The Financial Stability Oversight Council (“FSOC”) on October 11 issued a second notice of proposed rulemaking (“Second Notice”) regarding its process for designating a nonbank financial company as a systemically important financial institution (“SIFI”). The Second Notice provides new quantitative information to companies regarding their status as potential candidates for designation at the initial stage of review, but the FSOC would retain substantial discretion at subsequent stages. There will be a 60-day comment period following publication of the Second Notice in the Federal Register.

Background

Section 113 of the Dodd-Frank Act (“Act”) authorizes the FSOC to designate U.S. and foreign nonbank financial companies as SIFIs, which would then be subject to heightened prudential standards and to supervision and enforcement action by the Federal Reserve Board (“FRB”). The FSOC issued an advance notice of proposed rulemaking in October 2010 in which it sought public comments on how the statutory standards for SIFI designation should be applied. Commenters provided extensive and detailed analysis and recommendations as to how particular standards should be applied and particular financial industry sectors should be addressed. In January 2011, the FSOC issued a notice of proposed rulemaking (“First Notice”) that was criticized by commenters and members of Congress for not providing any indication of the FSOC’s reaction to the public comments and providing little indication of how the FSOC would apply the statutory standards. Members of the FSOC acknowledged to Congress that they needed to reconsider their approach to SIFI designation.