Federal Register, Volume 88 Issue 221 (Friday, November 17, 2023)

[Federal Register Volume 88, Number 221 (Friday, November 17, 2023)]
[Rules and Regulations]
[Pages 80110-80131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25053]

[[Page 80110]]

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FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Part 1310

Guidance on Nonbank Financial Company Determinations

AGENCY: Financial Stability Oversight Council.

ACTION: Final interpretive guidance.

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SUMMARY: This final interpretive guidance describes the process the
Financial Stability Oversight Council intends to undertake in
determining whether to subject a nonbank financial company to
prudential standards and supervision by the Board of Governors of the
Federal Reserve System under section 113 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.

DATES: Effective January 16, 2024

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 Priya Agarwal, Office
of the General Counsel, Treasury, at (202) 622-3773.

SUPPLEMENTARY INFORMATION:

I. Background

Section 111 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act) established the Financial Stability
Oversight Council (the Council).\1\ The statutory purposes of the
Council 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.'' \2\
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\1\ Dodd-Frank Act section 111, 12 U.S.C. 5321.
\2\ Dodd-Frank Act section 112(a)(1), 12 U.S.C. 5322(a)(1).
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The Council's duties under section 112 of the Dodd-Frank Act
reflect the range of approaches the Council may consider to respond to
potential threats to U.S. financial stability, which include collecting
information from regulators, requesting data and analyses from the
Office of Financial Research (OFR), 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,\3\ and designating certain
entities or payment, clearing, and settlement activities for additional
regulation.
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\3\ ``Primary financial regulatory agency'' is defined in
section 2(12) of the Dodd-Frank Act, 12 U.S.C. 5301(12). Primary
financial regulatory agencies and home country supervisors are
referred to collectively as ``primary financial regulators'' in this
preamble.
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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 and lists
the considerations that the Council must take into account in making
such a determination. Designation \4\ is authorized if the Council
determines that either (1) material financial distress at the nonbank
financial company could pose a threat to U.S. financial stability
(referred to as 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'').\5\
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 under section 113 of the Dodd-Frank Act.
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\4\ Section 113 of the Dodd-Frank Act, 12 U.S.C. 5323, refers to
a Council ``determination'' regarding a nonbank financial company.
This preamble and the following interpretive guidance refer to
``determination'' and ``designation'' interchangeably for ease of
reading.
\5\ For ease of reading, this preamble often refers to the first
and second determination standards together as whether a company's
``material financial distress or activities'' could pose a threat to
financial stability.
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The Council has previously issued rules, guidance, and other public
statements regarding its process for evaluating nonbank financial
companies for potential designation. On April 11, 2012, the Council
issued a final rule at 12 CFR 1310.1 through 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.\6\ On March 13, 2019, the Council amended the 2012
Rule by adding a new provision at 12 CFR 1310.3.\7\ On December 30,
2019, the Council replaced the 2012 Interpretive Guidance with revised
interpretive guidance (the 2019 Interpretive Guidance).\8\ In
connection with the adoption of the 2019 Interpretive Guidance, the
Council rescinded the 2015 Supplemental Procedures.\9\
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\6\ 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 Financial Stability
Oversight 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.
\7\ 84 FR 8,958 (March 13, 2019).
\8\ 84 FR 71,740 (Dec. 30, 2019).
\9\ Minutes of the Council (Dec. 4, 2019), available at https://home.treasury.gov/system/files/261/December-4-2019.pdf. In addition,
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 and 5463; see 77 FR 31,855 (May 30, 2012). The hearing
procedures were amended in 2013 (78 FR 22,546 (April 16, 2013)) and
2018 (83 FR 12,010 (March 19, 2018)). The following interpretive
guidance does not amend the Council's hearing procedures.
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On April 21, 2023, the Council approved proposed interpretive
guidance (the Proposed Guidance) to revise and update the 2019
Interpretive Guidance.\10\ The comment period was initially set to
close after 60 days; however, in response to public requests for
additional time to review and comment on the Proposed Guidance, the
Council extended the comment period by 30 days.\11\ The comment period
closed on July 27, 2023.
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\10\ 88 FR 26,234 (April 28, 2023).
\11\ 88 FR 41,510 (June 27, 2023).
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The Council received 47 comment letters in response to the Proposed
Guidance, of which 13 were from various advocacy groups, 11 were from
companies or trade associations in the investment management industry,
six were from trade associations in the

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insurance industry, seven were from other companies or trade
associations, five were from current or former state or federal
government officials, two were from groups of academics, and three were
from other individuals.\12\
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\12\ The comment letters are available at https://www.regulations.gov/docket/FSOC-2023-0002/comments.
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Having carefully considered the comments it received, at a public
meeting on November 3, 2023, the Council adopted the final interpretive
guidance below (the Final Guidance), which replaces in its entirety the
2019 Interpretive Guidance, found at Appendix A to 12 CFR part 1310.
The Council's rules at 12 CFR 1310.1 through 23 remain in effect.
Also on November 3, 2023, the Council adopted a separate document
explaining the Council's substantive approach to identifying,
assessing, and responding to certain potential risks to U.S. financial
stability (the Analytic Framework). The 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. The
Council approved a proposed version of the Analytic Framework (the
Proposed Analytic Framework) on April 21, 2023.\13\ The public comment
period for the Proposed Analytic Framework ran concurrently with the
comment period for the Proposed Guidance, including the 30-day
extension, and most of the comment letters noted above also addressed
the Proposed Analytic Framework.
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\13\ 88 FR 26,305 (April 28, 2023).
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II. Overview of the Final Guidance

A. Overview

With the Final Guidance, the Council aims to establish a durable
process for the Council's use of its nonbank financial company
designation authority, maintain rigorous procedural protections for
nonbank financial companies reviewed for potential designation, and
remove unwarranted hurdles to designation imposed by the 2019
Interpretive Guidance. Congress created the designation authority based
on lessons learned from 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. While the financial system, market participants, and
risks can rapidly evolve, it remains the Council's statutory
responsibility not only to monitor the financial services marketplace
but to take action to respond to emerging threats to U.S. financial
stability.\14\
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\14\ See Dodd-Frank Act sections 112(a)(1)(C), (a)(2)(C), and
(a)(2)(H), 12 U.S.C. 5322(a)(1)(C), (a)(2)(C), and (a)(2)(H).
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Under the Final Guidance, the Council's designation process is
built on transparency and engagement with a company under review and
its existing primary financial regulator (if any) during the
designation process. Through this process, any Council designation of a
nonbank financial company will be based on data-driven analysis that
reflects the distinctive aspects of the company, its market, and its
existing regulation. Further, the approach adopted in the Final
Guidance does not make designation the Council's default method of
addressing risks to financial stability--and the Final Guidance does
not eliminate the Council's use of an activities-based approach to
address risks to financial stability when the Council finds it to be
appropriate. Instead, the Final Guidance puts the Council's designation
authority on equal footing with its other powers. The Council expects
to continue addressing most risks through its collaboration with
primary financial regulators.

B. Key Changes From the 2019 Interpretive Guidance

The Final Guidance removes three significant but inappropriate
prerequisites to the exercise of the Council's nonbank financial
company designation authority that were created by the 2019
Interpretive Guidance. In particular, the 2019 Interpretive Guidance
stated that before considering a nonbank financial company for
potential designation under section 113 of the Dodd-Frank Act, the
Council would exhaust all available alternatives by prioritizing an
``activities-based approach,'' perform a cost-benefit analysis, and
assess a company's likelihood of material financial distress. As
explained below, the Council has determined that these steps are not
legally required, are not useful or appropriate, and would unduly
hamper the Council's ability to use the statutory designation authority
in relevant circumstances:
By prioritizing other approaches to mitigating risks to
financial stability, the 2019 Interpretive Guidance generally allowed
the Council to consider a nonbank financial company for potential
designation only after the Council completed a multi-step process in
which the Council would wait for existing regulators to address
identified risks to financial stability, obstructing the Council's
ability to respond to risks to financial stability in a timely fashion.
Cost-benefit analysis is not in the list of considerations
Congress specifically required the Council to consider in a
designation, and due to the unpredictability of financial crises, such
an analysis is not reasonably estimable, useful, or warranted in this
context.
Assessing a nonbank financial company's likelihood of
material financial distress is not among the tasks Congress set for the
Council and could undermine financial stability by spurring a run on a
company that is designated or under review for potential designation.
Unlike the 2012 Interpretive Guidance and the 2019 Interpretive
Guidance, the Final Guidance is focused on the Council's procedures for
nonbank financial company designations. It therefore does not discuss
the substantive analytic factors the Council applies in its assessments
of nonbank financial companies. The Council has issued a separate
document--the Analytic Framework--regarding its approach to
identifying, assessing, and responding to potential risks to U.S.
financial stability. The Analytic Framework provides additional 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 the risk.
Similarly, the Final Guidance does not include the 2019
Interpretive Guidance's definition of ``threat to the financial
stability of the United States'' as requiring ``severe damage on the
broader economy.'' \15\ The Council has determined that this definition
was overly restrictive and in conflict with the Council's statutory
purpose ``to respond to emerging threats to the stability of the United
States financial system.'' \16\ Instead, as described in detail below,
the Analytic Framework states that events or conditions that could
substantially impair the financial system's ability to support economic
activity would constitute a threat to financial stability.
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\15\ See 84 FR at 71,763 (Dec. 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.
\16\ Dodd-Frank Act section 112(a)(1)(C), 12 U.S.C.
5322(a)(1)(C).
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With respect to the Council's procedures for nonbank financial
company designations and annual reevaluations of designations, the
Final

[[Page 80112]]

Guidance makes only minor changes to the 2019 Interpretive Guidance.
Among other things, the Final 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 regulator. In addition to these
pre-existing features, the Final Guidance provides further detail on
how the Council expects to 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 will be rigorous and transparent.\17\
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\17\ Because the Final Guidance itself appears in narrative form
and makes only minor changes to the designation process described in
the Council's existing guidance--separate from the modification of
the substantive analytic content discussed below--this preamble does
not include a complete and detailed description of the designation
process, which appears in the Final Guidance itself. Instead, the
following overview focuses on the Council's reasons for adopting the
Final Guidance, key changes from the 2019 Interpretive Guidance and
the Proposed Guidance, and responses to comments received on the
Proposed Guidance.
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C. Process for Nonbank Financial Company Determinations

As described in the Final Guidance,\18\ the Council expects
generally to follow a two-stage process in considering a nonbank
financial company for potential designation under section 113 of the
Dodd-Frank Act. This process is designed to enable substantial
engagement with the company under consideration and its primary
financial regulator,\19\ in recognition of the primary financial
regulator's knowledge regarding the company and its market. The Final
Guidance does not prioritize the designation authority above other
approaches to mitigating risks to financial stability; instead, the
Council's process explicitly contemplates that identified risks may be
addressed through alternatives to designation, such as nonbinding
recommendations to primary financial regulatory agencies. The Council
does not expect that every company that comes under review will
progress to a proposed or final designation, and it is the Council's
goal that companies will have ample opportunities to provide relevant
information to and engage with the Council as part of a transparent and
durable designation process.
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\18\ This discussion provides an abbreviated summary of the
procedural steps of the Council's nonbank financial company
designation process. The Final Guidance itself sets forth the
process the Council expects to follow and should be consulted with
respect to the elements of that process.
\19\ In each stage of the designation process, the Council may
also consult with, request information from, or coordinate with
other state or federal financial regulatory agencies that have
jurisdiction over the nonbank financial company or its activities.
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The initial identification of companies that the Council may review
in the first stage of the designation process (Stage 1) is a function
of the Council's staff-level committees, which are responsible for
monitoring and analyzing financial markets, financial companies, the
financial system, and issues related to financial stability. These
committees monitor the financial system and report to the Council's
Deputies Committee \20\ regarding potential risks to U.S. financial
stability that they identify. If an identified risk relates to one or
more nonbank financial companies that may merit review, 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 or direct the Council's Nonbank
Financial Companies Designations Committee \21\ to conduct an initial
analysis of one or more companies based on the risk-assessment approach
described in the Analytic Framework. Following any such analysis, the
Council may review one or more companies in Stage 1.
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\20\ 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.
\21\ The Nonbank Financial Companies 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.
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Stage 1 involves a preliminary analysis of nonbank financial
companies to assess the risks they could pose to U.S. financial
stability. Review in this stage is based on quantitative and
qualitative information available to the Council primarily through
public and regulatory sources and includes consultation with the
company's primary financial regulator (if any), as appropriate. Among
other procedural safeguards, the Final Guidance states that the company
is notified of its consideration in Stage 1 at least 60 days before the
Council votes on whether to evaluate the company further in the second
stage of review (Stage 2). This provides the company with an
opportunity voluntarily to submit relevant information to the Council
and to meet with staff who are leading the Council's analysis. A
nonbank financial company that is identified for review in Stage 2 will
receive an additional notice that it is being considered for a proposed
designation. The Council wishes to underscore, as the Final Guidance
notes, that its work in Stage 1 is preliminary. A decision to commence
review of a company in Stage 1, or to continue a review in Stage 2,
does not constitute a final decision regarding whether the company
should be designated.
Stage 2 involves an in-depth review of a nonbank financial company
using information collected directly from the company through the OFR,
as well as public and regulatory information. Stage 2 involves
significant engagement with the company under review and its primary
financial regulator. Following notice of a Council decision to evaluate
the company in Stage 2, the Council will submit to the company a
request that it provide information that the Council deems relevant to
the Council's evaluation. The nonbank financial company will also be
provided an opportunity to submit any other written information it
deems relevant. The Council will make staff representing its 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, and the Council expects that its Deputies Committee
will also grant a request to meet with a company in Stage 2. Further,
communication during Stage 2 will be two-way: For example, if the
analysis in Stage 1 has identified specific aspects of the company's
operations or activities as the primary focus for the Council's
evaluation, staff will notify the company of those specific aspects,
enabling the company to understand and provide information relevant to
those concerns. The Council will also notify any nonbank financial
company in Stage 2 if the company ceases to be considered for a
determination.
At the conclusion of Stage 2, the Council may consider whether to
make a proposed determination with respect to the nonbank financial
company (a Proposed Determination) through a process that emphasizes
transparency through additional notice, engagement, and procedural
safeguards. 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, and cannot be
delegated by the Council.\22\ Following a Proposed Determination, the
Council will issue a written notice of the Proposed

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Determination to the nonbank financial company, which will include an
explanation of the basis of the Proposed Determination.\23\ Promptly
after the Council votes to make a Proposed Determination regarding a
company, the Council will also provide the company's primary financial
regulator with the written explanation of the basis of the Council's
Proposed Determination (subject to appropriate protections for
confidential information). A nonbank financial company that is subject
to a Proposed Determination may request a hearing to contest the
Proposed Determination in accordance with section 113(e) of the Dodd-
Frank Act and applicable Council procedures.
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\22\ 12 CFR 1310.10(b).
\23\ Dodd-Frank Act section 113(e)(1), 12 U.S.C. 5323(e)(1).
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After making a Proposed Determination and holding any written or
oral hearing if requested, the Council may vote to make a final
determination that the company will be subject to supervision by the
Federal Reserve and prudential standards (a Final Determination). Like
a Proposed Determination, a Final 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, and cannot be
delegated by the Council.\24\ If the Council makes a Final
Determination, it will provide the company with a written notice of its
Final Determination, including an explanation of the basis for the
Council's decision.\25\ The Council will also provide the company's
primary financial regulator with the written explanation of the basis
of the Council's Final Determination (subject to appropriate
protections for confidential information) and will publicly release the
explanation of the Council's basis for the Final Determination.\26\
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\24\ 12 CFR 1310.10(b).
\25\ Dodd-Frank Act section 113(e)(3), 12 U.S.C. 5323(e)(3); see
also 12 CFR 1310.21 and 1310.22.
\26\ 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.
See Dodd-Frank Act section 112(d)(5), 12 U.S.C. 5322(d)(5); see also
12 CFR 1310.20(e). 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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After the Council makes a Final Determination regarding a nonbank
financial company, the Council intends to continue 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. The Council is required to reevaluate each Final
Determination at least annually and to rescind the designation if the
Council determines that the company no longer meets the statutory
standards for designation under section 113 of the Dodd-Frank Act.\27\
The annual reevaluation process is a key mechanism through which a
company's designation may be rescinded if the company has mitigated the
threat that its material financial distress or activities could pose to
U.S. financial stability. Moreover, once every five years, each nonbank
financial company subject to a Final Determination will have an
opportunity for an oral hearing before the Council at which the company
can contest the designation.
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\27\ Dodd-Frank Act section 113(d), 12 U.S.C. 5323(d).
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Numerous public comments on the Proposed Guidance supported the
proposed approach of maintaining certain procedural steps that were set
forth in the 2019 Interpretive Guidance, including the two-stage
designation process, extensive engagement by the Council and staff with
companies under review and their primary financial regulators, and the
Council's annual reevaluations of previous designations. Some
commenters stated that the two-stage process, including notice and
opportunities for engagement between the Council and the company under
review and its primary financial regulator, provides a balanced and
transparent approach to designation. Others expressed support for
specific aspects of the Proposed Guidance. For example, one commenter
stated that the Council should retain the ability to consider companies
and their subsidiaries either together or separately for designation
because modern risk management emphasizes the importance of
understanding and managing a firm's risks holistically, across the
entire enterprise.
Some commenters noted that the Proposed Guidance would increase
public transparency regarding how companies are identified for review
for a potential designation under section 113 of the Dodd-Frank Act. As
discussed above, the Final Guidance provides additional detail,
compared to the 2019 Interpretive Guidance, on how the Council expects
to identify nonbank financial companies for preliminary review in Stage
1.
Other commenters suggested procedural changes to the designation
process in the Proposed Guidance. For example, commenters suggested
accelerating the designation process by combining Stage 1 and Stage 2
or by removing the opportunity in Stage 1 for a company under review to
submit information to the Council. At least one commenter suggested
adding a step in the process to determine whether existing regulation
is insufficient to mitigate relevant threats to financial stability.
Other commenters suggested expanding the notice periods provided in the
Proposed Guidance, including a longer notice period in advance of a
vote to commence Stage 2 or a 120-day period for a company to review
all information before the Council \28\ in advance of a Final
Determination vote. The Council has declined to modify the stages or
notice periods as proposed, which enable appropriate time periods for
engaging with companies and their primary financial regulators while
not unduly delaying the Council's ability to act to address a potential
threat to U.S. financial stability. Further, the proposed two-stage
process enables the Council gradually to intensify its review of a
company, beginning with a review in Stage 1 based primarily on
available information and potentially moving to in-depth engagement
with the company and its primary financial regulator in Stage 2.
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\28\ Some commenters also advocated providing the ``full
evidentiary record'' to the company under review before a Council
vote on a Final Determination. The Council appreciates the
importance of transparency and dialogue with a company under review
and will provide a company under review with a written explanation
of the basis of any Proposed Determination as well as the
opportunity for a hearing, among other opportunities to engage with
the Council and staff representing Council members and member
agencies.
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Some commenters requested that the Council further explain how
companies under consideration in Stage 1 or Stage 2 can take steps that
would avoid a designation. Others recommended that the guidance include
language, found in the 2019 Interpretive Guidance, that the information
the Council provides to a company during Stage 1 ``may enable the
company to act to mitigate any risks to financial stability and thereby
potentially avoid becoming subject to a Council determination.'' \29\
The Council agrees that its engagement with a company under review may
enable the company to act to mitigate the threat its material financial
distress or activities could pose to financial stability. Further, if
the company were to mitigate those risks before a Final Designation
such that its material financial distress or activities could not pose
a threat to financial stability, designation would not be warranted.
Accordingly, the Council has added the language quoted above to the
Final Guidance.

[[Page 80114]]

Nonetheless, while the Council expects to communicate to companies
under review regarding potential risks to financial stability that have
been identified, in light of the importance of acting promptly to
mitigate potential threats to financial stability, the Council does not
expect to advise companies on actions they may take, delay the
designation process in connection with potential actions that a company
considers taking, or refrain from a proposed or final designation based
on actions that a company has proposed but not completed.
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\29\ 84 FR at 71,767 (Dec. 30, 2019).
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With respect to the transparency measures embedded in the
designation process under the Proposed Guidance, several commenters
voiced support, including noting that the Council has continued the
procedural transparency provided for in the 2019 Interpretive Guidance.
For example, some commenters noted that the opportunities for
engagement with the Council and submission of relevant information to
it would facilitate transparency for companies under review. Other
commenters specifically noted the importance of the Proposed Guidance's
commitment to publicly release the written explanation of the Council's
basis for a Final Determination.
Several commenters raised other transparency-related suggestions.
Some stated that more information regarding how the Council considers
threats to financial stability could give companies additional insight
and help mitigate risks and avoid designation. As noted above, the
Final Guidance states that engagement with a company under review may
enable the company to mitigate any risks to financial stability. The
Council's Analytic Framework also provides additional transparency into
how the Council considers risks to financial stability. The Council
believes that the numerous transparency mechanisms in the Final
Guidance, which provide opportunities for engagement with companies
under review and their primary financial regulators in Stage 1, in
Stage 2, after a Proposed Determination, and after a Final
Determination, provide an appropriate level of transparency to
companies regarding the Council's reviews. Some commenters also noted
that the Federal Reserve's establishment of prudential standards and an
applicable supervisory regime only after a company's designation leaves
opaque the consequences of designation. However, the division of
authority between the Council and the Federal Reserve is an element of
the statutory structure Congress adopted, not the Council's designation
procedures. In developing prudential standards applicable to designated
nonbank financial companies, the Federal Reserve is required to
differentiate among companies on an individual basis or by category,
taking into consideration their capital structure, riskiness,
complexity, financial activities, size, and any other risk-related
factors that the Federal Reserve deems appropriate.\30\
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\30\ Dodd-Frank Act section 165(a)(2)(A), 12 U.S.C.
5365(a)(2)(A).
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Several commenters suggested the Council further emphasize the
importance of the Council's engagement with primary financial
regulators. The Proposed Guidance noted the Council's expectation of
engagement with the primary financial regulator of a company under
review at every stage of the designation process, and the Final
Guidance maintains that commitment. The Council extensively engages
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.\31\
These activities comprise the foundation of the Council's work, and
under the Final Guidance the Council will continue to work with
regulators to identify, assess, and respond to risks to financial
stability.
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\31\ See, e.g., Dodd-Frank Act sections 112(a)(2)(A), (C), (D),
(E), (F), (I), and (K), 12 U.S.C. 5322(a)(2)(A), (C), (D), (E), (F),
(I), and (K).
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Other commenters suggested that the Council should notify a
company's primary financial regulator that the company is under
consideration in Stage 1. The Proposed Guidance and Final Guidance
provide that a company's primary financial regulator will receive
notice that the company is under review no later than when the company
receives notice, which occurs no later than 60 days before the Council
votes on whether to evaluate the company in Stage 2. In some cases, the
primary financial regulator may receive earlier notice, including if
the Council has been engaging with the primary financial regulator in
previous efforts, unrelated to a potential designation, to evaluate the
potential threat to financial stability, or if the primary financial
regulator is among the Council's member agencies. In general, however,
the Council believes that receiving notice simultaneously with the
company during Stage 1 will enable the primary financial regulator
appropriately to engage with the Council.\32\
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\32\ The Proposed Guidance refers to the notice provided to
companies in Stage 1 in both section II.a, which provides an
overview of the determination process, and section II.b, which
describes Stage 1 in detail. The Final Guidance clarifies these
references by specifying that the description in section II.a refers
to the notice provided in section II.b.
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Other commenters suggested that the Council should not only engage
with a company's primary financial regulator during the designation
process, but should defer to the primary financial regulator's views.
The Council firmly supports close engagement with primary financial
regulators, but deferring to those regulators during a review under
section 113 of the Dodd-Frank Act would not fulfill the Council's duty
to determine whether a company under review meets the statutory
standard for designation. The Council values the role of primary
financial regulators due to their expertise regarding their regulated
entities or markets, but Congress charged the Council with making
determinations regarding threats to U.S. financial stability. The
Council will engage with primary financial regulators and take their
views into account, but ultimately the Council itself is responsible
for determining whether a nonbank financial company meets the statutory
standard for designation.
Some commenters called for additional clarity regarding the staff-
level process for identifying nonbank financial companies for
preliminary evaluation, or recommended that the Council adopt uniform
quantitative thresholds, such as those in the 2012 Interpretive
Guidance, to identify companies for review in Stage 1. The Council
believes that the process set forth in the Final Guidance under
``Identification of Company for Review in Stage 1'' appropriately
explains the Council's process. To the extent commenters seek
information regarding the substantive analyses the Council and staff
representing Council members expect to use in considering risks that
relate to a company that may be considered in Stage 1, those analyses
are described in the Analytic Framework. While quantitative thresholds
such as those in the 2012 Interpretive Guidance \33\ provide some
clarity regarding companies that are most likely to come under review
for potential designation, even that previous guidance noted that firms
not captured

[[Page 80115]]

by the thresholds could also be reviewed. Further, the Council believes
that in light of the distinct nature of nonbank financial companies in
diverse sectors of the financial system, uniform quantitative
thresholds do not adequately align with the range of risks that nonbank
financial companies' material financial distress or activities could
pose. Because the activities of nonbank financial companies
continuously evolve, uniform thresholds that are applicable across the
financial sector may also become obsolete or less relevant to specific
risks. The Council believes the approach described in the Final
Guidance and the Analytic Framework will be more conducive to
identifying firms for consideration for designation than uniform
quantitative thresholds such as those that the Council applied in Stage
1 under the 2012 Interpretive Guidance.
---------------------------------------------------------------------------

\33\ Uniform quantitative thresholds were not included in the
2019 Interpretive Guidance.
---------------------------------------------------------------------------

A few commenters recommended that the guidance prohibit the Council
from delegating its authority to commence a review of a company in
Stage 1.\34\ Some commenters further contended that a Council vote on
commencing Stage 1 is legally required by either the Dodd-Frank Act or
the Administrative Procedure Act (APA). However, while the Dodd-Frank
Act specifies that the Council may not delegate its vote to designate a
company, it contains no such requirement regarding earlier steps in the
process, such as commencing Stage 1. Indeed, the statute itself does
not contemplate any procedural safeguards for companies under review
prior to a Council vote on a Proposed Determination; Stage 1 and Stage
2 are investigatory processes the Council has voluntarily adopted to
enhance its analytic rigor and to promote transparency. The APA
likewise contains no requirement related to the delegation of authority
to commence Stage 1, which involves only the interlocutory decision to
initiate an investigatory process and does not determine any rights or
obligations of any person or entity or cause any legal consequences.
The Final Guidance does not prohibit a delegation of the vote to
commence Stage 1, but it also does not mandate such a delegation.
Moreover, under the Final Guidance the Council itself will vote
multiple times during the designation process, including voting on
commencing Stage 2, a Proposed Designation, and a Final Designation,
and potentially the determination that the administrative record in
Stage 2 is complete.
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\34\ In accordance with the Council's Rules of Organization, the
Council may delegate authority, including to its Deputies Committee,
to implement and take any actions under the Final Guidance, except
with respect to actions that are expressly nondelegable under the
Dodd-Frank Act, the Council's Rules of Organization, or the Final
Guidance.
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D. Substantive Analyses

The Council has issued a separate document--the Analytic
Framework--that describes in detail the Council's approach for
identifying, assessing, and responding to potential risks to financial
stability. The Analytic Framework explains how the Council analyzes
risks to financial stability, regardless of both the origin of a
particular risk (including whether the risk arises from widely
conducted activities or from individual entities) and which of the
Council's authorities may be used to address the risk. The Council
believes that the Analytic Framework provides new public transparency
into how the Council expects to consider risks to financial stability.
Among other things, the Analytic Framework interprets terms that
broadly frame the Council's work, including ``financial stability'' and
``threat to financial stability.'' Therefore, while the 2012
Interpretive Guidance and the 2019 Interpretive Guidance discussed both
nonbank financial company designation procedures and also substantive
analytic factors and standards the Council applies in its assessment of
nonbank financial companies, the Final Guidance is limited to the
Council's procedures related to nonbank financial company
designations.\35\ The substantive factors the Council considers in
analyzing potential risks to financial stability are addressed in the
Analytic Framework. The Council believes that publishing its procedures
for nonbank financial company designations (the Final Guidance)
separately from its explanation of how it substantively assesses
potential financial stability risks (the Analytic Framework) enhances
public transparency and provides clarity regarding the range of
authorities the Council uses to respond to risks.\36\
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\35\ The Final Guidance retains the 2019 Interpretive Guidance's
interpretations of ``company'' and ``material financial distress,''
key terms in section 113 of the Dodd-Frank Act that are left
undefined in the statute. The Final Guidance also includes the 2019
Interpretive Guidance's interpretation of ``nonbank financial
company supervised by the Board of Governors,'' a term defined in
the Dodd-Frank Act. The preamble to the Proposed Guidance noted the
Council's proposal to retain its 2019 interpretation of this
statutory term, and the Proposed Guidance contained language from
the 2019 Interpretive Guidance regarding the practical implications
of that interpretation. Consistent with the Proposed Guidance, the
Final Guidance states that ``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.''
\36\ Comments on the Proposed Analytic Framework are addressed
in the preamble to the Analytic Framework.
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1. Analytic Factors
The 2019 Interpretive Guidance described both the Council's
procedures and analytic factors that the Council expected to apply in
nonbank financial company designations. For example, that guidance
described channels the Council deemed most likely to facilitate the
transmission of the negative effects of a nonbank financial company's
material financial distress or activities to other financial firms and
markets. These descriptions do not appear in the Final Guidance and
will not be included in Appendix A to 12 CFR part 1310. Instead, a
description of the analyses the Council expects to apply, both within
and outside of the designation context, appears in its separately
issued Analytic Framework.
Some commenters supported separating the Council's guidance on the
nonbank financial company designation process from the discussion of
the substantive analyses it uses to consider risks to financial
stability, citing, among other things, the procedural nature of the
Proposed Guidance (and by extension, the Final Guidance) and the
benefits of establishing a unified framework for considering risks
without regard to their origin. Additional commenters noted that
adopting a broadly applicable Analytic Framework will help the Council
and regulators take a consistent approach, regardless of the origin of
a particular risk, and will provide transparency that may help nonbank
financial companies identify and mitigate risks that might otherwise
lead the firms to be considered for potential designation under the
Final Guidance.
Other commenters argued that the Final Guidance should retain a
description of the Council's analysis specifically applicable to
nonbank financial company designations.\37\ As explained above, the
Council believes that issuing separate documents regarding the
procedural aspects of the nonbank financial company designation process
and the Council's substantive

[[Page 80116]]

analysis of risks to financial stability is the better approach.
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 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.\38\ The
Council may consider those risk factors and transmission channels in
activities-based reviews, entity-specific analyses, or other work.\39\
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.
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\37\ At least one commenter stated that the Analytic Framework
should be appended to the 2012 Rule--the Council's procedural rule
on nonbank financial company designations--by incorporating it into
the appendix to 12 CFR part 1310. The Analytic Framework explains
how the Council approaches risks to financial stability generally,
so it would not appropriately be appended to the 2012 Rule, which is
focused exclusively on nonbank financial company designations.
\38\ As discussed in section II.G below, the ``vulnerabilities''
described in the Analytic Framework do not imply an intention to
consider a company's likelihood of material financial distress. The
vulnerabilities described in the Analytic Framework are
characteristics that most commonly contribute to risks to financial
stability. They are not meant to relate to the likelihood of a
company's material financial distress. Although some commenters
equated a company's ``vulnerability'' with the company's likelihood
of material financial distress, that is not how the Council uses the
term in the Analytic Framework or the Final Guidance.
\39\ Consistent with its longstanding precedent, the identified
transmission channels are non-exhaustive. See 2019 Interpretive
Guidance, 84 FR at 71,763 (Dec. 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 at 21,657 (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.'').
---------------------------------------------------------------------------

A number of commenters addressed the relationship between the
statutory standards and statutory considerations for nonbank financial
company designations, on one hand, and the vulnerabilities, sample
metrics, and transmission channels described in the Analytic Framework,
on the other hand. Some commenters questioned whether the Analytic
Framework would displace the statutory standards and considerations
established by section 113 of the Dodd-Frank Act, and other commenters
asked for more detail regarding how the Council would apply the
Analytic Framework's vulnerabilities, sample metrics, and transmission
channels in the nonbank financial company designation context. Some
commenters stated that the Proposed Analytic Framework and the Proposed
Guidance did not provide enough detail on how the Council considers
risks to financial stability.
With respect to nonbank financial company designations, 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. Consistent with the statutory
requirements, the Council will apply the statutory standard and each of
the 10 statutory considerations in evaluations of nonbank financial
companies for potential designation.
At the same time, 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. Accordingly, the vulnerabilities and transmission channels
described in the Analytic Framework will inform the Council's
assessment of the designation standard and mandatory considerations
under section 113. As the Proposed Guidance and Final Guidance note, in
the designation process, including to identify companies for potential
review in Stage 1, the Council and its staff-level committees expect to
consider the vulnerabilities, types of sample metrics, and transmission
channels described in the Analytic Framework.
Other commenters asked for greater detail on how the Council would
assess the vulnerabilities described in the Analytic Framework. As also
discussed in the preamble to the Analytic Framework, the Council has
addressed these requests by adding further details to several listed
vulnerabilities in the Analytic Framework regarding the types of sample
metrics the Council expects to use to assess them.
Some commenters noted that the vulnerabilities described in the
Analytic Framework do not restate the 10 mandatory considerations in
section 113 of the Dodd-Frank Act, and several objected to the
vulnerabilities on that basis. A purpose of the Analytic Framework,
however, is to provide transparency into how the Council considers
risks to financial stability in general. Repetition of the statutory
language applicable to nonbank financial company designations
specifically would not further that goal. In the context of a review of
a nonbank financial company under section 113 of the Dodd-Frank Act,
the vulnerabilities and transmission channels described in the Analytic
Framework clarify the statutory considerations. For example:
The section 113 considerations of leverage and
concentration are both listed as vulnerabilities in the Analytic
Framework, and the Analytic Framework provides additional insight into
these issues.
The section 113 consideration of ``the extent and nature
of the transactions and relationships of the company with other
significant nonbank financial companies and significant bank holding
companies'' may relate to the ``interconnections'' vulnerability and
``exposures'' transmission channel in the Analytic Framework, among
others.
The section 113 consideration of ``the amount and types of
the liabilities of the company, including the degree of reliance on
short-term funding'' may relate to a number of vulnerabilities in the
Analytic Framework, including ``leverage,'' ``liquidity risk and
maturity mismatch,'' ``interconnections,'' and ``inadequate risk
management,'' as well as the ``exposures'' and ``asset liquidation''
transmission channels, among others.
The section 113 considerations of ``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 United States
financial system'' and ``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'' may relate to the ``interconnections''
and ``concentration'' vulnerabilities and ``critical function''
transmission channel in the Analytic Framework, among others.
The section 113 consideration of ``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'' may relate to
the ``interconnections'' and ``concentration'' vulnerabilities in the
Analytic Framework, among others, and each of the transmission
channels.
The section 113 consideration of ``the degree to which the
company is already regulated by 1 or more primary financial regulatory
agencies'' may relate to the vulnerability of ``inadequate risk
management,'' among others, and each of the transmission channels in
the Analytic Framework.
Although the Analytic Framework provides transparency into how the
Council considers risks in general, the Council stresses that any
determination regarding a nonbank financial company under section 113
of the Dodd-Frank Act will be made based on the statutory

[[Page 80117]]

standard and considerations prescribed by Congress.
Several commenters suggested that the Council should state
explicitly how it intends to weight the various statutory
considerations or the vulnerabilities, including by stating whether
some are more important than others. Some commenters stated that,
unless the Council explains how it will consider relevant statutory
considerations and vulnerabilities with sufficient detail to allow any
nonbank financial company to avoid designation, the Final Guidance and
Analytic Framework provide inadequate notice to companies under
consideration. However, the Council must consider all of the mandatory
considerations Congress set forth in section 113 of the Dodd-Frank Act,
and the relevance of any particular consideration will depend on the
relevant facts and circumstances. Thus, an explicit weighting scheme,
determined outside the context of a specific designation, may not be
suitable to analyze a range of companies or conditions. The Dodd-Frank
Act itself provides notice to companies regarding the standards and
considerations the Council will rely on to make determinations under
section 113. Further, the Dodd-Frank Act provides that a nonbank
financial company under consideration for designation must receive a
written notice and an explanation of the basis of any Proposed
Determination in advance of an opportunity for a hearing.\40\ The Final
Guidance (and Analytic Framework) go far beyond these statutory
minimums to provide insight into how the Council considers risks in
general and opportunities for a company under review to understand how
the Council considers the threat the company's material financial
distress or activities could pose to financial stability.
---------------------------------------------------------------------------

\40\ Dodd-Frank Act section 113(e), 12 U.S.C. 5323(e).
---------------------------------------------------------------------------

The Council notes that it routinely provides public transparency
regarding how it assesses various particular financial stability risks.
For example, since 2020, the Council has issued reports or statements
regarding secondary mortgage market activities,\41\ money market mutual
funds,\42\ climate-related financial risk,\43\ nonbank financial
intermediation,\44\ and digital assets,\45\ in addition to its annual
reports, all of which detail the Council's views about various risks to
financial stability and in many cases recommend steps for mitigation.
---------------------------------------------------------------------------

\41\ Council Statement on Activities-Based Review of Secondary
Mortgage Market Activities (Sept. 25, 2020), available at https://home.treasury.gov/system/files/261/Financial-Stability-Oversight-Councils-Statement-on-Secondary-Mortgage-Market-Activities.pdf.
\42\ Council Statement on Money Market Fund Reform (June 11,
2021), available at https://home.treasury.gov/system/files/261/FSOC_Statement_6-11-21.pdf.
\43\ Council Report on Climate-Related Financial Risk (Oct. 21,
2021), available at https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf; see also Fact Sheet: The Financial Stability
Oversight Council and Progress in Addressing Climate-Related
Financial Risk (July 28, 2022), available at https://home.treasury.gov/system/files/261/FSOC_20220728_Factsheet_Climate-Related_Financial_Risk.pdf.
\44\ Council Statement on Nonbank Financial Intermediation (Feb.
4, 2022), available at https://home.treasury.gov/system/files/261/FSOC_Nonbank_Financial_Intermediation.pdf.
\45\ Council Report on Digital Asset Financial Stability Risks
and Regulation (Oct. 3, 2022), available at https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
---------------------------------------------------------------------------

2. ``Threat'' To Financial Stability
Under section 113 of the Dodd-Frank Act, the Council may designate
a nonbank financial company if the Council determines that the
company's material financial distress or activities ``could pose a
threat to the financial stability of the United States.'' \46\ Under
the Proposed Guidance, the Council proposed 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. In response to public comments on this approach,
the Council has included, in the Analytic Framework as adopted in final
form, an interpretation of ``threat to financial stability'' \47\ that
is based on the interpretation of ``financial stability'' set forth in
the Analytic Framework.
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\46\ Dodd-Frank Act section 113(a)(1), 12 U.S.C. 5323(a)(1). The
Dodd-Frank Act separately sets forth the same statutory standard for
the designation of foreign nonbank financial companies. Dodd-Frank
Act section 113(b)(1), 12 U.S.C. 5323(b)(1). In the context of
foreign nonbank financial companies, section 113 also lists the
considerations that the Council must take into account, which are
similar to the considerations applicable to U.S. nonbank financial
companies, in some cases limited to the foreign nonbank financial
companies' U.S. business or activities. See Dodd-Frank Act section
113(b)(2), 12 U.S.C. 5323(b)(2). The Final Guidance and this
preamble do not generally distinguish between U.S. nonbank financial
companies and foreign nonbank financial companies, and the Council
intends for the Final Guidance to apply in the same manner to both
types of companies.
\47\ The Council's statutory responsibilities related to
financial stability are generally focused on the United States (see,
e.g., Dodd-Frank Act section 112(a)(1)(A), 12 U.S.C. 5322(a)(1)(A)
(``to identify risks to the financial stability of the United
States''); 112(a)(1)(C), 5322(a)(1)(C) (``to respond to emerging
threats to the stability of the United States financial system'');
112(a)(2)(A), 5322(a)(2)(A) (``to assess risks to the United States
financial system''); 112(a)(2)(C), 5322(a)(2)(C) (``to identify
potential threats to the financial stability of the United
States''); 112(a)(2)(G), 5322(a)(2)(G) (``identify gaps in
regulation that could pose risks to the financial stability of the
United States''); 112(a)(2)(H), 5322(a)(2)(H) (``require supervision
by the Board of Governors for nonbank financial companies that may
risks to the financial stability of the United States'')).
References to the United States may be omitted herein solely for
ease of reading.
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A number of commenters stated that they supported the Council's
interpretation of ``threat to the financial stability of the United
States'' in the 2019 Interpretive Guidance and recommended that the
Council define this term in the Final Guidance. Some commenters urged
the Council to retain the interpretation of this term set forth in the
2019 Interpretive Guidance or to revert to the interpretation in the
2012 Interpretive Guidance.\48\ The Council believes the interpretation
of ``threat to the financial stability of the United States'' in the
2019 Interpretive Guidance imposed an inappropriately high threshold,
as discussed below. One commenter stated that the interpretation of
``financial stability'' in the Proposed Analytic Framework was at odds
with the Financial Stability Board's interpretation of the term. The
Council agrees that coordination with international bodies is
important, but this consideration cannot supersede the Council's
statutorily specified duties. In contrast, a number of commenters
expressed concern that the 2019 definition eroded the Council's
preventative role in risk mitigation. Some commenters stated that the
2019 definition effectively precluded the Council from fulfilling its
statutory duties to respond to potential or emerging threats to
financial stability. Some commenters noted that while the Dodd-Frank
Act calls on the Council to determine whether there ``could'' be a
threat to financial stability, the 2019 definition required the Council
to determine that the economy ``would'' be severely damaged.\49\
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\48\ The 2012 Interpretive Guidance stated the Council ``will
consider a `threat to the financial stability of the United States'
to exist if there would be an impairment of financial intermediation
or of financial market functioning that would be sufficiently severe
to inflict significant damage on the broader economy.'' 77 FR at
21,657 (April 11, 2012).
\49\ See also Dodd-Frank Act section 112(a)(2)(H), 12 U.S.C.
5322(a)(2)(H) (setting forth the Council's duty to ``require
supervision . . . for nonbank financial companies that may pose
risks to . . . financial stability'' (emphasis added)).
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The Council appreciates this feedback and agrees that providing an
interpretation of ``threat to financial stability'' provides clarity to
nonbank financial companies and other stakeholders. As commenters
noted, providing such an interpretation helps companies understand the
substantive analytic approach the Council will use

[[Page 80118]]

for designations under section 113 of the Dodd-Frank Act and provides
an indication of the significance of a potential threat to financial
stability that may warrant a designation under section 113.
The Proposed Analytic Framework interpreted ``financial
stability,'' and the Council continues to view that interpretation as
appropriate. The interpretation of ``threat to financial stability''
is, by its nature, closely related to the interpretation of ``financial
stability,'' and can best be understood when considering these two
terms together. Further, threats to financial stability will be
evaluated within the framework of the Council's efforts to identify,
assess, and respond to potential risks to financial stability, as set
forth in the Analytic Framework. Therefore, the Analytic Framework
offers the opportunity to situate the Council's interpretation of a
threat to financial stability, whether posed by a nonbank financial
company or originating from other sources, within the Council's broader
approach.
As noted above, many commenters expressed varying views regarding
whether the Council should maintain the definition of ``threat to the
financial stability of the United States,'' found in the 2019
Interpretive Guidance, as ``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.'' \50\ The
Council views the 2019 definition as unwarranted, and, as many
commenters noted, the 2019 definition contrasts sharply with the
statutory standard under section 113 of the Dodd-Frank Act. In light of
the Council's statutory duty to act to address potential threats to
financial stability, the purpose of the designation authority in
mitigating the risks of financial crises, and the uncertainty inherent
in predicting future financial market developments, requiring the
Council to determine that a nonbank financial company's material
financial distress or activities could inflict ``severe damage'' on the
broader economy creates an unduly high threshold for Council action.
The Council must be able to 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.
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\50\ 84 FR at 71,763 (Dec. 30, 2019).
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Some commenters stated that the interpretation of ``financial
stability'' in the Proposed Analytic Framework would unduly lower the
standard for designation under section 113 of the Dodd-Frank Act. The
Council disagrees. The standard for designation is set forth in section
113 itself. The Analytic Framework's interpretation of ``financial
stability'' does not expand the statutory standard. Rather, the
Analytic Framework describes how the Council considers financial
stability and threats to it. However, in response to public comments,
the Council has included in the Analytic Framework, as adopted in final
form, an interpretation of ``threat to financial stability'' that is
based on the proposed interpretation of ``financial stability'' and
that includes an indication of the significance of a threat to
financial stability: Events or conditions that could substantially
impair the ability of the financial system to support economic activity
would constitute a threat to financial stability. This approach
clarifies that a designation under section 113 would not be justified
if a nonbank financial company's material financial distress or
activities could only cause immaterial impairments of the financial
system.
Some commenters indicated that the lack of concrete guidance on an
interpretation of ``threat to the financial stability of the United
States'' may dissuade nonbank financial companies from engaging in
innovation and could lead to concentration risks. The Council notes
that the definition of ``threat to the financial stability of the
United States'' in the 2019 Interpretive Guidance did not specify
particular activities or risk factors that could result in a
designation under section 113 of the Dodd-Frank Act, but instead
indicated the significance of a risk that could fall within the
statutory standard for designation. The interpretation in the Analytic
Framework, while reflecting different terminology than the 2019
Interpretive Guidance, maintains this type of approach. For nonbank
financial companies that wish to understand the activities or business
characteristics that could lead to a potential designation under
section 113--or that wish to mitigate the risks their material
financial distress or activities could pose to financial stability--the
Council encourages those companies to consider how the vulnerabilities
and transmission channels described in the Analytic Framework may apply
to their companies.
3. Suitability of Designation
The Final Guidance sets forth the process the Council expects to
follow when considering nonbank financial companies for potential
designation. The Council's analytic approach to identifying, assessing,
and responding to risks to financial stability and the substantive
considerations it will take into account in determining whether to
designate a company for prudential standards and supervision by the
Federal Reserve are set forth in section 113 of the Dodd-Frank Act and
the Analytic Framework. Neither the Proposed Guidance nor the Final
Guidance addresses the suitability of designation with respect to any
particular entity, sector, or circumstances. Nevertheless, the Council
received a number of comments regarding the suitability of designation
for certain sectors, entities, or circumstances as well as the merits
and disadvantages of entity-based designation in general.
Several commenters stated that designation under section 113 of the
Dodd-Frank Act is not generally a suitable response to a threat to
financial stability. Some stated that designation would result in
regulation that may be ill-fitting for some types of nonbank financial
companies, their products or services, or for financial risk channels
that are different from those of bank holding companies. Some
commenters stated that designations under section 113 are generally
inadvisable because they would distort or disrupt markets or increase
burdens for the designated nonbank financial company. However, the
Dodd-Frank Act authorizes the Council to designate nonbank financial
companies if their material financial distress or activities could pose
a threat to financial stability. Further, the statute requires the
Federal Reserve to adopt regulatory requirements applicable to a
designated nonbank financial company and provides for the Federal
Reserve to differentiate ``among companies on an individual basis or by
category, taking into consideration their capital structure, riskiness,
complexity, financial activities (including the financial activities of
their subsidiaries), size, and any other risk-related factors that the
Board of Governors deems appropriate.'' \51\ Therefore, the Council
will not reject in advance the use of its statutory authority and is
adopting the Final Guidance to explain the process it would use in
considering nonbank financial companies for designation.
---------------------------------------------------------------------------

\51\ Dodd-Frank Act section 165(a)(2)(A), 12 U.S.C.
5365(a)(2)(A).
---------------------------------------------------------------------------

As noted above, Congress created the designation authority based on
lessons learned from the financial crisis in 2007-09, when financial
distress at large, complex, highly interconnected, highly leveraged,
and inadequately regulated nonbank financial companies

[[Page 80119]]

devastated the financial system. Potential risks to financial stability
may often be addressed by existing regulators; however, if one or more
nonbank financial companies, though their material financial distress
or activities, could pose a threat to financial stability, Congress
determined that designation of the relevant companies for Federal
Reserve supervision and prudential standards is an appropriate
response.
Some commenters stated that the Proposed Guidance does not set
forth with sufficient clarity the analyses the Council will conduct
during the designation process or the prudential standards that will
apply after designation. While the Council appreciates these comments,
the Final Guidance does not address the substantive analytic factors to
be used in designations because the Council has issued a separate
document--the Analytic Framework--regarding its analytic approach for
identifying and assessing potential risks to U.S. financial stability
more broadly. Further, as noted above, Congress assigned responsibility
to the Federal Reserve to determine the prudential standards that apply
to a designated nonbank financial company, although the Council can
recommend standards.
Other commenters stated that the Council should make climate-
related financial risks a factor in the designation analysis of a
nonbank financial company that may be subject to physical or transition
climate-related risks. The Council appreciates these comments and has
published a number of analyses regarding the emerging and increasing
risks that climate change poses to the financial system. However, the
Council believes that potential risks related to climate change may be
assessed under the vulnerabilities, sample metrics, and transmission
channels in the Analytic Framework. For example, to the extent that
climate-related financial risks could result in defaults on a company's
outstanding obligations, those risks may be considered, in part,
through the ``interconnections'' vulnerability and the ``exposures''
transmission channel.
Some commenters requested that the Council tailor the Final
Guidance to one or more particular industries. As noted above, the
Final Guidance does not set forth the substantive analyses the Council
intends to apply in designation determinations. Instead, the Analytic
Framework explains 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 the risk. This approach seeks to
strengthen the Council's ability to identify, assess, and respond to
risks to U.S. financial stability, regardless of whether those risks
originate from individual companies or widely conducted activities. The
Council further notes that it expects to take into account relevant
differences among various sectors, markets, or activities in the
designation process, and to consult with a company's existing primary
financial regulator. For example, the Council would take into account
the extent to which assets are managed rather than owned by the
company.\52\
---------------------------------------------------------------------------

\52\ See Dodd-Frank Act section 113(a)(2)(F), 12 U.S.C.
5323(a)(2)(F).
---------------------------------------------------------------------------

Finally, some commenters stated that entity-based designation is
not suitable for their industry, including life insurers, property and
casualty insurers, reinsurers, asset managers, nonbank mortgage
lenders, nonbank mortgage servicers, mutual funds (including money
market mutual funds), private funds, fintech companies (including
certain payment providers), and issuers of asset-backed securities.
These commenters indicated that the Council should exclude certain
types of companies from potential review. As it did in the 2019
Interpretive Guidance, the Council declines to categorically exclude
any particular financial sectors or types of nonbank financial
companies from its assessment of potential threats to financial
stability. The Council expects that any analysis of a nonbank financial
company for potential designation will be tailored to reflect the
unique attributes of the company and its existing regulatory framework,
but assessing the suitability of designation of any class of nonbank
financial companies would be premature. The substantive rigor under the
Analytic Framework, the transparency under the Final Guidance, and the
Council's adherence to the statutory requirements for designations will
provide nonbank financial companies under review for potential
designation with ample opportunities to raise risk-related factors
during the Council's evaluation.

E. Activities-Based Approach

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, and the statute does not prioritize among the
Council's authorities. For example, pursuant to section 113 of the
Dodd-Frank Act, the Council may determine that an individual nonbank
financial company will be subject to supervision by the Federal Reserve
and prudential standards if the Council determines that the company's
material financial distress or activities could pose a threat to
financial stability. The Dodd-Frank Act also gives the Council various
authorities to make nonbinding recommendations to regulators.\53\
---------------------------------------------------------------------------

\53\ See, e.g., Dodd-Frank Act sections 112(a)(2)(D), (F), (I),
(K), and (N), 12 U.S.C. 5322(a)(2)(D), (F), (I), (K), and (N).
---------------------------------------------------------------------------

The Council's response to a particular risk to financial stability
depends 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, in cases where the financial system relies on
the ongoing financial activities of a small number of entities, such
that the impairment of one of the entities could threaten financial
stability, or where a particular financial company's material financial
distress or activities could pose a threat to financial stability,
entity-based action may be appropriate.
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,\54\ many
in the form of an activities-based approach. The Council has also used
entity-specific approaches in designating eight financial market
utilities in 2012 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.
---------------------------------------------------------------------------

\54\ See, e.g., Council 2022 Annual Report, available at https://home.treasury.gov/system/files/261/FSOC2022AnnualReport.pdf.
---------------------------------------------------------------------------

However, the statute does not contemplate that one of the Council's
authorities takes precedence over others, or that the Council must make
recommendations to existing regulators before commencing a review of a
company for potential designation. 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,

[[Page 80120]]

interconnected, and highly leveraged nonbank financial companies could
threaten the stability of the U.S. financial system. Many commenters
cited the failure of American International Group (AIG), where
regulators had not identified or addressed the risk the company
ultimately posed to financial stability. In light of the experience
during the financial crisis in 2007-09, the Dodd-Frank Act recognizes
that relying on existing regulators is not sufficient in some
circumstances. Congress did not structure the Dodd-Frank Act to
deprioritize the Council's nonbank financial company designation
authority.
Nonetheless, the 2019 Interpretive Guidance stated that the Council
would identify, assess, and address potential risks and threats to U.S.
financial stability through a process that began with what it called an
``activities-based approach.'' Under that guidance, the activities-
based approach meant the Council would rely on existing regulators to
address potential threats to financial stability before the Council
could consider designating a nonbank financial company.\55\ The 2019
Interpretive Guidance further generally limited the use of designations
under section 113 of the Dodd-Frank Act to cases where a potential risk
or threat could not be adequately addressed by existing regulators. The
Council received many comments favoring the prioritization of an
activities-based approach over entity-specific designation, and many
other comments advocating for the removal of the prioritization. The
Final Guidance does not include the statement that the Council will
first rely on existing regulators to address risks to financial
stability before considering a nonbank financial company for potential
designation.
---------------------------------------------------------------------------

\55\ One commenter cited an estimate from two former
Chairpersons of the Council and two former Chairs of the Federal
Reserve Board that the nonbank financial company designation process
under the 2019 Interpretive Guidance would take six years or more.
---------------------------------------------------------------------------

The Council believes that rescinding the prioritization of an
activities-based approach will better enable the Council to respond to
threats to financial stability irrespective of their source. The
Council agrees with the many commenters that stated that the Council
should work closely with federal and state regulators. As discussed
above and below, the Council engages extensively with federal and state
financial regulatory agencies to identify, assess, and respond to risks
to financial stability. The Council appreciates the expertise and
experience, noted by many commenters, of primary financial regulators.
The Council agrees with commenters that collaborating with existing
regulators is critical. Under the Final Guidance, the Council will
maintain its previous commitment to engaging extensively with existing
regulators.
Some commenters noted that other bodies, including the Financial
Stability Board, have focused in recent years on an activities-based
approach, and encouraged the Council to do the same. Some commenters
also stated that an activities-based approach is the most effective
means of addressing risks to the financial system. The Council believes
that the availability of its full range of authorities is important to
enable it to address the full range of potential risks to financial
stability. In many respects, the Council agrees with reasons identified
by commenters for supporting efforts by existing regulators to address
potential risks to financial stability. For example, as commenters
noted, in appropriate circumstances such actions can enable the
mitigation of risks that arise from the activities of numerous
financial companies in a particular sector or from financial products
that are offered on a widespread basis. Other commenters stated that
addressing risks through generally applicable regulatory requirements
may increase fairness and reduce competitive disadvantages by promoting
consistent treatment across firms. Some commenters stated that action
by existing regulators may also be quicker than a Council designation
process followed by the adoption of prudential standards by the Federal
Reserve. The Council appreciates these points.
Some commenters suggested that the prioritization of an activities-
based approach is appropriate, in part, because the Council is not a
primary financial regulator and should defer to the judgment of primary
financial regulators. During any designation review, the Council will
consider the ``degree to which the company is already regulated by 1 or
more primary financial regulatory agencies,'' \56\ but the statute does
not prioritize this factor among the list of required considerations.
While the Council engages routinely with primary financial regulators,
as discussed above, Congress gave the Council itself the responsibility
to reach judgments under the standard set forth in section 113 of the
Dodd-Frank Act regarding potential threats to financial stability.
---------------------------------------------------------------------------

\56\ Dodd-Frank Act section 113(a)(2)(H), 12 U.S.C.
5323(a)(2)(H).
---------------------------------------------------------------------------

Other commenters highlighted the benefits of nonbank financial
company designations compared to other ways to respond to a potential
threat to financial stability. Many commenters pointed out that
designation may be more appropriate when a threat to U.S. financial
stability arises from the material financial distress or activities of
a particular nonbank financial company, and that in the event of such a
risk, a designation may be a more targeted solution that does not
impact all firms in the same market. Designation may also be more
suitable when a large, complex, interconnected nonbank financial
company is subject to varying levels of regulation across financial
markets and regulatory jurisdictions. As some commenters stated, the
potential impact of a nonbank financial company's material financial
distress or activities on financial stability is frequently related to
the interconnections and combination of financial risks across multiple
business lines within a single company and the company's existing
regulation and risk-management practices.
One commenter also noted more holistic benefits of nonbank
financial company designations. Designation may be a more effective
deterrent against companies' actions that increase potential risks to
financial stability because some companies may be able to avoid
activities-based rules through regulatory arbitrage. Moreover, one
commenter noted that designation, whose resulting regulatory regime
includes resolution-planning requirements, supports the success of the
Orderly Liquidation Authority under Title II of the Dodd-Frank Act,
which is designed to limit the consequences of insolvencies when they
do occur. Commenters also noted that the Council's nonbank financial
company designation process enables firms to respond quickly, and that
the Council can reconsider a previous designation if there are changes
that reduce the potential threat to financial stability.
Some commenters asserted that the Proposed Guidance indicates that
the Council intends to prioritize an entity-based approach. This is
incorrect. The Council does not intend to favor any of its statutory
authorities over others. The Proposed Guidance and the Final Guidance
focus on the nonbank financial company designation authority simply
because the sole purpose of the guidance is to establish the Council's
process for designating nonbank financial companies. Other Council

[[Page 80121]]

materials, including the Analytic Framework, describe how the Council
may apply other authorities.

F. Cost-Benefit Analysis

Although the Dodd-Frank Act does not require a cost-benefit
analysis prior to the designation of a nonbank financial company, the
2019 Interpretive Guidance stated that the Council would perform a
quantitative cost-benefit analysis, whenever possible,\57\ as a
prerequisite to designation. Under the Proposed Guidance, the Council
would not conduct a cost-benefit analysis prior to a designation of a
nonbank financial company. The Council received and considered numerous
comments both favoring retention of cost-benefit analysis as a step in
the designation process and advocating its removal. As described below,
the Council does not believe that a cost-benefit analysis of individual
designation determinations is legally required or reasonably estimable,
useful, or appropriate in this context. Therefore, the Final Guidance
does not contemplate the Council conducting a cost-benefit analysis
prior to a nonbank financial company designation.
---------------------------------------------------------------------------

\57\ The 2019 Interpretive Guidance further provided, ``If such
benefits or costs cannot be quantified in this manner, the Council
will explain why such benefits or costs could not be quantified.''
84 FR at 71,765 (Dec. 30, 2019).
---------------------------------------------------------------------------

Section 113 of the Dodd-Frank Act sets forth the standard for
designation, which directs the Council to determine whether ``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 the
financial stability of the United States.'' \58\ The Dodd-Frank Act
also sets forth the list of considerations ``the Council shall
consider'' ``[i]n making a determination'' to designate a nonbank
financial company under section 113.\59\ Subsection 113(a)(2) lists 10
explicit and mandatory considerations--including the company's
leverage, transactions with other financial companies, assets under
management, and existing regulation--as well as a permissive eleventh
consideration: ``any other risk-related factors that the Council deems
appropriate.'' \60\
---------------------------------------------------------------------------

\58\ Dodd-Frank Act sections 113(a)(1) (with respect to U.S.
nonbank financial companies) and (b)(1) (with respect to foreign
nonbank financial companies), 12 U.S.C. 5323(a)(1) and (b)(1).
\59\ Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2).
\60\ Id.
---------------------------------------------------------------------------

The designation standard and the statutory considerations are
focused on the threat a nonbank financial company's material financial
distress or activities could pose to U.S. financial stability. Section
113 establishes a structure for the Council's evaluation of a company
and the risks it could pose to financial stability. This statutory
structure does not contain, nor does it require the Council to perform,
a cost-benefit analysis. The statute instructs the Council to focus on
potential threats to financial stability, not the costs of designation
to the company under review or to others. The potential costs and
benefits of designation depend, among other things, on financial
conditions, market behaviors, and the risk and magnitude of potential
future financial crises that are inestimable with reasonable precision.
Congress determined that when a nonbank financial company meets the
statutory standard, designation is justified. The Council declines to
second-guess that legislative judgment.
Some commenters noted that neither the costs nor the benefits of
designation appear in the considerations listed in section 113 of the
Dodd-Frank Act, and that they are not similar to any of the listed
considerations. The absence of a cost-benefit analysis requirement in
section 113 contrasts with other provisions of the Dodd-Frank Act that
do require cost-benefit analysis.\61\ As several commenters noted, this
contrast demonstrates that Congress did not intend for the Council to
perform a cost-benefit analysis when making determinations under
section 113.
---------------------------------------------------------------------------

\61\ See, e.g., Dodd-Frank Act sections 1013(d)(7)(A)(i)(IV) and
1022(b)(2)(A)(i), 12 U.S.C. 5493(d)(7)(A)(i)(IV) and
5512(b)(2)(A)(i).
---------------------------------------------------------------------------

Further, some commenters noted that while Congress granted the
Council discretion to consider other factors it ``deems appropriate,''
these too must be ``risk-related.'' \62\ Thus, under the text of
section 113 of the Dodd-Frank Act, whether cost-benefit analysis is a
prerequisite to designation depends on two inquiries: (1) is cost-
benefit analysis a ``risk-related factor,'' and (2) does ``the Council
deem[ ] appropriate'' the consideration of costs and benefits in a
designation? The answer to both is no.
---------------------------------------------------------------------------

\62\ See Dodd-Frank Act section 113(a)(2)(K), 12 U.S.C.
5323(a)(2)(K).
---------------------------------------------------------------------------

Having considered the public comments on the Proposed Guidance, the
Council does not believe that cost-benefit analysis, or its results or
components, are ``risk-related factors,'' and does not expect to
consider them. The Council believes the statutory reference to ``any
other risk-related factors'' 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 a nonbank financial company's material
financial distress or activities.\63\ Cost-benefit analysis is unlike
any of the 10 explicit considerations the Council must take into
account prior to designating a nonbank financial company. Each of the
mandatory considerations--for example, a company's leverage, off-
balance-sheet exposures, and importance as a source of credit--all
directly inform the threat a company's material financial distress or
activities could pose to U.S. financial stability. Analysis of the
costs and benefits of designation does not have that character. The
Council acknowledges that there would be costs to a designated nonbank
financial company associated with the Federal Reserve's prudential
standards and supervision, but the Council does not believe that those
costs would be ``risk-related factors.'' \64\
---------------------------------------------------------------------------

\63\ This interpretation is also consistent with how the word
``risk'' is used in surrounding provisions of the Dodd-Frank Act.
See, e.g., Dodd-Frank Act sections 112, 115, 120, 121, and 123, 12
U.S.C. 5322, 5325, 5330, 5331, and 5333.
\64\ Under section 165 of the Dodd-Frank Act, the Federal
Reserve has authority to establish prudential standards applicable
to designated nonbank financial companies, and the Council may
recommend standards under section 115 of the Dodd-Frank Act. 12
U.S.C. 5325 and 5365.
---------------------------------------------------------------------------

Some commenters contended that the costs of designation could be so
great as to increase the threat to financial stability that a company's
material financial distress or activities could pose. Thus, these
commenters stated, the costs of designation should also be considered a
risk-related factor. However, the Council does not believe that
commenters on the Proposed Guidance identified a credible scenario in
which the costs of designation could be relevant to the assessment of
the threat a company's material financial distress or activities could
pose to financial stability.\65\ That is, while commenters noted that
costs of designation hypothetically could affect a company's financial
position, they did not convincingly demonstrate that such costs could
affect the threat to financial stability posed by the company's

[[Page 80122]]

material financial distress, were it to occur, or activities. Moreover,
the purpose of the prudential standards and Federal Reserve supervision
applicable to a designated nonbank financial company is to mitigate the
threat to financial stability that the company's material financial
distress or activities could pose. For example, even if they were
costly to implement, risk-based capital requirements, leverage limits,
or liquidity requirements reduce risks posed by companies to the
financial system. Notwithstanding the potential costs of a Council
designation, Congress set out a process by which companies should be
evaluated and, if they meet the statutory standard, subject to
prudential standards and Federal Reserve supervision.
---------------------------------------------------------------------------

\65\ While, for the reasons described in this section, the
Council does not expect to consider any anticipated costs of
designation, under the Final Guidance a company under review may
submit to the Council any information the company deems relevant to
the Council's evaluation under the statutory standard for
designation. Consistent with section 113(a)(2)(K) of the Dodd-Frank
Act, 12 U.S.C. 5323(a)(2)(K), the Final Guidance does not preclude
the Council from considering any risk-related factors, including
factors that the Council later determines to be risk-related, if the
Council deems their consideration appropriate.
---------------------------------------------------------------------------

Other commenters contended that costs accruing to the market more
generally (e.g., potential competitive harms) or the results of a cost-
benefit analysis assessing the effect of designation on the broader
economy could be ``risk-related factors.'' However, the standard
Congress chose for nonbank financial company designations indicates
that such costs and cost-benefit analysis are not ``risk-related
factors.'' The Council does not believe that cost-benefit analysis
indicates whether a company's material financial distress or activities
``could pose a threat to the financial stability of the United
States,'' the standard for designation under section 113. As noted
above, in adopting this statutory standard, Congress determined that if
a company meets the standard, based on the considerations Congress
identified, the designation is justified.\66\
---------------------------------------------------------------------------

\66\ See also Dodd-Frank Act section 112(a)(2)(H), 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 pursuant to section 113''
(emphasis added)).
---------------------------------------------------------------------------

Even if the cost of designation or the results of cost-benefit
analysis were ``risk-related factors,'' the Council does not deem
appropriate their consideration as a prerequisite to designation. A
cost-benefit analysis aimed at assessing the incremental costs
resulting from a designation and the potential benefits from mitigating
the threat a company's material financial distress or activities could
pose to financial stability would be impossible to perform with
reasonable precision. This is in part because, as some commenters
noted, it is not feasible to estimate with any certainty the
likelihood, magnitude, or timing of a future financial crisis. The
costs to financial stability arising from the material financial
distress or activities of a nonbank financial company will depend on
the state of the economy, the financial system, and innumerable other
factors at the time. The costs of any particular future financial
crisis, and thus the benefits of its prevention or mitigation through
designation or other measures, cannot be predicted. Even estimates of
the costs of past crises (which approximate the benefits of their
avoidance), in terms of reductions in gross domestic product (GDP),
greater government expenses, increases in unemployment, or other
factors, vary widely on the order of trillions of dollars.\67\
---------------------------------------------------------------------------

\67\ One study cited by a commenter estimated the costs of a
recent financial crisis to exceed an entire year of GDP. See Josh
Bivens, ``Why is recovery taking so long--and who's to blame?,''
Economic Policy Institute (Aug. 11, 2016), https://www.epi.org/publication/why-is-recovery-taking-so-long-and-who-is-to-blame
(estimating the cumulative output gap in the economy at 133% of
GDP). Other commenters cited a study that describes the large range
of financial-crisis cost estimates, often differing by trillions of
dollars, and notes the unsuitability of cost-benefit analysis for
regulation aimed at improving financial stability. See John Coates
IV, ``Cost-Benefit Analysis of Financial Regulation: Case Studies
and Implications,'' The Yale Law Journal (Jan.-Feb. 2015), https://www.yalelawjournal.org/article/cost-benefit-analysis-of-financial-regulation.
---------------------------------------------------------------------------

The costs of designation to the designated company, the market, or
others are also likely to evade useful estimation. These costs will
depend critically on the applicable regulatory regime, which the Dodd-
Frank Act directs the Federal Reserve, not the Council, to adopt.\68\
Generally, specific regulatory requirements for previously 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. Moreover, those requirements, along with
the company's behavior in response to them and relevant market
conditions, may vary over time. 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 designation would
yield a useful assessment. As noted by commenters, the infrequency and
heterogeneity of past financial crises, combined with the unpredictable
nature of financial markets and uncertain future evolution of financial
firms and activities, do not provide a reliable basis for conducting an
informative cost-benefit analysis. A cost-benefit analysis in this
context is likely to produce results that are highly sensitive to
discretionary assumptions and thus not helpful to decision-making.
Accordingly, it is not surprising that Congress declined to prescribe a
cost-benefit analysis as a prerequisite to designation.
---------------------------------------------------------------------------

\68\ One commenter cited an estimate that AIG would have faced
annual compliance costs between $100 million and $150 million
related to its previous designation. The Council takes no position
on the accuracy of this estimate, but notes that it is orders of
magnitude smaller than the likely costs of a financial crisis.
---------------------------------------------------------------------------

Some commenters also asserted that a cost-benefit analysis before a
designation is legally required by the district court's decision in
MetLife, Inc. v. Financial Stability Oversight Council (MetLife),\69\
the Supreme Court's decision in Michigan v. EPA,\70\ or the APA.\71\
The Council disagrees.
---------------------------------------------------------------------------

\69\ 177 F. Supp. 3d 219, 239-42 (D.D.C. 2016).
\70\ 576 U.S. 743 (2015).
\71\ One commenter also contended that a statement in the
Proposed Guidance acknowledging that the guidance was subject to the
procedures described in Executive Order 12866 (E.O. 12866), which
generally directs agencies to consider the relevant costs and
benefits of ``regulations'' and ``regulatory actions,'' undermines
the Council's view that cost-benefit analysis is not a requirement
of the designation process. However, E.O. 12866 defines
``regulation'' to mean ``an agency statement of general
applicability and future effect, which the agency intends to have
the force and effect of law, that is designed to implement,
interpret, or prescribe law or policy or to describe the procedure
or practice requirements of an agency,'' and defines ``regulatory
action'' as ``any substantive action by an agency . . . that
promulgates or is expected to lead to the promulgation of a final
rule or regulation.'' E.O. 12866 sections 3(e) and (f). The
Council's designation determinations under section 113 of the Dodd-
Frank Act are neither ``regulations'' nor ``regulatory actions.''
Determinations under section 113 are thus not subject to E.O. 12866.
---------------------------------------------------------------------------

The district court in MetLife rescinded one of the Council's
previous designations under section 113 of the Dodd-Frank Act because,
among other reasons, the Council did not consider the costs of the
designation. However, as the MetLife court noted: ``This Court is one
of 94 United States District Courts, comprising several hundred judges,
and its Opinion is not binding on others; the Opinion stands on its own
persuasive value, to the extent it has any.'' \72\ Furthermore, the
MetLife court's

[[Page 80123]]

holding appears to rely, in part, on its assessment that a company's
likelihood of material financial distress was a required consideration
under the Council's guidance in effect at that time.\73\ As discussed
below, the Final Guidance makes clear that the Council does not expect
to consider the likelihood of a nonbank financial company's material
financial distress; as a result, to the extent MetLife's reasoning
relied on that requirement, it would not apply. In addition, while the
court in MetLife viewed costs as a risk-related factor, it failed to
take into account that the Council did not ``deem'' the cost of
designation an appropriate risk-related factor to consider. Consistent
with section 113(a)(2)(K) of the Dodd-Frank Act, because the Council
did not deem cost appropriate to consider, its consideration was not
required for the statutory reasons described above.
---------------------------------------------------------------------------

\72\ MetLife v. Financial Stability Oversight Council, Order,
Dkt. No. 129,15-cv-45 (D.D.C. Feb. 28, 2018) (declining to vacate
portion of opinion rescinding MetLife's designation); see also Pears
v. Mobile Cnty., 645 F. Supp. 2d 1062, 1076 (S.D. Ala. 2009) (``It
is black-letter law that the decision of one federal district court
is not binding on another federal district court, or even on the
same judge in another case.'') (collecting cases). The MetLife
decision has limited significance even for MetLife itself. In the
final settlement agreement between the Council and MetLife in 2018,
the Council maintained that its designation of MetLife complied with
applicable law, and 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.
\73\ See 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''
and citing Council's ``own Guidance'' as obligating the Council to
consider associated ``risk'').
---------------------------------------------------------------------------

Other commenters stated that Michigan v. EPA requires the Council
to perform cost-benefit analyses of its designations. In Michigan, the
Supreme Court considered whether cost-benefit analysis was required by
a provision of the Clean Air Act directing the EPA to regulate certain
hazardous emissions only if EPA found that ``such regulation is
appropriate and necessary.'' \74\ The Court held that the requirement
to determine that the regulation was ```appropriate and necessary'
requires at least some attention to cost.'' Notably, the Court stated
that it was not concluding the statute required EPA ``to conduct a
formal cost-benefit analysis.'' \75\
---------------------------------------------------------------------------

\74\ See Michigan v. EPA, 576 U.S. 743, 747, 751 (2015); 42
U.S.C. 7412.
\75\ Id. at 759.
---------------------------------------------------------------------------

While section 113 of the Dodd-Frank Act also uses the word
``appropriate,'' the context is entirely different. First, the phrase
``any other risk-related factors that the Council deems appropriate''
is permissive, not mandatory.\76\ Unlike the EPA, which was directed to
act only when it found that regulation was ``appropriate and
necessary,'' \77\ under the Dodd-Frank Act, the Council has clear
statutory authority to choose which ``other risk-related factors'' to
consider by deeming them appropriate, or not. Second, section 113's
permissive reference to ``appropriate'' is limited to ``risk-related
factors,'' rather than other considerations that could conceivably
influence agency decision-making, such as cost-benefit analysis. This
interpretation of section 113 is consistent with the Supreme Court's
decision in Michigan v. EPA, in which it noted that ``[t]here are
undoubtedly settings in which the phrase `appropriate and necessary'
does not encompass cost.'' \78\ Similarly, and more recently, the Court
of Appeals for the D.C. Circuit has rejected the claim that the word
``appropriate'' necessarily requires consideration of economic costs,
in part, because the Supreme Court in Michigan v. EPA ``was careful to
emphasize that its reading of `appropriate' was dependent on the
statutory context . . . .'' \79\
---------------------------------------------------------------------------

\76\ Dodd-Frank Act section 113(a)(2)(K), 12 U.S.C.
5323(a)(2)(K); see also Webster v. Doe, 486 U.S. 592, 600 (1988)
(statutory grant of agency authority to ``deem'' actions ``necessary
or advisable'' ``fairly exudes deference to [the agency],''
``appears to . . . foreclose'' judicial review, and ``strongly
suggests that [the statute's] implementation `was committed to
agency discretion by law.' '').
\77\ See Michigan v. EPA, 576 U.S. 743, 747, 751 (2015).
\78\ Id. at 752.
\79\ Murray Energy Corp. v. EPA, 936 F.3d 597, 622 (D.C. Cir.
2019).
---------------------------------------------------------------------------

Several commenters argued that the APA's general prohibition on
arbitrary and capricious agency action could require the Council to
perform cost-benefit analysis, regardless of the standard and
requirements set forth in the Dodd-Frank Act. However, the APA contains
no such mandate, and the Supreme Court has long held that the APA's
text sets forth the ``maximum procedural requirements'' courts may
impose.\80\ Reading additional requirements into the APA ``would
violate the very basic tenet of administrative law that agencies should
be free to fashion their own rules of procedure.'' \81\
---------------------------------------------------------------------------

\80\ Perez v. Mortg. Bankers Ass'n, 575 U.S. 92, 100, 102 (2015)
(``Beyond the APA's minimum requirements, courts lack authority `to
impose upon an agency its own notion of which procedures are `best'
or most likely to further some vague, undefined public good.''')
(quoting Vermont Yankee Nuclear Power Corp. v. Nat. Res. Def.
Council, Inc., 435 U.S. 519, 549 (1978)).
\81\ Id. at 102.
---------------------------------------------------------------------------

A number of commenters stated that cost-benefit analysis is
generally a helpful agency practice because it disciplines agency
decision-making and leads to better policy outcomes. The Council takes
no view on these propositions in general, but as discussed above, does
not believe cost-benefit analysis would generally be appropriate in the
context of nonbank financial company designations such that it should
be a prerequisite to designation. Under the Analytic Framework, the
Council anticipates that its analyses, including in the context of a
designation under section 113 of the Dodd-Frank Act, will be rigorous,
data-driven, and transparent. Other commenters contended that cost-
benefit analysis is necessary to ensure that designation will promote
U.S. financial stability or generally do more good than harm. The
Council disagrees. Under the statutory standard in section 113, the
Council has authority to designate a nonbank financial company only if
the company's material financial distress or activities could pose a
threat to U.S. financial stability. Thus, the promotion of U.S.
financial stability is already embedded in the designation standard.
In addition, these commenters did not acknowledge the fact that the
prudential standards will be developed by the Federal Reserve, and some
presume it would regulate nonbank financial companies in a way that
actually increases risks to financial stability. However, under its
statutory mandate, the Federal Reserve would seek to establish
prudential standards that would ``prevent or mitigate risks to the
financial stability of the United States.'' \82\ The Federal Reserve
will also take into consideration companies' ``capital structure,
riskiness, complexity, financial activities (including the financial
activities of their subsidiaries), size, and any other risk-related
factors that the Board of Governors deems appropriate.'' \83\
---------------------------------------------------------------------------

\82\ Dodd-Frank Act section 165(a)(1), 12 U.S.C. 5365(a)(1).
\83\ Dodd-Frank Act section 165(a)(2)(A), 12 U.S.C.
5365(a)(2)(A).
---------------------------------------------------------------------------

G. Likelihood of Material Financial Distress

As part of the evaluation of a company being considered for
designation, the 2019 Interpretive Guidance provided that ``the Council
will assess the likelihood of the company's material financial
distress.'' \84\ The Final Guidance removes this ``likelihood
assessment'' from the Council's designation procedures.\85\
---------------------------------------------------------------------------

\84\ 84 FR at 71,766-67 (Dec. 30, 2019).
\85\ The Council for many years consistently expressed the view
that neither the Dodd-Frank Act nor the 2012 Interpretive Guidance
contemplated the consideration of the likelihood of a nonbank
financial company's material financial distress. The district court
in MetLife held that, notwithstanding the Council's arguments to the
contrary, the 2012 Interpretive Guidance required an assessment of
the likelihood of a company's material financial distress. The 2019
Interpretive Guidance altered the Council's approach by stating that
the Council would consider this factor. The Final Guidance conforms
to the Council's previous understanding that this factor should not
be taken into account. To the extent that the 2012 Interpretive
Guidance could reasonably be interpreted as committing the Council
to consider this factor, the Council is now clarifying that it does
not interpret the Dodd-Frank Act, the Final Guidance, or the
Analytic Framework to contemplate an assessment of the likelihood of
a company's material financial distress.

---------------------------------------------------------------------------

[[Page 80124]]

The Council believes that assessing the likelihood of a company's
material financial distress (referred to by some commenters as a
company's ``vulnerability'' to financial distress) is neither required
nor appropriate. As described below, such an assessment does not appear
in relevant provisions of the Dodd-Frank Act, fits poorly with the
statutory standard for designation, compromises the preventative nature
of the designation authority, and could cause the very financial
instability that a designation is intended to avert. Further, history
provides myriad examples of the futility of predicting, years in
advance, the likelihood of any specific financial company's material
financial distress. Accordingly, the Council unequivocally declines to
include any requirement to assess a company's likelihood of, or
vulnerability to, material financial distress before a designation
under section 113 of the Dodd-Frank Act.
Congress authorized the Council to designate a company under
section 113 of the Dodd-Frank Act 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.'' \86\
This standard (one of two statutory designation standards under section
113) instructs the Council to determine whether a company's material
financial distress could pose a threat to financial stability--not to
assess how likely such distress is to occur. Thus, under section 113,
the Council presupposes a company's material financial distress, and
then evaluates what consequences for U.S. financial stability could
follow.\87\ If those consequences ``could pose a threat'' to U.S.
financial stability, designation is warranted. The first determination
standard, thus, does not require or contemplate an assessment of how
likely a company is to experience material financial distress. Put
differently, the assessment under the first designation standard is
binary. If a company's material financial distress, were it to occur,
could pose a threat to financial stability, then the company meets the
standard for designation; if not, the first standard for designation is
not met. The likelihood of the company's material financial distress is
not relevant to the statutory standard for designation.
---------------------------------------------------------------------------

\86\ Dodd-Frank Act section 113(a)(1), 12 U.S.C. 5323(a)(1). See
also Dodd-Frank Act section 113(b)(1) (with respect to foreign
nonbank financial companies), 12 U.S.C. 5323(b)(1).
\87\ Some commenters suggested that the Council should define
``material financial distress.'' Both the Proposed Guidance and
Final Guidance provide that 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. This interpretation is unchanged from both
the 2012 Interpretive Guidance and the 2019 Interpretive Guidance.
---------------------------------------------------------------------------

Moreover, none of the 10 statutory considerations the Council must
consider in making a determination under section 113 includes such a
likelihood assessment. As some commenters pointed out, the Council's
designation determinations take into account these statutory
considerations, not the probability of material financial distress.
Further, the 10 statutory considerations inform the Council's
determination whether the statutory standard has been met; they do not
alter the statutory standard.
Some commenters contended that the 10 considerations in section 113
of the Dodd-Frank Act imply that the Council must consider a nonbank
financial company's likelihood of material financial distress. As noted
above, the 10 considerations do not contain any language relating to
such a likelihood assessment. Moreover, reading such a requirement into
the statute would conflict, in different ways, with each of the two
alternative statutory standards for designation. As noted above, the
first designation standard turns on whether a company's material
financial distress could pose a threat to financial stability, not how
likely such distress is to occur. Section 112 of the Dodd-Frank Act
underscores that the Council's duty is to designate ``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.''
\88\ By assigning the duty to designate nonbank financial companies
that may pose risks ``in the event'' of their material financial
distress or failure, section 112 emphasizes that the Council takes
material financial distress or failure as a given and assesses what
risks could flow from it.
---------------------------------------------------------------------------

\88\ Dodd-Frank Act section 112(a)(2)(H), 12 U.S.C.
5322(a)(2)(H).
---------------------------------------------------------------------------

In contrast, the second designation standard under section 113
provides for designation of a company if the Council determines that
``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.'' \89\ This
second standard does not take into account or depend on the effects of
a company's material financial distress, much less an assessment of its
likelihood. For that reason, the 2019 Interpretive Guidance specified
that the Council would undertake a likelihood assessment only under the
first designation standard--not when the Council considers a company
under the second designation standard.\90\ But the 10 statutory
considerations apply to the second designation standard as well as the
first designation standard. Therefore, to interpret the 10 statutory
considerations as requiring the Council to assess a company's
likelihood of material financial distress would contradict the plain
meaning of section 113 by collapsing the two statutory designation
standards--the second of which is not related to a company's material
financial distress--into one.
---------------------------------------------------------------------------

\89\ Dodd-Frank Act section 113(a)(1), 12 U.S.C. 5323(a)(1). See
also Dodd-Frank Act section 113(b)(1) (with respect to foreign
nonbank financial companies), 12 U.S.C. 5323(b)(1).
\90\ See 84 FR at 71,754 and 71,767 (Dec. 30, 2019).
---------------------------------------------------------------------------

A number of commenters supported the Council's interpretation as
proposed. Some commenters stated that proceeding with a designation
only after a determination that the company's material financial
distress is likely would alter the statutory standard--authorizing
designation only when a company's material financial distress ``does
threaten'' financial stability, rather than when it ``could pose a
threat'' to financial stability.
Further, the designation authority 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.\91\ As some
commenters underscored, permitting designation to occur only when the
Council determines that a company is likely to fail, or has a
reasonable or foreseeable likelihood of failure, would be damaging to
financial stability. Waiting to act until there is an estimable
likelihood of a company's failure would negate the purpose of the
Council's designation authority, which is to mitigate risks before they
actually threaten financial stability. The designation process under
the Final Guidance will 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

[[Page 80125]]

stability. For these tools to be most effective, they must be in place
well before material financial distress appears on the horizon.
---------------------------------------------------------------------------

\91\ See Dodd-Frank Act section 112(a)(1)(C), 12 U.S.C.
5322(a)(1)(C).
---------------------------------------------------------------------------

Some commenters argued that a likelihood assessment will help the
Council identify which companies are suitable for designation. But
there are good reasons that Congress chose not to require the Council
to consider the likelihood of a nonbank financial company's material
financial distress, and the Council does not believe it would be a
useful consideration. As other commenters noted, companies that seem
unlikely to experience financial distress may nonetheless experience
material financial distress and rapidly threaten financial stability. 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, on September 10, 2008, Lehman Brothers reported shareholder
equity--which is a measure of solvency--of $28 billion as of the end of
August.\92\ Two days later, on September 12, 2008, ``experts from the
country's biggest commercial investment banks . . . could not agree
whether or not'' Lehman Brothers was solvent.\93\ The next business
day, Monday, September 15, 2008, Lehman Brothers declared bankruptcy.
The collapse of Long-Term Capital Management in 1998, which one
commenter attributed to significant leverage and a lack of regulation,
was similarly rapid.\94\ 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.
Several commenters noted that even without the undue hurdles to
designation imposed by the 2019 Interpretive Guidance, the designation
process will likely remain lengthy, and stated that it is unrealistic
to expect the Council to estimate the likelihood of a company's
material financial distress potentially years in advance. The Council
agrees.
---------------------------------------------------------------------------

\92\ 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.
\93\ Id.
\94\ The more recent failures of Silicon Valley Bank and
Signature Bank in March 2023 further underscore how quickly and
unexpectedly a financial company can become insolvent.
---------------------------------------------------------------------------

Finally, if the Council can only designate a company by taking into
account the likelihood of the company's material financial distress,
public awareness of a designation (or its mere possibility) could
create a perception that the Council views the company as relatively
likely to fail, causing a run on the company by its creditors and
counterparties.\95\ This is an important reason why bank supervisory
ratings are confidential, in acknowledgement of the risk that the
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.
---------------------------------------------------------------------------

\95\ While a likelihood assessment would presumably not be
treated differently than other elements of the designation process
with respect to the Council's confidentiality procedures, a company
under consideration for designation may publicly disclose that it is
under review, either voluntarily or pursuant to otherwise applicable
disclosure requirements. Further, under the Final Guidance the
Council will publicly announce all Final Determinations.
---------------------------------------------------------------------------

Some commenters interpreted a discussion of this issue in the
preamble to the Proposed Guidance as indicating that designation under
any procedures could cause a run on the nonbank financial company under
consideration or otherwise give rise to material financial distress or
financial instability. Some suggested that the Council should always
consider the potential for designation itself to lead to material
financial distress at the company. That is not the Council's view.
Rather, the Council believes that its evaluation of a company's
likelihood of material financial distress, or determination regarding
the likelihood of a company's material financial distress as part of a
designation, could trigger a run on the company. As evidenced by the
four previous examples of the Council's use of the nonbank financial
company designation authority, designation is unlikely to have that
effect in the absence of a likelihood assessment; instead, designation
leads to the establishment of prudential requirements and supervision
by the Federal Reserve, which serve to mitigate the risks arising from
material financial distress at the designated company.
Some commenters contended that the Council must assess a company's
likelihood of material financial distress because a company with no
likelihood of distress could not possibly ``pose a threat'' to
financial stability. These commenters misread the first designation
standard. As noted above, that standard presupposes material financial
distress at the company under consideration. Congress instructed the
Council to take material financial distress as a given and assess the
consequences. That a company might have a low likelihood of material
financial distress does not change the inquiry under the statutory
standard.
Furthermore, the contention that a likelihood assessment is
necessary because some companies are immune to material financial
distress rests on a factual assumption the Council rejects. As
discussed above, and as some commenters noted, there is little ability
to predict, years in advance, the likelihood of any specific financial
company's material financial distress, and history has revealed that
even financial companies viewed as strong and stable can rapidly weaken
and fail.\96\ Moreover, material financial distress may arise
unpredictably from shocks generated outside of the financial system.
For example, even companies with excellent financial risk management
may experience material financial distress as a result of operational
risks such as cyberattacks or other information technology
failures.\97\
---------------------------------------------------------------------------

\96\ Expected default frequencies (EDF) from Moody's Credit Edge
and Kamakura default probability (KDP) are two off[hyphen]the-shelf
metrics of the likelihood of default. During the 2007-09 financial
crisis, both metrics provided little lead time ahead of material
financial distress. EDFs rose above 5 percent for Fannie Mae and
Freddie Mac in February 2008, about seven months before they were
put into conservatorship. Lehman Brothers' EDF rose above 5 percent
in June 2008, roughly two months before its bankruptcy. AIG's EDF
remained below 5 percent until the day the Federal Reserve stepped
in to rescue the firm. Similar patterns were observed at commercial
banks. As summarized by the Federal Deposit Insurance Corporation
(FDIC), ``Throughout 2006, only about one-half of 1 percent of banks
were on the problem list, the lowest percentage for any year for
which these data are available (1980-2017), suggesting, incorrectly
as it turned out, that the risk profile of the banking industry was
at a historic low.'' FDIC, Crisis and Response: An FDIC History,
2008-2013, at 106 (2017).
\97\ Operational risks associated with inadequate or failed
internal processes, people, and systems, or from external events,
are inherent in most financial company products, activities,
processes, and systems. An operational failure could result in
material financial distress at a company if the failure impedes the
company's ability to provide key products or services.
---------------------------------------------------------------------------

Some commenters stated that, in the absence of a likelihood
assessment, two companies that have vastly different probabilities of
material financial distress (or of threatening financial stability)
will receive equivalent treatment in the designation process. These
concerns are misplaced. In a designation process, the Council
determines whether a company's material financial distress or
activities could pose a threat to financial stability. The supervisory
regime and prudential requirements to mitigate that threat are
established by the Federal Reserve, generally following the
designation. As noted above, in developing prudential standards
applicable to designated

[[Page 80126]]

nonbank financial companies, the Federal Reserve is required to
differentiate among companies on an individual basis or by category,
taking into consideration their capital structure, riskiness,
complexity, financial activities, size, and any other risk-related
factors that the Federal Reserve deems appropriate.\98\
---------------------------------------------------------------------------

\98\ Dodd-Frank Act section 165(a)(2)(A), 12 U.S.C.
5365(a)(2)(A).
---------------------------------------------------------------------------

Other commenters stated that the Council must assess a company's
likelihood of material financial distress under the first designation
standard because, in their view, the court's decision in MetLife
requires it. As noted in section II.F above, as a district court
opinion, MetLife is not binding on any other court or the Council
(outside of the specific orders entered in that proceeding). More
fundamentally, the court in MetLife held that the Council's failure to
assess the likelihood of MetLife's material financial distress was
contrary to the 2012 Interpretive Guidance, which the court interpreted
to require a likelihood assessment.\99\ The MetLife court did not hold
that a likelihood assessment was required by the Dodd-Frank Act or any
other source of law beyond the 2012 Interpretive Guidance. Because the
Final Guidance unequivocally eliminates any statement that the Council
will assess a company's likelihood of material financial distress, this
element of the MetLife decision does not apply.
---------------------------------------------------------------------------

\99\ 177 F. Supp. 3d at 233-39.
---------------------------------------------------------------------------

Some commenters contended that the vulnerabilities or other factors
described in the Proposed Analytic Framework implied an obligation to
consider a company's likelihood of financial distress. The Council
disagrees and does not intend to interpret the Analytic Framework in
that manner. The Analytic Framework does not add to or modify the
standard for designation. Rather, the Analytic Framework describes how
the Council considers risks to financial stability generally,
regardless of the tool used to address those risks. The
``vulnerabilities'' described in the Analytic Framework do not imply an
intention to consider a company's likelihood of material financial
distress.
Some commenters argued that in the absence of a likelihood
assessment, the Council will inappropriately designate companies
without considering all of the relevant factors or any mitigation by
the company or its regulators, and in circumstances such that
designation will harm economic growth or impair financial stability.
Some commenters argued that because designation is an important action,
the Council should read into the statutory standard additional
requirements, including the likelihood assessment, that Congress did
not expressly adopt. For the reasons described above, the Council does
not view a likelihood assessment as relevant to the statutory standard,
related to the statutory considerations, or appropriate in a
designation analysis.

H. Other Comments Received

The public comments on the Proposed Guidance were largely focused
on the relatively small number of topics addressed above. However, the
Council received and considered some comments addressing other issues.
For example, one commenter stated that the Council should not designate
nonbank financial companies during any period in which Congress is
considering legislation related to financial stability. The Council
believes that, pending any future legislation, the Council has a
current statutory duty to carry out its responsibilities as directed by
existing law.
Another commenter suggested that following the failures of certain
banks in the first half of 2023, the Council should table the Proposed
Guidance and instead prioritize the identification and assessment of
risks potentially affecting banks. The Council believes that the recent
stress in the banking sector underscores the importance of actionable,
durable, and transparent procedures for addressing potential threats to
financial stability, consistent with the Final Guidance and the
Analytic Framework.
Some commenters who are commissioners of Council member agencies,
but are not their chairs, expressed concern that only the chairs of
their respective agencies are members of the Council. The Council
appreciates the contributions of member agencies that are led by multi-
member bodies, and notes that the composition of the Council is
dictated by the Dodd-Frank Act.
One commenter stated that any Council member's public comments
about potential designations could suggest prejudgment of the outcome
before required procedural steps have occurred. The Council notes that
it has reached no conclusions regarding the analysis of any nonbank
financial company under the Final Guidance and the Analytic Framework
and notes that the procedures in the Final Guidance are designed to
provide many opportunities for companies under consideration to engage
with staff of Council members and member agencies and to present
relevant information to inform the views of the Council and its
members.
Several commenters expressed general support for the Proposed
Guidance. Their reasons included that the changes proposed would help
curb risks at nonbank entities, demonstrate the Council's commitment to
promoting financial innovation while safeguarding financial stability,
and restore the Council's ability to fulfill its mission. Commenters
who expressed general opposition to the Proposed Guidance largely
focused on changes from the 2019 Interpretive Guidance, arguing that
the Council should retain elements of the 2019 Guidance that the
proposal omitted. These points are discussed in the sections above.
Other commenters expressed support for the Proposed Guidance while
also urging the Council to take immediate steps to respond to perceived
risks to financial stability. The Council believes the Final Guidance
provides the Council with the ability to use its statutory designation
authority in applicable circumstances while providing important
procedural safeguards and ample opportunities for engagement with
companies under review and their primary financial regulators.

III. Legal Authority of the 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.\100\ 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 intends
to take in the determination process.\101\ The Council also has
authority to issue procedural rules \102\ and policy

[[Page 80127]]

statements.\103\ The Final 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 Final Guidance
sets forth rules of agency organization, procedure, or practice, the
Council has concluded that the Final Guidance does not have binding
effect and does not impose duties on, or alter the rights or interests
of, any person. Further, the Final Guidance does not change the
statutory standards for the Council's actions 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 Final 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 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 APA would not apply.\104\ However, in the
Council's rule codified at 12 CFR 1310.3, the Council voluntarily
committed that it would not amend or rescind Appendix A to 12 CFR 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.\105\ Consequently, the Council followed those
procedures with respect to the Final Guidance.
---------------------------------------------------------------------------

\100\ See, for example, Dodd-Frank Act sections 112(a)(2), 113,
115, 120, and 804, 12 U.S.C. 5322(a)(2), 5323, 5325, 5330, and 5463.
\101\ 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, Prod. Tool v. Employment & Training Admin., 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.'' U.S. v. Mead,
533 U.S. 218, 227 (2001).
\102\ See Dodd-Frank Act section 111(e)(2), 12 U.S.C.
5321(e)(2).
\103\ See Ass'n of Flight Attendants-CWA, AFL-CIO v. Huerta, 785
F.3d 710 (D.C. Cir. 2015).
\104\ See 5 U.S.C. 553(b)(A).
\105\ 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, including
documents that are referred to in but are not a part of the Final
Guidance, such as the Council's separately issued Analytic
Framework, hearing procedures, bylaws, and committee charters, are
not subject to section 1310.3's requirements.
---------------------------------------------------------------------------

It is the Council's intention that each portion of the Final
Guidance, and the rescission of the 2019 Interpretive Guidance, should
continue in effect if all or any other portion of the Final Guidance is
held unlawful or otherwise set aside by a court. Further, if any
portion of the Analytic Framework is held unlawful or otherwise set
aside by a court, the Council intends that each portion of the Final
Guidance that is not also held unlawful or otherwise set aside by a
court should continue in effect. While the Final Guidance as a whole
sets forth the process the Council intends to follow when considering a
nonbank financial company for designation under section 113 of the
Dodd-Frank Act, the Council would expect to follow any of the Final
Guidance's remaining portions if other portions were no longer in
effect, and for the reasons described above would not expect to follow
any aspect of the 2019 Interpretive Guidance (other than with respect
to those aspects of the Final Guidance that are identical to the 2019
Interpretive Guidance). Similarly, the Council would expect to apply
the Analytic Framework even if the Final Guidance, or any part of it,
were no longer in effect.

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 \106\ under control
number 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.
---------------------------------------------------------------------------

\106\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

The collection of information under the Final 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 Final Guidance is 1,000 hours. We estimate the cost associated
with this information collection to be $562,500.
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 $500 per hour, and the remainder will
be carried by outside professionals retained by financial companies at
an average cost of $750 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
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.
The Proposed Guidance requested comment on the estimates and other
assumptions in the proposed collection of information, but the Council
received no comments in response to the questions presented.

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, as amended by Executive Order
14094, the Office of Information and Regulatory Affairs within the
Office of Management and Budget has determined that the Final Guidance
is a ``significant regulatory action.'' Accordingly, the Office of
Management and Budget has reviewed the Final Guidance.

VI. Congressional Review Act

Pursuant to the Congressional Review Act,\107\ the Office of
Information and Regulatory Affairs designated this rule as a major rule
as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

\107\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

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:

[[Page 80128]]

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 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
regarding nonbank financial company determinations.\2\
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\1\ 12 U.S.C. 5323.
\2\ 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.\3\ Section III sets forth the
process the Council expects to follow in conducting reevaluations of
its previous determinations.
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\3\ 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, 12 U.S.C.
5323(f).
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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 \4\ for an entity-specific
determination. This section describes the process the Council
expects to follow in general for those reviews.
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\4\ 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 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. 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 of this appendix A, 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 as
provided below 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 \5\ 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 agency before requiring the submission of
reports from any nonbank financial company.\6\
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\5\ 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.
\6\ 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.\7\ 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).
---------------------------------------------------------------------------

\7\ See 12 CFR 1310.21(c).
---------------------------------------------------------------------------

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 Analytic 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,
types of metrics, and transmission channels 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 \8\ 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) \9\ to conduct an initial analysis of

[[Page 80129]]

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.
---------------------------------------------------------------------------

\8\ 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.
\9\ 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.

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, which may enable the company to act to mitigate any risks
to financial stability and thereby potentially avoid becoming
subject to a Council determination.
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.\10\ 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.
---------------------------------------------------------------------------

\10\ 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 \11\ 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.
---------------------------------------------------------------------------

\11\ 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.\12\ This
information will generally be collected by the OFR.\13\ 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.
---------------------------------------------------------------------------

\12\ See 12 CFR 1310.21(a).
\13\ See Dodd-Frank Act section 112(d), 12 U.S.C. 5322(d).
---------------------------------------------------------------------------

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

[[Page 80130]]

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 would expect to
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.\14\ 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 potential determination in the future at the
Council's discretion, consistent with the processes described above.
---------------------------------------------------------------------------

\14\ See 12 CFR 1310.21(a)(3).
---------------------------------------------------------------------------

d. Proposed and Final Determinations

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 nondelegable basis, of two-
thirds of the voting members of the Council then serving, including
an affirmative vote by the Chairperson of the Council.\15\ 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.\16\ 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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\15\ 12 CFR 1310.10(b).
\16\ See Dodd-Frank Act section 113(e)(1), 12 U.S.C. 5323(e)(1).
---------------------------------------------------------------------------

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 and Sec. 1310.21(c) of the Council's rule regarding
nonbank financial company determinations.\17\ If the nonbank
financial company requests a hearing in accordance with the
procedures set forth in Sec. 1310.21(c), the Council will set a
time and place for such hearing. The Council has published hearing
procedures on its website.\18\ 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.
---------------------------------------------------------------------------

\17\ See 12 CFR 1310.21(c).
\18\ 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.
---------------------------------------------------------------------------

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.\19\ 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(d)(3), Sec. 1310.21(e)(3), or Sec. 1310.22(d)(3)
of the Council's rule.\20\ 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.\21\
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\19\ 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).
\20\ See 12 CFR 1310.21(d)(3) and (e)(3) and 1310.22(d)(3).
\21\ See Dodd-Frank Act section 113(h), 12 U.S.C. 5323(h).
---------------------------------------------------------------------------

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.\22\ 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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\22\ 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.\23\ 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.
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\23\ Dodd-Frank Act section 113(d), 12 U.S.C. 5323(d).
---------------------------------------------------------------------------

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

[[Page 80131]]

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 deems 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 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.

Nellie Liang
Under Secretary for Domestic Finance.
[FR Doc. 2023-25053 Filed 11-16-23; 8:45 am]
BILLING CODE 4810-AK-P-P