Federal Reserve Board Approves Final "Predominately Engaged in Financial Activities" Rule

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The Board of Governors of the Federal Reserve System has approved a final rule setting forth requirements for determining when a company is “predominately engaged in financial activities.” Although the rule addresses the meaning of that phrase only in the context of Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it also provides the most comprehensive guidance to date as to when an entity will be a “financial entity” for purposes of the swap rules under Title VII. This guidance is based on the final clause of the definition of that term (i.e., “a person predominantly engaged in activities . . . that are financial in nature, as defined in Section 4(k) of the Bank Holding Company Act of 1956”).

The rule also defines the terms “significant nonbank financial company” and “significant bank holding company.” All these definitions are relevant when the Financial Stability Oversight Council is considering designating a nonbank financial company for consolidated supervision by the Federal Reserve under the authority of Title I.

The effective date of the rule is May 6, 2013.

Some highlights from the rule:

  • Predominance can be found if a company meets the relevant tests in either of its last two fiscal years.
  • Engaging in physically settled derivative transactions is not considered a “financial activity.”
  • The rule has a lengthy appendix setting forth all activities that have been historically determined by the Federal Reserve to be financial in nature.

The text of the final rule is available here.

The related press release is available here.