
relevant financial regulatory agencies during the activities-based 
approach, the Council expects that any response to an identified risk 
to financial stability will be tailored in a manner that reflects the 
unique attributes of affected companies and their existing regulatory 
framework. One commenter stated that the activities-based approach 
should cover activities, but not products and practices. The Council 
believes that the activities-based approach would be rendered less 
effective if it excluded products and practices, because activities 
that may pose risks to financial stability often involve the issuance 
of products or the conduct of practices.
    Other commenters stated that there should be a high bar to Council 
actions. These commenters stated that the Council and primary 
regulators should bear the burden of proof in establishing the 
existence of a risk to financial stability and of demonstrating that 
the Council's proposed response to the risk is optimal from an 
effectiveness and efficiency standpoint. The Council expects that its 
analyses will sufficiently establish the existence of any potential 
risk or emerging threat to financial stability to which the Council 
seeks to respond. Further, any regulation adopted by relevant financial 
regulatory agencies in response to the Council's activities-based 
approach would generally be subject to existing federal or state 
administrative law requirements.
    Several commenters opposed the prioritization of the activities-
based approach, based on various legal, procedural, analytical, and 
other objections. Some commenters noted that the Council does not have 
authority to regulate financial activities, or stated that the proposal 
to rely on primary regulators to address potential risks has no basis 
in the Dodd-Frank Act. One commenter stated that Congress did not 
intend the Council's designation authority to be subordinate to or 
contingent upon an activities-based approach, and two other commenters 
stated that the Council's authority to make recommendations under 
section 120 of the Dodd-Frank Act cannot serve as a substitute for 
designations under section 113. One commenter stated that the Council's 
analysis should begin with an activities-based approach, but that the 
activities-based approach should not be undertaken at the expense of 
designation, which the commenter stated is an important tool that 
should be used when warranted.
    The Dodd-Frank Act gives the Council broad discretion to determine 
how to respond to potential threats to U.S. financial stability. The 
activities-based approach is consistent with the Council's priorities 
of identifying and addressing potential risks and emerging threats on a 
system-wide basis, allowing relevant financial regulatory agencies to 
address identified potential risks. The Council retains the authority 
to designate nonbank companies under the Final Guidance. The Council 
recognizes that its authority under section 120 of the Dodd-Frank Act 
is not a substitute for designations in all circumstances. However, 
consistent with the Council's prioritization of an activities-based 
approach, the Council's authority under section 120 may be a more 
effective means of addressing certain types of potential risks than 
designating one or more individual companies.
    Two commenters stated that the activities-based approach cannot 
address risks that are tied to the funding and leverage or combination 
of activities within a specific firm. Another commenter stated that the 
Federal Reserve's regulatory authorities with respect to designated 
nonbank financial companies, such as capital and liquidity 
requirements, risk management requirements, and stress testing, are not 
available through an activities-based approach. In the activities-based 
approach, the Council anticipates identifying risks from activities 
such as the use of leverage, and working with relevant financial 
regulatory agencies to respond to identified risks. The Council expects 
that in many cases, relevant financial regulatory agencies will have 
authority to address risks identified by the Council in the activities-
based approach. However, if a potential threat to U.S. financial 
stability cannot be adequately addressed through an activities-based 
approach, the Council may consider a nonbank financial company for a 
potential determination under section 113 of the Dodd-Frank Act.
    One commenter stated that although the Proposed Guidance suggests 
that the activities-based approach will minimize competitive 
distortions that arise from firm-specific decisions, large, 
systemically important firms actually create competitive distortions, 
because of the perception that they will receive a bailout in a 
situation where their failure could create systemic risk.

[[Page 71745]]

Another commenter stated that competitive market distortions are not 
among the statutory factors that the Council is required to consider 
when evaluating specific companies for a determination. One of the 
Council's priorities is to identify and address potential risks and 
emerging threats to financial stability on a system-wide basis, which, 
in turn, reduces the potential for competitive market distortions that 
could arise from entity-specific determinations. The activities-based 
approach is consistent with this system-wide perspective.
    One commenter objected to the activities-based approach on the 
basis that it is easier for regulators to identify systemic firms ex 
ante than to predict which activities will threaten financial 
stability. Another commenter stated that jurisdictional gaps will 
impede the activities-based approach, including with respect to 
insurance companies, hedge funds, and nonbank financial technology 
companies. By leveraging the expertise and regulatory authorities of 
relevant financial regulatory agencies as part of its collaborative 
engagement in the activities-based approach, the Council expects to 
identify products, activities, and practices that may raise concerns 
and effectively address any jurisdictional gaps. Council members can, 
at their discretion, raise potential risks for consideration by the 
Council, including with respect to risks that are, or are migrating, 
outside a particular regulator's jurisdiction. Another commenter stated 
that the activities-based approach will incentivize firms to engage in 
regulatory arbitrage by seeking out activities that have not been 
identified or appropriately regulated. However, actions taken to 
address potential risks across an entire industry or market under the 
activities-based approach may be more effective in discouraging 
regulatory arbitrage than company-specific determinations under section 
113. Two commenters stated that it would not be possible for the 
Council to undertake an activities-based approach effectively, given 
the reduction in funding and staff for the Office of Financial Research 
(OFR). The Council has confidence that Council members and member 
agencies, including the OFR, will be able to conduct the market 
monitoring, risk identification, information sharing, and analysis 
contemplated by the activities-based approach.
2. First Step of Activities-Based Approach
    The Final Guidance establishes a two-step process for the Council's 
activities-based approach. In the first step, in an effort to identify 
potential risks to U.S. financial stability, the Council intends to 
monitor diverse financial markets and market developments, in 
consultation with relevant financial regulatory agencies, to identify 
products, activities, or practices that could pose risks to financial 
stability.\15\ The Council intends to continue to monitor a broad scope 
of financial markets and market developments, which may include 
corporate and sovereign debt and loan markets, equity markets, new or 
evolving financial products, activities, and practices, and 
developments affecting the resiliency of financial market participants. 
If the Council's monitoring of markets and market developments 
identifies a product, activity, or practice that could pose a potential 
risk to U.S. financial stability, the Council, in consultation with the 
relevant financial regulatory agencies, will evaluate the potential 
risk to determine whether it merits further review or action. The Final 
Guidance defines a ``risk to financial stability'' as a risk of an 
event or development that could impair financial intermediation or 
financial market functioning to a degree that would be sufficient to 
inflict significant damage on the broader economy.\16\ One commenter 
stated that the Council should amend the proposed definition of ``risk 
to financial stability'' by evaluating the impact and likelihood of a 
potential risk, among other attributes. The definition in the Final 
Guidance is unchanged from the proposal, because the definition already 
addresses the scale of the risk by reference to the impact on the 
broader economy. The likelihood of the risk arising is more relevant to 
the consideration of any appropriate regulatory response than to this 
definition.
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    \15\ The Council has a statutory duty to monitor the financial 
services marketplace in order to identify potential threats to U.S. 
financial stability. See Dodd-Frank Act section 112(a)(2)(C), 12 
U.S.C. 5322(a)(2)(C).
    \16\ The 2012 Final Rule and Interpretive Guidance did not 
define ``risk to financial stability.''
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    In its analysis in the first step of the activities-based approach, 
the Council will evaluate the extent to which certain characteristics 
could amplify potential risks to U.S. financial stability arising from 
products, activities, or practices. While these characteristics may not 
themselves present risks to U.S. financial stability, the Council will 
consider whether the combination or prominence of such characteristics 
in the products, activities, or practices under evaluation warrants 
further scrutiny. Such characteristics include asset valuation risk or 
credit risk; leverage, including leverage arising from debt, 
derivatives, off-balance sheet obligations, and other arrangements; and 
the transparency of financial markets, such as growth in financial 
transactions occurring outside of regulated sectors, among others. When 
evaluating the potential risks associated with a product, activity, or 
practice, the Council will take into account these characteristics and 
various other factors that may exacerbate or mitigate the risks. For 
example, activities may pose greater risks if they are complex or 
opaque, are conducted without effective risk-management practices, are 
significantly correlated with other financial products, or are either 
highly concentrated or significant and widespread. A trading activity 
in a market subject to a significant amount of asset valuation risk, 
for instance, may pose a greater threat to financial stability if the 
activity is also opaque. In contrast, regulatory requirements or market 
practices may mitigate risks by, for example, limiting exposures or 
leverage, enhancing risk-management practices, or restricting excessive 
risk-taking. Regulatory requirements associated with a lending 
activity, such as an asset concentration limit or repayment test, may 
reduce the potential risk to financial stability stemming from the 
activity. Council members can, at their discretion, raise potential 
risks for consideration by the Council, including with respect to risks 
that are, or are migrating, outside a particular regulator's 
jurisdiction.
    Commenters offered numerous views regarding the proposed analytical 
components of the first step of the activities-based approach. Several 
commenters stated that the Final Guidance should take into account 
existing regulations implemented since the financial crisis, or 
consider the existing regulatory framework and work with the primary 
regulator to harmonize an approach to evaluating risk. As discussed 
below, the Final Guidance has been revised to make clear that the 
Council will consult with relevant financial regulatory agencies and 
will take into account existing laws and regulations that may mitigate 
a potential risk to U.S. financial stability. One commenter stated that 
the Council should tailor regulation to firms' risk profiles. The 
Council itself does not adopt financial services regulations, but it 
expects that actions that relevant financial regulatory agencies take 
to address potential risks to financial stability will be tailored to 
respond effectively and efficiently to the relevant risk. Further, the 
Final Guidance has

[[Page 71746]]

been revised to state that the Council will take into account the risk 
profiles and business models of market participants engaging in the 
products, activities, or practices under evaluation.
    Other commenters recommended that the Council further specify how 
it will analyze potential risks in the activities-based approach, such 
as by clarifying the criteria or standards the Council will apply, or 
establishing an empirical connection between an identified risk and 
measures to address the risk. As discussed below, the Final Guidance 
has been revised to make clear that the Council will consider available 
evidence regarding the potential risk and the behavior of financial 
market participants. At the same time, empirical data may not be 
available regarding all potential risks, and the type and scope of the 
Council's analysis will be tailored to the potential risk under 
consideration.
    Several commenters provided recommendations on the types of risks 
that the Council should focus on. Commenters stated that the Council 
should focus on new or emerging risks, or on substantially changed 
activities. Other commenters stated that the Council should focus on 
risks such as: Key service providers or market participants that could 
introduce new threats; cross-jurisdictional risks; or historical 
sources of financial disruptions. The Council expects that such risks 
and activities will be reviewed as part of the activities-based 
approach. One commenter stated that the activities-based approach 
should consider risks from sovereign entities, central banks, 
government agencies, and cyber threats. The activities-based approach 
will be sufficiently flexible to enable the Council to consider any 
relevant risks that may arise from these sources. One commenter stated 
that the Council should consider how to address risks that arise 
rapidly and require an expedited response from the Council and 
regulators. The Council will act expeditiously, as appropriate, to 
address emerging risks to financial stability.
    One commenter stated that the Council should solicit public comment 
when identifying potential risks during the activities-based approach. 
During the activities-based approach, the Council will engage 
extensively with relevant financial regulatory agencies, which are 
generally in close contact with market participants and other 
stakeholders. In addition, the Final Guidance notes that the Council 
may engage with industry participants and other members of the public 
as it assesses potential risks. Further, as described below, if the 
Council proposes to issue recommendations under section 120 of the 
Dodd-Frank Act, the Council will provide public notice and an 
opportunity to comment on proposed recommendations in accordance with 
its statutory obligations.
    Several commenters raised considerations specific to certain 
industries. One commenter stated that insurance is not inherently a 
source of systemic risk and can be an effective tool of risk 
mitigation. Another commenter stated that property and casualty 
insurers do not create systemic risk due to their low levels of 
leverage and liquidity risk.
    Several commenters discussed the application of the activities-
based approach to the asset management industry. Commenters stated that 
private equity and private credit do not pose risks to financial 
stability, and highlighted the existing federal regulation of such 
firms. Another commenter stated that the Final Guidance should state 
that there is no historical evidence demonstrating that traditional 
asset management activities have threatened U.S. financial stability. 
One commenter stated that when the Council evaluates leverage in the 
investment funds sector, it should defer to existing regulation 
regarding funds' asset segregation and derivatives use.
    One of the priorities of the activities-based approach is to allow 
relevant financial regulatory agencies, which generally possess greater 
information and expertise with respect to company, product, and market 
risks, to address potential risks, rather than subjecting companies to 
new regulatory authorities. The Council believes that this approach 
will enable the Council, working together with financial regulatory 
agencies, to appropriately consider specific attributes of particular 
industries, business models, and existing regulatory frameworks, 
including the factors highlighted in the public comments regarding 
insurance and asset management.
    Several commenters provided additional views regarding the 
Council's analysis of specific risk factors. One commenter stated that 
the activities-based approach should consider risks and mitigants for 
each relevant industry, since each industry has distinct risk-
mitigation techniques. Another commenter stated that leverage alone 
does not equal risk, and that some leverage can decrease risk. One 
commenter stated that the Final Guidance should distinguish between 
investor protection concerns and financial stability concerns. The 
Council expects to collaborate with relevant financial regulatory 
agencies when evaluating the extent to which certain characteristics 
could amplify potential risks to U.S. financial stability arising from 
products, activities, or practices. Such characteristics include 
leverage, such as leverage arising from debt, derivatives, off-balance 
sheet obligations, and other arrangements. The Council will give due 
consideration to the attributes of particular risks during this 
collaboration.
    One commenter stated that the Council should regularly survey 
financial firms on their sources of short-term funding. While the 
Council does not believe it is appropriate at this time to impose this 
additional reporting requirement on market participants, the Council 
will regularly rely on a wide range of data, research, and analysis 
from Council member agencies, the OFR, and public sources to inform its 
actions.
3. Four Framing Questions in First Step of Activities-Based Approach
    The Council's analysis in the first step of the activities-based 
approach will generally focus on four framing questions, which analyze 
(1) triggers of potential risks (for example, sharp reductions in the 
valuation of particular classes of financial assets or significant 
credit losses); (2) how adverse effects of the potential risk may be 
transmitted to financial markets or market participants (for example, 
through direct or indirect exposures in financial markets to the 
potential risk or funding or trading pressures that may result from 
associated declines in asset prices); (3) the effects the potential 
risk could have on the U.S. financial system (for example, the scale 
and magnitude of adverse effects on other companies and markets, and 
whether such effects could be concentrated or diffused among market 
participants); and (4) whether the adverse effects of the potential 
risk could impair the U.S. financial system in a manner that could harm 
the non-financial sector of the U.S. economy (for example, through 
curtailed or interrupted provision of credit to non-financial 
companies).
    Commenters that expressed a view on the four framing questions 
generally supported the proposed framework, in some cases with 
suggestions for additional factors or steps the Council should 
consider. Two commenters stated that the Council should consult with 
primary regulators regarding new dynamics that could fuel a financial 
crisis, such as risks that start in the broader economy and propagate 
to the financial system. Another commenter stated that the Council 
should provide

[[Page 71747]]

more detail on how it will analyze data under the four framing 
questions. In addition, three commenters stated that the Council's 
analysis under the four framing questions should be based on empirical 
and historical evidence. The Final Guidance has been revised to clarify 
that in its evaluation of the four framing questions, the Council will 
consult with relevant financial regulatory agencies and will take into 
account existing laws and regulations that may mitigate a potential 
risk to U.S. financial stability. The Council will also take into 
account the risk profiles and business models of market participants 
engaging in the products, activities, or practices under evaluation. 
The Council will consider available evidence regarding potential risks. 
However, the Final Guidance notes that empirical data may not be 
available regarding all potential risks, and the type and scope of the 
Council's analysis will be tailored to the potential risk under 
consideration.
    Several other commenters stated that the analysis under the four 
framing questions should include an assessment of the likelihood, 
significance, dollar value, or magnitude of a potential risk to 
financial stability. The Council expects that the scale of the adverse 
effects a potential risk could have on companies and markets will be 
part of its evaluation under the four framing questions--particularly 
the third question, regarding the effects the potential risk could have 
on the U.S. financial system. However, the Council does not intend to 
introduce a separate assessment of the likelihood of a particular risk, 
which could unnecessarily restrict its ability to evaluate the framing 
questions.
4. Second Step of Activities-Based Approach
    If the Council identifies a potential risk to U.S. financial 
stability in step one of the activities-based approach, then in the 
second step, the Council will work with the relevant financial 
regulatory agencies at the federal and state levels to seek the 
implementation of appropriate actions to address the identified 
potential risk.\17\ The goal of this step is for these regulators to 
take appropriate actions such as modifying their regulation or 
supervision of companies or markets under their jurisdiction in order 
to mitigate potential risks to U.S. financial stability identified by 
the Council. Measures that regulators can take to address a particular 
risk may vary widely, based on their authorities and the urgency of the 
risk. The Council will seek to take advantage of these regulators' 
expertise and their regulatory and supervisory authorities to address 
the potential risk identified by the Council. Two commenters stated 
that the Council should vote on advancing from step one to step two of 
the activities-based approach. Because of the continued preliminary 
nature of any analysis and interagency collaboration at the outset of 
step two, the Council is not adopting a requirement to hold a vote at 
that time.
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    \17\ The Council has a statutory duty to ``recommend to the 
member agencies general supervisory priorities and principles 
reflecting the outcome of discussions among the member agencies.'' 
See Dodd-Frank Act section 112(a)(2)(F), 12 U.S.C. 5322(a)(2)(F).
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    The Council expects that much of its initial identification and 
assessment of risks, and engagement with regulators, will be informal 
and nonpublic in nature. The staffs of Council members and member 
agencies will be responsible for much of the market monitoring, risk 
identification, information sharing, and analysis in the activities-
based approach. This engagement may yield a range of diverse outcomes, 
including the sharing of data, research, and analysis among the Council 
and regulators, or the public issuance of recommendations by the 
Council in its annual reports. Potential risks that merit further 
attention may be raised at meetings of the Council members or with 
other stakeholders, and, as appropriate, may result in public 
statements or recommendations by the Council, as described above.
    The Council anticipates that appropriate measures it may take to 
address an identified potential risk will also typically take the form 
of relatively informal actions, such as information sharing among 
regulators, but as deemed appropriate could also include more formal 
measures, such as the Council's public issuance of recommendations to 
regulators or the public. Such recommendations could be made in the 
Council's annual report. Alternatively, if after engaging with relevant 
financial regulatory agencies, the Council finds that those regulators' 
actions are inadequate to address the identified potential risk to U.S. 
financial stability, the Council has authority under section 120 of the 
Dodd-Frank Act to ``provide for more stringent regulation of a 
financial activity'' by publicly issuing nonbinding 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 their 
jurisdictions.\18\ The Council's authority under section 120 of the 
Dodd-Frank Act is discussed below.
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    \18\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
---------------------------------------------------------------------------

    Several commenters provided views regarding the Council's process 
and engagement with primary regulators in the activities-based 
approach. One commenter stated that the Council should separate 
responsibility among the Council staff for investigating an activity 
from responsibility for determining that the activity poses a systemic 
risk. The Council has limited staff and also relies on the resources of 
its members and member agencies, and therefore does not propose to 
restructure its staff in this manner. Two commenters stated that the 
Council should rely as much as possible on public or existing 
regulatory data. The Council will regularly rely on data, research, and 
analysis from Council member agencies, the OFR, industry participants, 
and other public sources to inform its actions. Consistent with its 
statutory obligations, the Council will, whenever possible, rely on 
information available from the OFR or primary financial regulatory 
agencies before requiring the submission of reports from any nonbank 
financial company or bank holding company that is regulated by a member 
agency or primary financial regulatory agency.\19\ One commenter stated 
that the Council should report publicly on its activities-based 
approach evaluations and other Council activities, and include this 
reporting in the Council annual report. The issues the Council is 
likely to consider in the activities-based approach are often discussed 
in the Council's annual reports. In the event the Council issues 
recommendations in connection with the activities-based approach, such 
recommendations could also be made in the Council's annual report, 
which includes the Council's recommendations to enhance the integrity, 
efficiency, competitiveness, and stability of U.S. financial markets, 
to promote market discipline, and to maintain investor confidence.
---------------------------------------------------------------------------

    \19\ See Dodd-Frank Act section 112(d)(3)(B), 12 U.S.C. 
5322(d)(3)(B).
---------------------------------------------------------------------------

    One commenter stated that the Council should consider whether new 
regulatory requirements could have an unintended adverse impact on 
financial stability. The Council will coordinate among its members and 
member agencies and will follow up on supervisory or regulatory actions 
to ensure the potential risk is adequately addressed, with due 
consideration for

[[Page 71748]]

any identified, unintended adverse impact.
    One commenter stated that the Council should further clarify the 
process it will follow during the activities-based approach. The 
Council believes the process set forth in the Final Guidance provides 
an appropriate level of specificity while also permitting sufficient 
flexibility for informal collaboration among financial regulators to 
identify, assess, and address potential risks. One commenter stated 
that the Council should publicly issue a written provisional 
determination regarding any identified potential risk to financial 
stability. The Council's collaboration with relevant financial 
regulatory agencies in the activities-based approach may yield a range 
of diverse outcomes, including the sharing of data, research, and 
analysis among the Council and these regulators, or the public issuance 
of recommendations by the Council in its annual reports. The approach 
described in the Final Guidance will enable robust analysis and 
collaboration, without unduly restricting the Council's ability to 
respond to potential risks to U.S. financial stability.
    A number of commenters provided recommendations about the Council's 
engagement with regulators or industry stakeholders in the activities-
based approach. Several commenters stated that engagement with primary 
regulators and companies should be a key component of the activities-
based approach, and another stated that the Council should strengthen 
the role of the primary regulator in activities-based approach step 
one, with a presumption supporting the primary regulator's findings. 
The Final Guidance makes clear that the Council will seek to take 
advantage of existing regulators' expertise and regulatory authorities 
to address any potential risk identified by the Council during the 
activities-based approach. One commenter stated that the Council should 
communicate with the primary regulator about existing regulations 
applicable to companies engaged in financial activities that may be 
evaluated in connection with the activities-based approach, any 
possible changes to such regulations, and whether it can address the 
identified risk on an industry-wide basis. As discussed above, the 
Final Guidance has been revised to clarify that in its evaluation, the 
Council will consult with relevant financial regulatory agencies and 
will take into account existing laws and regulations that may mitigate 
a potential risk to U.S. financial stability. Several commenters stated 
that the Council should coordinate with various other parties during 
the activities-based approach, including state insurance regulators, 
the National Association of Insurance Commissioners (NAIC), and other 
industry stakeholders. If the Council identifies a potential risk to 
U.S. financial stability in step one of the activities-based approach, 
then in the second step, the Council will work with the relevant 
financial regulatory agencies, including state regulators, to seek the 
implementation of appropriate actions to address the identified 
potential risk.
    Several commenters stated that the Council or the relevant primary 
regulator should undertake a cost-benefit analysis in connection with 
the activities-based approach. Because the Council will not itself be 
adopting regulations or taking supervisory actions to address potential 
risks to U.S. financial stability identified in the activities-based 
approach, a cost-benefit analysis by the Council during the activities-
based approach would not generally be appropriate. In addition, several 
commenters recommended that the Council undertake a cost-benefit 
analysis in connection with any recommendation the Council may issue 
under section 120 of the Dodd-Frank Act. As described below, the 
Council made changes to the Final Guidance in response to these 
comments, because it has determined that such an analysis would 
increase the rigor of the Council's recommendations under section 120.
5. Recommendations Under Section 120 of the Dodd-Frank Act
    Under section 120 of the Dodd-Frank Act, the Council has authority 
to ``provide for more stringent regulation of a financial activity'' by 
publicly issuing nonbinding recommendations to primary financial 
regulatory agencies to apply new or heightened standards and safeguards 
for a financial activity or practice conducted by certain financial 
companies.\20\
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    \20\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
---------------------------------------------------------------------------

    The authority to issue recommendations to primary financial 
regulatory agencies under section 120 is one of the Council's most 
formal tools for responding to potential risks to U.S. financial 
stability. Given the importance of this tool, and consistent with the 
public comments on the Proposed Guidance, the Council believes that a 
cost-benefit analysis should be performed and made public in connection 
with any recommendations issued under section 120. The Final Guidance 
has been revised to provide additional clarity on the process by which 
the Council may issue recommendations under section 120, and how the 
costs and benefits associated with such recommendations will be 
analyzed. Consistent with section 120, the Council will make these 
recommendations only if it determines that the conduct, scope, nature, 
size, scale, concentration, or interconnectedness of the 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.
    In its recommendations under section 120, the Council may suggest 
broad approaches to address the risks it has identified. When 
appropriate, the Council may make a more specific recommendation. To 
promote analytical rigor and avoid duplication, before making any 
recommendation under section 120, the Council will ascertain whether 
the relevant primary financial regulatory agency would be expected to 
perform a cost-benefit analysis of the actions it would take in 
response to the Council's contemplated recommendation. In cases where 
the primary financial regulatory agency would not be expected to 
conduct such an analysis, the Council itself will--prior to making a 
final recommendation--conduct an analysis, using empirical data, to the 
extent available, of the benefits and costs of the actions that the 
primary financial regulatory agency would be expected to take in 
response to the contemplated recommendation. Where the Council conducts 
its own such analysis, the specificity of its assessment of benefits 
and costs would be commensurate with the specificity of the 
contemplated recommendation. In general, such an assessment by the 
Council will include a consideration of the benefits and costs to 
market participants and to the U.S. financial system and long-term 
economic growth. Where the Council conducts its own analysis, the 
Council will make a recommendation under section 120 only if it 
believes that the results of its assessment of benefits and costs 
support the recommendation.
    Primary financial regulatory agencies have significant experience, 
knowledge, and expertise that can be useful in determining the most 
efficient way to address a particular risk within their regulatory 
jurisdiction. In every case, prior to issuing a recommendation under 
section 120, the Council will consult with the relevant primary 
financial regulatory agency and provide

[[Page 71749]]

notice to the public and opportunity for comment as required by section 
120.
    In any case in which no primary financial regulatory agency exists 
for one or more nonbank financial companies conducting financial 
activities or practices identified by the Council as posing risks, the 
Council can consider reporting to Congress on recommendations for 
legislation that would prevent such activities or practices from 
threatening U.S. financial stability.\21\ The Council intends to make 
recommendations under section 120 of the Dodd-Frank Act only to the 
extent that its recommendations are consistent with the statutory 
mandate of the relevant primary financial regulatory agency.
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    \21\ See Dodd-Frank Act section 120(d)(3), 12 U.S.C. 5330(d)(3).
---------------------------------------------------------------------------

    One commenter stated that the Council should use its authority 
under section 120 of the Dodd-Frank Act after informal and nonpublic 
actions have been tried and deemed insufficient. As noted above, if the 
Council, after engaging with relevant financial regulatory agencies, 
believes those regulators' actions are inadequate to address an 
identified potential risk to U.S. financial stability, the Council may 
make formal public recommendations to primary financial regulatory 
agencies under section 120. Another commenter stated that the consent 
of the primary financial regulatory agency should be required before 
the Council issues a recommendation under section 120. The Council 
expects to issue recommendations under section 120 only after engaging 
with relevant financial regulatory agencies, but the primary financial 
regulatory agency's consent is not required under section 120, and the 
Council believes that its consultation with regulators will be more 
effective than the commenter's proposed restriction on the Council's 
discretion.
6. Transition From Activities-Based Approach to Determination Process
    The Proposed Guidance stated that if the activities-based approach 
did not adequately address a potential risk identified by the Council, 
the Council may evaluate one or more individual nonbank financial 
companies for an entity-specific determination under section 113 of the 
Dodd-Frank Act.
    Commenters provided various recommendations on the procedural steps 
that should be required for the Council to advance beyond the 
activities-based approach and commence an evaluation of a nonbank 
financial company for a potential determination under section 113 of 
the Dodd-Frank Act. One commenter requested that the Council clarify 
that the activities-based approach is distinct from the determination 
process. The Final Guidance reflects the fact that the process for 
evaluating a nonbank financial company for a potential determination 
under section 113 of the Dodd-Frank Act is distinct from the process 
for an activities-based approach under section 112 of the Dodd-Frank 
Act. Commenters made a number of comments intended to ensure that 
sufficient analysis is conducted in the activities-based approach 
before the Council initiates a designation analysis. One commenter 
stated that before considering a nonbank financial company for a 
potential determination, the Council should explain in writing the 
empirical basis why the activities-based approach is insufficient. 
Several other commenters stated that the Council should only move from 
the activities-based approach to a designation analysis if the primary 
regulator of the relevant nonbank financial company states in writing 
that it cannot address the risk through an activities-based approach. 
Other commenters recommended that the Council and relevant primary 
regulator prepare a list of the regulator's findings in connection with 
the transition from the activities-based approach to a designation 
analysis and that the Council should make a ``written finding'' that it 
is moving to a designation analysis.
    The Proposed Guidance stated that the Council or its Deputies 
Committee would vote to commence review of a nonbank financial company 
in Stage 1. Several commenters stated that the Council should vote on 
any decision to commence the review of a nonbank financial company for 
a potential determination, and that such a vote should not be delegable 
to the Deputies Committee. In light of the significance of a Council 
determination, the Council agrees with these comments. Accordingly, the 
Final Guidance has been revised to provide that the Council will vote 
to commence review of a nonbank financial company in Stage 1. The 
Council's vote before considering a nonbank financial company for a 
potential determination will help ensure that sufficient analysis has 
been conducted in the activities-based approach.\22\
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    \22\ See also the chart of Council votes that would occur at 
significant transition points in the Council's analysis, in section 
II(A)(2) above.
---------------------------------------------------------------------------

C. Analytic Framework for Nonbank Financial Company Determinations

    The Proposed Guidance stated that the Council expects to advance 
beyond the activities-based approach, and evaluate a nonbank financial 
company for a potential determination under section 113 of the Dodd-
Frank Act, only in a limited set of circumstances--namely, if (1) the 
Council's collaboration and engagement with the relevant financial 
regulatory agencies using an activities-based approach does not 
adequately address the potential risk identified by the Council, or if 
the potential threat to U.S. financial stability is outside the 
jurisdiction or authority of financial regulatory agencies, and (2) the 
potential threat identified by the Council is one that could be 
addressed by a Council determination regarding one or more nonbank 
financial companies. Two commenters stated that the Final Guidance 
should be modified to state that the Council may consider a nonbank 
financial company for a potential determination only if a potential 
threat ``can only be adequately addressed'' through designation. While 
the Council believes that the commenters' proposed language would 
unduly restrict the Council's ability to respond to potential threats 
to financial stability, the Final Guidance has been revised, with 
respect to clause (2) above, to add that the Council will only evaluate 
a company for a designation if the potential threat identified is one 
that could be effectively addressed by a Council determination.
    Following is a description of the substantive analysis the Council 
would undertake regarding any nonbank financial company under review 
for a potential determination.
1. Statutory Standards and Considerations
    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,'' other than bank holding 
companies and certain other types of firms.\23\ The Dodd-Frank Act 
provides that a company is ``predominantly engaged'' in financial 
activities if either (1) 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 (2) the consolidated assets of the

[[Page 71750]]

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.\24\ The Dodd-Frank Act requires the Federal Reserve to 
establish the requirements for determining whether a company is 
``predominantly engaged in financial activities'' for this purpose.\25\
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    \23\ See Dodd-Frank Act section 102(a)(4), 12 U.S.C. 5311(a)(4).
    \24\ See Dodd-Frank Act section 102(a)(6), 12 U.S.C. 5311(a)(6).
    \25\ See Dodd-Frank Act section 102(b), 12 U.S.C. 5311(b). The 
Federal Reserve published a final rule in April 2013 establishing 
the requirements for determining if a company is ``predominantly 
engaged in financial activities.'' See 12 CFR 242.3.
---------------------------------------------------------------------------

    Section 113 of the Dodd-Frank Act authorizes the Council to subject 
a nonbank financial company to supervision by the Federal Reserve and 
prudential standards if the Council determines that (1) material 
financial distress at the nonbank financial company could pose a threat 
to U.S. financial stability (the ``First Determination Standard''), or 
(2) the nature, scope, size, scale, concentration, interconnectedness, 
or mix of the activities of the nonbank financial company could pose a 
threat to U.S. financial stability (the ``Second Determination 
Standard''). The analytic framework in the Final Guidance focuses 
primarily on the First Determination Standard, because risks to 
financial stability (such as asset fire sales or financial market 
disruptions) are most commonly propagated through a nonbank financial 
company when it is in distress.
    The Council is statutorily required to take into account the 
following considerations in making a determination under section 113 of 
the Dodd-Frank Act: \26\
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    \26\ See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2). 
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 corresponding factors in making a 
determination with respect to a foreign nonbank financial company.

     The extent of the leverage of the company;
     The extent and nature of the off-balance-sheet 
exposures of the company;
     The extent and nature of the transactions and 
relationships of the company with other significant nonbank 
financial companies and significant bank holding companies;
     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;
     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;
     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;
     The nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the company;
     The degree to which the company is already regulated by 
one or more primary financial regulatory agencies;
     The amount and nature of the financial assets of the 
company;
     The amount and types of the liabilities of the company, 
including the degree of reliance on short-term funding; and
     Any other risk-related factors that the Council deems 
appropriate.

    One commenter stated that the Council should make clear that 
designation of certain entities, like mutual funds and their managers, 
is inappropriate. Another commenter stated that designation is the 
wrong approach for capital markets firms, because it applies rules 
designed for banks to non-banks. Several commenters stated that the 
Federal Reserve should exempt from designation certain types of nonbank 
financial companies that do not exhibit certain risk factors, pursuant 
to section 170 of the Dodd-Frank Act. The Council does not intend to 
provide industry-based exemptions from potential determinations under 
section 113 of the Dodd-Frank Act. The Council would evaluate industry- 
or firm-specific factors as part of the assessment of any nonbank 
financial company for potential designation. Therefore, based on these 
comments, the Final Guidance has been revised to make clear that the 
information relevant to an in-depth analysis of a nonbank financial 
company may vary based on the nonbank financial company's 
characteristics. One commenter stated that the Council should consider 
how the enhanced prudential standards that apply to designated nonbank 
financial companies should be tailored to specific types of nonbank 
financial companies. The Council has statutory authority to make 
recommendations to the Federal Reserve concerning the establishment and 
refinement of prudential standards and other requirements applicable to 
designated nonbank financial companies; \27\ the Council may consider, 
at a future date, whether to issue such recommendations.
---------------------------------------------------------------------------

    \27\ See Dodd-Frank Act section 115, 12 U.S.C. 5325.
---------------------------------------------------------------------------

    Several other commenters generally opposed to the proposal stated 
that the Council's designation authority is a vital tool that should 
not be de-emphasized in favor of the activities-based approach. One 
commenter stated that Congress intended that designation be the 
mandatory and primary mechanism for addressing risks to financial 
stability. Another stated that the Proposed Guidance imposed conditions 
that conflicted with section 113 of the Dodd-Frank Act. Several 
commenters stated that the proposed changes would make designation 
unworkably lengthy, or would preclude its use to address potential 
risks in advance of an emergency. Other commenters made similar 
arguments regarding the benefits of nonbank financial company 
designations. The Final Guidance is intended to ensure that the 
Council's work is clear, transparent and analytically rigorous, and to 
enhance the Council's engagement with companies, regulators, and other 
stakeholders. By issuing clear and transparent guidance, the Council 
seeks to provide the public with sufficient information to understand 
the Council's concerns regarding risks to U.S. financial stability, 
while appropriately protecting information submitted by companies and 
regulators to the Council. The Final Guidance does not prohibit the 
Council from considering a nonbank financial company for potential 
designation, in appropriate circumstances. The Final Guidance makes 
clear that the Council may pursue entity-specific determinations under 
section 113 of the Dodd-Frank Act if a potential risk or threat cannot 
be adequately addressed through an activities-based approach. The 
Council anticipates it would consider a nonbank financial company for a 
potential determination under section 113 only in rare instances, such 
as if the products, activities, or practices of a company that pose a 
potential threat to U.S. financial stability are outside the 
jurisdiction or authority of financial regulatory agencies. Further, 
the Final Guidance does not limit the ability of the Council to waive 
or modify the procedural requirements related to nonbank financial 
company designations if the Council determines that such action is 
necessary or appropriate to prevent or mitigate threats posed by a 
nonbank financial company to U.S. financial stability.\28\
---------------------------------------------------------------------------

    \28\ See Dodd-Frank Act section 113(f), 12 U.S.C. 5323(f), 12 
CFR 1310.22.
---------------------------------------------------------------------------

    The Final Guidance clarifies several terms used in the Dodd-Frank 
Act that are not defined in the Act, including ``company,'' ``material 
financial distress,'' and ``threat to the financial stability of the 
United States.'' The Final Guidance defines ``threat to the

[[Page 71751]]

financial stability of the United States'' by reference to the 
potential for ``severe damage on the broader economy,'' in contrast to 
the definition in the 2012 Interpretive Guidance, which refers to 
``significant'' damage. The Council intends to interpret the term 
``company'' to include any corporation, limited liability company, 
partnership, business trust, association, or similar organization.\29\ 
The Proposed Guidance stated that the Council intends to interpret 
``nonbank financial company'' as including any successor of a company 
that is subject to a final determination of the Council. Several 
commenters stated that the Council should either eliminate the 
``successor'' language, or limit successors to those entities that 
succeed to substantially all the designated company's assets and 
liabilities.
---------------------------------------------------------------------------

    \29\ The statutory definition of ``nonbank financial company'' 
excludes bank holding companies and certain other types of 
companies. Dodd-Frank Act section 102(a)(4), 12 U.S.C. 5311(a)(4).
---------------------------------------------------------------------------

    The Council agrees with commenters that the proposed interpretation 
of ``nonbank financial company'' was overly broad. The Final Guidance 
has therefore been revised to narrow the proposed interpretation and 
further clarify which entity would be subject to a Council 
determination in the event of a sale that involves the transfer of a 
majority, but not all, of a designated nonbank financial company's 
assets or liabilities. The Final Guidance states that the Council 
intends to interpret the statutory term ``nonbank financial company 
supervised by the Board of Governors'' as including any nonbank 
financial company that acquires, directly or indirectly, a majority of 
the assets or liabilities of a company that is subject to a final 
determination of the Council. As a result, if a nonbank financial 
company subject to a final determination of the Council sells or 
otherwise transfers a majority of its assets or liabilities, the 
acquirer, rather than the remaining small entity, will succeed to and 
become subject to the Council's determination.\30\ This new definition 
has the benefit of clarity, because it relies on a simple balance 
sheet-related test to determine whether an entity succeeds to, and 
becomes subject to, a Council determination. This definition also makes 
clear that the acquirer of a minority of a designated nonbank financial 
company's assets or liabilities will not be deemed to become subject to 
the Council determination. At the request of the designated nonbank 
financial company, the Council may engage in discussions with the 
company to evaluate the structure of any transaction involving a 
potential successor. Further, as discussed in section V of the Final 
Guidance, a nonbank financial company that is subject to a final 
determination of the Council may request a reevaluation of the 
determination before the next required annual reevaluation, in 
appropriate cases. The Final Guidance has been revised to make clear 
that if a nonbank financial company subject to a final determination of 
the Council sells or otherwise transfers a majority of its assets or 
liabilities, the acquirer can use this reevaluation process to seek a 
rescission of the determination upon consummation of its transaction.
---------------------------------------------------------------------------

    \30\ In narrowing and clarifying its interpretation of ``nonbank 
financial company supervised by the Board of Governors,'' the 
Council is guided by general principles of corporate law under which 
an acquirer of another company's assets may be liable for 
obligations of the seller in certain situations, including if the 
purchaser is merely a continuation of the seller.
---------------------------------------------------------------------------

    Several commenters stated that the Council should add specificity 
regarding certain definitions in the Proposed Guidance, such as 
``impairment of financial intermediation or of financial market 
functioning,'' ``severe damage on the broader economy,'' ``overall 
stress in the financial services industry,'' and ``weak macroeconomic 
environment.'' The Council believes that these definitions accurately 
reflect the statutory requirements and the nature of the threat that 
the Council's authority under the Dodd-Frank Act seeks to mitigate. 
Attempting to define them with greater specificity could unacceptably 
limit the Council's discretion in a situation that is not precisely 
foreseeable.
    The Council received a number of comments regarding its analysis in 
the designation context. One commenter stated that the Council should 
defer to the nonbank financial company's primary regulator during the 
analysis, and another stated that the Council should provide a key role 
on the Council analytic team to staff of the primary regulator, and 
solicit input from industry and academic economists. The Council will 
consult with a company's primary financial regulatory agency (if any) 
when assessing a company for potential designation. A company under 
review in Stage 1 or Stage 2 may voluntarily submit to the Council any 
information it deems relevant to the Council's evaluation. In 
consideration of the benefits that the Council will derive from 
extensive engagement with a company's primary financial regulatory 
agency, the Council will actively solicit the regulator's views 
regarding risks at the company and potential means to mitigate those 
risks, and will share its preliminary views regarding potential risks 
at the company with the regulator. During the determination process, 
the Council will continue to encourage the regulator to address 
relevant risks using the regulator's existing authorities.
    Other commenters provided specific analytical recommendations to 
the Council, including that the Council should consider market risks in 
conjunction with the analysis of a nonbank financial company's 
liquidity risk; the Council should assess the ability of financial 
markets to absorb asset fire sales; and, when analyzing leverage, the 
Council should distinguish between long and short exposures. The 
Council has not revised the Final Guidance to address these comments 
but intends to consider such factors in its analyses as appropriate.
2. Transmission Channels
    The Final Guidance explains that the Council's evaluation of a 
nonbank financial company for a potential determination will focus 
primarily on how the negative effects of the company's material 
financial distress, or of the nature, scope, size, scale, 
concentration, interconnectedness, or mix of the company's activities, 
could be transmitted to or affect other firms or markets, thereby 
causing a broader impairment of financial intermediation or of 
financial market functioning. The Council has identified three 
transmission channels as most likely to facilitate the transmission of 
these negative effects. These transmission channels are: (1) The 
exposure transmission channel; (2) the asset liquidation transmission 
channel; and (3) the critical function or service transmission channel. 
While these transmission channels were also described in the 2012 
Interpretive Guidance, the Final Guidance substantially enhances and 
clarifies the Council's analyses under these three channels. The 
Council may also consider other relevant channels through which risks 
could be transmitted from a particular nonbank financial company and 
thereby pose a threat to U.S. financial stability.

a. Exposure Transmission Channel

    Under the exposure transmission channel, the Council will evaluate 
whether a nonbank financial company's creditors, counterparties, 
investors, or other market participants have direct or indirect 
exposure to the nonbank financial company that is significant enough to 
materially and adversely affect those or other creditors, 
counterparties, investors, or other market participants and thereby 
pose a threat to U.S. financial stability. Among

[[Page 71752]]

other factors, the Council expects to evaluate the amounts of 
exposures, the degree of protection for the counterparty under the 
terms of transactions, whether the largest counterparties include large 
financial institutions, and the company's leverage and size. The 
Council will also consider the exposures that counterparties and other 
market participants have to a nonbank financial company arising from 
the company's capital markets activities. The Council expects to 
consider a variety of factors in connection with this analysis, such as 
the amount and nature of, and counterparties to, the company's 
outstanding debt (regardless of term) and other liabilities, 
derivatives transactions (which may be measured on the basis of gross 
notional amount, net fair value, or potential future exposures), and 
securities financing transactions, among others. The Council will also 
consider applicable factors, including existing regulatory 
requirements, that may mitigate potential risks under the exposure 
transmission channel. The Final Guidance notes that the Council will 
consider the extent to which assets are managed rather than owned by 
the company, in recognition of the distinct nature of exposure risks 
when the company is acting as an agent rather than as principal. In 
particular, in the case of a nonbank financial company that manages 
assets on behalf of customers or other third parties, the third 
parties' direct financial exposures are often to the issuers of the 
managed assets, rather than to the nonbank financial company managing 
those assets. Finally, the Council will evaluate the potential for 
contagion in conjunction with other factors summarized above when 
evaluating risk under this channel. As part of this assessment, the 
Council will consider relevant industry-specific historical examples, 
the scope of the company's interconnectedness with large financial 
institutions, and market-based or regulatory factors that may mitigate 
the risk of contagion, among other factors.

b. Asset Liquidation Transmission Channel

    Under the asset liquidation transmission channel, the Council will 
consider whether a nonbank financial company holds assets that, if 
liquidated quickly, could pose a threat to U.S. financial stability by, 
for example, causing a fall in asset prices that significantly disrupts 
trading or funding in key markets or causes significant losses or 
funding problems for other firms with similar holdings. The Council may 
also consider whether a deterioration in asset pricing or market 
functioning could pressure other financial firms to sell their holdings 
of affected assets in order to maintain adequate capital and liquidity, 
which, in turn, could produce a cycle of asset sales that could lead to 
further market disruptions. The Council will also consider the extent 
to which assets are managed rather than owned by the company. The 
Council's analysis of the asset liquidation transmission channel will 
focus on three central factors: (1) Liquidity of the company's 
liabilities; (2) liquidity of the company's assets; and (3) potential 
fire sale impacts.
    When analyzing the liquidity of the company's liabilities, the 
Council will assess the company's liquidity risk by reviewing factors 
such as the company's short-term financial obligations, financial 
arrangements that can be terminated by counterparties and therefore 
become short-term, and long-term liabilities that may come due in a 
short-term period, among other factors. The Council will also evaluate 
the company's leverage (for example, by assessing total assets and 
total debt measured relative to total equity, and derivatives 
liabilities and off-balance sheet obligations relative to total 
equity), as well as the company's short-term debt ratio. When analyzing 
the liquidity of the company's assets, the Council will consider which 
assets the company could rapidly liquidate, if necessary, to satisfy 
its obligations. Finally, when analyzing potential fire sale impacts, 
the Council will consider the potential effects of the company's asset 
liquidation on markets and market participants.
c. Critical Function or Service Transmission Channel
    Finally, under the critical function or service transmission 
channel, the Council will consider the potential for a nonbank 
financial company to become unable or unwilling to provide a critical 
function or service that is relied upon by market participants and for 
which there are no ready substitutes and thereby pose a threat to U.S. 
financial stability. This analysis considers 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, a factor commonly known as 
``substitutability.'' 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. When evaluating this transmission channel, 
the Council may consider the nonbank financial company's activities and 
critical functions and the importance of those activities and functions 
to the U.S. financial system, including how those activities and 
functions would be performed by the company or other market 
participants in the event of the company's material financial distress; 
the competitive landscape for markets in which a nonbank financial 
company participates and for the services it provides; the company's 
market share in specific product lines; and the ability of substitutes 
to replace a service or function provided by the company, among other 
factors.
    The Council received a number of comments regarding the 
transmission channels. One commenter stated that the transmission 
channels should refer to existing regulations or policies that relate 
to financial stability. The Council is statutorily required to take 
into account the degree to which the nonbank financial company is 
already regulated by one or more primary financial regulatory agencies, 
and this analysis will focus on the extent to which existing regulation 
of the company mitigates the potential risks to financial stability 
identified by the Council.
    One commenter stated that in the asset liquidation transmission 
channel, the Council should establish a basis for concluding that a 
decline in asset prices, and resulting disruptions or losses, poses a 
threat to financial stability. The Final Guidance has been revised to 
clarify that, under the asset liquidation channel, the Council will 
consider whether a nonbank financial company holds assets that, if 
liquidated quickly, could pose a threat to U.S. financial stability by, 
for example, causing a fall in asset prices that significantly disrupts 
trading or funding in key markets or causes significant losses or 
funding problems for other firms with similar holdings. Commenters also 
stated that the Council should establish a basis for concluding that 
the risks identified under each transmission channel could pose a 
threat to financial stability, and should take into account mitigating 
factors. The Final Guidance has been revised to provide that the 
analysis under each transmission channel relates to the potential 
threat to U.S. financial stability, and that the Council will consider 
applicable factors that may mitigate potential threats under each 
transmission channel.
    Several commenters provided industry-specific comments with respect 
to the transmission channels.

[[Page 71753]]

One commenter stated that the Council should include examples of risk-
mitigating features of the insurance sector, such as recognizing 
insurance separate accounts, and mechanisms that mitigate potential 
fire sales of assets resulting from policyholder withdrawals or 
surrenders. The Final Guidance has been revised to make clear that the 
Council will consider applicable factors that may mitigate potential 
risks under the exposure transmission channel, such as the use of 
insurance funds to limit counterparty exposures or other transactions 
that reallocate risk to well-capitalized entities. Several commenters 
supported the statement in the Proposed Guidance that the Council will 
consider the extent to which assets are managed rather than owned by 
the company. Other comments highlighted factors that may limit 
potential risks to financial stability arising from asset managers. The 
Final Guidance has been revised to make clear that in its analyses 
under the transmission channels, the Council will consider applicable 
factors that may limit the transmission of risk, such as existing 
regulatory requirements, collateralization, bankruptcy-remote 
structures, or guarantee funds that reduce counterparties' exposures to 
the nonbank financial company or mitigate incentives for customers or 
counterparties to withdraw funding or assets. The Council's 
determination with respect to a nonbank financial company will be based 
on an evaluation of whether the nonbank financial company meets the 
statutory standards, taking into account the statutory considerations 
set forth in section 113 of the Dodd-Frank Act, and any other risk-
related factors that the Council deems appropriate. While the Council 
does not intend to provide industry-based exemptions from potential 
determinations under section 113 of the Dodd-Frank Act, the Council 
intends to give these types of mitigating factors due consideration in 
its analysis of any nonbank financial company for a potential 
determination.
3. Complexity, Opacity, and Resolvability
    In addition to the three transmission channels, the Final Guidance 
explains that the Council also intends to consider a nonbank financial 
company's complexity, opacity, and resolvability when evaluating 
whether the company poses a risk to U.S. financial stability. As part 
of this analysis, the Council may assess the complexity of the nonbank 
financial company's legal, funding, and operational structure, and any 
obstacles to the rapid and orderly resolution of the company. One 
commenter requested that the Final Guidance state that the Council 
expects to discuss these matters with the regulatory agency. The Final 
Guidance notes that the Council will consult with the relevant primary 
financial regulatory agency during both Stage 1 and Stage 2. When 
consulting with a company's primary financial regulatory agency (if 
any), the Council expects to discuss the company's complexity, opacity, 
and resolvability, as well as the likelihood of its material financial 
distress, taking into account a period of overall stress in the 
financial services industry and a weak macroeconomic environment 
(discussed in detail below).
4. Existing Regulatory Scrutiny
    Consistent with section 113 of the Dodd-Frank Act, the Final 
Guidance explains that the Council will consider the degree to which a 
nonbank financial company is already regulated by one or more primary 
financial regulatory agencies. When considering existing regulatory 
scrutiny, the Council may weigh factors such as the comprehensiveness 
of the regulatory regime, the extent to which the company's primary 
financial regulatory agency has imposed risk-management standards as 
relevant to the type of company, regulators' processes for inter-
regulator coordination, and the extent to which existing regulation of 
the company has mitigated the potential risks to financial stability 
identified by the Council.
5. Cost-Benefit Analysis and Likelihood of Material Financial Distress
a. Cost-Benefit Analysis
    Under the Final Guidance, the Council will perform a cost-benefit 
analysis before making any determination under section 113. The Council 
proposes to make a determination under section 113 only if the expected 
benefits justify the expected costs that the determination would 
impose.\31\ The key elements of regulatory analysis include (1) a 
statement of the need for the proposed action, (2) an examination of 
alternative approaches, and (3) an evaluation of the benefits and costs 
of the proposed action and the main alternatives.\32\ The Council will 
conduct this analysis only in cases where the Council is concluding 
that the company meets one of the standards for a determination by the 
Council under section 113 of the Dodd-Frank Act, because in other cases 
doing so would not affect the outcome of the Council's analysis.
---------------------------------------------------------------------------

    \31\ See MetLife, Inc. v. Financial Stability Oversight Council, 
177 F. Supp.3d 219, 242 (D.D.C. 2016) (quoting 12 U.S.C. 
5323(a)(2)(K) and Michigan v. Environmental Protection Agency, 135 
S. Ct. 2699, 2707 (2015)).
    \32\ See Office of Management and Budget Circular A-4 (Sept. 17, 
2003).
---------------------------------------------------------------------------

    The Council will consider the benefits of a determination to the 
U.S. financial system, long-term economic growth, and the nonbank 
financial company due to additional regulatory and supervisory 
requirements resulting from the determination, including the benefits 
of the prudential standards adopted by the Federal Reserve under 
section 165 of the Dodd-Frank Act. When evaluating potential benefits 
to the U.S. financial system and long-term economic growth arising from 
a determination, the Council may consider whether the determination 
enhances U.S. financial stability and mitigates the severity of 
economic downturns by reducing the likelihood or severity of a 
potential financial crisis, among other factors. With respect to 
company-specific benefits, a company subject to a determination may 
derive benefits from anticipated new or increased requirements, 
including, for example, a lower cost of capital or higher credit 
ratings upon meeting its post-designation regulatory and supervisory 
requirements.
    When evaluating the costs of a determination, the Council will 
consider not only the cost to the nonbank financial company from 
anticipated new or increased regulatory and supervisory requirements in 
connection with a determination, but also costs to the U.S. economy. 
Relevant costs to the company will likely include costs related to 
risk-management requirements, supervision and examination, and 
liquidity requirements. When evaluating the costs of a determination to 
the U.S. economy, the Council will assess the impact of the 
determination on the availability and cost of credit or financial 
products in relevant U.S. markets, among other factors.
    The majority of the commenters supported the proposal to perform a 
cost-benefit analysis before making any determination under section 
113. Several commenters provided recommendations regarding the 
Council's analysis, including that the Council's analysis should be 
empirically based or use historical data (not assumptions), with 
estimates of indirect costs. The Final Guidance has been revised to add 
greater specificity regarding the Council's cost-benefit analysis. The 
Final Guidance makes clear that when possible, the Council will 
quantify reasonably estimable benefits and costs, using ranges, as 
appropriate, and based on empirical

[[Page 71754]]

data when available. If such benefits or costs cannot be quantified in 
this manner, the Council will explain why such benefits or costs could 
not be quantified or estimated. The Council also expects to consider 
benefits and costs qualitatively. To the extent feasible, the Council 
will attempt to assess the relative importance of any such qualitative 
elements. At the same time, the Final Guidance recognizes that it may 
not be possible to assess with any degree of certainty certain 
potential benefits or costs, including indirect benefits or costs.
    One commenter stated that the Council should not designate a 
nonbank financial company unless the Council can demonstrate that 
designation would effectively mitigate the risk posed by the firm. 
Another stated that the Council should make clear that the Council will 
not designate a nonbank financial company unless designation mitigates 
the risk to financial stability better than available alternatives. The 
Council believes these concerns are adequately addressed by the 
activities-based approach, as well as the Council's approach to making 
a determination under section 113 only if the expected benefits justify 
the expected costs that the determination would impose.
    Several commenters stated that the Council should conduct its cost-
benefit analysis based on the specific regulations that would apply to 
a nonbank financial company if it were designated. The Council declines 
to incorporate this requirement into its cost-benefit analysis, because 
it is not logistically practicable for the Federal Reserve, which must 
establish such prudential standards by rule or order, to provide this 
information to the Council before the relevant company has been 
designated. Another commenter stated that the Council should apply a 
cost-benefit analysis to any additional regulation the Council 
considers. However, the Council itself does not adopt regulations 
applicable to designated nonbank financial companies.
    Several commenters opposed the proposal to perform a cost-benefit 
analysis before making determinations under section 113. Several 
commenters noted that the Dodd-Frank Act does not discuss a cost-
benefit analysis in connection with section 113. Two commenters stated 
that the costs that will apply to a particular firm will depend on the 
supervisory and regulatory regime the Federal Reserve establishes after 
the designation. One commenter stated that cost-benefit analysis is a 
burdensome, time-consuming, and imprecise methodology. One commenter 
stated that the costs and benefits of designation are difficult to 
predict in advance, in part because it is impossible to estimate the 
likelihood, magnitude, or timing of a future financial crisis. The 
Council believes that rigorous cost-benefit analysis is consistent with 
thoughtful decision-making, and that it is an important step to ensure 
that the Council makes a determination under section 113 only if the 
expected benefits justify the expected costs of the determination. 
Finally, two commenters stated that requiring cost-benefit analysis 
will make it easier for a designated company to litigate its 
designation. The Council will strive to perform analytically robust 
cost-benefit analysis in a timely manner.
b. Likelihood of Material Financial Distress
    Consistent with sound risk regulation, the Council will consider 
not only the impact of an identifiable risk, but also the likelihood 
that the risk will be realized. The Council will therefore assess the 
likelihood of a company's material financial distress, based on its 
vulnerability to a range of factors, when evaluating the overall impact 
of a Council determination for any company under review under the First 
Determination Standard. The description of the Council's analytical 
process for assessing the likelihood of a company's material financial 
distress has been revised based on public comments. The Final Guidance 
provides that factors the Council may consider include leverage (both 
on and off balance sheet), potential risks associated with asset 
reevaluations (whether such reevaluations arise from market disruptions 
or severe macroeconomic conditions), reliance on short-term funding or 
other fragile funding markets, maturity transformation, and risks from 
exposures to counterparties or other market participants. The Council's 
assessment may rely upon historical examples regarding the 
characteristics of financial companies that have experienced financial 
distress, but may also consider other risks that do not have historical 
precedent. The Council's analysis of the vulnerability of a nonbank 
financial company to material financial distress will be conducted 
taking into account a period of overall stress in the financial 
services industry and a weak macroeconomic environment.
    Several commenters supported the proposal that the Council will 
assess the likelihood of a company's material financial distress. One 
commenter stated that for any determination, the Council should be 
required to determine that distress is reasonably likely to occur and 
that the distress is reasonably likely to inflict severe damage on the 
economy as a whole, using empirical and historical data. The criterion 
is not included in the Final Guidance, because it would impose an 
unduly high burden on the Council's ability to designate a nonbank 
financial company.
    Several other commenters opposed the proposal that the Council will 
assess the likelihood of a company's material financial distress. Three 
commenters stated that the Dodd-Frank Act does not require that the 
Council assess the likelihood of a company's material financial 
distress. However, the Council believes that performing such a 
likelihood assessment is an important part of the Council's assessment 
of the extent to which a determination may promote U.S. financial 
stability. Several commenters stated that the Dodd-Frank Act requires 
the Council to assume the material financial distress of a nonbank 
financial company. One commenter stated that the Council has a duty to 
designate a nonbank financial company when the Council determines that 
the company could pose a risk to financial stability if it fails, and 
that the Council does not need to predict the probability of failure or 
the mechanism for that failure. The Council has authority under section 
113 of the Dodd-Frank Act, including under section 113(a)(2)(K), which 
authorizes the Council to consider ``any other risk-related factors 
that the Council deems appropriate,'' to consider the vulnerability of 
a nonbank financial company to material financial distress as part of 
the Council's analysis.
    Commenters opposed to the Council's assessment of the likelihood of 
material financial distress raised a number of other objections, 
including that this assessment will be a significant barrier to 
designation; no accurate metrics exist that would enable the Council to 
measure the likelihood of a company's material financial distress; and 
it is difficult to anticipate the catalyst, dynamics, or timing of a 
financial crisis. The Council believes that its analysis, including its 
consultations with a company's primary financial regulatory agency and 
its assessment of the statutory considerations, will enable the Council 
to evaluate the likelihood of the company's material financial 
distress. Several commenters also stated that the Council's 
determination regarding the likelihood of a company's material 
financial distress could publicly signal concern regarding a firm's 
health, which could harm the company. The Council believes that the 
marketplace will, in most cases, consider the same fundamental factors 
that the Council

[[Page 71755]]

evaluates for purposes of independently assessing the likelihood of 
material financial distress at a company that is being evaluated for a 
potential determination. Finally, several commenters argued that the 
Council should interpret section 113 of the Dodd-Frank Act in a manner 
that is consistent with MetLife v. FSOC,\33\ while several others 
argued it should not. Where appropriate, the Final Guidance reflects 
the Council's view regarding the extent to which it should adopt the 
analysis from that judicial decision.\34\
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    \33\ 177 F. Supp.3d 219 (D.D.C. 2016).
    \34\ The U.S. District Court for the District of Columbia in 
MetLife v. FSOC held that the Council had acted in an arbitrary and 
capricious manner. Specifically, the court stated that ``FSOC 
purposefully omitted any consideration of the cost of designation to 
MetLife. Thus, FSOC assumed the upside benefits of designation (even 
without specific standards from the Federal Reserve) but not the 
downside costs of its decision.'' 177 F.Supp.3d 219, 230. The Final 
Guidance seeks to ensure that future Council determinations comport 
with the court's decision and consider costs.
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D. Determination and Annual Reevaluation Process

    As noted above, the Council will prioritize an activities-based 
approach for identifying, assessing, and addressing potential risks to 
financial stability. The Council may, however, subject a nonbank 
financial company to review for an entity-specific determination under 
section 113 of the Dodd-Frank Act if the activities-based approach 
would not adequately address potential risks to U.S. financial 
stability.\35\ As noted above, the Final Guidance provides that the 
Council will vote to commence review of a nonbank financial company in 
Stage 1.
---------------------------------------------------------------------------

    \35\ As noted above, the Council anticipates it would consider a 
determination under section 113 only in rare instances, such as if 
the products, activities, or practices of a company that pose a 
potential threat to U.S. financial stability are outside the 
jurisdiction or authority of financial regulatory agencies.
---------------------------------------------------------------------------

    As proposed, the Final Guidance condenses the prior three-stage 
determination process into two stages by eliminating prior stage 1, 
makes other procedural improvements, and incorporates certain 
provisions of the 2015 Supplemental Procedures.\36\ Following is a 
description of the processes set forth in the Final Guidance for the 
Council's evaluation of a nonbank financial company for a potential 
determination under section 113 and the Council's annual reevaluations 
of any such determinations.
---------------------------------------------------------------------------

    \36\ As discussed in section II(A)(1) above, the Proposed 
Guidance eliminates the six-category framework described in the 2012 
Interpretive Guidance.
---------------------------------------------------------------------------

1. Stage 1: Preliminary Evaluation of Nonbank Financial Companies
    In the first stage of the determination process, the Council will 
notify nonbank financial companies identified as potentially posing 
risks to U.S. financial stability. Under the Final Guidance, the 
Council will engage extensively with the relevant company and its 
financial regulators during Stage 1. The Council's preliminary analysis 
will be based on quantitative and qualitative information available to 
the Council primarily through public and regulatory sources. In 
addition, a company under review in Stage 1 may voluntarily submit to 
the Council any information it deems relevant to the Council's 
evaluation and may, upon request, meet with staff of Council members 
and member agencies who are leading the Council's analysis. In order to 
reduce the burdens of review on the company, the Council will not 
require the company to submit information during Stage 1.
    In consideration of the benefits that the Council will derive from 
extensive engagement with a company's primary financial regulatory 
agency, the Council will actively solicit the regulator's views 
regarding risks at the company and potential means to mitigate those 
risks, and will share its preliminary views regarding potential risks 
at the company with the regulator. The Final Guidance notes that the 
Council will consult with the primary financial regulatory agency 
during both Stage 1 and Stage 2. Several commenters expressed support 
for this approach, and stated that engagement with primary regulators 
should be a key component of the determination process.
    Enhanced engagement in Stage 1 is intended to allow a company under 
review to provide the Council with relevant information, which will 
help to ensure that the Council is making decisions based on a diverse 
array of data and rigorous analysis, and to provide the company with 
greater visibility into the aspects of its business that may pose risks 
to U.S. financial stability. Another goal of the enhanced engagement in 
Stage 1 is to enable the company to take actions in response to the 
Council's concerns, thereby providing a pre-designation ``off-ramp,'' 
while not burdening a company with the relatively higher costs that may 
be incurred during a Stage 2 evaluation. By making a company aware of 
the potential risks the Council has identified during its preliminary 
review, the Council seeks to give the company more information and 
tools to mitigate those risks prior to any Council determination. One 
commenter recommended that the Final Guidance provide greater detail 
regarding the pre-designation ``off-ramp.'' The Final Guidance has been 
revised to clarify that the Council will seek to enable a company under 
review to understand the focus of the Council's analysis, which may 
enable the company to act to mitigate any threats to U.S. financial 
stability and thereby potentially avoid becoming subject to a Council 
determination. One commenter stated that the Council should undertake 
early engagement with firms during the designation process. The Council 
believes that its approach in Stage 1, as described above, addresses 
this comment.
    Following the preliminary evaluation in Stage 1, the Council may 
decide not to evaluate the company further, or it may vote to commence 
a more detailed analysis of the company by advancing it to Stage 2. One 
commenter recommended that if a Stage 1 review is terminated, there 
should be a waiting period before Stage 1 can be restarted. Because 
such a waiting period could prevent the Council from acting to address 
a potential threat to financial stability even if new developments or 
new information arose, this requested change has not been made.
    As noted above, the Final Guidance condenses the prior three-stage 
process for a determination under section 113 into two stages, by 
eliminating prior stage 1, which had been established by the 2012 
Interpretive Guidance. Under prior stage 1, a set of uniform 
quantitative metrics was applied to a broad group of nonbank financial 
companies in order to identify nonbank financial companies for further 
evaluation and to provide clarity for other nonbank financial companies 
that likely would not be subject to evaluation for a potential 
determination. Several commenters expressed views on the elimination of 
the stage 1 thresholds. Prior stage 1 had generated confusion among 
firms and members of the public and was not compatible with the 
prioritization of an activities-based approach, so it has been 
eliminated.
2. Transition From Stage 1 to Stage 2
    The Proposed Guidance did not specify whether a Council vote would 
be required to advance a nonbank financial company from Stage 1 to 
Stage 2. Based on public comments, the Final Guidance has been revised 
to specify that a Council vote is required to

[[Page 71756]]

advance a company to Stage 2.\37\ For any company under review in Stage 
1 that is regulated by a primary financial regulatory agency or home 
country supervisor, the Council will consult with the regulator, as 
appropriate, before the Council votes on whether to advance the company 
to Stage 2. One commenter stated that the primary regulator should have 
the primary role in advancing a firm from Stage 1 to Stage 2. As 
described above, the Final Guidance provides for extensive engagement 
between the Council and the primary financial regulatory agency during 
the determination process. The Council does not, however, believe it is 
appropriate to give the primary financial regulatory agency a specific 
additional role in advancing a firm from Stage 1 to Stage 2.
---------------------------------------------------------------------------

    \37\ Under the Dodd-Frank Act, unless otherwise specified in the 
statute, the Council must make all decisions that it is authorized 
or required to make by a majority vote of the voting members then 
serving. Dodd-Frank Act section 111(f), 12 U.S.C. 5321(f).
---------------------------------------------------------------------------

    One commenter requested that the Council clarify that there is no 
obligation to advance a nonbank financial company from Stage 1 to Stage 
2. The Council confirms that it will advance a nonbank financial 
company to Stage 2 only if the Council determines that the company 
merits further review after the analysis in Stage 1.\38\
---------------------------------------------------------------------------

    \38\ See also the chart of Council votes that would occur at 
significant transition points in the Council's analysis, in section 
II(A)(2) above.
---------------------------------------------------------------------------

3. Stage 2: In-Depth Evaluation
    In Stage 2, the Council will conduct an in-depth evaluation of any 
company that the Council has determined in Stage 1 merits additional 
review. Under the Final Guidance, the Council would continue in Stage 2 
to engage extensively with the relevant company and its existing 
regulators.
    In Stage 2, the Council will request that the company provide 
information that the Council deems relevant to its evaluation, which 
will involve both qualitative and quantitative data. The Council will 
take certain preliminary steps 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; 
acting through the OFR, the Council will coordinate with these agencies 
and, whenever possible, rely on information available from the OFR or 
these agencies.
    The Council will take steps to facilitate a transparent review 
process with the company during Stage 2. During Stage 2, the company 
may submit any other information that it deems relevant to the 
Council's evaluation, and the Council will make staff representing 
Council members available to meet with the representatives of the 
company, to explain the evaluation process and the framework for the 
Council's analysis. If the analysis in Stage 1 has identified specific 
aspects of the company's operations or activities as the primary focus 
for the evaluation, staff will notify the company of those issues. 
Several commenters stated that the Final Guidance should provide that 
Council members and their deputies are available to meet with nonbank 
financial companies in Stage 1 and Stage 2. The Final Guidance provides 
for the Council's Deputies Committee to meet with a company in Stage 2, 
to allow the company to present any information or arguments it deems 
relevant to the Council's evaluation. In addition, individual Council 
members may determine that it is appropriate to meet with a nonbank 
financial company under review, subject to the need to maintain a 
single administrative record and consistency in the information 
available to each of the Council members. In addition, the Council will 
seek to continue its consultation with the company's primary financial 
regulatory agency or home country supervisor in a timely manner before 
the Council makes any proposed or final determination, encouraging the 
relevant financial regulator to address relevant risks using the 
regulator's existing authorities. The Council will notify the company 
when the Council believes that the evidentiary record regarding the 
company is complete, before the Council either makes any proposed 
determination regarding the company, or alternatively, notifies the 
company that it is no longer being considered for a determination at 
that time.
    Several commenters provided recommendations regarding the 
transparency of the determination process and the Council's procedures 
for providing information to nonbank financial companies under review. 
Two commenters stated that the Council should not consider information 
from primary regulators that cannot, due to confidentiality 
requirements, also be provided to the nonbank financial company under 
review. The Council expects to rely on data, research, and analysis 
from Council member agencies and the OFR, among other sources, in the 
determination process. Certain of these materials may include internal 
work product and analysis that are not intended for external 
distribution. However, the Council expects that any information that 
the Council relies on to support a determination regarding a nonbank 
financial company under section 113 of the Dodd-Frank Act will be 
included in the Council's written explanation of the final 
determination, which will be provided to the company. Several other 
commenters stated that the Council should provide a nonbank financial 
company under evaluation with a written description of its potential 
threat to financial stability in Stage 1, or an explanation why an 
activities-based approach would not mitigate the potential threat. The 
Final Guidance provides that during Stage 1, the Council intends for 
staff of Council members and member agencies to explain to the company 
the key risks that have been identified in the analysis. However, 
because the review of the company is preliminary and continues to 
change until the Council makes a final determination, these identified 
risks may shift over time, so it is not practicable to provide a 
company with a written explanation of the potential threat to financial 
stability during Stage 1.
    Several commenters stated that the Council should share all Council 
information with a nonbank financial company under review during Stages 
1 and 2, including any cost-benefit analysis, expert, or regulatory 
analysis. Due to the preliminary nature of the Council's internal work 
product during Stages 1 and 2, sharing all of this information with the 
company under review would impose considerable burdens on the Council, 
while not necessarily providing the company with a clear understanding 
of the issues the Council is focusing on. Instead, the Final Guidance 
reflects numerous procedural improvements to the determination process 
compared to the 2012 Interpretive Guidance, which are intended to 
facilitate the Council's engagement and transparency. The Final 
Guidance increases the Council's engagement with nonbank financial 
companies and their regulators during the determination process, 
balanced with the Council's resources and need to perform the analysis 
in a timely manner.
    Several commenters stated that the Council should provide a nonbank 
financial company with a written explanation of the reasons for 
advancing it from Stage 1 to Stage 2, and an opportunity to respond, 
before advancing it to Stage 2. The process under the Final Guidance 
for Stage 1 and Stage 2 provides extensive opportunities for a company 
to submit information to the Council and to

[[Page 71757]]

discuss that information with staff of Council members and member 
agencies. In particular, the Final Guidance provides that if the 
Council's analysis in Stage 1 has identified specific aspects of the 
company's operations or activities as the primary focus for the 
evaluation, staff will notify the company of those issues, although the 
issues will be subject to change based on the ongoing analysis. 
Further, during Stage 2, a company may submit any information that it 
deems relevant to the Council's evaluation, and the Council will make 
staff representing Council members available to meet with the 
representatives of the company, to explain the evaluation process and 
the framework for the Council's analysis. The Final Guidance also 
provides for the Council's Deputies Committee to meet with a company in 
Stage 2, to allow the company to present any information or arguments 
it deems relevant to the Council's evaluation.
4. Proposed Determination; Hearing
    The procedural steps related to the Council's proposed 
determinations, hearings, and final determinations are largely 
specified in section 113 of the Dodd-Frank Act.
    A nonbank financial company may be considered for a proposed 
determination based on the analysis performed in Stage 2. In the event 
the Council votes to make a proposed determination, the Council will 
issue a written notice and explanation of the proposed determination to 
the company, and will also provide the company's primary financial 
regulatory agency or home country supervisor (subject to appropriate 
protections for confidential information) with the nonpublic written 
explanation of the basis for the proposed determination. In accordance 
with section 113(e) of the Dodd-Frank Act, a nonbank financial company 
that is subject to a proposed determination may request a nonpublic 
hearing before the Council to contest the proposed determination.
    Several commenters stated that the Council should provide the full 
evidentiary record to a nonbank financial company in Stage 2 at least 
30 days before a proposed determination, and give the company the 
opportunity to review and comment on the materials. The procedures 
under the Final Guidance provide extensive opportunities for engagement 
with companies under review, including during Stages 1 and 2 and after 
a proposed determination, so the Council is not adopting these 
recommended changes.
    Several commenters requested additional changes to the procedures 
for the Council's hearings for nonbank financial companies subject to 
proposed determinations. The Council's Hearing Procedures, which are 
not being amended at this time, provide for transparent engagement 
between the Council and nonbank financial companies. Further, under the 
Final Guidance, a company has extensive opportunities to submit 
information to the Council and meet with representatives of Council 
members and member agencies during the Council's review in Stage 2, 
which will precede any proposed determination or hearing. The Council 
is therefore not adopting further changes related to its hearings.
5. Final Determination
    After making a proposed determination and holding any requested 
written or oral hearing, the Council may make a final determination in 
accordance with the Dodd-Frank Act that the company will be subject to 
supervision by the Federal Reserve and prudential standards. If the 
Council makes a final determination regarding the company, the Council 
will provide the company with a written notice of the Council's final 
determination, including an explanation of the basis for the Council's 
decision, and will also provide the company's primary financial 
regulatory agency or home country supervisor with the nonpublic written 
explanation of the basis of the Council's final determination, subject 
to appropriate protections for confidential information. Under the 
Final Guidance, the Council expects that its explanation of the final 
basis for any determination will highlight the key risks that led to 
the determination and include clear guidance regarding the factors that 
were most important in the Council's determination.
    One commenter recommended that the Final Guidance state that the 
Council will assess all available alternatives before considering any 
nonbank financial company for potential determination. Two commenters 
stated that the Council should only designate a nonbank financial 
company with the consent of its primary regulator. Under the Final 
Guidance, Stage 2 will include numerous procedures to facilitate a 
robust and transparent review process with the company and its primary 
financial regulatory agency. For example, during Stage 2, the company 
may submit any information that it deems relevant to the Council's 
evaluation, and the Council will make staff representing Council 
members available to meet with the representatives of the company. In 
addition, the Council will seek to continue its consultation with the 
company's primary financial regulatory agency or home country 
supervisor in a timely manner before the Council makes any proposed or 
final determination, encouraging the relevant financial regulator to 
address relevant risks using the regulator's existing authorities. 
These procedures should ensure adequate engagement between the Council, 
the company under review, and its primary financial regulatory agency.
    Unchanged from the 2012 Interpretive Guidance, when practicable and 
consistent with the purposes of the determination process, the Council 
will provide a nonbank financial company with a notice of a final 
determination at least one business day before publicly announcing the 
determination. As a result, the Council generally will not issue any 
public notice regarding its determination vote on the day of the vote; 
instead, to enable the company adequately to prepare its public 
disclosures regarding the Council's determination, the first public 
announcement by the Council will generally be the day after the 
Council's vote. Although this approach will result in a short delay in 
the public announcement of a Council vote on a final determination, the 
benefit of enabling the company to prepare for the public announcement, 
and to review the Council's materials for confidential, sensitive 
business information before their public release, warrants the delay.
    Other commenters provided recommendations related to the procedural 
steps for a final determination. Several commenters stated that the 
Council should separate Council staff responsible for reviewing a 
nonbank financial company from those responsible for determining 
whether designation is warranted, and one commenter stated that the 
Council should allow companies to examine the Council staff who 
conducted the analysis. While staff of the Council members and member 
agencies analyze nonbank financial companies, the decision makers are 
the voting members of the Council, and the Council is not adopting 
these recommendations regarding its staffing structure. One commenter 
stated that the Council should allow firms to appeal their designation 
to an ``independent authority.'' The Dodd-Frank Act provides that any 
nonbank financial company subject to a final determination may 
challenge the Council's action in court, which

[[Page 71758]]

provides ample opportunity for an independent authority to review the 
determination.\39\ Two commenters stated that before making a final 
determination regarding a nonbank financial company, the Council should 
receive from the Federal Reserve a detailed, company-specific 
supervisory plan. One of these commenters stated that the Council 
should share the plan with the relevant nonbank financial company. This 
recommendation has not been incorporated into the Final Guidance 
because it is not logistically practicable for the Federal Reserve, 
which must establish such prudential standards by rule or order, to 
provide this information to the Council before the relevant company has 
been designated.
---------------------------------------------------------------------------

    \39\ Dodd-Frank Act section 113(h), 12 U.S.C. 5323(h).
---------------------------------------------------------------------------

    Several commenters expressed support for the greater analytical 
rigor and process improvements reflected in the Proposed Guidance. For 
example, the Council will provide each designated nonbank financial 
company with an opportunity for an oral hearing before the Council once 
every five years at which the company can contest the determination.
6. Annual Reevaluations of Nonbank Financial Company Determinations
    For any nonbank financial company that is subject to a final 
determination, the Council is required by statute to reevaluate the 
determination at least annually, and to rescind the determination if 
the Council determines that the company no longer meets the statutory 
standards for a determination. The Final Guidance incorporates a number 
of additional procedural steps, not mandated by the Dodd-Frank Act, for 
annual reevaluations, in order to enhance engagement with companies and 
their regulators, and to increase transparency. One of the goals of 
these changes is to clarify the post-designation ``off-ramp'' process 
for a company, which would enable the company to identify changes it 
could consider making to address the potential threat to financial 
stability identified by the Council, and receive feedback regarding 
whether those changes may address the Council's concerns. One commenter 
opposed to the off-ramp procedures stated that they would involve the 
Council in firms' business decisions, thereby increasing litigation 
risk. The Council intends that this process should be flexible and 
tailored to the risks posed by designated companies, rather than hard-
wired or overly prescriptive. The process is intended to incentivize 
designated companies to address the key factors that led to 
designation, which would promote the Council's goal of reducing risks 
to U.S. financial stability. The Council believes that this flexible 
approach will limit its involvement in a designated company's business 
decisions and allow the company, rather than the Council, to identify 
the most appropriate means to mitigate risks.
    The Final Guidance provides that in the event the Council makes a 
final determination regarding a company, the Council intends to 
encourage the company and, if appropriate, its regulators to take steps 
to mitigate the potential risks identified in the Council's written 
explanation of the basis for its final determination. Except in cases 
where new material risks arise over time, if a company adequately 
addresses the potential risks identified in writing by the Council at 
the time of the final determination and in subsequent reevaluations, 
the Council should generally be expected to rescind its determination 
regarding the company. To facilitate this process, companies are 
encouraged during annual reevaluations to submit information regarding 
any changes related to the company's risk profile that mitigate the 
potential risks identified in the Council's final determination of the 
company and in reevaluations of the determination. If the company 
explains in detail potential changes it could make to its business to 
address the potential risks previously identified by the Council, staff 
of Council members and Council member agencies will endeavor to provide 
their feedback on the extent to which those changes may address the 
potential risks. Consistent with public comments, the Final Guidance 
provides that if a company contests the Council's determination during 
the Council's annual reevaluation, the Council will provide the 
company, its primary financial regulatory agency, and the primary 
financial regulatory agency of its significant subsidiaries with a 
notice explaining the primary basis for any decision not to rescind the 
determination. The notice will address each of the material factors 
raised by the company in its submissions to the Council contesting the 
determination during the annual reevaluation.
    Several commenters expressed support for both the pre-designation 
and post-designation ``off-ramps''. One commenter also stated that the 
Council should de-designate firms if the benefits of designation are 
not outweighing costs, and another stated that the Council should have 
a streamlined process for doing so. The Council believes that the post-
designation off-ramp described above provides for a robust and 
streamlined review process. As part of its review of a designated 
company, the Council does not believe it is appropriate to perform 
another cost-benefit analysis, in addition to the cost-benefit analysis 
performed prior to the designation, in light of timing and resource 
constraints in the context of annual reevaluations of previous 
determinations.
    The Final Guidance also underscores that the Council applies the 
same standards of review in its annual reevaluations as the standard 
for an initial determination regarding a nonbank financial company: 
Either the company's material financial distress, or the nature, scope, 
size, scale, concentration, interconnectedness, or mix of the company's 
activities, could pose a threat to U.S. financial stability. If the 
Council determines that the company no longer meets those standards, 
the Council will rescind its determination. The Final Guidance also 
stresses that, while the Council's annual reevaluation of a company 
subject to a final determination will generally focus on changes since 
the Council's previous review, the ultimate question the Council will 
seek to assess is whether changes in the aggregate since the company's 
designation have caused the company to cease meeting the Determination 
Standards.\40\
---------------------------------------------------------------------------

    \40\ In a reevaluation of a determination, the Council may 
choose to consider only one Determination Standard, for example 
because changes that address the potential threats previously 
identified by the Council under one Determination Standard may also 
address potential threats relevant to the other Determination 
Standard.
---------------------------------------------------------------------------

    Several commenters stated that the Council should adopt a framework 
for evaluating the impact of its designations, and assess the 
effectiveness of designation regularly. For any nonbank financial 
company that is subject to a final determination, the Council is 
required by statute to reevaluate the determination at least annually, 
and to rescind the determination if the Council determines that the 
company no longer meets the statutory standards for a designation. The 
Final Guidance incorporates a number of additional procedural steps for 
annual reevaluations to enhance engagement with companies and their 
regulators, and to increase transparency. The measures should ensure 
that a nonbank financial company is designated, or remains designated, 
only if it meets the statutory standard for designation.

[[Page 71759]]

E. Other Comments Received

    Several commenters provided recommendations about international 
issues regarding the Proposed Guidance, including international 
regulatory coordination and the relationship between Council 
designations and the Financial Stability Board's (FSB's) identification 
of U.S. nonbank financial companies as global systemically important 
institutions. The Council supports the promotion of regulatory 
coordination at the international level, but is not expressing a view 
on its member agencies' roles in international discussions.
    Several commenters stated that the Council should commit in the 
Final Guidance to ensuring the confidentiality of all collected 
information. The Final Guidance notes that the Council is subject to 
statutory and regulatory requirements to maintain the confidentiality 
of certain information submitted to it by a nonbank financial company 
or its regulators.\41\ Under applicable law and the Council's rules, 
the Freedom of Information Act (FOIA) and the applicable exemptions 
thereunder apply to any data or information submitted under the rule. 
In addition, the Council's FOIA rule applies to data and information 
received by the Council.\42\ The Council expects that nonbank financial 
companies' submissions will likely contain or consist of ``trade 
secrets and commercial or financial information obtained from a person 
and privileged or confidential'' and information that is ``contained in 
or related to examination, operating, or condition reports prepared by, 
on behalf of, or for the use of an agency responsible for the 
regulation or supervision of financial institutions.'' These types of 
information are subject to withholding under exemptions 4 and 8 of the 
FOIA (5 U.S.C. 552(b)(4) and (8)). To the extent that nonbank financial 
companies' submissions contain or consist of data or information not 
subject to an applicable FOIA exemption, that data or information would 
be releasable under the FOIA.
---------------------------------------------------------------------------

    \41\ See Dodd-Frank Act section 112(d)(5), 12 U.S.C. 5322(d)(5); 
see also 2012 Final Rule and Interpretive Guidance at 21648-21649 
and 12 CFR 1310.20(e).
    \42\ See 12 CFR 1310.20(e)(3).
---------------------------------------------------------------------------

    In addition, it should be noted that all members of the Council, 
including both its voting and non-voting members, will treat records of 
the Council in accordance with the Council's FOIA rule. When the 
Council and its members provide non-public information to each other in 
connection with Council functions and activities, the recipients 
generally intend to treat such information as confidential and not 
publicly disclose such information without the consent of the providing 
party. However, such information may be used by the recipients for 
enforcement, examination, resolution planning, or other purposes, 
subject to any appropriate limitations on the disclosure of such 
information to third parties, taking into account factors including the 
need to preserve the integrity of the supervision and examination 
process. The Council believes that the additional confidentiality 
restrictions suggested by commenters generally would not materially 
increase the confidentiality of information collected by the Council, 
due to requirements under the FOIA, or would harmfully constrain the 
Council's ability to perform its evaluations of nonbank financial 
companies.
    Finally, other commenters raised various comments related to the 
operations of the Council. One commenter recommended that the Final 
Guidance should state that any departure from the Final Guidance should 
be treated as a modification that requires public comment (other than 
in emergency situations affecting a single company that require 
immediate action). The Council previously adopted a rule stating that 
it will not amend or rescind its interpretive guidance on nonbank 
financial company determinations without soliciting public notice and 
comment,\43\ which the Council believes addresses this concern.
---------------------------------------------------------------------------

    \43\ 84 FR 8958 (March 13, 2019).
---------------------------------------------------------------------------

III. Legal Authority of Council and Status of the Final Guidance

    The Council has numerous authorities and tools under the Dodd-Frank 
Act to carry out its statutory purposes.\44\ The Council expects that 
its response to any potential risk or threat to U.S. financial 
stability will be based on an assessment of the circumstances. As the 
agency charged by Congress with broad-ranging responsibilities under 
sections 112 and 113 of the Dodd-Frank Act, the Council has the 
inherent authority to promulgate interpretive guidance under those 
provisions that explains and interprets the statutory factors that the 
Council will consider when employing the activities-based approach and 
undertaking the determination process.\45\ The Council also has 
authority to issue procedural rules \46\ and policy statements.\47\ The 
Final Guidance describes the Council's interpretation of the statutory 
factors and provides transparency to the public as to how the Council 
intends to exercise its statutory grant of discretionary authority. 
Except to the extent that the Final Guidance sets forth rules of agency 
organization, procedure, or practice, the Council has concluded that 
the Final Guidance does not have binding effect; does not impose duties 
on, or alter the rights or interests of, any person; does not change 
the statutory standards for the Council's decision making; and does not 
relieve the Council of the need to make entity-specific determinations 
in accordance with section 113 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \44\ See, for example, Dodd-Frank Act sections 112(a)(2), 113, 
115, 120, 804, 12 U.S.C. 5322(a)(2), 5323, 5325, 5330, 5463.
    \45\ Courts have recognized that ``an agency charged with a duty 
to enforce or administer a statute has inherent authority to issue 
interpretive rules informing the public of the procedures and 
standards it intends to apply in exercising its discretion.'' See, 
for example, Production Tool v. Employment & Training 
Administration, 688 F.2d 1161, 1166 (7th Cir. 1982). The Supreme 
Court has acknowledged that ``whether or not they enjoy any express 
delegation of authority on a particular question, agencies charged 
with applying a statute necessarily make all sorts of interpretive 
choices.'' See U.S. v. Mead, 533 U.S. 218, 227 (2001).
    \46\ See Dodd-Frank Act section 111(e)(2), 12 U.S.C. 5321(e)(2).
    \47\ See Association of Flight Attendants-CWA, AFL-CIO v. 
Huerta, 785 F.3d 710 (D.C. Cir. 2015).
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    The collection of information contained in the Final Guidance has 
been reviewed and approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
under control 1505-0244. 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.
    The collection of information under the Final Guidance is found in 
12 CFR 1310.20-1310.23, which were added pursuant to the 2012 Final 
Rule and Interpretive Guidance.\48\
---------------------------------------------------------------------------

    \48\ See note 3 above.
---------------------------------------------------------------------------

    The hours and costs associated with preparing data, information, 
and reports for submission to the Council constitute reporting and cost 
burdens imposed by the collection of information. The estimated total 
annual reporting burden associated with the collection of information 
in the Final Guidance is 20 hours, based on an estimate of one 
respondent. We estimate the cost associated with this information 
collection to be $9,000. These estimates are significantly lower than 
those in the Paperwork Reduction Act discussion in the 2012 Final Rule 
and Interpretive Guidance, because the Council expects

[[Page 71760]]

that, notwithstanding any additional reporting burden that financial 
companies participating in the activities-based approach may incur, the 
aggregate reporting burden on companies will be significantly reduced 
as a result of the Council's proposal to pursue entity-specific 
determinations under section 113 of the Dodd-Frank Act only if a 
potential risk or threat cannot be adequately addressed through an 
activities-based approach.
    In making this estimate, the Council estimates that due to the 
nature of the information likely to be requested, approximately 75 
percent of the burden in hours will be carried by financial companies 
internally at an average cost of $400 per hour, and the remainder will 
be carried by outside professionals retained by financial companies at 
an average cost of $600 per hour. In addition, in determining these 
estimates, the Council considered its obligation under 12 CFR 
1310.20(b) to, whenever possible, rely on information available from 
the OFR or any Council member agency or primary financial regulatory 
agency that regulates a nonbank financial company before requiring the 
submission of reports from such nonbank financial company. The Council 
expects that its collection of information under the Final Guidance 
will be performed in a manner that attempts to minimize burdens for 
affected financial companies. The aggregate burden will be subject to 
the number of financial companies that participate in the activities-
based approach or are evaluated in the determination process, the 
extent of information regarding such companies that is available to the 
Council through existing public and regulatory sources, and the amount 
and types of information that financial companies provide to the 
Council. The Proposed Guidance requested comment on the estimates and 
other assumptions in the proposed collection of information, but no 
comments were received in response to the questions presented.

V. 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. The Office of Information and Regulatory Affairs within 
the Office of Management and Budget has designated this interpretive 
guidance as a ``significant regulatory action'' under section 3(f) of 
Executive Order 12866.

List of Subjects in 12 CFR Part 1310

    Brokers, Investments, Securities.

    The Financial Stability Oversight Council is amending 12 CFR part 
1310 as follows:

PART 1310--AUTHORITY TO REQUIRE SUPERVISION AND REGULATION OF 
CERTAIN NONBANK FINANCIAL COMPANIES

0
1. The authority citation for part 1310 continues to read as follows:

    Authority: 12 U.S.C. 5321; 12 U.S.C. 5322; 12 U.S.C. 5323.


0
2. Appendix A is revised to read as follows:

Appendix A 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'') \1\ 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 ``Federal Reserve'') 
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 Federal Reserve 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 Federal Reserve and subject to prudential 
standards if the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the activities of the nonbank 
financial company could pose a threat to U.S. financial stability. 
Section 113 of the Dodd-Frank Act also lists considerations that the 
Council must take into account in making a determination.
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    \1\ See Dodd-Frank Act section 113, 12 U.S.C. 5323.
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    Section II of this document describes the approach the Council 
intends to take in prioritizing its work to identify and address 
potential risks to U.S. financial stability using an activities-
based approach. This approach reflects the Council's priorities of 
identifying potential risks on a system-wide basis, reducing the 
potential for competitive distortions that could arise from entity-
specific determinations, and allowing relevant financial regulatory 
agencies \2\ to address identified potential risks. First, the 
Council will monitor markets to identify potential risks to U.S. 
financial stability and to assess those risks on a system-wide 
basis. Second, the Council will then work with relevant financial 
regulatory agencies to seek the implementation of actions intended 
to address identified potential risks to financial stability.
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    \2\ References in this appendix to ``relevant financial 
regulatory agencies'' may encompass a broader range of regulators 
than those included in the statutory definition of ``primary 
financial regulatory agency,'' which is defined in Dodd-Frank Act 
section 2(12), 12 U.S.C. 5301(12).
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    Section III of this appendix 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, if 
the Council determines that potential risks to U.S. financial 
stability are not adequately addressed through the activities-based 
approach. Section III defines key terms used in the statute, 
including ``threat to the financial stability of the United 
States.'' Section III also includes a detailed description of the 
analysis that the Council intends to conduct during its reviews, 
including a discussion of channels through which risks from a 
company may be transmitted to other companies or markets, and the 
Council's assessment of the likelihood of the company's material 
financial distress and the benefits and costs of a determination.
    Section IV of this appendix outlines a two-stage process that 
the Council will follow in non-emergency situations when determining 
whether to subject a nonbank financial company to Federal Reserve 
supervision and prudential standards. In the first stage of the 
process, the Council will notify the company and its primary 
financial regulatory agency and conduct a preliminary analysis to 
determine whether the company should be subject to further 
evaluation by the Council. During the second stage of the evaluation 
process, the Council will conduct an in-depth evaluation if it 
determines in the first stage that the nonbank financial company 
merits additional review.
    The Council's practices set forth in this guidance to address 
potential risks to U.S. financial stability are intended to comply 
with its statutory purposes: (1) To identify risks to U.S. financial 
stability 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; (2) 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 (3) to respond to emerging threats to the stability of the U.S. 
financial system.\3\ Council actions seek to foster transparency and 
to avoid competitive distortions in markets for financial services 
and products. Further, nonbank financial

[[Page 71761]]

companies should not benefit from an implicit federal financial 
safety net. Therefore, the Council emphasizes the importance of 
market discipline as a mechanism for addressing potential risks to 
U.S. financial stability posed by financial companies.
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    \3\ Dodd-Frank Act section 112(a)(1), 12 U.S.C. 5322(a)(1).
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    This interpretive guidance is not a binding rule, except to the 
extent that it sets forth rules of agency organization, procedure, 
or practice. This guidance is intended to assist financial companies 
and other market participants in understanding how the Council 
expects to exercise certain of its authorities under Title I of the 
Dodd-Frank Act. The Council retains discretion, subject to 
applicable statutory requirements, to consider factors relevant to 
the assessment of a potential risk or threat to U.S. financial 
stability on a case-by-case basis. If the Council were to depart 
from the interpretative guidance, it would need to provide a 
reasoned explanation for its action, which would ordinarily require 
acknowledging the change in position.\4\
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    \4\ See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 
(2009).
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II. Activities-Based Approach

    The Dodd-Frank Act gives the Council broad discretion in 
determining how to respond to potential threats to U.S. financial 
stability. A determination to subject a nonbank financial company to 
Federal Reserve supervision and prudential standards under section 
113 of the Dodd-Frank Act is only one of several Council authorities 
for responding to potential risks to U.S. financial stability.\5\ 
The Council will prioritize its efforts to identify, assess, and 
address potential risks and threats to U.S. financial stability 
through a process that begins with an activities-based approach, and 
will pursue entity-specific determinations under section 113 of the 
Dodd-Frank Act only if a potential risk or threat cannot be 
adequately addressed through an activities-based approach. The 
Council anticipates it would consider a nonbank financial company 
for a potential determination under section 113 only in rare 
instances, such as if the products, activities, or practices of a 
company that pose a potential threat to U.S. financial stability are 
outside the jurisdiction or authority of financial regulatory 
agencies. This approach reflects two priorities: (1) Identifying and 
addressing, in consultation with relevant financial regulatory 
agencies, potential risks and emerging threats on a system-wide 
basis and to reduce the potential for competitive distortions among 
financial companies and in markets that could arise from entity-
specific determinations, and (2) allowing relevant financial 
regulatory agencies, which generally possess greater information and 
expertise with respect to company, product, and market risks, to 
address potential risks, rather than subjecting the companies to new 
regulatory authorities.
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    \5\ For example, the Council has authority to make 
recommendations to the Federal Reserve concerning the establishment 
and refinement of prudential standards and reporting and disclosure 
requirements applicable to nonbank financial companies supervised by 
the Federal Reserve; make recommendations to primary financial 
regulatory agencies to apply new or heightened standards and 
safeguards for a financial activity or practice conducted by certain 
financial companies if the Council determines that such activity or 
practice could create or increase certain risks; and designate 
financial market utilities and payment, clearing, and settlement 
activities that the Council determines are, or are likely to become, 
systemically important. Dodd-Frank Act sections 115, 120, 804, 12 
U.S.C. 5325, 5330, 5463.
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    As part of its activities-based approach, the Council will 
examine a range of financial products, activities, or practices that 
could pose risks to U.S. financial stability. These types of 
activities are often identified in the Council's annual reports, 
such as activities related to (1) the extension of credit, (2) the 
use of leverage or short-term funding, (3) the provision of 
guarantees of financial performance, and (4) other key functions 
critical to support the functioning of financial markets. The 
Council considers a risk to financial stability to mean a risk of an 
event or development that could impair financial intermediation or 
financial market functioning to a degree that would be sufficient to 
inflict significant damage on the broader economy. The Council's 
activities-based approach is intended to identify and address risks 
to financial stability using a two-step approach, described below.

a. Step One of Activities-Based Approach: Identifying Potential 
Risks From Products, Activities, or Practices

Monitoring Markets

    The Council has a statutory duty to monitor the financial 
services marketplace in order to identify potential threats to U.S. 
financial stability.\6\ In the first step of the activities-based 
approach, to enable the Council to identify potential risks to U.S. 
financial stability, the Council, in consultation with relevant 
financial regulatory agencies, intends to monitor diverse financial 
markets and market developments to identify products, activities, or 
practices that could pose risks to U.S. financial stability. When 
monitoring potential risks to financial stability, the Council 
intends to consider the linkages across products, activities, and 
practices, and their interconnectedness across firms and markets.
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    \6\ Dodd-Frank Act section 112(a)(2), 12 U.S.C. 5322(a)(2).
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    For example, the Council's monitoring may include:
     Corporate and sovereign debt and loan markets;
     equity markets;
     markets for other financial products, including 
structured products and derivatives;
     short-term funding markets;
     payment, clearing, and settlement functions;
     new or evolving financial products, activities, and 
practices; and
     developments affecting the resiliency of financial 
market participants.
    To monitor markets and market developments, the Council will 
review information such as historical data, research regarding the 
behavior of financial market participants, and new developments that 
arise in evolving marketplaces. The Council will regularly rely on 
data, research, and analysis from Council member agencies, the 
Office of Financial Research, industry participants, and other 
public sources. Consistent with its statutory obligations, the 
Council will, whenever possible, rely on information available from 
primary financial regulatory agencies.\7\
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    \7\ Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
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Evaluating Potential Risks

    If the Council's monitoring of markets and market developments 
identifies a product, activity, or practice that could pose a 
potential risk to U.S. financial stability, the Council, in 
consultation with relevant financial regulatory agencies, will 
evaluate the potential risk to determine whether it merits further 
review or action. The Council's work in this step may include 
efforts such as sharing data, research, and analysis among Council 
members and member agencies and their staffs; consultations with 
regulators and other experts regarding the scope of potential risks 
and factors that may mitigate those risks; and the collaborative 
development of analyses for consideration by the Council. As part of 
this work, the Council may also engage with industry participants 
and other members of the public as it assesses potential risks.
    The Council will assess the extent to which characteristics such 
as the following could amplify potential risks to U.S. financial 
stability arising from products, activities, or practices:
     Asset valuation risk or credit risk;
     leverage, including leverage arising from debt, 
derivatives, off-balance sheet obligations, and other arrangements;
     liquidity risk or maturity mismatch, such as reliance 
on funding sources that could be susceptible to dislocations;
     counterparty risk and interconnectedness among 
financial market participants;
     the transparency of financial markets, such as growth 
in financial transactions occurring outside of regulated sectors;
     operational risks, such as cybersecurity and 
operational resilience; or
     the risk of destabilizing markets for particular types 
of financial instruments, such as trading practices that 
substantially increase volatility in key markets.
    Various factors may exacerbate or mitigate each of these types 
of risks. For example, activities may pose greater risks if they are 
complex or opaque, are conducted without effective risk-management 
practices, are significantly correlated with other financial 
products, and are either highly concentrated or significant and 
widespread. In contrast, regulatory requirements or market practices 
may mitigate risks by, for example, limiting exposures or leverage, 
enhancing risk-management practices, or restricting excessive risk-
taking.
    While the contours of the Council's initial evaluation of any 
potential risk will depend on the type and scope of analysis 
relevant to the particular risk, the Council's analyses will 
generally focus on four framing questions:

[[Page 71762]]

    1. How could the potential risk be triggered? For example, could 
it be triggered by sharp reductions in the valuation of particular 
classes of financial assets?
    2. How could the adverse effects of the potential risk be 
transmitted to financial markets or market participants? For 
example, what are the direct or indirect exposures in financial 
markets to the potential risk?
    3. What impact could the potential risk have on the financial 
system? For example, what could be the scale of its adverse effects 
on other companies and markets, and would its effects be 
concentrated or distributed broadly among market participants? This 
analysis should take into account factors such as existing 
regulatory requirements or market practices that mitigate potential 
risks.
    4. Could the adverse effects of the potential risk impair the 
financial system in a manner that could harm the non-financial 
sector of the U.S. economy?
    In this evaluation, the Council will consult with relevant 
financial regulatory agencies and will take into account existing 
laws and regulations that may mitigate a potential risk to U.S. 
financial stability. The Council will also take into account the 
risk profiles and business models of market participants engaging in 
the products, activities, or practices under evaluation, and 
consider available evidence regarding the potential risk. Empirical 
data may not be available regarding all potential risks, and the 
type and scope of the Council's analysis will be tailored to the 
potential risk under consideration.
    If a product, activity, or practice creating a potential risk to 
financial stability is identified, the Council will work with 
relevant financial regulatory agencies to address the identified 
risk, as described in section II.b of this appendix.

b. Step Two of Activities-Based Approach: Working With Regulators 
To Address Identified Risks

    If the Council identifies a potential risk to U.S. financial 
stability in step one of the activities-based approach, the Council 
will work with the relevant financial regulatory agencies at the 
federal and state levels to seek the implementation of appropriate 
actions to address the identified potential risk. The Council will 
coordinate among its members and member agencies and will follow up 
on supervisory or regulatory actions to ensure the potential risk is 
adequately addressed. The goal of this step would be for existing 
regulators to take appropriate action, such as modifying their 
regulation or supervision of companies or markets under their 
jurisdiction in order to mitigate potential risks to U.S. financial 
stability identified by the Council.\8\ If a potential risk 
identified by the Council relates to a product, activity, or 
practice arising at a limited number of individual financial 
companies, the Council nonetheless will prioritize a remedy that 
addresses the underlying risk across all companies that engage in 
the relevant activity. If the Council finds that a particular type 
of financial product could present risks to U.S. financial 
stability, there may be different approaches existing regulators 
could take, based on their authorities and the urgency of the risk, 
such as restricting or prohibiting the offering of that product, or 
requiring market participants to take additional risk-management 
steps that address the risks.
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    \8\ The Dodd-Frank Act provides that the Council's duties 
include to recommend to the member agencies general supervisory 
priorities and principles reflecting the outcome of discussions 
among the member agencies and to make recommendations to primary 
financial regulatory agencies to apply new or heightened standards 
and safeguards for financial activities or practices that could 
create or increase risks of significant liquidity, credit, or other 
problems spreading among bank holding companies, nonbank financial 
companies, and United States financial markets. Dodd-Frank Act 
sections 112(a)(2)(F), (K), 12 U.S.C. 5322(a)(2)(F), (K).
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    If, after engaging with relevant financial regulatory agencies, 
the Council believes those regulators' actions are inadequate to 
address the identified potential risk to U.S. financial stability, 
the Council has authority to make formal public recommendations to 
primary financial regulatory agencies under section 120 of the Dodd-
Frank Act. Under section 120, the Council may provide for more 
stringent regulation of a financial activity by issuing nonbinding 
recommendations, following consultation with the primary financial 
regulatory agency and public notice inviting comments on proposed 
recommendations, to the primary financial regulatory agency to apply 
new or heightened standards or safeguards for a financial activity 
or practice conducted by bank holding companies or nonbank financial 
companies under their jurisdiction.\9\ In addition, in any case in 
which no primary financial regulatory agency exists for the markets 
or companies conducting financial activities or practices identified 
by the Council as posing risks, the Council can consider reporting 
to Congress on recommendations for legislation that would prevent 
such activities or practices from threatening U.S. financial 
stability. The Council intends to make recommendations under section 
120 only to the extent that its recommendations are consistent with 
the statutory mandate of the primary financial regulatory agency to 
which the Council is making the recommendation.
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    \9\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
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    The authority to issue recommendations to primary financial 
regulatory agencies under section 120 is one of the Council's most 
formal tools for responding to potential risks to U.S. financial 
stability. The Council will make these recommendations only if it 
determines that the conduct, scope, nature, size, scale, 
concentration, or interconnectedness of the 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.
    In its recommendations under section 120, the Council may 
suggest broad approaches to address the risks it has identified. 
When appropriate, the Council may make a more specific 
recommendation. To promote analytical rigor and avoid duplication, 
before making any recommendation under section 120, the Council will 
ascertain whether the relevant primary financial regulatory agency 
would be expected to perform a cost-benefit analysis of the actions 
it would take in response to the Council's contemplated 
recommendation. In cases where the primary financial regulatory 
agency would not be expected to conduct such an analysis, the 
Council itself will--prior to making a final recommendation--conduct 
an analysis, using empirical data, to the extent available, of the 
benefits and costs of the actions that the primary financial 
regulatory agency would be expected to take in response to the 
contemplated recommendation. Where the Council conducts its own such 
analysis, the specificity of its assessment of benefits and costs 
would be commensurate with the specificity of the contemplated 
recommendation. Furthermore, where the Council conducts its own 
analysis, the Council will make a recommendation under section 120 
only if it believes that the results of its assessment of benefits 
and costs support the recommendation.
    Primary financial regulatory agencies have significant 
experience, knowledge, and expertise that can be useful in 
determining the most efficient way to address a particular risk 
within their regulatory jurisdiction. In every case, prior to 
issuing a recommendation under section 120, the Council will consult 
with the relevant primary financial regulatory agency and provide 
notice to the public and opportunity for comment as required by 
section 120.

III. Analytic Framework for Nonbank Financial Company Determinations

    If the Council's collaboration and engagement with the relevant 
financial regulatory agencies during the activities-based approach 
does not adequately address a potential threat identified by the 
Council--or if a potential threat to U.S. financial stability is 
outside the jurisdiction or authority of financial regulatory 
agencies--and if the potential threat identified by the Council is 
one that could be effectively addressed by a Council determination 
regarding one or more nonbank financial companies, the Council may 
evaluate one or more nonbank financial companies for an entity-
specific determination under section 113 of the Dodd-Frank Act, 
applying the analytic framework described below. This section 
describes the analysis the Council will conduct in general regarding 
individual nonbank financial companies that are considered for a 
potential determination, and section IV of this appendix describes 
the Council's process for those reviews.

a. Statutory Standards and Considerations

    The Council may determine, by a vote of not fewer than two-
thirds of the voting members of the Council then serving, including 
an affirmative vote by the Chairperson of the Council, that a 
nonbank financial company will be supervised by the Federal Reserve 
and be subject to prudential standards if the Council determines 
that (1) material financial distress at the nonbank

[[Page 71763]]

financial company could pose a threat to the financial stability of 
the United States (the ``First Determination Standard'') or (2) 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'').\10\ The analytic 
framework described below focuses primarily on the First 
Determination Standard because threats to financial stability (such 
as asset fire sales or financial market disruptions) are most 
commonly propagated through a nonbank financial company when it is 
in distress.
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    \10\ If the Council is unable to determine whether the financial 
activities of a U.S. nonbank financial company pose a threat to the 
financial stability of the United States based on certain 
information, the Council may request the Federal Reserve to conduct 
an examination of the U.S. nonbank financial company for the sole 
purpose of determining whether the company should be supervised by 
the Federal Reserve for purposes of Title I of the Dodd-Frank Act. 
Dodd-Frank Act section 112(d)(4), 12 U.S.C. 5322(d)(4).
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    Several relevant terms used in the Dodd-Frank Act are not 
defined in the statute. The Council intends to interpret the term 
``company'' to include any corporation, limited liability company, 
partnership, business trust, association, or similar 
organization.\11\ In addition, the Council intends to interpret 
``nonbank financial company supervised by the Board of Governors'' 
as including any nonbank financial company that acquires, directly 
or indirectly, a majority of the assets or liabilities of a company 
that is subject to a final determination of the Council.\12\ The 
Council intends to interpret the term ``material financial 
distress'' as a nonbank financial company being in imminent danger 
of insolvency or defaulting on its financial obligations. The 
Council intends to interpret the term ``threat to the financial 
stability of the United States'' as meaning the threat of an 
impairment of financial intermediation or of financial market 
functioning that would be sufficient to inflict severe damage on the 
broader economy. For purposes of considering whether a nonbank 
financial company could pose a threat to U.S. financial stability 
under either Determination Standard, the Council intends to assess 
the company in the context of a period of overall stress in the 
financial services industry and in a weak macroeconomic environment, 
with market developments such as increased counterparty defaults, 
decreased funding availability, and decreased asset prices. The 
Council believes this is appropriate because in such a context, the 
risks posed by a nonbank financial company may have a greater effect 
on U.S. financial stability.
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    \11\ The statutory definition of ``nonbank financial company'' 
excludes bank holding companies and certain other types of 
companies. Dodd-Frank Act section 102(a)(4), 12 U.S.C. 5311(a)(4).
    \12\ As a result, if a nonbank financial company subject to a 
final determination of the Council sells or otherwise transfers a 
majority of its assets or liabilities, the acquirer will succeed to, 
and become subject to, the Council's determination. As discussed in 
section V below, a nonbank financial company that is subject to a 
final determination of the Council may request a reevaluation of the 
determination before the next required annual reevaluation, in 
appropriate cases. Such an acquirer can use this reevaluation 
process to seek a rescission of the determination upon consummation 
of its transaction.
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    The Dodd-Frank Act requires the Council to consider 10 specific 
considerations when determining whether a nonbank financial company 
satisfies either of the Determination Standards. These statutory 
considerations help the Council to evaluate whether one of the 
Determination Standards has been met: \13\
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    \13\ Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2). 
This list of considerations is applicable to U.S. nonbank financial 
companies. With respect to foreign nonbank financial companies, the 
Council is required to take into account a similar list of 
considerations, in some cases limited to the companies' U.S. 
business or activities. See Dodd-Frank Act section 113(b)(2), 12 
U.S.C. 5323(b)(2).
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     The extent of the leverage of the company;
     the extent and nature of the off-balance-sheet 
exposures of the company;
     the extent and nature of the transactions and 
relationships of the company with other significant nonbank 
financial companies and significant bank holding companies;
     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;
     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;
     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;
     the nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the company;
     the degree to which the company is already regulated by 
one or more primary financial regulatory agencies;
     the amount and nature of the financial assets of the 
company; and
     the amount and types of the liabilities of the company, 
including the degree of reliance on short-term funding.
    The statute also requires the Council to take into account any 
other risk-related factors that the Council deems appropriate. Any 
determination by the Council will be made based on a company-
specific evaluation and an application of the standards and 
considerations set forth in section 113 of the Dodd-Frank Act, and 
taking into account qualitative and quantitative information the 
Council deems relevant to a particular nonbank financial company. 
The Council anticipates that the information relevant to an in-depth 
analysis of a nonbank financial company may vary based on the 
nonbank financial company's characteristics.
    The discussion below describes how the Council will apply the 
Determination Standards in its evaluation of a nonbank financial 
company, including how the Council will take into account the 
statutory considerations, and other risk-related factors that the 
Council will take into account. Due to the unique threat that each 
nonbank financial company could pose to U.S. financial stability and 
the nature of the inquiry required by the statutory considerations, 
the Council expects that its evaluations of nonbank financial 
companies will be firm-specific and may include quantitative and 
qualitative information that the Council deems relevant to a 
particular nonbank financial company. The transmission channels, 
sample metrics, and other factors set forth below are not exhaustive 
and may not apply to all nonbank financial companies under 
evaluation.

b. Transmission Channels

    The Council's evaluation of any nonbank financial company under 
section 113 of the Dodd-Frank Act will seek to determine whether a 
nonbank financial company meets one of the Determination Standards 
described above. In its analysis of a nonbank financial company, the 
Council will assess how the negative effects of the company's 
material financial distress, or of the nature, scope, size, scale, 
concentration, interconnectedness, or mix of the company's 
activities, could be transmitted to or affect other firms or 
markets, thereby causing a broader impairment of financial 
intermediation or of financial market functioning. Such a 
transmission of risk can occur through various mechanisms, or 
channels. The Council has identified three transmission channels as 
most likely to facilitate the transmission of the negative effects 
of a nonbank financial company's material financial distress, or of 
the nature, scope, size, scale, concentration, interconnectedness, 
or mix of the company's activities, to other financial firms and 
markets: Exposure; asset liquidation; and critical function or 
service. These three transmission channels are described below. The 
Council may also consider other relevant channels through which 
risks could be transmitted from a particular nonbank financial 
company and thereby pose a threat to U.S. financial stability. The 
Council will take into account the 10 statutory considerations and 
any other risk-related factors the Council deems appropriate as part 
of its evaluation of a nonbank financial company under the three 
transmission channels and the other factors described below. 
Further, in its analyses under the transmission channels, the 
Council will consider applicable factors that may limit the 
transmission of risk, such as existing regulatory requirements, 
collateralization, bankruptcy-remote structures, or guarantee funds 
that reduce counterparties' exposures to the nonbank financial 
company or mitigate incentives for customers or counterparties to 
withdraw funding or assets.

Exposure Transmission Channel

    Under this transmission channel, the Council will evaluate 
whether a nonbank financial company's creditors, counterparties, 
investors, or other market participants have direct or indirect 
exposure to the nonbank financial company that is significant enough 
to materially and adversely affect those or other creditors,

[[Page 71764]]

counterparties, investors, or other market participants and thereby 
pose a threat to U.S. financial stability.
    The Council expects that its analyses under the exposure 
transmission channel will generally include the factors described 
below. The potential threat to U.S. financial stability will 
generally be greater if the amounts of the exposures are larger; if 
the terms of the transactions provide less protection for the 
counterparty; and if the largest counterparties include large 
financial institutions.
    The Council also will consider a company's leverage and size. A 
company's leverage can amplify the risks posed by exposures, 
including off-balance sheet exposures, by reducing the company's 
ability to satisfy its obligations to creditors in the event of its 
material financial distress. Size is relevant to this analysis, as 
material financial distress at a larger nonbank financial company 
would generally transmit risk on a larger scale than distress at a 
smaller company. Size may be measured by the assets, liabilities, 
and capital of the firm.
    As required by statute, the Council will consider 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. The 
Council's analysis will recognize the distinct nature of exposure 
risks when the company is acting as an agent rather than as 
principal.\14\ In particular, in the case of a nonbank financial 
company that manages assets on behalf of customers or other third 
parties, the third parties' direct financial exposures are often to 
the issuers of the managed assets, rather than to the nonbank 
financial company managing those assets.
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    \14\ Dodd-Frank Act section 113(a)(2)(F), 12 U.S.C. 
5323(a)(2)(F).
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    The Council will consider the exposures that counterparties and 
other market participants have to a nonbank financial company 
arising from the company's capital markets activities. This 
assessment includes an evaluation of the company's relationships 
with other significant nonbank financial companies and significant 
bank holding companies. In most cases, the Council will consider 
factors such as the amount and nature of, and counterparties to, the 
company's:
     Outstanding debt (regardless of term) and other 
liabilities (such as guaranteed investment contracts issued by an 
insurance company or Federal Home Loan Bank loans).
     Derivatives transactions (which may be measured on the 
basis of gross notional amount, net fair value, or potential future 
exposures).
     Securities financing transactions (i.e., repurchase 
agreements and securities lending transactions).
     Lines of credit.
     Credit-default swaps outstanding for which the company 
or an affiliate is the reference entity (generally focusing on 
single-name credit-default swaps).
    Relevant metrics may include the 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. The 
potential risk arising under this transmission channel 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. Therefore, the Council 
will focus on exposures of large financial institutions to the 
nonbank financial company under review. This analysis will take into 
account both individual counterparty exposures as well as aggregate 
exposures of other financial institutions to the company under 
review. The amount and types of other exposures that counterparties 
and other market participants have to a nonbank financial company is 
highly dependent on the nature of the company's business. The 
Council's analysis will take these other fact-specific 
considerations into account.
    The Council also will consider applicable factors, including 
existing regulatory requirements, that may mitigate potential risks 
under the exposure transmission channel. For example, 
collateralization by high-quality, highly liquid securities, such as 
U.S. Treasury securities, the use of insurance funds to limit 
counterparty exposures, or other transactions that reallocate risk 
to well-capitalized entities, may reduce the potential for certain 
exposures to serve as a channel for the transmission of risk.
    Contagion. The negative effects of the material financial 
distress of a large, interconnected nonbank financial company are 
not necessarily limited to the amount of direct losses suffered by 
the firm's creditors, counterparties, investors, or other market 
participants. In general, the wider and more interconnected a 
company's network of financial counterparties, the greater the 
potential negative effect of the material financial distress of the 
company. Aggregate exposures to a nonbank financial company can 
create a potential threat to U.S. financial stability if they lead 
to contagion among financial institutions and financial markets more 
broadly. Contagion has the potential to spread distress quickly and 
seemingly unexpectedly. Such transmission is associated with opaque 
balance sheets, closely correlated markets, and coordination 
failures among investors. In such circumstances, fire sales by a 
highly leveraged and interconnected nonbank financial company may 
result in a loss of confidence in other financial companies that are 
perceived to have similar characteristics. The Council will seek 
evidence regarding the potential for contagion, including relevant 
industry-specific historical examples and the scope of the company's 
interconnectedness with large financial institutions, among other 
factors. Various market-based or regulatory factors can strongly 
mitigate the risk of contagion. Contagion should be viewed in 
conjunction with other factors described above when evaluating risk 
under the exposure transmission channel.

Asset Liquidation Transmission Channel

    Under this transmission channel, the Council will consider 
whether a nonbank financial company holds assets that, if liquidated 
quickly, could pose a threat to U.S. financial stability by, for 
example, causing a fall in asset prices that significantly disrupts 
trading or funding in key markets or causes significant losses or 
funding problems for other firms with similar holdings. This channel 
would likely be most relevant for a nonbank financial company that 
could be forced to liquidate assets quickly due to its funding and 
liquid asset profile. For example, this could be the case if a 
nonbank financial company relies heavily on short-term funding. The 
Council may also consider whether a deterioration in asset pricing 
or market functioning could pressure other financial firms to sell 
their holdings of affected assets in order to maintain adequate 
capital and liquidity, which, in turn, could produce a cycle of 
asset sales that could lead to further market disruptions. This 
analysis includes an assessment of any maturity mismatch at the 
company--the difference between the maturities of the company's 
assets and liabilities. A company's reliance on short-term funding 
to finance longer-term positions can subject the company to rollover 
or refinancing risk that may force it to sell assets rapidly at low 
market prices. The Council will also consider applicable factors 
that may mitigate potential risks under the asset liquidation 
transmission channel. As part of its analysis, the Council will 
consider the extent to which assets are managed rather than owned by 
the company.
    The Council's analyses of the asset liquidation transmission 
channel will focus on three central factors, described below.
    Liquidity of the company's liabilities. The first factor in the 
Council's assessment under this transmission channel is the amount 
and nature of the company's liabilities that are, or could become, 
short-term in nature. This analysis involves an assessment of the 
company's liquidity risk. Liquidity risk generally refers to the 
risk that a company may not have sufficient funding to satisfy its 
short-term needs. For example, relevant factors may include:
     The company's short-term financial obligations 
(including outstanding commercial paper).
     Financial arrangements that can be terminated by 
counterparties and therefore become short-term (including callable 
debt, derivatives, securities lending, repurchase agreements, and 
off-balance-sheet exposures).
     Long-term liabilities that may come due in a short-term 
period.
     Financial transactions that may require the company to 
provide additional margin or collateral to the counterparty.
     Products that allow customers rapidly to withdraw funds 
from the company.
     Liabilities related to other collateralized borrowings 
and deposits.
    The Council will quantitatively identify the scale of potential 
liquidity needs that could plausibly arise at the company. As part 
of this analysis, the Council will apply counterparty and customer 
withdrawal rates based on historical examples and other relevant 
models to assess the scope of

[[Page 71765]]

plausible withdrawals. In addition, any ability of the company or 
its financial regulators to impose stays on counterparty 
terminations or withdrawals is relevant, because it may reduce the 
company's liquidity needs in an event of material financial 
distress. The Council also will consider the company's internal 
estimates of potential liquidity needs in a context of material 
financial distress.
    The company's leverage and short-term debt ratios are relevant 
to this analysis, as high leverage and reliance on short-term 
funding can increase the potential for a company to be subject to 
sudden liquidity strains that force it rapidly to sell assets. 
Leverage can be measured by the ratio of assets to capital or 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. Comparisons of leverage to peer financial institutions can 
help indicate the level of risk at the company. Metrics that may be 
used to assess leverage include:
     Total assets and total debt measured relative to total 
equity, which measures financial leverage.
     Derivatives liabilities and off-balance sheet 
obligations relative to total equity, which may show how much off-
balance sheet leverage a nonbank financial company may have.
     Securities financing transactions and funding 
agreements that provide alternative sources of liquidity or 
operating income, which indicate the use of operating leverage.
     Changes in leverage ratios, which may indicate that a 
nonbank financial company is increasing or decreasing its risk 
profile.
    Liquidity of the company's assets. The second factor under the 
asset liquidation transmission channel is an analysis of the 
company's assets that the company could rapidly liquidate, if 
necessary, to satisfy its obligations. In particular, the Council 
expects that this assessment will focus on the size and liquidity 
characteristics of the company's investment portfolio. The Council 
will assess the company's assets, grouped into categories such as 
highly liquid (for example, cash, U.S. Treasury securities, and U.S. 
agency mortgage-backed securities) and less-liquid (for example, 
corporate bonds, non-agency mortgage-backed securities, and 
mortgages and other loans) to determine if it holds cash instruments 
or readily marketable securities that could reasonably be expected 
to have a liquid market in times of broader market stress. To the 
extent that the company's assets are encumbered, those assets would 
generally not be considered to be available to satisfy short-term 
obligations.
    Potential fire sale impacts. The third factor in the asset 
liquidation transmission channel analysis is the potential effects 
of the company's asset liquidation on markets and market 
participants. As described above, the Council will assess the scale 
of potential liquidity needs that could plausibly arise at the 
company and the amount and nature of financial assets the company 
could sell to satisfy its obligations. In this step of the asset 
liquidation transmission channel analysis, the Council will apply 
quantitative models to assess how the company could satisfy the 
identified range of potential liquidity needs by rapidly selling its 
identified liquid assets. To assess this factor, the Council will 
compare the volume of the company's potential liquidation of 
particular categories of financial instruments with the average 
daily trading volume in the United States of those types of 
instruments. In general, a rapid liquidation of a significant amount 
of relatively illiquid financial instruments, or instruments that 
are widely held by other market participants, will have a greater 
effect on the market than a liquidation of the same amount of highly 
liquid instruments or instruments that are not widely held. The 
Council may also conduct an analysis to assess the relative impact 
of negative shocks to the equity or assets of certain financial 
institutions on other financial institutions. The Council expects 
that its analysis will generally focus on potential asset 
liquidation periods of 30 to 90 days.
    The order in which a nonbank financial company may liquidate 
assets is a factor in the extent of any fire sale risk, but is 
subject to considerable uncertainties. A company could liquidate a 
significant portion of its highly liquid assets first, in order to 
reduce the likelihood that the company would be forced to liquidate 
illiquid assets in the event of its material financial distress. 
However, in the event of the company's material financial distress, 
a company may also be expected to seek to maintain compliance with 
any applicable risk-based capital ratios and other requirements. 
Doing so might require a company to sell a mix of assets across a 
number of asset classes, rather than proceed with the sale of assets 
in order from most liquid to least liquid. Further, in the event of 
a significant market disruption, there could be a meaningful first-
mover advantage to selling less-liquid assets first. For example, 
markets for less-liquid assets, such as private and public corporate 
bonds and asset-backed securities, could be prone to disruption in 
the event that a seller liquidated a large portion of its portfolio 
of those assets. Given these potential discounts, in some 
circumstances a company may be incentivized to sell a portion of its 
less-liquid assets first and to hold U.S. government securities and 
agency mortgage-backed securities, which tend to increase in value 
during a period of market turmoil. To the extent that a company's 
highly liquid assets are encumbered (for example, under securities 
financing transactions or as collateral for loans), the company 
would also need to sell less-liquid assets to satisfy its liquidity 
needs. Further, a company's holdings of liquid assets could be 
reduced before the company enters material financial distress. As a 
result, the Council may take into account company-specific factors 
in assessing the order in which the company might liquidate assets. 
One approach the Council may take is to assess the potential effects 
if the company sells pro rata portions of the more-liquid segments 
of its investment portfolio (such as cash and highly liquid 
instruments, U.S. agency securities, investment-grade public 
corporate debt securities, publicly traded equity securities, and 
asset backed-securities).

Critical Function or Service Transmission Channel

    Under this transmission channel, the Council will consider the 
potential for a nonbank financial company to become unable or 
unwilling to provide a critical function or service that is relied 
upon by market participants and for which there are no ready 
substitutes and thereby pose a threat to U.S. financial stability. 
This factor is commonly referred to as ``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. A risk under this 
transmission channel may be identified if a company provides a 
critical function or service that may not easily be substitutable. 
The Council's analysis will also consider applicable factors that 
may mitigate potential risks under the critical function or service 
transmission channel.
    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 the nonbank 
financial company's activities and critical functions and the 
importance of those activities and functions to the U.S. financial 
system and assess how those activities 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 will consider the 
substitutability of critical market functions that the company 
provides in the United States in the event of material financial 
distress of a foreign parent company.
    The analysis of this channel incorporates 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 ability of other firms to replace those 
services, and the nonbank financial company's market share. This 
analysis may focus on the company's market share in specific product 
lines and the ability of substitutes to replace a service or 
function provided by the company. The Council's evaluation of a 
nonbank financial company's market share regarding a particular 
product or service may include assessments of the ability of the 
nonbank financial company's competitors to expand to meet market 
needs during a period of overall stress in the financial services 
industry or in a weak macroeconomic environment; 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

[[Page 71766]]

functioning; and the economic implications of such a disruption.

c. Complexity and Resolvability

    The potential threat a nonbank financial company could pose to 
U.S. financial stability may be mitigated or aggravated by the 
company's complexity, opacity, or resolvability. In particular, a 
risk may be aggravated if a nonbank financial company's resolution 
under ordinary insolvency regimes could disrupt key markets or have 
a material adverse impact on other financial firms or markets. An 
evaluation of a nonbank financial company's complexity and 
resolvability entails an assessment of (1) the complexity of the 
nonbank financial company's legal, funding, and operational 
structure, and (2) any obstacles to the rapid and orderly resolution 
of the nonbank financial company:
     Legal structure factors may include the number of 
jurisdictions the company operates in, the number of subsidiaries, 
and the organizational structure.
     Funding structure factors may include the degree of 
interaffiliate dependency for liquidity and funding (such as 
intercompany loans or other affiliate support arrangements), payment 
operation (such as treasury operations), and risk-management.
     Operational structure factors may include the number of 
employees, the number of U.S. and non-U.S. locations, and the degree 
of inter-company dependency in regard to financial guarantees and 
support arrangements, the ability to separate functions and spin off 
services or business lines, the complexity and resiliency of 
intercompany and outsourced services and arrangements in resolution, 
and the likelihood of preserving franchise value in a recovery or 
resolution scenario.
     Cross-border operational factors may include size and 
complexity of the company's cross-border operations and impact of 
potential ring-fencing on an orderly resolution.
    Factors that would tend to increase the risk associated with a 
company's complexity and resolvability include large size or scope 
of activities; a complex legal or operational structure; multi-
jurisdictional operations and regulatory regimes; complex funding 
structures; the potential impact of a loss of key personnel; and 
shared services among affiliates. The opacity of a firm's 
structure--if the firm's structure and operations cannot readily or 
easily be determined--may present an obstacle to resolution.

d. Existing Regulatory Scrutiny

    As noted above, one of the considerations the Council is 
statutorily required to take into account in making a determination 
under section 113 of the Dodd-Frank Act is the degree to which the 
nonbank financial company is already regulated by one or more 
primary financial regulatory agencies.\15\ In its analysis of this 
statutory consideration, the Council will focus on the extent to 
which existing regulation of the company has mitigated the potential 
risks to financial stability identified by the Council. For example, 
factors that may be used to assess existing regulatory scrutiny 
include:
---------------------------------------------------------------------------

    \15\ Dodd-Frank Act section 113(a)(2)(H), 12 U.S.C. 
5323(a)(2)(H).
---------------------------------------------------------------------------

     The extent to which the company's primary financial 
regulator has imposed risk-management standards such as capital, 
liquidity, and reporting requirements, as relevant to the type of 
company, and has authority to supervise, examine, and bring 
enforcement actions, with respect to the company and its affiliates.
     Regulators' processes for inter-regulator coordination.
     For non-U.S. entities, the extent to which the company 
is supervised and subject to prudential standards on a consolidated 
basis in its home country that are administered and enforced by a 
comparable foreign supervisory authority.

e. Benefits and Costs of Determination; Likelihood of Material 
Financial Distress

    Determining whether the expected benefits of a potential Council 
determination justify the expected costs is necessary to ensure that 
the Council's actions are expected to provide a net benefit to U.S. 
financial stability and are consistent with thoughtful 
decisionmaking.\16\ Financial stability benefits may be difficult to 
quantify, and some of the costs may be difficult to forecast with 
precision. When possible, the Council will quantify reasonably 
estimable benefits and costs, using ranges, as appropriate, and 
based on empirical data when available. If such benefits or costs 
cannot be quantified in this manner, the Council will explain why 
such benefits or costs could not be quantified. The Council also 
expects to consider benefits and costs qualitatively.\17\ To the 
extent feasible, the Council will attempt to assess the relative 
importance of any such qualitative elements. The Council will make a 
determination under section 113 only if the expected benefits to 
financial stability from Federal Reserve supervision and prudential 
standards justify the expected costs that the determination would 
impose. As part of this analysis, the Council will assess the 
likelihood of a firm's material financial distress, in order to 
assess the extent to which a determination may promote U.S. 
financial stability.
---------------------------------------------------------------------------

    \16\ See MetLife, Inc. v. Financial Stability Oversight Council, 
177 F. Supp.3d 219, 242 (D.D.C. 2016) (quoting 12 U.S.C. 
5323(a)(2)(K) and Michigan v. Environmental Protection Agency, 135 
S. Ct. 2699, 2707 (2015)).
    \17\ The Council will also consider non-quantified benefits and 
costs. See Office of Management and Budget Circular A-4 (Sept. 17, 
2003), section (E) (Developing Benefit and Cost Estimates) (7).
---------------------------------------------------------------------------

    The key elements of regulatory analysis include (1) a statement 
of the need for the proposed action, (2) an examination of 
alternative approaches, and (3) an evaluation of the benefits and 
costs (quantitative and qualitative) of the proposed action and the 
main alternatives.\18\ The Council will conduct this analysis only 
in cases where the Council is concluding that the company meets one 
of the standards for a determination by the Council under section 
113 of the Dodd-Frank Act, because in other cases doing so would not 
affect the outcome of the Council's analysis.
---------------------------------------------------------------------------

    \18\ See Office of Management and Budget Circular A-4 (Sept. 17, 
2003).
---------------------------------------------------------------------------

    Benefits. With respect to the benefits of a Council 
determination, the Council will consider the benefits of the 
determination itself, both to (1) the U.S. financial system and 
long-term economic growth and (2) the nonbank financial company due 
to additional regulatory requirements resulting from the 
determination, particularly the prudential standards adopted by the 
Federal Reserve under section 165 of the Dodd-Frank Act.
    One of the Council's statutory purposes is to respond to 
emerging threats to the stability of the U.S. financial system.\19\ 
The primary intended benefit of a determination under section 113 of 
the Dodd-Frank Act is a reduction in the likelihood or severity of a 
financial crisis. Therefore, the Council will consider potential 
benefits to the U.S. financial system and the U.S. economy arising 
from a Council determination. To the extent that a Council 
determination reduces the likelihood or severity of a potential 
financial crisis, the determination could enhance financial 
stability and mitigate the severity of economic downturns. The 
Council may use various measures of systemic risk to assess any 
improvement in financial stability. Such measures include S-Risk 
(which attempts to quantify the amount of capital a financial firm 
would need to raise in order to function normally in the event of a 
severe financial crisis), conditional value at risk, and certain 
estimates of fire sale risk, among others. To assess the benefit to 
the U.S. financial system and the U.S. economy from a determination, 
the Council may also consider historical analogues to the nonbank 
under review. In addition, the Council may compare the risks to 
financial stability posed by a particular nonbank to the risks posed 
by large bank holding companies, in order to produce an assessment 
of the relative risks the company may pose. Further, the loss of any 
implicit ``too big to fail'' or similar subsidy would be considered 
a benefit to the economy, even if it increases the nonbank financial 
company's cost of capital.
---------------------------------------------------------------------------

    \19\ Dodd-Frank Act section 112(a)(1)(C), 12 U.S.C. 
5322(a)(1)(C).
---------------------------------------------------------------------------

    Analysis of the benefits of a determination for the relevant 
nonbank financial company may include those arising directly from 
the Council's determination as well as any benefits arising from 
anticipated new or increased requirements resulting from the 
determination, such as additional supervision and enhanced capital, 
liquidity, or risk-management requirements. For example, a nonbank 
financial company subject to a Council determination may benefit 
from a lower cost of capital or higher credit ratings upon meeting 
its post-determination regulatory requirements.
    Costs. With respect to the costs of a Council determination, the 
Council will consider the costs of the determination itself, both to 
(1) the nonbank financial company due to additional regulatory 
requirements resulting from the determination, including the costs 
of the prudential standards adopted by the Federal Reserve under 
section 165 of the Dodd Frank Act; and (2) the U.S. economy.

[[Page 71767]]

    The Council will consider costs to the company arising from 
anticipated new or increased regulatory requirements resulting from 
the determination related to:
     Risk-management requirements, such as the costs of 
capital planning and stress testing.
     Supervision and examination, such as compliance costs 
to the firm of additional examination and supervision.
     Increased capital requirements, after accounting for 
offsetting benefits to taxpayers and to the holders of the firm's 
other liabilities.
     Liquidity requirements, such as the opportunity cost 
from any requirement to hold additional high-quality liquid assets, 
relative to the company's current investment portfolio.
    Because the Federal Reserve is required to tailor prudential 
standards to a nonbank financial company subject to a Council 
determination after the Council has made a determination regarding 
the company, the new regulatory requirements that result from the 
Council's determination will not be known to the Council during its 
analysis of the company. In cases where the nonbank financial 
company under review primarily engages in bank-like activities, the 
Council may consider, as a proxy, the costs that would be imposed on 
the nonbank if the Federal Reserve imposed prudential standards 
similar to those imposed on bank holding companies with at least 
$250 billion in total consolidated assets under section 165 of the 
Dodd-Frank Act.\20\
---------------------------------------------------------------------------

    \20\ Dodd-Frank Act section 165, 12 U.S.C. 5365.
---------------------------------------------------------------------------

    The Council also will consider the cost of a determination under 
section 113 of the Dodd-Frank Act to the U.S. economy by assessing 
the impact of the determination on the availability and cost of 
credit or financial products in relevant U.S. markets. To the extent 
that the markets in which the relevant nonbank participates have low 
concentration, the impact that the determination regarding one firm 
would have on credit conditions would generally be immaterial. 
However, if the relevant markets are concentrated, a Council 
determination regarding a significant market participant could have 
a material impact on credit conditions in that market. As part of 
this analysis, the Council may also consider the extent to which any 
reduction in financial services provided by the nonbank financial 
company under review would be offset by other market participants.
    Likelihood of Material Financial Distress. As part of the 
assessment of the overall impact of a Council determination for any 
company under review under the First Determination Standard, the 
Council will assess the likelihood of the company's material 
financial distress based on its vulnerability to a range of factors. 
For example, these factors may include leverage (both on- and off-
balance sheet), potential risks associated with asset reevaluations 
(whether such reevaluations arise from market disruptions or severe 
macroeconomic conditions), reliance on short-term funding or other 
fragile funding markets, maturity transformation, and risks from 
exposures to counterparties or other market participants. This 
assessment may rely upon historical examples regarding the 
characteristics of financial companies that have experienced 
financial distress, but may also consider other risks that do not 
have historical precedent. The Council's analysis of the 
vulnerability of a nonbank financial company to material financial 
distress will be conducted taking into account a period of overall 
stress in the financial services industry and a weak macroeconomic 
environment. The Council may also consider the results of any stress 
tests that have previously been conducted by the company or by its 
primary financial regulatory agency.

IV. The Determination Process

    As described in section II above, the Council will prioritize an 
activities-based approach for identifying, assessing, and addressing 
potential risks to financial stability. However, if a potential risk 
or threat to U.S. financial stability cannot be adequately addressed 
through an activities-based approach, the Council may consider a 
nonbank financial company for a potential determination under 
section 113 of the Dodd-Frank Act. The Council anticipates it would 
consider a nonbank financial company for a potential determination 
under section 113 only in rare instances, such as if the products, 
activities, or practices of a company that pose a potential threat 
to U.S. financial stability are outside the jurisdiction or 
authority of financial regulatory agencies. The Council expects 
generally to follow a two-stage process of evaluation and analysis, 
as described below.
    In the first stage of the process (``Stage 1''), nonbank 
financial companies identified as potentially posing risks to U.S. 
financial stability will be notified and subject to a preliminary 
analysis, based on quantitative and qualitative information 
available to the Council primarily through public and regulatory 
sources. During Stage 1, the Council will permit, but not require, 
the company to submit relevant information. The Council will also 
consult with the primary financial regulatory agency or home country 
supervisor, as appropriate. This approach will enable the Council to 
fulfill its statutory obligation to rely whenever possible on 
information available through the Office of Financial Research (the 
``OFR''), Council member agencies, or the nonbank financial 
company's primary financial regulatory agencies before requiring the 
submission of reports from any nonbank financial company.\21\
---------------------------------------------------------------------------

    \21\ See Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
---------------------------------------------------------------------------

    Following Stage 1, nonbank financial companies that are selected 
for additional review will receive notice that they are being 
considered for a proposed determination that the company could pose 
a threat to U.S. financial stability (a ``Proposed Determination'') 
and will be subject to in-depth evaluation during the second stage 
of review (``Stage 2''). Stage 2 will involve the evaluation of 
additional information collected directly from the nonbank financial 
company. At the end of Stage 2, 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 Sec.  1310.21(c) of the 
Council's rule.\22\ After making a Proposed Determination and 
holding any written or oral hearing if requested, the Council may 
vote to make a final determination.
---------------------------------------------------------------------------

    \22\ See 12 CFR 1310.21(c).
---------------------------------------------------------------------------

a. Stage 1: Preliminary Evaluation of Nonbank Financial Companies

    Stage 1 involves a preliminary analysis of nonbank financial 
companies to assess the risks they could pose to U.S. financial 
stability.

Identification of Company for Review in Stage 1

    If, as described in section II, the Council's consultation with 
and any recommendations to a nonbank financial company's primary 
financial regulatory agency do not adequately address a potential 
risk identified by the Council, the Council may evaluate one or more 
individual nonbank financial companies for an entity-specific 
determination under section 113 of the Dodd-Frank Act. The Council 
will vote to commence review of a nonbank financial company in Stage 
1. When evaluating the potential risks associated with a nonbank 
financial company, the Council may consider the company and its 
subsidiaries together. This approach enables the Council to consider 
potential risks arising across the consolidated organization, while 
retaining the ability to make a determination regarding either the 
parent or any individual nonbank financial company subsidiary (or 
neither), depending on which entity the Council determines could 
pose a threat to financial stability.

Engagement With Company and Regulators in Stage 1

    The Council will provide a notice to any nonbank financial 
company under review in Stage 1. In Stage 1, the Council will 
consider available public and regulatory information; in addition, a 
company under review in Stage 1 may submit to the Council any 
information it deems relevant to the Council's evaluation and may, 
upon request, meet with staff of Council members and member agencies 
who are leading the Council's analysis. In order to reduce the 
burdens of review on the company, the Council will not require the 
company to submit information during Stage 1. In addition, staff 
representing Council members will, upon request, provide the company 
with a list of the primary public sources of information being 
considered during the Stage 1 analysis, so that the company has an 
opportunity to understand the information the Council may rely upon 
during Stage 1. Through this engagement, the Council will seek to 
enable the company under review to understand the focus of the 
Council's analysis, which may enable the company to act to mitigate 
any risks to financial stability and thereby potentially avoid 
becoming subject to a Council determination.

[[Page 71768]]

    During the discussions in Stage 1 with the company, the Council 
intends for staff of Council members and member agencies to explain 
to the company the key risks that have been identified in the 
analysis. Because the review of the company is preliminary and 
continues to change until the Council makes a final determination, 
these identified risks may shift over time.
    The Council will also consider in Stage 1 information available 
from relevant existing regulators of the company. Under the Dodd-
Frank Act, the Council is required to consult with the primary 
financial regulatory agency, if any, for each nonbank financial 
company or subsidiary of a nonbank financial company that is being 
considered for a determination before the Council makes any final 
determination with respect to such company.\23\ For any company 
under review in Stage 1 that is regulated by a primary financial 
regulatory agency or home country supervisor, the Council will 
notify the regulator or supervisor that the company is under review 
no later than such time as the company is notified. As part of that 
consultation process, the Council will consult with the primary 
financial regulatory agency, if any, of each significant subsidiary 
of the nonbank financial company, to the extent the Council deems 
appropriate in Stage 1. The Council will actively solicit the 
regulator's views regarding risks at the company and potential 
mitigants. In order to enable the regulator to provide relevant 
information, the Council will share its preliminary views regarding 
potential risks at the company, and request that the regulator 
provide information regarding those specific risks, including 
whether the risks are adequately mitigated by factors such as 
existing regulation or the company's business practices. During the 
determination process, the Council will continue to encourage the 
regulator to address any risks to U.S. financial stability using the 
regulator's existing authorities; if the Council believes the 
regulator's actions adequately address the potential risks to U.S. 
financial stability the Council has identified, the Council may 
discontinue its consideration of the firm for a potential 
determination under section 113 of the Dodd-Frank Act.
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    \23\ Dodd-Frank Act section 113(g), 12 U.S.C. 5323(g).
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    Based on the preliminary evaluation in Stage 1, the Council may 
vote to commence a more detailed analysis of the company by 
advancing the company to Stage 2, or it may decide not to evaluate 
the company further. If the Council determines not to advance a 
company that has been reviewed in Stage 1 to Stage 2, the Council 
will notify the company in writing of the Council's decision. The 
notice will clarify that a decision not to advance the company from 
Stage 1 to Stage 2 at that time does not preclude the Council from 
reinitiating review of the company in Stage 1. For example, the 
Council may reinitiate review of the company if material changes 
affecting the firm merit further evaluation.

b. Stage 2: In-Depth Evaluation

    Stage 2 involves an in-depth evaluation of any company that the 
Council has determined merits additional review.
    In Stage 2, the Council will review the relevant company using 
information collected directly from the nonbank financial company, 
through the OFR, as well as public and regulatory information. 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 activities of the 
company. The Council expects that the transmission channels and the 
other factors described above will be used to evaluate a nonbank 
financial company's potential to pose a threat to U.S. financial 
stability.

Engagement With Company and Regulators in Stage 2

    Each nonbank financial company to be evaluated in Stage 2 will 
receive a notice (a ``Notice of Consideration'') that the nonbank 
financial company is under consideration for a Proposed 
Determination. The Council also will submit to the company a request 
that the 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.\24\ This information will generally be collected by the 
OFR. 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. Council members and their agencies and staffs will 
maintain the confidentiality of such information in accordance with 
applicable law. During Stage 2, the company may also submit any 
other information that it deems relevant to the Council's 
evaluation. Information considered by the Council includes details 
regarding the company's financial activities, legal structure, 
liabilities, counterparty exposures, resolvability, and existing 
regulatory oversight.
---------------------------------------------------------------------------

    \24\ See 12 CFR 1310.21(a).
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    Information requests likely will involve both qualitative and 
quantitative data. Information relevant to the Council's analysis 
may include confidential business information such as detailed 
information regarding financial assets, terms of funding 
arrangements, counterparty exposure or position data, strategic 
plans, and interaffiliate transactions.
    The Council will make staff representing Council members 
available to meet with the representatives of any company that 
enters Stage 2, to explain the evaluation process and the framework 
for the Council's analysis. If the analysis in Stage 1 has 
identified specific aspects of the company's operations or 
activities as the primary focus for the evaluation, staff will 
notify the company of those issues, although the issues will be 
subject to change based on the ongoing analysis. In addition, the 
Council expects that its Deputies Committee \25\ will grant a 
request to meet with a company in Stage 2 to allow the company to 
present any information or arguments it deems relevant to the 
Council's evaluation.
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    \25\ The Council's Deputies Committee is composed of senior 
officials from each Council member and member agency. It coordinates 
and oversees the work of the Council's other interagency staff 
committees.
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    During Stage 2 the Council will also seek to continue its 
consultation with the company's primary financial regulatory agency 
or home country supervisor in a timely manner before the Council 
makes any proposed or final determination with respect to such 
nonbank financial company. The Council will continue to encourage 
the regulator during the determination process to address any risks 
to U.S. financial stability using the regulator's existing 
authorities; as noted above, if the Council believes the regulator's 
actions adequately address the potential risks to U.S. financial 
stability the Council has identified, the Council may discontinue 
its consideration of the firm for a potential determination under 
section 113 of the Dodd-Frank Act.
    Before making a Proposed Determination regarding a nonbank 
financial company, the Council will notify the company when the 
Council believes that the evidentiary record regarding such nonbank 
financial company is complete. The Council will notify any nonbank 
financial company in Stage 2 if the nonbank financial company ceases 
to be considered for a determination. Any nonbank financial company 
that ceases to be considered at any time in the Council's 
determination process may be considered for a Proposed Determination 
in the future at the Council's discretion, consistent with the 
processes described above.

c. Proposed and Final Determination

Proposed Determination

    Based on the analysis performed in Stage 2, a nonbank financial 
company may be considered for a Proposed Determination. A proposed 
determination requires a vote of two-thirds of the voting members of 
the Council then serving, including an affirmative vote by the 
Chairperson of the Council.\26\ Following a Proposed Determination, 
the Council will 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.\27\ 
Promptly after the Council votes to make a proposed determination 
regarding a company, the Council will provide the company's primary 
financial regulatory agency or home country supervisor (subject to 
appropriate protections for confidential information) with the 
nonpublic written explanation of the basis of the Council's proposed 
or final determination. The Council also will publish the 
explanation of the basis of the Proposed Determination, subject to 
redactions to

[[Page 71769]]

protect confidential information from the company or its regulators.
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    \26\ 12 CFR 1310.10(b).
    \27\ Dodd-Frank Act section 113(e)(1), 12 U.S.C. 5323(e)(1).
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Hearing

    A nonbank financial company that is subject to a Proposed 
Determination may request a nonpublic 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 Sec.  1310.21(c) of 
the Council's rule,\28\ the Council will set a time and place for 
such hearing. The Council has published hearing procedures on its 
website.\29\ In light of the short statutory timeframe for 
conducting a hearing, and the fact that the purpose of the hearing 
is to benefit the company, if a company requests that the Council 
waive the statutory deadline for conducting the hearing, the Council 
may do so in appropriate circumstances.
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    \28\ See 12 CFR 1310.21(c).
    \29\ Financial Stability Oversight Council Hearing Procedures 
for Proceedings Under Title I or Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, available at https://www.treasury.gov/initiatives/fsoc/designations/Pages/Hearing-Procedures.aspx.
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Final Determination

    After making a Proposed Determination and holding any requested 
written or oral hearing, the Council may, by a vote of not fewer 
than two-thirds of the voting members of the Council then serving 
(including an affirmative vote by the Chairperson of the Council), 
make a final determination that the company will be subject to 
supervision by the Federal Reserve and prudential standards. If the 
Council makes a final determination, it will provide the company 
with a written notice of the Council's final determination, 
including an explanation of the basis for the Council's 
decision.\30\ The Council will also provide the company's primary 
financial regulatory agency or home country supervisor (subject to 
appropriate protections for confidential information) with the 
nonpublic written explanation of the basis of the Council's final 
determination. The Council expects that its explanation of the final 
basis for any determination will highlight the key risks that led to 
the determination and include clear guidance regarding the factors 
that were most important in the Council's determination. When 
practicable and consistent with the purposes of the determination 
process, the Council will provide a nonbank financial company with a 
notice of a final determination at least one business day before 
publicly announcing the determination pursuant to Sec.  
1310.21(d)(3), Sec.  1310.21(e)(3), or Sec.  1310.22(d)(3) of the 
Council's rule.\31\ 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.
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    \30\ Dodd-Frank Act section 113(e)(3), 12 U.S.C. 5323(e)(3); see 
also 12 CFR 1310.21(d)(2) and (e)(2).
    \31\ See 12 CFR 1310.21(d)(3) and (e)(3) and 1310.22(d)(3).
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    The Council does not intend to publicly announce the name of any 
nonbank financial company that is under evaluation prior to a final 
determination with respect to such company. However, if a company 
that is under review in Stage 1 or Stage 2 publicly announces the 
status of its review by the Council, the Council intends, upon the 
request of a third party, to confirm the status of the company's 
review. In addition, the Council will publicly release the 
explanation of the Council's basis for any nonbank financial company 
determination or rescission of a determination. The Council is 
subject to statutory and regulatory requirements to maintain the 
confidentiality of certain information submitted to it by a nonbank 
financial company or its regulators.\32\ In light of these 
confidentiality obligations, such confidential information will be 
redacted from the materials that the Council makes publicly 
available.
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    \32\ See Dodd-Frank Act section 112(d)(5), 12 U.S.C. 5322(d)(5); 
see also 12 CFR 1310.20(e).
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V. Annual Reevaluations of Nonbank Financial Company Determinations

    After the Council makes a final determination regarding a 
company, the Council intends to encourage the company or its 
regulators to take steps to mitigate the potential risks identified 
in the Council's written explanation of the basis for its final 
determination. Except in cases where new material risks arise over 
time, if a company adequately addresses the potential risks 
identified in writing by the Council at the time of the final 
determination and in subsequent reevaluations, the Council should 
generally be expected to rescind its determination regarding the 
company.
    For any nonbank financial company that is subject to a final 
determination, the Council is required to reevaluate the 
determination at least annually, and to rescind the determination if 
the Council determines that the company no longer meets the 
statutory standards for a determination. The Council may also 
consider a request from a company for a reevaluation before the next 
required annual reevaluation, in the case of an extraordinary change 
that materially decreases the threat the nonbank financial company 
could pose to U.S. financial stability.\33\
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    \33\ See note 12 above.
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    The Council applies the same standards of review in its annual 
reevaluations as the standard for an initial determination regarding 
a nonbank financial company: Either the company's material financial 
distress, or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the company's activities, could pose a 
threat to U.S. financial stability. If the Council determines that 
the company no longer meets those standards, the Council will 
rescind its determination.
    The Council's annual reevaluations generally assess whether any 
material changes since the previous reevaluation and since the 
determination justify a rescission of the determination, based on 
the same transmission channels and other factors that are considered 
during a determination decision. The Council expects that its 
reevaluation process will focus on whether any material changes--
including changes at the company, changes in its markets or its 
regulation, changes in the Council's own analysis, or otherwise--
result in the company no longer meeting the standard for a 
determination. In light of the frequent reevaluations, the Council's 
analyses will generally focus on changes since the Council's 
previous review, but the ultimate question the Council will seek to 
assess is whether changes in the aggregate since the Council's 
determination regarding the company have caused the company to cease 
meeting the Determination Standards. The Council expects that its 
analysis in its annual reevaluations will generally be organized 
around the three transmission channels described above as well as 
existing regulatory scrutiny and the company's complexity and 
resolvability.
    Before the Council's annual reevaluation of a determination 
regarding a nonbank financial company, the Council will provide the 
company with an opportunity to meet with staff of Council members 
and member agencies to discuss the scope and process for the review 
and to present information regarding any change that may be relevant 
to the threat the company could pose to financial stability. Staff 
of Council members and member agencies will also be available to 
meet with the company during the annual reevaluation, at the 
company's request. In addition, during an annual reevaluation, a 
company may submit any written information to the Council the 
company considers relevant to the Council's analysis. During annual 
reevaluations, companies are encouraged to submit information 
regarding any changes related to the company's risk profile that 
mitigate the potential risks previously identified by the Council. 
Such changes could include updates regarding company restructurings, 
regulatory developments, market changes, or other factors. If the 
company has taken steps to address the potential risks previously 
identified by the Council, the Council will assess whether those 
risks have been adequately mitigated to merit a rescission of the 
determination regarding the company. If the company explains in 
detail potential changes it could make to its business to address 
the potential risks previously identified by the Council, staff of 
Council members and member agencies will endeavor to provide their 
feedback on the extent to which those changes may address the 
potential risks.
    If a company contests the Council's determination during the 
Council's annual reevaluation, the Council will vote on whether to 
rescind the determination and provide the company, its primary 
financial regulatory agency, and the primary financial regulatory 
agency of its significant subsidiaries with a notice explaining the 
primary basis for any decision not to rescind the determination. If 
the Council does not rescind the determination, the written notice 
provided to the company will address each of the material factors 
raised by the company in its submissions to the Council contesting 
the determination during the annual reevaluation. The written notice 
from the Council will also explain in detail why the

[[Page 71770]]

Council did not find that the company no longer met the standard for 
a determination under section 113 of the Dodd-Frank Act. In general, 
due to the sensitive nature of its analyses in annual reevaluations, 
the Council may not in all cases publicly release the written 
findings that it provides to the company.
    Finally, the Council will provide each nonbank financial company 
subject to a Council determination with an opportunity for an oral 
hearing before the Council once every five years at which the 
company can contest the determination.

    Dated: December 9, 2019.
Howard Adler,
Deputy Assistant Secretary for the Financial Stability Oversight 
Council, Department of the Treasury.
[FR Doc. 2019-27108 Filed 12-27-19; 8:45 am]
BILLING CODE 4810-25-P-P