[Federal Register Volume 88, Number 82 (Friday, April 28, 2023)]
[Proposed Rules]
[Pages 26234-26244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-08964]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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  Federal Register / Vol. 88, No. 82 / Friday, April 28, 2023 / 
Proposed Rules  

[[Page 26234]]



FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Part 1310


Authority To Require Supervision and Regulation of Certain 
Nonbank Financial Companies

AGENCY: Financial Stability Oversight Council.

ACTION: Notification of proposed interpretive guidance; request for 
public comment.

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SUMMARY: This proposed interpretive guidance, which would replace the 
Financial Stability Oversight Council's existing interpretive guidance 
on nonbank financial company determinations, describes the process the 
Council intends to take in determining whether to subject a nonbank 
financial company to supervision and prudential standards by the Board 
of Governors of the Federal Reserve System.

DATES: Comment due date: June 27, 2023.

ADDRESSES: You may submit comments by either of the following methods. 
All submissions must refer to the document title and RIN 4030-[XXXX].
    Electronic Submission of Comments: You may submit comments 
electronically through the Federal eRulemaking Portal at https://www.regulations.gov. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt, and enables the Council to make them available to the public. 
Comments submitted electronically through the https://www.regulations.gov website can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.
    Mail: Send comments to Financial Stability Oversight Council, Attn: 
Eric Froman, 1500 Pennsylvania Avenue NW, Room 2308, Washington, DC 
20220.
    All properly submitted comments will be available for inspection 
and downloading at https://www.regulations.gov.
    In general, comments received, including attachments and other 
supporting materials, are part of the public record and are available 
to the public. Do not submit any information in your comment or 
supporting materials that you consider confidential or inappropriate 
for public disclosure.

FOR FURTHER INFORMATION CONTACT: Eric Froman, Office of the General 
Counsel, Treasury, at (202) 622-1942; Devin Mauney, Office of the 
General Counsel, Treasury, at (202) 622-2537; or Carol Rodrigues, 
Office of the General Counsel, Treasury, at (202) 622-6127.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 111 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5321) (the ``Dodd-Frank Act'') established 
the Financial Stability Oversight 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.''
    The Dodd-Frank Act gives the Council broad discretion to determine 
how to respond to potential threats to U.S. financial stability, and 
the Council uses each of its statutory authorities as appropriate. The 
Council's duties under section 112 of the Dodd-Frank Act reflect the 
range of approaches the Council may consider, including collecting 
information from regulators, requesting data and analyses from the 
Office of Financial Research, monitoring the financial services 
marketplace and financial regulatory developments, facilitating 
information sharing and coordination among regulators, recommending to 
the Council member agencies general supervisory priorities and 
principles, identifying regulatory gaps, making recommendations to the 
Board of Governors of the Federal Reserve System (``Federal Reserve'') 
or other primary financial regulatory agencies,\1\ and designating 
certain entities or payment, clearing, and settlement activities for 
additional regulation.
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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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    Section 113 of the Dodd-Frank Act authorizes the Council to 
determine that a nonbank financial company will be subject to 
supervision by the Federal Reserve and prudential standards. Under 
section 165 of the Dodd-Frank Act, the Federal Reserve is responsible 
for establishing the prudential standards that will be applicable to a 
nonbank financial company subject to a Council designation \2\ under 
section 113. The Council has previously issued rules, guidance, and 
other public statements regarding its process for evaluating nonbank 
financial companies for a potential designation.\3\ On April 11, 2012, 
the Council issued a final rule at 12 CFR 1310.1-23 (the ``2012 Rule'') 
setting forth certain procedures related to designations under section 
113 of the Dodd-Frank Act. Attached to the 2012 Rule as Appendix A was 
interpretive guidance (the ``2012 Interpretive Guidance'') setting 
forth additional information regarding the manner in which the Council 
made determinations under section 113 (together with the 2012 Rule, the 
``2012 Rule and Guidance''). On February 4, 2015, the Council adopted 
supplemental procedures (the ``2015 Supplemental Procedures'') to the 
2012 Rule and Guidance.\4\ On March 13, 2019, the

[[Page 26235]]

Council amended the 2012 Rule by adding a new provision at 12 CFR 
1310.3.\5\ On December 30, 2019, the Council replaced the 2012 
Interpretive Guidance with revised interpretive guidance (the ``2019 
Interpretive Guidance'').\6\ In connection with the adoption of the 
2019 Interpretive Guidance, the Council rescinded the 2015 Supplemental 
Procedures.
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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 proposal refers to ``determination'' and ``designation'' 
interchangeably for ease of reading.
    \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, 12 
U.S.C. 5323, 5463; 77 FR 31855 (May 30, 2012). The hearing 
procedures were amended in 2013, 78 FR 22546 (April 16, 2013), and 
2018, 83 FR 12010 (March 19, 2018). This proposed guidance would not 
amend the Council's hearing procedures.
    \4\ Financial Stability Oversight Council Supplemental 
Procedures Relating to Nonbank Financial Company Determinations 
(Feb. 4, 2015), available at https://home.treasury.gov/system/files/261/Supplemental%20Procedures%20Related%20to%20Nonbank%20Financial%20Company%20Determinations%20%20%28February%204%2C%202015%29.pdf. In 
addition, in June 2015, the Council published staff guidance with 
details regarding certain methodologies used in connection with the 
determination process under section 113. See Council, Staff Guidance 
Methodologies Relating to Stage 1 Thresholds (June 8, 2015), 
available at https://home.treasury.gov/system/files/261/Staff%20Guidance%20Methodologies%20Relating%20to%20Stage%201%20Thresholds.pdf.
    \5\ 84 FR 8958 (March 13, 2019).
    \6\ 84 FR 71740 (Dec. 30, 2019).
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    The Council is proposing this interpretive guidance (the ``Proposed 
Guidance'') to revise and update the 2019 Interpretive Guidance. If the 
Council issues final interpretive guidance based on this proposal, the 
final interpretive guidance will replace the 2019 Interpretive 
Guidance, found at Appendix A to 12 CFR part 1310, in its entirety but 
will not modify the rules at 12 CFR 1310.1-23.
    The Council is concurrently issuing for public comment a separate 
document (the Proposed Analytic Framework) explaining the Council's 
broader approach to identifying, evaluating, and addressing potential 
risks to U.S. financial stability. The Proposed Analytic Framework 
describes the Council's analytic approach without regard to the origin 
of a particular risk, including whether the risk arises from widely 
conducted activities or from individual entities, and regardless of 
which of the Council's authorities may be used to address the risk.

II. Overview of Proposed Guidance

A. Key Changes

    The Proposed Guidance seeks to establish a durable process for the 
Council's use of its authority to designate nonbank financial 
companies. The 2012 Interpretive Guidance provided a crucial framework 
for the Council's analyses, but because it was adopted before the 
Council had designated any nonbank financial companies, it could not 
reflect the lessons learned from engaging in such designations. The 
2019 Interpretive Guidance provided additional clarity regarding the 
Council's procedures but created inappropriate hurdles to the Council's 
ability to use this authority. Congress created the designation 
authority to fill a glaring regulatory gap that became apparent during 
the financial crisis in 2007-09, when financial distress at large, 
complex, highly interconnected, highly leveraged, and inadequately 
regulated nonbank financial companies devastated the financial system. 
The Council has used this authority sparingly, but to mitigate the 
risks of future financial crises, the Council must be able to use each 
of its statutory authorities as appropriate to address potential 
threats to U.S. financial stability. The Proposed Guidance is intended 
to make this authority available to the Council while maintaining 
rigorous procedural protections for nonbank financial companies that 
may be reviewed for potential designation.
    The Proposed Guidance would make three key changes. First, the 
Proposed Guidance would eliminate the statement, found in the 2019 
Interpretive Guidance, that the Council would first rely on federal and 
state regulators to address risks to financial stability before the 
Council would begin to consider a nonbank financial company for 
potential designation. The 2019 Interpretive Guidance refers to the 
Council's reliance on existing regulators as an ``activities-based 
approach,'' and provides that the Council will prioritize that approach 
before considering designations.\7\ The Council constantly works with 
federal and state financial regulatory agencies to identify, assess, 
and respond to risks to financial stability. Nearly all the Council 
members represent such agencies. Many of the Council's statutory duties 
relate to promoting interagency collaboration, monitoring financial 
market developments, facilitating information sharing, and recommending 
that existing regulators address risks. These activities comprise the 
foundation of all the Council's work, and under the Proposed Guidance 
the Council would continue to monitor for activities that pose risks to 
financial stability and to work with regulators to respond to those 
risks. Under the Proposed Guidance, the Council would maintain its 
previous commitment to engaging extensively with existing regulators. 
The Council considers dozens of potential risks to financial stability 
every year, as described in its annual reports, and the Council expects 
that most potential risks to financial stability will continue to be 
addressed by existing regulators rather than by use of the Council's 
nonbank financial company designation authority. However, to enable the 
Council to use its authorities as appropriate, the Proposed Guidance 
would eliminate the statement in the 2019 Interpretive Guidance that 
the Council would use an activities-based approach before considering a 
designation under section 113.
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    \7\ See 84 FR 71740, 71761 (Dec. 30, 2019).
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    The second fundamental change under the Proposed Guidance is that 
it is limited to the Council's procedures--rather than substantive 
analyses--related to nonbank financial company designations. The 
Council is issuing, for public comment, a separate document explaining 
the Council's broader approach to identifying, evaluating, and 
addressing potential risks to U.S. financial stability. The Proposed 
Analytic Framework describes the Council's analytic approach without 
regard to the origin of a particular risk, including whether the risk 
arises from widely conducted activities or from individual entities. It 
provides new public transparency into how the Council expects to 
consider any type of risk to financial stability, regardless of which 
of the Council's authorities may be used to address those risks. 
Therefore, the Council proposes to rescind the description, set forth 
in section III of the 2019 Interpretive Guidance, of the Council's 
analytic approach to evaluating nonbank financial companies under 
consideration for designation.
    The third primary change under the Proposed Guidance, related to 
its focus on the Council's procedures rather than substantive analyses, 
is that the Proposed Guidance does not include language, found in the 
2019 Interpretive Guidance, stating that the Council would conduct a 
cost-benefit analysis and an assessment of the likelihood of a firm's 
material financial distress prior to making a determination under 
section 113. As explained in greater detail below, the Council believes 
that these steps are not required by the Dodd-Frank Act, are not useful 
or appropriate, and unduly hamper the Council's ability to use the 
statutory authority Congress provided to it.
    With respect to the Council's procedures for nonbank financial 
company designations and annual reevaluations of designations, the 
Proposed Guidance would make only minor changes. The revisions made in 
the 2019 Interpretive Guidance related to the Council's procedures for 
nonbank financial company designations largely reflected the rules and 
guidance the Council had previously issued, including the 2015 
Supplemental Procedures, as well as the Council's

[[Page 26236]]

practices in its previous designations. Among other things, the 
Proposed Guidance continues to provide for significant engagement and 
communication between the Council and a nonbank financial company under 
review for potential designation, and with the company's primary 
financial regulatory agency or home-country supervisor. In addition to 
these existing features, the Proposed Guidance provides further detail 
on how the Council would identify nonbank financial companies for 
preliminary evaluation to assess the risks they could pose to U.S. 
financial stability. The Council believes that under these procedures, 
the designation process would be rigorous and transparent.\8\
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    \8\ In accordance with the Council's bylaws, the Council may 
delegate authority, including to its Deputies Committee, to 
implement and take any actions under the guidance, except with 
respect to actions that are expressly nondelegable under the Dodd-
Frank Act, the Council's bylaws, or the guidance.
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B. Basis for Nonbank Financial Company Determinations

    Both the 2012 Interpretive Guidance and the 2019 Interpretive 
Guidance discussed substantive analytic factors the Council applies in 
its assessment of nonbank financial companies. The Proposed Guidance is 
instead limited to the Council's procedures related to nonbank 
financial company designations and does not include a discussion of the 
Council's substantive analyses of nonbank financial companies, like the 
description in section III of the 2019 Interpretive Guidance. The 
Proposed Guidance does not include that type of discussion because the 
Council is issuing a separate document--the Proposed Analytic 
Framework--apart from its guidance on nonbank financial company 
designations, regarding its approach for identifying and evaluating 
potential risks to U.S. financial stability. That framework describes 
the Council's planned analytic approach without regard to either the 
origin of a particular risk, including whether the risk arises from 
widely conducted activities or from individual entities, or any 
potential application of the Council's authorities to mitigate such 
risks.
    In particular, the 2019 Interpretive Guidance describes channels 
deemed 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; how the complexity and resolvability and 
existing regulatory scrutiny of a company under consideration for 
designation may affect the Council's evaluation of the relevant 
statutory factors; and the Council's interpretation of several 
statutory terms. For the reasons discussed below, these descriptions do 
not appear in the Proposed Guidance and would not be included in 
Appendix A to part 1310.
    History illustrates that many factors, such as leverage, liquidity 
risk, and operational risk, regularly recur in different forms and 
under different conditions to generate risks to financial stability, 
and the Proposed Analytic Framework describes vulnerabilities that 
commonly generate or exacerbate risks to financial stability and the 
mechanisms by which negative effects can be transmitted more broadly. 
The Council may consider those risk factors and transmission channels 
in activities-based reviews, entity-specific analyses, or other 
work.\9\ Accordingly, the Council believes that describing these 
substantive analytic approaches broadly, rather than in a context 
limited to nonbank financial company designations, is most appropriate. 
With respect to nonbank financial company designations specifically, 
the Dodd-Frank Act sets forth the standard for designations and certain 
specific considerations that the Council must take into account in 
making any determination under section 113. The Council will apply the 
statutory standard and considerations in any evaluation of a nonbank 
financial company for potential designation.
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    \9\ The Council has long noted that the identified transmission 
channels are non-exhaustive. See 2019 Interpretive Guidance, 84 FR 
71763 (December 30, 2019) (``The transmission channels . . . set 
forth below are not exhaustive and may not apply to all nonbank 
financial companies under evaluation. . . . 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.''); see also 2012 
Interpretive Guidance, 77 FR 21637, 21657 (April 11, 2012) (``The 
Council intends to continue to evaluate additional transmission 
channels and may, at its discretion, consider other channels through 
which a nonbank financial company may transmit the negative effects 
of its material financial distress or activities and thereby pose a 
threat to U.S. financial stability.'').
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    The 2019 Interpretive Guidance also provides the Council's 
interpretation of several statutory terms not defined in the Dodd-Frank 
Act, including ``company,'' ``nonbank financial company supervised by 
the Board of Governors,'' and ``material financial distress''--that the 
Council proposes to retain and has incorporated into the Proposed 
Guidance. However, the Council believes the 2019 Interpretive 
Guidance's interpretation of ``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'' \10\ is 
inappropriate. That definition, which requires the Council to determine 
that the economy ``would'' be severely damaged, contrasts sharply with 
the statutory standard under section 113 of the Dodd-Frank Act, which 
calls on the Council to determine whether there ``could'' be a threat 
to financial stability.\11\ Moreover, the Council's statutory purpose 
``to respond to emerging threats to the stability of the United States 
financial system'' indicates that the Council must address threats that 
may impair the financial system before they are realized. The nature of 
financial crises is that the precise severity of harm posed by emerging 
threats may not be apparent until it is too late. Accordingly, the 
Proposed Guidance does not include this definition. For purposes of 
analyses under section 113, the Council would expect to evaluate a 
``threat to the financial stability of the United States'' with 
reference to the description of financial stability provided in the 
Proposed Analytic Framework.
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    \10\ See 84 FR 71763 (December 30, 2019). The definition of this 
term in the 2019 Interpretive Guidance imposed a higher threshold 
than the Council's previous interpretation of this term under the 
2012 Interpretive Guidance.
    \11\ See also Dodd-Frank Act section 112(a)(2)(C) (setting forth 
the Council's duty to ``require [enhanced] supervision . . . for 
nonbank financial companies that may pose risks to . . . financial 
stability'' (emphasis added)).
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Questions for Comment
    1. Does the proposal described above not to include in the 
interpretive guidance a description of the Council's substantive 
analytic approach to evaluating nonbank financial companies in the 
context of a designation under section 113 of the Dodd-Frank Act, in 
favor of a separate framework that describes the Council's analytic 
approach without regard to the origin of a particular risk or the 
authority the Council may use to mitigate such risk, allow the Council 
to achieve its statutory purposes? Should the Council's proposed 
approach be modified for other considerations?
    2. Are there additional statutory terms beyond ``company,'' 
``nonbank financial company supervised by the Board of Governors,'' and 
``material financial distress'' for which the Council should set forth 
its interpretation in the Proposed Guidance?
    3. Would the Council's elimination of the 2019 Interpretive 
Guidance's

[[Page 26237]]

interpretation of ``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'' enable it 
to achieve its statutory purposes? When the Council interprets the 
statutory phrase ``threat to the financial stability of the United 
States,'' are there additional factors it should consider?

C. Activities-Based Approach

    The 2019 Interpretive Guidance states that 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 that 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. As explained in the 2019 
Interpretive Guidance, an activities-based approach means an approach 
in which the Council seeks to address potential risks to financial 
stability using an authority other than nonbank financial company 
designations.
    The Proposed Guidance removes this prioritization among the 
Council's authorities, clarifying that the Council may use any of its 
statutory authorities, as appropriate, to address risks and threats to 
U.S. financial stability. As noted above, the Council will continue to 
monitor for activities that pose risks to financial stability and work 
with regulators to respond to those risks. Appropriate actions to 
respond to a particular risk depend on the nature of the risk. For 
example, vulnerabilities originating from activities that are widely 
conducted in a particular sector or market may be well-suited for 
activity-based or industry-wide regulation. In contrast, where distress 
at one entity could threaten financial stability, or where risks 
arising from a particular financial company could threaten financial 
stability, entity-based regulation may be appropriate. The Dodd-Frank 
Act gives the Council a range of authorities and broad discretion to 
determine how to respond to potential threats to U.S. financial 
stability. The Council stated in the 2019 Interpretive Guidance that it 
intended to use a prioritization scheme found nowhere in the Dodd-Frank 
Act, under which the Council would generally seek to use certain of its 
authorities before others. Consistent with the Council's statutory 
purpose to respond to emerging threats to U.S. financial stability, the 
Proposed Guidance would remove this prioritization, allowing the 
Council the flexibility to use the most appropriate tool for addressing 
potential risks. For example, the Proposed Guidance makes clear that 
the Council could consider using its section 113 designation authority 
when material financial distress at a nonbank financial company, or the 
nature, scope, size, scale, concentration, interconnectedness, or mix 
of the activities of a nonbank financial company, could pose a threat 
to U.S. financial stability, as appropriate, without first needing to 
consider other approaches.
    The Council's history provides instructive examples of the 
Council's use of different authorities and approaches for different 
types of risks. For example, the Council has taken an activities-based 
approach in recommending actions to address risks relating to crypto-
assets, climate-related financial risks, and other topics. In 2012, the 
Council used an activities-based approach in issuing for public comment 
proposed recommendations for money market mutual fund reforms. Further, 
all of the Council's annual reports have identified and recommended 
actions regarding various risks to U.S. financial stability,\12\ many 
in the form of an activities-based approach. The Council has also used 
entity-specific approaches in designating eight financial market 
utilities under Title VIII of the Dodd-Frank Act and in designating 
four nonbank financial companies in 2013 and 2014 under section 113 of 
the Dodd-Frank Act.
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    \12\ See, e.g., FSOC, 2022 Annual Report (2022), available at 
https://home.treasury.gov/system/files/261/FSOC2022AnnualReport.pdf.
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    Financial crises have illustrated the importance of ensuring that 
the Council can exercise its authorities as needed. For example, the 
2007-09 financial crisis showed that material financial distress at a 
small number of large, interconnected, and highly leveraged nonbank 
financial companies could threaten the stability of the U.S. financial 
system. Based in part on that experience, Congress created the Council 
and gave it a mandate to address risks that arise in the future. Under 
the Proposed Guidance, the Council would retain flexibility to address 
risks and threats to U.S. financial stability using whichever 
authorities are appropriate for the circumstances.
    Consistent with the modifications described above, the Proposed 
Guidance provides additional detail on how the Council would identify 
nonbank financial companies for preliminary evaluation to assess the 
risks they could pose to U.S. financial stability (referred to as 
``Stage 1''). The 2019 Interpretive Guidance, in accordance with the 
activities-based approach, provided that the Council could evaluate a 
company for designation if a company's primary financial regulatory 
agency did not adequately address a potential risk identified by the 
Council. The Proposed Guidance instead explains the process by which 
the Council's staff-level committees would preliminarily identify and 
assess potential risks to U.S. financial stability using the analytical 
methods described in the Council's separately issued Proposed Analytic 
Framework. This approach seeks to strengthen the Council's ability to 
monitor, assess, and mitigate risks to U.S. financial stability, 
regardless of whether those risks originate from individual companies 
or widely conducted activities, while providing flexibility for the 
Council to adapt to circumstances that may rapidly evolve.
Questions for Comment
    4. Would removal of the prioritization of the ``activities-based 
approach'' from the interpretive guidance enable the Council to achieve 
its statutory purposes? Should the Council's proposed approach be 
modified for other considerations?
    5. Are there additional steps the Council should take to ensure all 
of its authorities for addressing potential risks to U.S. financial 
stability are equally available and appropriately exercised?
    6. Would the proposed staff-level process for identifying nonbank 
financial companies for preliminary evaluation enable the Council to 
achieve its statutory purposes? Does the Proposed Guidance identify the 
appropriate procedures the Council should follow as it considers a 
company for potential designation? Are there other means of identifying 
companies for preliminary review the Council should consider, such as 
the application of specific metrics for different sectors of the 
nonbank financial system?
    7. If the Council were to establish a set of uniform quantitative 
metrics to identify nonbank financial companies for further evaluation, 
as it did through the Stage 1 thresholds in the 2012 Interpretive 
Guidance, what metrics should the Council consider?

D. Cost-Benefit Analysis and Likelihood of Material Financial Distress

    The 2019 Interpretive Guidance states, ``The Council will make a 
determination under section 113 only if

[[Page 26238]]

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.'' The Proposed Guidance does not include this 
language, as discussed below.
    Cost-Benefit Analysis. The Dodd-Frank Act does not require a cost-
benefit analysis prior to the designation of a nonbank financial 
company under section 113. Rather, the statute instructs the Council to 
designate a nonbank financial company if the Council ``determines that 
material financial distress at the U.S. nonbank financial company, or 
the nature, scope, size, scale, concentration, interconnectedness, or 
mix of the activities of the U.S. nonbank financial company, could pose 
a threat to the financial stability of the United States.'' \13\ 
Subsection 113(a)(2) of the Dodd-Frank Act lists 10 factors the Council 
must consider when making a determination, such as the company's 
leverage, transactions with other financial companies, assets under 
management, and existing regulation.\14\
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    \13\ 12 U.S.C. 5323(a)(1).
    \14\ Id. 5323(a)(2).
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    The costs and benefits of a designation are not listed 
considerations in the statute and are not similar to any of the listed 
considerations. The statute is clear that the only required 
considerations are related to the potential impact the company's 
material financial distress or activities could pose to U.S. financial 
stability. While Congress granted the Council discretion to consider 
other factors it ``deems appropriate,'' these too must be ``risk-
related.'' \15\ The Council acknowledges that there may be costs 
associated with a designation or the resulting Federal Reserve 
supervision; however the Council does not consider the potential cost 
of a designation or of the resulting Federal Reserve supervision and 
prudential standards to be a ``risk-related factor.'' The Council 
believes that the statutory reference to a ``risk-related factor'' 
instead should be interpreted, consistent with the statutory standard 
for designation and the expressly enumerated considerations, as meaning 
a factor related to the risk to U.S. financial stability posed by the 
company or the company's activities.\16\ Moreover, costs incurred by a 
designated nonbank financial company to comply with prudential 
standards established by the Federal Reserve would not increase the 
risk posed by the company or its activities because they are incurred 
for the purpose of increasing the safety and soundness of the company. 
For example, risk-based capital requirements, leverage limits, or 
liquidity requirements would reduce the risk the company poses to the 
financial system.
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    \15\ Dodd-Frank Act section 113(a)(2)(K), 12 U.S.C. 
5323(a)(2)(K).
    \16\ The U.S. District Court for the District of Columbia held 
that the Council should have considered the potential costs of 
designation before designating MetLife, Inc. under section 113, but 
the Court's reasoning assumes that a company's likelihood of 
material financial distress is itself a required consideration under 
the Council's guidance in effect at that time. See MetLife Inc. v. 
Financial Stability Oversight Council (MetLife), 177 F. Supp. 3d 
219, 239-42 (D.D.C. 2016) (discussing company's argument that 
``imposing billions of dollars in cost could actually make MetLife 
more vulnerable to distress''). The government appealed the district 
court's decision in 2016, but agreed to dismiss its appeal in 2018. 
In the final settlement agreement between the Council and MetLife, 
the Council maintained that its designation of MetLife complied with 
applicable law. In the agreement MetLife expressly waived any right 
to argue that the cost-benefit portion of the district court's 
opinion had any preclusive effect in any future proceeding before 
the Council or in any subsequent litigation. Under the Proposed 
Guidance, the likelihood of a company's material financial distress 
would not be a consideration in a designation under section 113.
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    The text of section 113 indicates that Congress itself determined 
that the potential costs of designation are outweighed by the 
benefits--mitigating risks to financial stability--if the company meets 
the statutory standard, based on the considerations Congress 
identified. That is, Congress's legislative judgment was that if, based 
on the Council's consideration of the factors listed in section 113, a 
nonbank financial company ``could pose a threat to the financial 
stability of the United States,'' then the benefits of a designation 
outweigh the costs.\17\
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    \17\ See also Dodd-Frank Act section 112, 12 U.S.C. 
5322(a)(2)(H) (providing that ``[t]he Council shall . . . require 
supervision by the Board of Governors for nonbank financial 
companies that may pose risks to the financial stability of the 
United States in the event of their material financial distress or 
failure, or because of their activities . . .'' (emphasis added)).
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    Further, even if the potential cost of designation were a ``risk-
related factor,'' the Council does not believe that prescribing a cost-
benefit analysis prior to a determination under section 113 is useful 
or appropriate. This is in part because it is not feasible to estimate 
with any certainty the likelihood, magnitude, or timing of a future 
financial crisis. The costs imposed by the potential failure of a 
nonbank financial company will depend on the state of the economy and 
financial system at the time. The benefits of designation are 
potentially enormous and, in many respects, incalculable, representing 
the tangible and intangible gains that come from averting a financial 
crisis and economic catastrophe. The costs of any particular future 
financial crisis, and thus the benefits of its prevention through 
designation or other measures, cannot be predicted. Even estimates of 
the costs of past crises, in terms of reductions in gross domestic 
product, greater government expenses, increases in unemployment, or 
other factors, vary widely but can be measured in the trillions of 
dollars. Moreover, the Dodd-Frank Act directs the Federal Reserve to 
adopt regulatory requirements applicable to a designated nonbank 
financial company. The cost to a company of designation will depend 
critically on the applicable regulatory regime. Generally, specific 
regulatory requirements for designated nonbank financial companies have 
been determined after the designation, in order to enable the 
requirements to be appropriately tailored to risks posed by the 
company. As such, evaluating the potential costs and benefits of a 
designation with reasonable specificity is not possible before a 
designation, and it is unlikely that performing a cost-benefit analysis 
for a nonbank financial company would yield a balanced picture.
    Likelihood of Material Financial Distress. Under the Proposed 
Guidance, the Council would not assess the likelihood of a company's 
material financial distress in considering a nonbank financial company 
under section 113. Similar to the language regarding a cost-benefit 
analysis, the Council does not believe an assessment of the likelihood 
of a company's material financial distress is required or 
appropriate.\18\
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    \18\ In its MetLife decision, the U.S. District Court for the 
District of Columbia held that the Council's failure to assess the 
likelihood of MetLife's material financial distress was contrary to 
the 2012 Interpretive Guidance. 177 F. Supp. 3d at 233-39. This 
prong of the District Court's holding would not apply under the 
Proposed Guidance, which does not require any such assessment.
---------------------------------------------------------------------------

    The Dodd-Frank Act charges the Council with designating a company 
under section 113 if it ``determines that material financial distress 
at the U.S. nonbank financial company . . . could pose a threat to the 
financial stability of the United States.'' \19\ Under this first prong 
of the statutory determination standard, the Council is instructed to 
determine whether material financial

[[Page 26239]]

distress at the company could pose a threat to U.S. financial 
stability. Thus, pursuant to section 113, the Council presupposes a 
company's material financial distress, and then evaluates what 
consequences could follow for U.S. financial stability. The first 
determination standard, by its terms, does not require the Council 
first to analyze the likelihood of a company experiencing material 
financial distress before determining whether such distress could 
threaten U.S. financial stability. Section 112 of the Dodd-Frank Act 
further underscores the statutory standard, making clear that the 
Council's duty is to designate nonbank financial companies that could 
threaten U.S. financial stability ``in the event of their material 
financial distress or failure''--not based on the Council's estimation 
of the likelihood of such distress or failure.\20\ Therefore, the 
language in the 2019 Interpretive Guidance regarding this factor fits 
poorly with the statutory standard.\21\
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    \19\ 12 U.S.C. 5323(a)(1).
    \20\ 12 U.S.C. 5322(a)(2)(H).
    \21\ The Council for many years consistently expressed the view 
that the 2012 Interpretive Guidance did not contemplate the 
consideration of the likelihood of a nonbank financial company's 
material financial distress. The 2019 Interpretive Guidance altered 
the Council's approach. The Proposed Guidance would conform to the 
Council's original understanding that this factor should not be 
taken into account.
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    Further, the designation authority in section 113 is preventative 
and is meant to ``respond to emerging threats to the stability of the 
United States financial system,'' consistent with the Council's 
purpose.\22\ Waiting to act until there is a reasonable likelihood of a 
company's failure would negate the purpose of the Council's designation 
authority, which is to mitigate risks before they threaten financial 
stability. The designation process under the Proposed Guidance would be 
a time-intensive exercise, and even once a company is designated, the 
Federal Reserve may then need to develop and implement prudential 
standards for the company. Such prudential standards, which may include 
capital and liquidity requirements, risk-management standards, and the 
development of resolution plans, are intended to prevent or mitigate 
risks to financial stability. For these tools to be most effective, 
they must be in place well before material financial distress appears 
to be likely.
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    \22\ See Dodd-Frank Act section 112(a)(1)(c), 12 U.S.C. 
5322(a)(1)(c).
---------------------------------------------------------------------------

    There are good reasons that Congress chose not to require the 
Council to determine the likelihood of a nonbank financial company's 
material financial distress. A financial company can go from seemingly 
healthy to in danger of imminent collapse in a matter of months, weeks, 
or even days. For example, at the end of August 2008, Lehman Brothers 
had reported shareholder equity--which is a measure of solvency--of $28 
billion.\23\ On September 12, 2008 ``experts from the country's biggest 
commercial investment banks . . . could not agree whether or not'' 
Lehman Brothers was solvent.\24\ Only two days later, on Monday, 
September 14, 2008, Lehman Brothers declared bankruptcy. The failures 
of Silicon Valley Bank and Signature Bank in March 2023 further 
underscored how quickly and unexpectedly an institution can become 
insolvent. For designation to strengthen the financial system, it must 
be deployed early enough that companies have time to take actions to 
bolster their safety and soundness, which in turn supports financial 
stability--something that can take several years.
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    \23\ Financial Crisis Inquiry Commission, The Financial Crisis 
Inquiry Report at 324 (2011), available at https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
    \24\ Id.
---------------------------------------------------------------------------

    Finally, if designation requires an assessment of the likelihood of 
material financial distress at the company, public awareness of 
designation (or its mere possibility) could create a run on the company 
by its creditors and counterparties. This is an important reason why 
bank supervisory ratings are confidential, in acknowledgement of the 
risk that disclosure of material issues at a company could trigger a 
run on the company. Thus, a designation that includes an assessment of 
the likelihood of material financial distress at the company could 
accelerate the company's demise and thereby threaten financial 
stability and undermine the purpose of the designation.
Questions for Comment
    8. Does the Council's proposal described above to remove from the 
interpretive guidance provisions the discussion of the Council 
conducting a cost-benefit analysis and assessing the likelihood of a 
company's material financial distress allow the Council to achieve its 
statutory purposes? Should the Council's proposed approach be modified 
for other considerations?
    9. Are there additional points the Council should consider 
regarding the usefulness, practicality, or feasibility of conducting a 
cost-benefit analysis regarding the designation of a company under 
section 113?
    10. What data or factors should the Council consider in evaluating 
the potential risk to U.S. financial stability that could be posed by 
the failure of a company, should that company experience material 
financial distress?
    11. If the Council were to identify a nonbank financial company as 
likely to experience material financial distress, what, if any, effects 
would such identification have when it became public knowledge?

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

    The Council has numerous authorities and tools under the Dodd-Frank 
Act to carry out its statutory purposes.\25\ 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 steps the Council will take 
when undertaking the determination process.\26\ The Council also has 
authority to issue procedural rules \27\ and policy statements.\28\ The 
Proposed Guidance 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 Proposed Guidance sets forth 
rules of agency organization, procedure, or practice, the Council has 
concluded that the Proposed 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. The Proposed Guidance also does not limit the ability of the 
Council to take emergency action under section 113(f) of the Dodd-Frank 
Act if the Council determines that such action is necessary

[[Page 26240]]

or appropriate to prevent or mitigate threats posed by a nonbank 
financial company to U.S. financial stability. As a result, the Council 
has concluded that the notice and comment requirements of the 
Administrative Procedure Act would not apply.\29\ However, under the 
Council's rule in 12 CFR 1310.3, the Council voluntarily committed that 
it would not amend or rescind Appendix A to part 1310 without providing 
the public with notice and an opportunity to comment in accordance with 
the procedures applicable to legislative rules under 5 U.S.C. 553.\30\ 
Consequently, the Council invites interested persons to submit comments 
regarding the Proposed Guidance.
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    \25\ 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.
    \26\ 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).
    \27\ See Dodd-Frank Act section 111(e)(2), 12 U.S.C. 5321(e)(2).
    \28\ See Association of Flight Attendants-CWA, AFL-CIO v. 
Huerta, 785 F.3d 710 (D.C. Cir. 2015).
    \29\ See 5 U.S.C. 553(b)(A); 12 CFR 1310.3.
    \30\ Section 1310.3 does not apply to the Council's issuance of 
rules, guidance, procedures, or other documents that do not amend or 
rescind Appendix A. Thus, other Council materials, and documents 
that are referred to in but are not a part of the Proposed Guidance, 
such as the Council's separately issued Proposed Analytic Framework, 
hearing procedures, bylaws, and committee charters, are not subject 
to section 1310.3's requirements.
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IV. Paperwork Reduction Act

    The Proposed Guidance is not expected to alter the collections of 
information previously 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 number 1505-0244. Nonetheless, 
the Council provides the estimated burdens of the information 
collections associated with the Proposed Guidance and invites comments 
below. 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 Proposed Guidance is found 
in 12 CFR 1310.20-23.
    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 Proposed Guidance is 20 hours, based on an estimate of 1 
respondent. We estimate the cost associated with this information 
collection to be $9,000.
    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 Office of Financial Research 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 Proposed Guidance would 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 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.
    Interested persons are invited to submit comments regarding the 
estimates provided in this section. Comments on the collection of 
information should be sent to the Office of Management and Budget, 
Attn: Desk Officer for the Financial Stability Oversight Council, 
Office of Information and Regulatory Affairs, Washington, DC 20503, 
with copies to Samantha MacInnis, Department of the Treasury, 
Washington, DC 20220. Comments on the collection of information must be 
received by June 27, 2023.
    Comments are specifically requested concerning:
    (1) Whether the proposed collection of information is necessary for 
the proper performance of the functions of the Council, including 
whether the information will have practical utility;
    (2) The accuracy of the estimated burden associated with the 
proposed collection of information;
    (3) How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    (4) How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    (5) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.

V. Executive Orders 12866, 13563, and 14094

    Executive Orders 12866, 13563 and 14094 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). Pursuant 
to section 3(f) of Executive Order 12866, the Office of Information and 
Regulatory Affairs within the Office of Management and Budget has 
determined that the Proposed Guidance is a ``significant regulatory 
action''. Accordingly, the Proposed Guidance has been reviewed by the 
Office of Management and Budget.

List of Subjects in 12 CFR Part 1310

    Brokers, Investments, Securities.

    The Financial Stability Oversight Council proposes to amend 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) \31\ 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 Board) 
and be subject to prudential standards, in accordance with Title I 
of the Dodd-Frank Act, if either (1) the Council determines that 
material financial distress at the nonbank financial company could 
pose a threat to U.S. financial stability, 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. Section 113 of the Dodd-Frank Act lists 
the considerations that the Council must take into account in making 
a determination. This guidance supplements the Council's rule

[[Page 26241]]

regarding nonbank financial company determinations.\32\
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    \31\ See Dodd-Frank Act section 113, 12 U.S.C. 5323.
    \32\ See 12 CFR part 1310.
---------------------------------------------------------------------------

    Section II of this appendix outlines a two-stage process that 
the Council generally expects to follow when determining whether to 
subject a nonbank financial company to Federal Reserve Board 
supervision and prudential standards.\33\ Section III sets forth the 
process the Council expects to follow in conducting reevaluations of 
its previous determinations.
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    \33\ The Council may waive or modify this process in its 
discretion if it determines that emergency circumstances exist, 
including if necessary or appropriate to prevent or mitigate threats 
posed by a nonbank financial company to U.S. financial stability in 
accordance with section 113(f) of the Dodd-Frank Act.
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II. Process for Nonbank Financial Company Determinations

    Under section 113 of the Dodd-Frank Act, the Council may 
evaluate a nonbank financial company \34\ for an entity-specific 
determination. This section describes the process the Council 
expects to follow in general for those reviews.
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    \34\ The Council intends to interpret the term ``company'' to 
include any corporation, limited liability company, partnership, 
business trust, association, or similar organization. See Dodd-Frank 
Act section 102(a)(4), 12 U.S.C. 5311(a)(4). In addition, the 
Council intends to consider any nonbank financial company to be 
subject to a final determination of the Council if the company 
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 discussed in 
section III 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 an 
appropriate case. Such an acquirer can use this reevaluation process 
to seek a rescission of the determination upon consummation of its 
transaction.
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a. Overview of the Determination Process

    As described in detail below, the Council expects generally to 
follow a two-stage process of evaluation and analysis when 
evaluating a nonbank financial company under section 113 of the 
Dodd-Frank Act. During the first stage of the process (Stage 1), a 
nonbank financial company identified for review 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 company's primary financial 
regulatory agency \35\ 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.\36\
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    \35\ See Dodd-Frank Act section 2(12), 12 U.S.C. 5301(12). In 
each stage of the Council's process under section 113 of the Dodd-
Frank Act, the Council may also consult with, solicit information 
from, or coordinate with other state or federal financial regulatory 
agencies that have jurisdiction over the nonbank financial company 
or its activities.
    \36\ See Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
---------------------------------------------------------------------------

    Following Stage 1, any nonbank financial company that is 
selected for additional review will receive notice that it is being 
considered for a proposed determination that the company will be 
supervised by the Federal Reserve Board and be subject to prudential 
standards under Title I of the Dodd-Frank Act (a Proposed 
Determination) and that the company will be subject to in-depth 
evaluation during the second stage of review (Stage 2). Stage 2 will 
also 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 the Council makes 
a Proposed Determination, 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 regarding nonbank 
financial company determinations.\37\ After making a Proposed 
Determination and holding any written or oral hearing if requested, 
the Council may vote to make a final determination (a Final 
Determination).
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    \37\ See 12 CFR 1310.21(c).
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b. 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. In light of the preliminary nature of a review in Stage 
1, the Council expects that not all companies reviewed in Stage 1 
will proceed to Stage 2 or a Final Determination.

Identification of Company for Review in Stage 1

    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's staff-level 
committees are responsible for monitoring and analyzing financial 
markets, financial companies, the financial system, and issues 
related to financial stability. These committees monitor a broad 
range of asset classes, institutions, and activities, as described 
in the Council's Framework for Financial Stability Risk 
Identification, Assessment, and Response (the Analytic Framework), 
and as reflected in the Council's annual reports. In assessing 
potential risks, these committees consider the vulnerabilities and 
types of metrics described in the Analytic Framework. These 
committees, in the course of their duties, will monitor each sector 
of the financial system at least annually and will report to the 
Deputies Committee \38\ regarding potential risks to U.S. financial 
stability that they identify. With respect to these monitoring and 
reporting activities, the Council's Systemic Risk Committee is 
responsible for monitoring and reporting on each financial sector, 
including information on identified firms and activities that may 
pose risks that merit further review, unless another Council 
committee or working group provides such updates to the Deputies 
Committee on a particular sector. The updates to the Deputies 
Committee will use applicable metrics as described in the Analytic 
Framework. The Deputies Committee is responsible for directing, 
coordinating, and overseeing the work of the Systemic Risk Committee 
and all of the Council's other staff-level committees and working 
groups in accordance with this guidance. If an identified risk 
relates to one or more financial companies that may merit review in 
the context of a potential determination under section 113, the 
Council may review those companies in Stage 1. Alternatively, the 
Deputies Committee may direct a staff-level committee or working 
group to further assess the identified risks, including 
consideration of whether the risks could be addressed by a 
designation under section 113 or by use of a different Council 
authority, such as recommendations to existing regulators. The 
Deputies Committee may also direct the Council's Nonbank Financial 
Companies Designations Committee (the Nonbank Designations 
Committee) \39\ to conduct an initial analysis of the companies 
based on the risk-assessment approach described in the Analytic 
Framework. The purpose of such an analysis by the Nonbank 
Designations Committee would be to further inform the determination 
regarding whether one or more companies should be reviewed in Stage 
1, if needed. Following any such analysis by the Nonbank 
Designations Committee, the Council may review one or more companies 
in Stage 1. Any Council committee's identification, reporting, 
direction, analysis, or recommendation described in this paragraph 
will be made in accordance with such committee's bylaws or charter.
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    \38\ The Council's Deputies Committee is composed of senior 
officials from each Council member and member agency. See Bylaws of 
the Deputies Committee of the Financial Stability Oversight Council, 
available at https://fsoc.gov.
    \39\ The Nonbank Designations Committee supports the Council in 
fulfilling the Council's responsibilities to consider, make, and 
review Council determinations regarding nonbank financial companies 
under section 113 of the Dodd-Frank Act. See Charter of the Nonbank 
Financial Companies Designations Committee of the Financial 
Stability Oversight Council, available at https://fsoc.gov.
---------------------------------------------------------------------------

    When evaluating the potential risks associated with a nonbank 
financial company, the Council may consider the company and its 
subsidiaries separately or together. This approach enables the 
Council to consider potential risks arising across the entire 
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.

[[Page 26242]]

Engagement With Company and Regulators in Stage 1

    The Council will provide a notice to any nonbank financial 
company under review in Stage 1 no later than 60 days before the 
Council votes on whether to evaluate the company in Stage 2. In 
Stage 1, the Council will consider available public and regulatory 
information. In order to reduce the burdens of review on the 
company, the Council will not require the company to submit 
information during Stage 1; however, a company under review in Stage 
1 may submit to the Council any information 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. The Council may request a page-limited summary of the 
company's submissions. In addition, staff representing the Council 
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. In addition, 
during discussions in Stage 1 with the company, the Council intends 
for representatives of the Council to indicate to the company 
potential risks that have been identified in the analysis. However, 
any potential risks identified at this stage are preliminary and may 
continue to develop until the Council makes a Final Determination. 
Through this engagement, the Council seeks to provide the company 
under review an opportunity to understand the focus of the Council's 
analysis.
    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.\40\ 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 the time the company is notified. The Council will 
also 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 or aggravating factors. In order to 
enable the regulator to provide relevant information, the Council 
will share its preliminary views regarding potential risks at the 
company, if any and to the extent practicable, and request that the 
regulator provide information regarding those specific risks, 
including the extent to which the risks are adequately mitigated by 
factors such as existing regulation or the company's business 
practices. During the determination process, the Council will 
encourage the regulator to address any risks to U.S. financial 
stability using the regulator's existing authorities; if the Council 
believes regulators' or the company's actions have adequately 
addressed the potential risks to U.S. financial stability the 
Council has identified, the Council may discontinue its 
consideration of the company for a potential determination under 
section 113 of the Dodd-Frank Act.
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    \40\ Dodd-Frank Act section 113(g), 12 U.S.C. 5323(g).
---------------------------------------------------------------------------

    Based on the preliminary evaluation in Stage 1, the Council, on 
a nondelegable basis, 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 votes 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.

c. Stage 2: In-Depth Evaluation

    Stage 2 involves an in-depth evaluation of a nonbank financial 
company that the Council has determined merits additional review.
    In Stage 2, the Council will review a nonbank financial company 
using information collected directly from the company, through the 
OFR, as well as public and regulatory information. The review will 
focus on whether material financial distress \41\ at the nonbank 
financial company, or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the activities of the company, could 
pose a threat to U.S. financial stability. The Analytic Framework 
describes the Council's approach to evaluating potential risks to 
U.S. financial stability, including in the context of a review under 
section 113 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \41\ 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.
---------------------------------------------------------------------------

Engagement With Company and Regulators in Stage 2

    A nonbank financial company to be evaluated in Stage 2 will 
receive a notice (a Notice of Consideration) that the 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.\42\ This 
information will generally be collected by the OFR.\43\ Before 
requiring the submission of reports from any nonbank financial 
company that is regulated by a Council member agency or a 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 that may be considered by the Council includes details 
regarding the company's financial activities, legal structure, 
liabilities, counterparty exposures, resolvability, and existing 
regulatory oversight. Information requests likely will involve both 
qualitative and quantitative information. 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.
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    \42\ See 12 CFR 1310.21(a).
    \43\ See Dodd-Frank Act section 112(d), 12 U.S.C. 5322(d).
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    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. In addition, the Council expects that 
its Deputies Committee 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. 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 specific aspects, although 
the areas of analytic focus may change based on the ongoing 
analysis.
    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 a Proposed or Final Determination with respect to the 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 regulators' or the company's actions 
adequately address the potential risks to U.S. financial stability 
the Council has identified, the Council may discontinue its 
consideration of the company 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 the company 
is complete. The Council will notify any nonbank financial company 
in Stage 2 if the 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.

d. 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, on a

[[Page 26243]]

nondelegable basis, of two-thirds of the voting members of the 
Council then serving, including an affirmative vote by the 
Chairperson of the Council.\44\ 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.\45\ 
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 with the 
nonpublic written explanation of the basis of the Council's Proposed 
Determination (subject to appropriate protections for confidential 
information).
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    \44\ 12 CFR 1310.10(b).
    \45\ 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,\46\ the Council will set a time and place for 
such hearing. The Council has published hearing procedures on its 
website.\47\ In light of the 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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    \46\ See 12 CFR 1310.21(c).
    \47\ 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://fsoc.gov.
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Final Determination

    After making a Proposed Determination and holding any requested 
written or oral hearing, the Council, on a nondelegable basis, 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 Board 
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.\48\ The Council 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). The Council expects that 
its explanation of the basis for any Final Determination will 
highlight the key risks that led to the determination and include 
guidance regarding the factors that were 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 notice of a Final Determination at least one 
business day before publicly announcing the determination pursuant 
to Sec.  1310.21, paragraphs (d)(3), (e)(3), or (d)(3) of the 
Council's rule.\49\ In accordance with 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.\50\
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    \48\ 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).
    \49\ See 12 CFR 1310.21(d)(3) and (e)(3) and 1310.22(d)(3).
    \50\ See Dodd-Frank Act section 113(h), 12 U.S.C. 5323(h).
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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 Final Determination or 
rescission of a determination, following such an action by the 
Council. 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.\51\ In light of these confidentiality obligations, such 
confidential information will be redacted from the materials that 
the Council makes publicly available, although the Council does not 
expect to restrict a company's ability to disclose such information.
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    \51\ 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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III. Annual Reevaluations of Nonbank Financial Company Determinations

    After the Council makes a Final Determination regarding a 
nonbank financial 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 the potential risks identified in writing 
by the Council at the time of the Final Determination and in 
subsequent reevaluations have been adequately addressed, generally 
the Council would expect 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 affects the Council's analysis.\52\
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    \52\ See note 3 above.
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    The Council will apply the same standards of review in its 
annual reevaluations as the standards for an initial determination 
regarding a nonbank financial company: either material financial 
distress at the company, or the nature, scope, size, scale, 
concentration, interconnectedness, or the mix of the company's 
activities, could pose a threat to U.S. financial stability. If the 
Council determines that the company does not meet either of those 
standards, the Council will rescind its determination.
    The Council's annual reevaluations will generally assess whether 
any material changes since the previous reevaluation and since the 
Final Determination justify a rescission of the determination. The 
Council expects that its reevaluation process will focus on whether 
any material changes that have taken effect--including changes at 
the company, changes in its markets or its regulation, changes in 
the impact of relevant factors, or otherwise--result in the company 
no longer meeting the standards for a determination. In light of the 
frequent reevaluations, the Council's analyses will generally focus 
on material 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 Final Determination regarding 
the company have caused the company to cease meeting either of the 
statutory standards for a determination.
    During 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 representatives of the 
Council 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. In addition, 
during an annual reevaluation, the company may submit any written 
information to the Council the company considers relevant to the 
Council's analysis. During annual reevaluations, a company is 
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 or its regulators 
have taken steps to address the potential risks previously 
identified by the Council, the Council will assess whether the risks 
have been adequately mitigated to merit a rescission of the 
determination regarding the company. If the company explains in 
detail and in a timely manner potential changes it could make to its 
business to address the potential risks previously identified by the 
Council, representatives of the Council 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

[[Page 26244]]

whether to rescind the determination and provide the company, its 
primary financial regulatory agency or home country supervisor, 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 the most 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 why the 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, company-specific 
nature of its analyses in annual reevaluations, the Council 
generally would not publicly release the written findings that it 
provides to the company, although the Council does not expect to 
restrict a company's ability to disclose such information.
    Finally, the Council will provide each nonbank financial company 
subject to a Council determination an opportunity for an oral 
hearing before the Council once every five years at which the 
company can contest the determination.

Kayla Arslanian,
Executive Secretary.
[FR Doc. 2023-08964 Filed 4-27-23; 8:45 am]
BILLING CODE 4810-AK-P-P