On April 11, 2012, the Financial Stability Oversight Council (the “Council”) gave more shape to the framework of systemic risk regulation by publishing a final rule (the “Rule”) that sets forth the process for the designation of nonbank financial institutions as systemically important. Once designated, these systemically important financial institutions (“SIFIs”) will be supervised by the Federal Reserve Board (the “Board”) in much the same way that it supervises bank holding companies with $50 billion or more in consolidated assets. This supervision will involve the use of more rigorous “enhanced prudential standards” than apply to bank holding companies below the $50 billion floor. The Board proposed such standards earlier this year. Large nonbank financial companies should review the Rule with care, given the onerous consequences of designation and the intricacies of the designation process.

The designation of nonbank financial firms as SIFIs is one tool, but perhaps not the most efficient tool, for addressing systemic risk in the financial services industry. The Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or the “Act”) provides two other tools: the identification and regulation of systemically risky activities across all financial institutions and authority to resolve distressed SIFIs in an organized manner outside the bankruptcy and bank receivership processes.