Overview of the Proposed Rule

On October 11, 2011, the Financial Stability Oversight Council (the Council) released its second notice of proposed rulemaking (the SIFI Notice) implementing its authority under Section 113 of the Dodd-Frank Act to designate certain nonbank financial companies for enhanced supervision and regulation by the Board of Governors of the Federal Reserve System. Nonbank financial companies designated by the Council commonly are referred to as systemically important financial institutions, or SIFIs. The proposed rule is accompanied by proposed interpretive guidance.

The proposed rule, together with the proposed guidance, moves towards providing some clarity on the designation process but preserves a significant amount of discretion for the Council. In particular, the proposed rule and guidance describe a three-stage process for winnowing the pool of prospective SIFIs:

In Stage 1, the Council will consider a series of specified quantitative metrics intended to eliminate from consideration many smaller, less interconnected firms. By performing internal calculations using the published Stage 1 metrics, many firms will probably be able to anticipate whether they will advance in the consideration process to Stage 2.

Stage 2 will be a more substantive, firm-by-firm analysis that will examine both additional quantitative metrics and qualitative standards. The Council generally will rely on information available from existing public or regulatory sources to conduct Stage 2 review.4 While the proposed rule and guidance describe the various metrics that the Council will consider in Stage 2, there appears to be little practical guidance that would assist any particular nonbank financial company in evaluating the likelihood that it would progress from Stage 2 to Stage 3 review.

Stage 3 is the final stage prior to Council designation and offers the first meaningful opportunity for a nonbank financial company to contest the Council’s consideration. Stage 3 will involve a continuation of the qualitative and quantitative firm-by-firm assessment conducted under Stage 2, but the proposed rule and guidance suggest the Council will seek considerable additional information from the company in Stage 3. The culmination of Stage 3 will be the Council’s vote as to whether or not to issue a notice of proposed determination of SIFI status.5 As discussed below, the proposed rule will provide an opportunity to contest such a determination at the beginning of Stage 3.