[Federal Register Volume 77, Number 70 (Wednesday, April 11, 2012)]
[Rules and Regulations]
[Pages 21637-21662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8627]


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FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Part 1310

RIN 4030-AA00


Authority To Require Supervision and Regulation of Certain 
Nonbank Financial Companies

AGENCY: Financial Stability Oversight Council.

ACTION: Final rule and interpretive guidance.

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SUMMARY: Section 113 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act'') authorizes the Financial 
Stability Oversight Council (the ``Council'') to determine that a 
nonbank financial company shall be supervised by the Board of Governors 
of the Federal Reserve System (the ``Board of Governors'') and shall be 
subject to prudential standards, in accordance with Title I of the 
Dodd-Frank Act, if the Council determines that material financial 
distress at the nonbank financial company, or the nature, scope, size, 
scale, concentration, interconnectedness, or mix of the activities of 
the nonbank financial company, could pose a threat to the financial 
stability of the United States. This final rule and the interpretive 
guidance attached as an appendix thereto describe the manner in which 
the Council intends to apply the statutory standards and 
considerations, and the processes and procedures that the Council 
intends to follow, in making determinations under section 113 of the 
Dodd-Frank Act.

DATES: Effective date: May 11, 2012.

FOR FURTHER INFORMATION CONTACT: Lance Auer, Office of Domestic 
Finance, Treasury, at (202) 622-1262, or Eric Froman, Office of the 
General Counsel, Treasury, at (202) 622-1942.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 111 of the Dodd-Frank Act (12 U.S.C. 5321) established the 
Financial Stability Oversight Council. Among the purposes of the 
Council under section 112 of the Dodd-Frank Act (12 U.S.C. 5322) 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.''
    In the recent financial crisis, financial distress at certain 
nonbank financial companies contributed to a broad seizing up of 
financial markets and stress at other financial firms. Many of these 
nonbank financial companies were not subject to the type of regulation 
and consolidated supervision applied to bank holding companies, nor 
were there effective mechanisms in place to resolve the largest and 
most interconnected of these nonbank financial companies without 
causing further instability. To address any potential risks to U.S. 
financial stability posed by these companies, the Dodd-Frank Act 
authorizes the Council to determine that certain nonbank financial 
companies will be subject to supervision by the Board of Governors and 
prudential standards. The Board of Governors is responsible for 
establishing the prudential standards that will be applicable, under 
section 165 of the Dodd-Frank Act, to nonbank financial companies 
subject to a Council determination.
    Title I of the Dodd-Frank Act defines a ``nonbank financial 
company'' as a domestic or foreign company that is ``predominantly 
engaged in financial activities,'' other than bank holding companies 
and certain other types of firms.\1\ The Dodd-Frank Act provides that a 
company is ``predominantly engaged'' in financial activities if either 
(i) the annual gross revenues derived by the company and all of its 
subsidiaries from financial activities, as well as from the ownership 
or control of insured depository institutions, represent 85 percent or 
more of the consolidated annual gross revenues of the company; or (ii) 
the consolidated assets of the company and all of its subsidiaries 
related to financial activities, as well as related to the ownership or 
control of insured depository institutions, represent 85 percent or 
more of the consolidated assets of the company.\2\ The Dodd-Frank Act 
requires the Board of Governors to establish the requirements for 
determining whether a company is ``predominantly engaged in financial 
activities'' for this purpose.\3\
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    \1\ See 12 U.S.C. 5311(a)(4).
    \2\ See 12 U.S.C. 5311(a)(6).
    \3\ See 12 U.S.C. 5311(b).
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    The Council issued an advance notice of proposed rulemaking (the 
``ANPR'') on October 6, 2010 (75 FR 61653), in

[[Page 21638]]

which it requested public comment on the application of the statutory 
factors that the Dodd-Frank Act requires the Council to consider in 
determining whether a nonbank financial company should be supervised by 
the Board of Governors and subject to prudential standards. The ANPR 
posed 15 questions, all of which addressed the application of the 
statutory considerations that the Council must take into account in the 
process of determining whether a nonbank financial company should be 
subject to supervision by the Board of Governors and be subject to 
prudential standards (the ``Determination Process'').
    On January 26, 2011, the Council issued a notice of proposed 
rulemaking (the ``First NPR'') (76 FR 4555) through which it sought 
public comment regarding the specific criteria and analytic framework 
that the Council intends to apply in the Determination Process. The 
comment period for the First NPR closed on February 25, 2011.
    In response to comments that the Council received on the First NPR, 
on October 18, 2011, the Council issued a second notice of proposed 
rulemaking (the ``NPR'') and proposed interpretive guidance (the 
``Proposed Guidance'') (76 FR 64264) to provide (i) additional details 
regarding the framework that the Council intends to use in the process 
of assessing whether a nonbank financial company could pose a threat to 
U.S. financial stability, and (ii) further opportunity for public 
comment on the Council's proposed approach to the Determination 
Process.
    The Council received 41 comment letters in response to the NPR and 
Proposed Guidance, of which 12 were from companies or trade 
associations in the insurance industry, eight were from companies or 
trade associations in the asset management industry, seven were from 
other financial or business trade associations, four were from 
specialty finance companies, and 10 were from law firms, advocacy 
groups, think tanks, and individuals.\4\ (Comment letters are available 
online at http://www.regulations.gov.) In addition to issuing the ANPR, 
the First NPR, and the NPR and Proposed Guidance for public comment, 
staff of Council members and their agencies met with financial industry 
representatives to discuss the proposals. Meeting participants 
generally reiterated the views expressed in their comment submissions.
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    \4\ In addition, the Council received two comment letters dated 
March 8, 2012, requesting a public hearing or public roundtables on 
the NPR and Proposed Guidance. These letters also reiterated earlier 
substantive comments on the NPR and Proposed Guidance by a number of 
the letters' signatories. The writers acknowledged that these prior 
substantive comments were submitted and that the Council had 
received numerous comments to the NPR and Proposed Guidance on a 
wide range of concerns. In drafting the final rule and interpretive 
guidance, the Council has carefully considered all the comments 
received. Neither the Dodd-Frank Act nor the Administrative 
Procedure Act requires a public hearing on the NPR and Proposed 
Guidance prior to the issuance of the final rule and interpretive 
guidance. The letters requesting a hearing did not indicate why the 
opportunity to submit written comments was inadequate for commenters 
to participate fully in the rulemaking process. Accordingly, the 
Council has determined that a public hearing or roundtable is not 
necessary prior to adopting the final rule and interpretive 
guidance.
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    Commenters generally found that the NPR and Proposed Guidance 
provided helpful insight and transparency into the Council's approach 
to the Determination Process. Many commenters applauded the inclusion 
of a three-stage process for review of nonbank financial companies and 
the inclusion of sample metrics for the Council's analysis under its 
analytic framework. Some commenters suggested that the NPR and Proposed 
Guidance continued to provide an insufficient degree of certainty and 
transparency.\5\
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    \5\ In addition, one commenter recommended that the Council 
abandon this rulemaking entirely; the Council has declined to do so, 
for the reasons described below. Consistent with the Council's 
intended approach, two other commenters recommended that the 
determination process be implemented as soon as possible.
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    As described below, the Council has carefully considered the 
comments received on the NPR and Proposed Guidance in developing the 
final rule and interpretive guidance.

II. Comments on Scope and Implementation of Determination Authority

A. Comments on Scope of Council Determinations

    Many commenters addressed the types of nonbank financial companies 
that should be considered for determinations. Many commenters 
representing particular segments of the financial industry suggested 
that nonbank financial companies operating in those segments do not 
pose a threat to U.S. financial stability and should not generally be 
subject to a determination. For example, commenters representing the 
insurance industry argued that the products and services of regulated, 
traditional insurance companies are highly substitutable and that these 
companies operate without significant leverage or reliance on short-
term debt and are subject to high levels of existing regulatory 
scrutiny. Commenters representing the asset management industry 
contended that asset managers are unlikely to pose a threat to U.S. 
financial stability, and some noted that the legal distinction between 
investment advisers and the funds they manage make the prudential 
standards contemplated by section 165 of the Dodd-Frank Act an 
inappropriate mechanism for addressing any threat posed by such firms. 
Others commented on behalf of financial guaranty insurers, captive 
finance companies, money market funds, and the Federal Home Loan Banks. 
The Council's determination with respect to a nonbank financial company 
will be based on an evaluation of whether the nonbank financial company 
meets the statutory standards, taking into account the statutory 
considerations set forth in section 113 of the Dodd-Frank Act. The 
Council does not intend to provide industry-based exemptions from 
potential determinations under section 113 of the Dodd-Frank Act, but 
the Council intends to give these comments due consideration in the 
Determination Process.\6\
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    \6\ Pursuant to section 170 of the Dodd-Frank Act, the Board of 
Governors is authorized to promulgate regulations on behalf of, and 
in consultation with, the Council setting forth the criteria for 
exempting certain types or classes of nonbank financial companies 
from supervision by the Board of Governors. See 12 U.S.C. 5370.
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    In contrast, some commenters argued that the standard for 
determinations should be low, so that many nonbank financial companies 
may be subject to a determination. Other commenters suggested that 
particular types of nonbank financial companies, such as companies that 
serve as primary dealers or foreign banking organizations that 
reorganize their operations and deregister as bank holding companies in 
order to avoid new capital and liquidity requirements should 
automatically be considered by the Council.\7\ As noted above, the 
Council's determination with respect to a nonbank financial company 
will be based on an application of the statutory standards, taking into 
account

[[Page 21639]]

the considerations set forth in section 113 of the Dodd-Frank Act, to 
the facts regarding that nonbank financial company.
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    \7\ The Council notes that a foreign bank that is a bank holding 
company or that operates a branch or agency in the United States is 
subject to consolidated supervision by the Board of Governors and 
would be subject to the enhanced prudential standards to be adopted 
by the Board of Governors under section 165 of the Dodd-Frank Act, 
resolution planning requirements, and early remediation requirements 
to be adopted by the Board of Governors under section 166 of the 
Dodd-Frank Act if it has total consolidated worldwide assets of at 
least $50 billion. See 76 FR 67323, at 67326 (Nov. 1, 2011) for a 
discussion of the application of resolution-planning requirements to 
foreign banks. A foreign bank that has a financial but not a banking 
presence in the United States may not be subject to consolidated 
supervision by the Board of Governors and consequently, may not be 
subject to these requirements, regardless of its size, unless the 
Council were to make a determination with respect to such company 
pursuant to section 113 of the Dodd-Frank Act.
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    As noted above under ``Background,'' Title I of the Dodd-Frank Act 
defines a ``nonbank financial company'' as a domestic or foreign 
company that is ``predominantly engaged in financial activities,'' with 
certain exceptions. The guidance notes that the Council intends to 
interpret the term ``company'' broadly with respect to nonbank 
financial companies and other companies in connection with section 113 
of the Dodd-Frank Act, to include any corporation, limited liability 
company, partnership, business trust, association, or similar 
organization. In response to commenter concerns, the Council clarifies 
that it does not generally intend to encompass unincorporated 
associations within the definition of ``company.'' One commenter 
suggested that the rule include a definition of ``company.'' The 
Council has determined that adding this definition to the rule would 
not be consistent with the focus of the rule on issues of Council 
procedure and practice, but the Council's intended interpretation of 
this term has been included in the interpretive guidance. Other 
commenters argued that the definition of ``nonbank financial company'' 
should include financial businesses owned by another company that 
engage in separate, unrelated financial transactions, or that open-end 
investment companies might not be included within the statutory 
definition of ``nonbank financial company.'' The Board of Governors has 
authority to issue regulations regarding the requirements for 
determining if a company is predominantly engaged in financial 
activities, and thus potentially a nonbank financial company, and has 
issued a proposed rule under this authority.

B. Comments on Coordination With Other Regulatory Activities

    A number of commenters requested that the Council delay this 
rulemaking until other, related regulatory activities are completed. 
The other regulatory activities cited were (i) the requirements for 
determining if a company is ``predominantly engaged in financial 
activities'' under section 102 of the Dodd-Frank Act; (ii) the adoption 
of enhanced prudential standards applicable under section 165 of the 
Dodd-Frank Act to nonbank financial companies subject to a Council 
determination; (iii) the rule regarding the establishment of an 
intermediate holding company under section 626 of the Dodd-Frank Act; 
(iv) the rules further defining ``major swap participant'' and ``major 
security-based swap participant'' under Title VII of the Dodd-Frank 
Act; (v) the Council's regulations implementing the Freedom of 
Information Act (``FOIA''); (vi) safe harbors from Board of Governors 
supervision under section 170 of the Dodd-Frank Act; and (vii) 
recommendations of the Council for additional standards applicable to 
activities or practices under section 120 of the Dodd-Frank Act.
    The regulatory activities cited by commenters are in various stages 
of the rulemaking process, including the Council's FOIA regulations, 
which the Council adopted on April 3, 2012. The Council does not 
believe it is necessary or appropriate to postpone the adoption of this 
rule or the interpretive guidance until these other regulatory actions 
are completed. These rulemakings are not essential to the Council's 
consideration of whether a nonbank financial company could pose a 
threat to U.S. financial stability, and the Council has the statutory 
authority to proceed with determinations under section 113 of the Dodd-
Frank Act prior to the adoption of such rules.
    In addition, several commenters urged the Council to coordinate the 
issuance of the rule and interpretive guidance with G-20-mandated 
efforts being undertaken by international bodies, such as the Financial 
Stability Board and the International Association of Insurance 
Supervisors, or to postpone the Determination Process until broader 
U.S. and international financial reforms have been implemented. Council 
members are working closely with their international counterparts on a 
number of initiatives, including the process for identifying globally 
systemically important financial institutions and financial market 
infrastructures. At the same time, the Council's determinations under 
section 113 of the Dodd-Frank Act are an important part of the U.S. 
financial reform process, and the Council believes it is important for 
this framework to be in place as soon as practicable.

III. Description of the Rule and the Interpretive Guidance

    In developing the rule and interpretive guidance, the Council has 
carefully considered the comments received on the NPR and Proposed 
Guidance, as well as the language and legislative history of the Dodd-
Frank Act. After this review, the Council is adopting the rule and 
interpretive guidance substantially as proposed, but with a number of 
clarifications in response to commenter concerns.
    The rule sets forth the procedures and practices for the Council's 
determinations regarding nonbank financial companies, including the 
statutory considerations and procedures for information collection and 
hearings.
    The interpretive guidance, which is attached as an appendix to the 
rule, addresses, among other things--
    <bullet> Key terms and concepts related to the Council's 
determination authority, including ``material financial distress'' and 
``threat to financial stability'';
    <bullet> The uniform quantitative thresholds that the Council 
intends to use to identify nonbank financial companies for further 
evaluation;
    <bullet> The six-category framework that the Council intends to use 
to consider whether a nonbank financial company meets either of the 
statutory standards for a determination, including examples of 
quantitative metrics for assessing each category; and
    <bullet> The process that the Council intends to follow when 
considering whether to subject a nonbank financial company to 
supervision by the Board of Governors and prudential standards.
    To foster transparency with respect to the Determination Process, 
the rule and interpretive guidance provide a detailed description of 
(i) the profile of those nonbank financial companies that the Council 
likely will evaluate for potential determination, so as to minimize 
uncertainty among nonbank financial companies, market participants, and 
other members of the public, and (ii) the factors that the Council 
intends to use when analyzing companies at various stages of the 
Determination Process, including examples of the metrics that the 
Council intends to use when evaluating a nonbank financial company 
under the six-category analytic framework. The Council's ultimate 
assessment of whether a nonbank financial company meets a statutory 
standard for determination will be based on an evaluation of each of 
the statutory considerations, taking into account facts and 
circumstances relevant to each nonbank financial company.
    The Council has numerous authorities and tools to carry out its 
statutory duty to monitor the financial stability of the United States. 
In addition to the Council's determination authority under section 113 
of the Dodd-Frank Act, the Council has the authority to make 
recommendations to primary financial regulatory agencies to apply new 
or heightened standards and safeguards for a financial activity or 
practice conducted by bank holding companies or nonbank financial 
companies under

[[Page 21640]]

the jurisdiction of such agencies if the Council determines that the 
conduct, scope, nature, size, scale, concentration, or 
interconnectedness of such activity or practice could create or 
increase the risk of significant liquidity, credit, or other problems 
spreading among bank holding companies and nonbank financial companies, 
U.S. financial markets, or low-income, minority, or underserved 
communities.\8\ In addition, the Council may designate financial market 
utilities and payment, clearing and settlement activities that the 
Council determines are, or are likely to become, systemically 
important.\9\ The Council expects that its response to any potential 
threat to financial stability will be based on an assessment of the 
circumstances.
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    \8\ See 12 U.S.C. 5330(a).
    \9\ See 12 U.S.C. 5463(a)(1).
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    Pursuant to section 115(a) of the Dodd-Frank Act, the Council may 
also make recommendations to the Board of Governors concerning the 
establishment and refinement of prudential standards and reporting and 
disclosure requirements applicable to nonbank financial companies 
supervised by the Board of Governors pursuant to section 113 of the 
Dodd-Frank Act. In making such recommendations, the Dodd-Frank Act also 
authorizes the Council 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 Council deems appropriate. In 
addition, section 165 of the Dodd-Frank Act gives the Board of 
Governors the ability to tailor the application of the prudential 
standards on its own.
    Several commenters supported the recognition in the NPR of the 
Council's numerous authorities and tools to carry out its statutory 
duties. Commenters also urged the Council to perform, in connection 
with each potential determination with respect to a nonbank financial 
company, a comparative cost-benefit analysis of the tools available to 
the Council to mitigate any identified threat posed by the company. 
Some commenters further suggested that the Council provide this 
analysis to the nonbank financial company, explaining why a 
determination is the best available tool to mitigate the threat. 
Section 113 of the Dodd-Frank Act sets forth the factors that the 
Council must consider in determining whether to subject a nonbank 
financial company to Board of Governors supervision and prudential 
standards. The relative cost and benefit of such a determination is not 
one of these statutory considerations. Therefore, while the Council 
expects to consider its available regulatory tools in addressing any 
potential threat to financial stability, the Council does not intend to 
conduct cost-benefit analyses in making determinations with respect to 
individual nonbank financial companies.
    The rule and interpretive guidance, as well as the Council's 
responses to the comments received, are discussed in greater detail 
below.

A. Statutory Determination Standards and Considerations

    Section 113 of the Dodd-Frank Act authorizes the Council to subject 
a nonbank financial company to supervision by the Board of Governors 
and prudential standards if the Council determines that (i) material 
financial distress at the nonbank financial company could pose a threat 
to the financial stability of the United States (the ``First 
Determination Standard''), or (ii) the nature, scope, size, scale, 
concentration, interconnectedness, or mix of the activities of the 
nonbank financial company could pose a threat to the financial 
stability of the United States (the ``Second Determination Standard'').
    Pursuant to the provisions of the Dodd-Frank Act, the Council is 
required to consider the following statutory considerations when 
evaluating whether to make this determination with respect to a nonbank 
financial company: \10\
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    \10\ This list reflects the statutory considerations applicable 
to a determination with respect to a U.S. nonbank financial company. 
The Council is required to consider corresponding factors in making 
a determination with respect to a foreign nonbank financial company.
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    (A) The extent of the leverage of the company;
    (B) The extent and nature of the off-balance-sheet exposures of the 
company;
    (C) The extent and nature of the transactions and relationships of 
the company with other significant nonbank financial companies and 
significant bank holding companies;
    (D) 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 U.S. financial system;
    (E) 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;
    (F) 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;
    (G) The nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the company;
    (H) The degree to which the company is already regulated by one or 
more primary financial regulatory agencies;
    (I) The amount and nature of the financial assets of the company;
    (J) The amount and types of the liabilities of the company, 
including the degree of reliance on short-term funding; and
    (K) Any other risk-related factors that the Council deems 
appropriate.
    The Council intends to take into account all of the statutory 
considerations, separately and in conjunction with each other, when 
determining whether either of the statutory standards for determination 
has been met. The Council included each of the statutory considerations 
in the NPR and has retained this text in the rule. The interpretive 
guidance provides detail regarding the manner in which the Council 
intends to assess nonbank financial companies under the First and 
Second Determination Standards.\11\ The interpretive guidance sets 
forth definitions of the terms ``material financial distress,'' which 
is relevant to the First Determination Standard, and ``threat to the 
financial stability of the United States,'' which is relevant to both 
determination standards.
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    \11\ While one commenter suggested that the Council should 
disregard the Second Determination Standard, the Council intends to 
evaluate nonbank financial companies under either the First or the 
Second Determination Standard, in accordance with section 113 of the 
Dodd-Frank Act, as the Council deems appropriate.
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    Commenters requested further clarification of the Council's 
interpretation of certain relevant definitions underlying the First and 
Second Determination Standards, such as the addition of quantitative 
metrics to measure material financial distress and a threat to U.S. 
financial stability. In addition, two commenters recommended that 
``threat to the financial stability of the United States'' be defined 
narrowly, as a high threshold for the Council's determinations. The 
Council believes that these definitions accurately reflect the 
statutory requirements and the nature of the threat that the Council's 
authority under section 113 of the Dodd-Frank Act seeks to mitigate. 
The interpretive guidance therefore includes these definitions as 
proposed.

[[Page 21641]]

    The interpretive guidance also describes three channels the Council 
believes are most likely to facilitate the transmission of the negative 
effects of a nonbank financial company's material financial distress or 
activities to other firms and markets, thereby posing a threat to U.S. 
financial stability: (i) Exposure of creditors, counterparties, 
investors, or other market participants to a nonbank financial company; 
(ii) disruptions caused by the liquidation of a nonbank financial 
company's assets; and (iii) the inability or unwillingness of a nonbank 
financial company to provide a critical function or service relied upon 
by market participants and for which there are no ready substitutes.
    A number of commenters requested further clarification of the three 
transmission channels. These commenters suggested that the Council 
provide identifying metrics and explicit links between the channels and 
the statutory considerations. To address these requests, the 
interpretive guidance provides some additional clarification describing 
how the Council expects its assessments under the First and Second 
Determination Standards to relate to the transmission channels and the 
statutory considerations. However, due to the unique threat that each 
nonbank financial company may pose to U.S. financial stability and the 
qualitative nature of the inquiry under the statutory considerations, 
it is not possible to provide broadly applicable metrics defining these 
channels or to identify universally applicable links between the 
channels and the statutory considerations.
    Two commenters also objected to the inclusion in the third 
transmission channel of a nonbank financial company's ability or 
willingness to provide a critical function or service, arguing that 
regulators should not interfere with companies' business decisions in 
this regard. Substitutability is an important consideration for 
evaluating the importance of a financial company. If a nonbank 
financial company is the sole provider, or one of a small number of 
providers, of a critical market function or service, the Council 
believes that it is appropriate to consider the impact a decision by 
the company to cease providing that function or service could have on 
other market participants or market functioning and, thereby, on U.S. 
financial stability.

B. Analytic Framework for Determinations

    As described in the Proposed Guidance, the Council has incorporated 
the statutory considerations for evaluating whether a nonbank financial 
company meets either the First or Second Determination Standard into an 
analytic framework consisting of the following six categories: (i) 
Size, (ii) interconnectedness, (iii) substitutability, (iv) leverage, 
(v) liquidity risk and maturity mismatch, and (vi) existing regulatory 
scrutiny. Three of these six categories seek to assess the potential 
impact of a nonbank financial company's financial distress on the 
broader economy: size, interconnectedness, and substitutability. The 
remaining three categories seek to assess the vulnerability of a 
nonbank financial company to financial distress: leverage, liquidity 
risk and maturity mismatch, and existing regulatory scrutiny. The 
interpretive guidance contains the table from the Proposed Guidance 
that illustrates the relationship between the 10 statutory 
considerations and the six framework categories.
    Most commenters addressed these six categories either in the 
context of a particular financial sector (as described above under 
``Comments on Scope and Implementation of Determination Authority'') or 
with respect to the proposed uniform quantitative thresholds that the 
Council intends to use to identify nonbank financial companies for 
further evaluation (as described below under ``The Stage 1 
Thresholds''). Of the commenters that specifically addressed the 
analytic framework, several recommended that substitutability either be 
narrowed to focus on nonbank financial companies that provide a 
critical function or service, or be broadened to encompass 
circumstances such as oligopolies and potential future business 
changes. The Council is adopting the description of substitutability as 
proposed, because the Council believes it accurately delineates the 
primary factors that may cause a lack of substitutability to pose a 
threat to U.S. financial stability.
    Several commenters also urged the Council to give significant 
weight in its evaluations to existing regulatory scrutiny. In 
particular, one commenter argued that a nonbank financial company 
operating internationally should only have one lead supervisor, to 
ensure consistent supervision. Several other commenters advised that 
the effectiveness of existing regulation, or a consideration of 
existing regulations in light of the potential threat posed by a 
particular nonbank financial company, should be evaluated. As existing 
regulatory scrutiny is one of the statutory considerations, the Council 
intends to evaluate this factor, together with each of the other 
statutory considerations, in connection with any determination. In 
response to these comments, the interpretive guidance has been revised 
to clarify that the Council will consider both the existence and the 
effectiveness of consolidated supervision of a nonbank financial 
company.
    A number of commenters provided detailed recommendations regarding 
the analysis of companies within particular industries under the six-
category analytic framework in Stages 2 and 3. For example, commenters 
highlighted the differences between insurance companies and other types 
of nonbank financial companies. These comments addressed issues such as 
the importance of focusing on the unregulated, nontraditional 
activities undertaken by insurance companies, rather than on regulated 
activities. One commenter suggested that the analysis of 
interconnectedness of insurance companies should focus on 
interconnectedness within a financial services conglomerate and between 
a U.S. insurance company and foreign entities. Others recommended 
technical changes to the types of information described in the 
interpretive guidance that the Council may consider in evaluating 
insurance companies. With respect to all the comments on industry-
specific analyses, the evaluation of any nonbank financial company 
under the six-category framework will be company-specific, and the 
description in the interpretive guidance is intended to indicate the 
types of information that the Council will consider. The Council has 
not revised the interpretive guidance to address these comments but 
intends to consider such factors, where appropriate.
    In response to a commenter, the interpretive guidance clarifies 
that the risk of interest rate fluctuations and reinvestment risk may 
be considered in evaluating maturity mismatch of life insurance 
companies.

C. Three-Stage Process for Evaluating Nonbank Financial Companies

1. Overview of the Three-Stage Process
    The interpretive guidance provides a detailed description of the 
three-stage process that the Council intends to use to identify nonbank 
financial companies for determinations in non-emergency situations. 
Each stage of the Determination Process involves an analysis based on 
an increasing amount of information to determine whether a nonbank 
financial company meets the First or Second Determination Standard.
    The first stage of the process (``Stage 1'') is designed to narrow 
the universe

[[Page 21642]]

of nonbank financial companies to a smaller set of nonbank financial 
companies. In Stage 1, the Council intends to evaluate nonbank 
financial companies by applying uniform quantitative thresholds that 
are broadly applicable across the financial sector to a large group of 
nonbank financial companies. These Stage 1 thresholds represent the 
framework categories that are more readily quantified: Size, 
interconnectedness, leverage, and liquidity risk and maturity 
mismatch.\12\ A nonbank financial company would be subject to 
additional review if it meets both the size threshold and any one of 
the other quantitative thresholds. The Council believes that the Stage 
1 thresholds will help a nonbank financial company predict whether such 
company will be subject to additional review by the Council. Stage 1 
does not reflect a determination by the Council that the nonbank 
financial companies identified during Stage 1 meet one of the 
Determination Standards. Rather, Stage 1 is intended to identify 
nonbank financial companies that should be subject to further 
evaluation in subsequent stages of review.
---------------------------------------------------------------------------

    \12\ The Council believes that quantitative thresholds measuring 
substitutability and existing regulatory scrutiny would not be 
appropriate and intends to rely on company-specific qualitative and 
quantitative analyses of these factors in Stages 2 and 3.
---------------------------------------------------------------------------

    In the second stage of the process (``Stage 2''), the Council will 
conduct a comprehensive analysis, using the six-category analytic 
framework, of the potential for the nonbank financial companies 
identified in Stage 1 to pose a threat to U.S. financial stability. In 
general, this analysis will be based on a broad range of quantitative 
and qualitative information available to the Council through existing 
public and regulatory sources, including industry- and company-specific 
metrics beyond those analyzed in Stage 1, and any information 
voluntarily submitted by the company.
    Based on the analysis conducted during Stage 2, the Council intends 
to identify the nonbank financial companies that the Council believes 
merit further review in the third stage (``Stage 3''). The Council will 
send a notice of consideration to each nonbank financial company that 
will be reviewed in Stage 3, and will give those nonbank financial 
companies an opportunity to submit materials within a time period 
specified by the Council (which will be not less than 30 days). Stage 3 
will build on the Stage 2 analysis using quantitative and qualitative 
information collected directly from the nonbank financial company, 
generally by the Office of Financial Research (the ``OFR''), in 
addition to the information considered during Stages 1 and 2. The 
Council will determine whether to subject a nonbank financial company 
to Board of Governors supervision and prudential standards based on the 
results of the analyses conducted during this three-stage review 
process.
    As discussed in the interpretive guidance, the Council does not 
believe that a determination decision can be reduced to a formula. Each 
determination will be made based on a company-specific evaluation and 
an application of the standards and considerations set forth in section 
113 of the Dodd-Frank Act, and taking into account qualitative and 
quantitative information that the Council deems relevant to a 
particular nonbank financial company.
2. Stage 1
    As described in the interpretive guidance, in Stage 1, the Council 
intends to apply quantitative thresholds to a broad group of nonbank 
financial companies to identify a set of nonbank financial companies 
that merit further evaluation.
    Many commenters commended the inclusion of Stage 1 in the Proposed 
Guidance. A smaller number of commenters objected to the Stage 1 
process generally, stating either that the thresholds will capture too 
many or too few nonbank financial companies, or that the thresholds are 
not focused on activities that could cause a threat to financial 
stability. In addition, several commenters proposed that nonbank 
financial companies should be subject to further review only if they 
exceed at least two Stage 1 thresholds, rather than only one, in 
addition to the total consolidated assets threshold (described below). 
One commenter suggested that Stages 1 and 2 could be combined in 
instances when it is clear that a nonbank financial company may meet 
either the First or Second Determination Standard. Based on its 
analysis, the Council believes the Stage 1 approach as proposed, with 
certain clarifications, is appropriate. Stage 1 is not intended to 
identify nonbank financial companies for a final determination. 
Instead, Stage 1 is a tool that the Council, nonbank financial 
companies, market participants, and other members of the public may use 
to assess whether a nonbank financial company will be subject to 
further evaluation by the Council. Any nonbank financial company that 
is selected for further evaluation during Stage 1 will be assessed more 
comprehensively during Stage 2 and, if appropriate, Stage 3. In 
addition to its other benefits, the careful, company-specific analysis 
in Stages 2 and 3 avoids any possible ``cliff effects'' for nonbank 
financial companies that narrowly exceed the Stage 1 thresholds.
    The Council considered several approaches for Stage 1 other than 
the thresholds-based approach described in the interpretive guidance. 
Alternatives that were considered included a weighting of various 
metrics according to relative importance, and a multi-step, 
quantitative analysis under which progression through the analysis 
would have required meeting certain thresholds in each step. These 
approaches attempted to tailor the Stage 1 analysis more specifically 
to the various types of nonbank financial companies and to customize 
the factors to address narrower concepts of a threat to U.S. financial 
stability. In contrast to these alternative approaches, the Council 
determined that the thresholds-based approach set forth in the 
interpretive guidance offers greater transparency, consistency, and 
ease of application for the Council, nonbank financial companies, 
market participants, and other members of the public, and requires less 
reliance on subjective assumptions. A tailored analysis will be 
performed, potentially using the approaches described above, with 
respect to individual nonbank financial companies, as appropriate, in 
Stages 2 and 3. This approach will enable the Council to engage in a 
flexible, company-specific analysis that will reflect the unique risks 
posed by each nonbank financial company.
    In all instances, the Council reserves the right, at its 
discretion, to subject any nonbank financial company to further review 
if the Council believes that further analysis of the company is 
warranted to determine if the company could pose a threat to U.S. 
financial stability, irrespective of whether such company meets the 
thresholds in Stage 1. Several commenters commended the Council's 
reservation of authority, while others suggested that the Council's 
reservation of authority will generate uncertainty or was otherwise 
inappropriate. As noted above, the Stage 1 thresholds are intended only 
to identify nonbank financial companies for further evaluation. 
However, the Council recognizes that all relevant data are likely not 
available to assess all nonbank financial companies using the Stage 1 
quantitative thresholds and that the thresholds are an imperfect 
mechanism to identify all nonbank financial companies of which further 
review is warranted. While the thresholds were designed to be uniform,

[[Page 21643]]

transparent, and readily calculable by the Council, nonbank financial 
companies, market participants, and other members of the public, the 
Council also recognizes that the thresholds may not adequately measure 
unique risks posed by particular nonbank financial companies. 
Therefore, the Council retains its discretion to consider nonbank 
financial companies not identified by the Stage 1 thresholds for any 
reason, including a lack of available data in Stage 1.
    Commenters also suggested that the Council should provide an 
explanation of the basis for the Council's evaluation of any nonbank 
financial company that is reviewed in Stage 2 but did not exceed the 
Stage 1 thresholds. Any nonbank financial company that the Council 
determines should be reviewed during Stage 3 will receive notice of 
this review. If the Council determines by vote to subject a nonbank 
financial company to a proposed determination, the Council will provide 
the nonbank financial company with notice and an explanation of the 
basis of the proposed determination, as described below.
    Several commenters addressed the collection of data from nonbank 
financial companies in Stage 1. While some commenters sought 
clarification of how the Council would collect data for Stage 1, 
particularly in cases where the data underlying the Stage 1 thresholds 
is not available, others urged the Council expressly to reserve the 
right to collect data from nonbank financial companies in Stage 1, to 
avoid any failure to identify a nonbank financial company that should 
be evaluated further. A fundamental purpose of Stage 1 is to narrow the 
universe of nonbank financial companies, based on information available 
to the Council through existing public and regulatory sources, to a 
smaller set of companies that will be subject to company-specific 
evaluation in Stage 2. The Council recognizes that all relevant data 
are likely not available to assess all nonbank financial companies 
using the Stage 1 thresholds. Therefore, the Council may subject a 
nonbank financial company to further review in Stage 2 if the Council 
believes that further analysis is warranted, for any reason, to 
determine if the company could pose a threat to U.S. financial 
stability.
3. The Stage 1 Thresholds
    In Stage 1, the Council intends to apply six quantitative 
thresholds to a broad group of nonbank financial companies. The 
thresholds are--
    <bullet> $50 billion in total consolidated assets;
    <bullet> $30 billion in gross notional credit default swaps 
outstanding for which a nonbank financial company is the reference 
entity;
    <bullet> $3.5 billion of derivative liabilities;
    <bullet> $20 billion in total debt outstanding;
    <bullet> 15 to 1 leverage ratio of total consolidated assets 
(excluding separate accounts) to total equity; and
    <bullet> 10 percent short-term debt ratio of total debt outstanding 
with a maturity of less than 12 months to total consolidated assets 
(excluding separate accounts).

A nonbank financial company will be evaluated in Stage 2 if it meets 
both the total consolidated assets threshold and any one of the other 
thresholds.
    Many commenters provided detailed recommendations regarding the six 
Stage 1 thresholds. These comments generally fall into three 
categories: (i) The level of a threshold should be changed; (ii) the 
method of calculating a threshold should be refined; and (iii) a 
threshold generally is inappropriate. A smaller number of commenters 
suggested new Stage 1 thresholds.
    Commenters suggested that the Council tailor the thresholds by 
industry to provide a more accurate indication of the threat to U.S. 
financial stability that could be posed by a nonbank financial company 
in a particular industry. The Council recognizes that the quantitative 
thresholds it has identified for application during Stage 1 may not 
provide a comprehensive means to identify nonbank financial companies 
for further review across all financial industries and companies. 
However, the Stage 1 thresholds provide a reasonable set of measures 
for identifying nonbank financial companies that, in general, warrant 
further review. In addition, because many nonbank financial companies 
engage in financial activities across multiple segments of the 
financial markets, the application of specialized industry-specific 
thresholds to nonbank financial companies is not generally useful. 
Industry- and company-specific considerations are better evaluated 
during Stages 2 and 3, when more detailed information can be collected 
and more tailored analysis can be performed.
    Several commenters requested additional information on how the 
Stage 1 thresholds were selected and suggested alternative measures 
that could be used. The Council selected the Stage 1 thresholds based 
on their applicability to nonbank financial companies that operate in 
diverse financial industries and because the data underlying these 
thresholds for a broad range of nonbank financial companies are 
generally available from existing public and regulatory sources. The 
Council reviewed distributions of various samples of nonbank financial 
companies and bank holding companies to inform its judgment regarding 
the appropriate thresholds and their quantitative levels. As discussed 
in the interpretive guidance, the Council also considered historical 
testing of the thresholds to assess whether they would have captured 
nonbank financial companies that encountered material financial 
distress during the financial crisis of 2007-2008. In this review, the 
Council focused separately on the period immediately before the crisis 
and also a number of years preceding it. While some commenters argued 
that historical analyses are not a sufficient justification for 
determining appropriate levels of thresholds, this approach, when 
combined with other analytical methods, can be a helpful tool for 
evaluating potential thresholds. After considering the comments on the 
Stage 1 thresholds, including those recommending the elimination of 
particular thresholds, the Council has determined to finalize the 
thresholds largely as proposed. The Stage 1 thresholds and their levels 
reflect the collective judgment of the Council members regarding the 
appropriate thresholds and their levels, in light of the statutory 
standards and considerations and an extensive review of applicable data 
and various analyses. The Stage 1 thresholds do not reflect a 
determination that the identified nonbank financial companies meet one 
of the Determination Standards, or that nonbank financial companies 
that do not meet the thresholds will not be designated. Rather, they 
are designed to identify nonbank financial companies for further 
evaluation based on the statutory standards and considerations.
    While the Council will apply the Stage 1 thresholds to all types of 
nonbank financial companies, including, to the extent that the relevant 
data are available, to financial guarantors, asset management 
companies, private equity firms, and hedge funds, these and other types 
of companies may pose risks that are not well-measured by the 
quantitative thresholds approach.
    With respect to hedge funds and private equity firms in particular, 
the Council intends to apply the Stage 1 thresholds, but recognizes 
that less data are generally available about these companies than about 
certain other types of nonbank financial companies. Beginning in June 
2012, advisers to

[[Page 21644]]

hedge funds and private equity firms and commodity pool operators and 
commodity trading advisors will be required to file Form PF with the 
Securities and Exchange Commission (``SEC'') or the Commodity Futures 
Trading Commission (``CFTC''), as applicable, on which form such 
companies will make certain financial disclosures. Using these and 
other data, the Council will consider whether to establish an 
additional set of metrics or thresholds tailored to evaluate hedge 
funds and private equity firms and their advisers.
    In addition, the Council, its member agencies, and the OFR are 
analyzing the extent to which there are potential threats to U.S. 
financial stability arising from asset management companies. This 
analysis is considering what threats exist, if any, and whether such 
threats can be mitigated by subjecting such companies to Board of 
Governors supervision and prudential standards, or whether they are 
better addressed through other regulatory measures. The Council may 
develop additional guidance regarding potential metrics and thresholds 
relevant to determinations regarding asset managers, as appropriate. 
Commenters voiced both support for and opposition to the implementation 
of new metrics and thresholds applicable to asset managers. While the 
Council intends to address such issues at a later date, consistent with 
the intention described above not to provide exemptions under section 
113 of the Dodd-Frank Act for any type of nonbank financial company, 
the Council intends to evaluate asset managers under the current 
interpretive guidance.
    Generally, as reporting requirements evolve and new information 
about certain industries and nonbank financial companies become 
available, the Council expects to review the quantitative thresholds as 
appropriate based on this new information. For example, the Council may 
consider credit exposure data proposed to be collected under section 
165 of the Dodd-Frank Act by the Federal Deposit Insurance Corporation 
and the Board of Governors. Similarly, pursuant to reporting and 
disclosure requirements being implemented under section 728 of the 
Dodd-Frank Act,\13\ the Council may consider swaps information reported 
to swap data repositories.
---------------------------------------------------------------------------

    \13\ See 17 CFR 49.17.
---------------------------------------------------------------------------

    The Council recognizes that the Stage 1 threshold to measure a 
nonbank financial company's derivative liabilities captures only the 
current exposure, rather than the current and potential future exposure 
created by the nonbank financial company's outstanding derivatives. The 
SEC and CFTC have proposed rules to further define the terms ``major 
swap participant'' (``MSP'') and ``major security-based swap 
participant'' (``MSBSP'') that contain a methodology to measure the 
potential future exposure created by an entity's outstanding 
derivatives, with respect to certain institutions.
    Once the final rules regarding reporting of data on swaps and 
security-based swaps come into effect, and data have been collected 
pursuant to those rules, the Council may revisit this Stage 1 threshold 
based on factors such as a nonbank financial company's current and 
potential future exposure from its outstanding derivatives for purposes 
of determining whether some or all MSPs, MSBSPs, or other nonbank 
financial companies that are subject to the rules will be subject to 
further examination in Stage 2.
    In addition, in response to comments, the Council has made several 
clarifying changes to the interpretive guidance with respect to the 
Stage 1 thresholds. The Proposed Guidance included a ``loans and bonds 
outstanding'' threshold of $20 billion. A number of commenters 
requested a clarification of the types of obligations and instruments 
that would be included in the calculation of this threshold. In 
response to these comments, the Council has renamed this threshold 
``total debt outstanding.'' The interpretive guidance now also 
specifies that this threshold will be defined broadly and regardless of 
maturity to include loans, bonds, repurchase agreements, commercial 
paper, securities lending arrangements, surplus notes (for insurance 
companies), and other forms of indebtedness. The interpretive guidance 
has also been revised to clarify that this definition of ``total debt 
outstanding'' will be used in calculating the short-term debt ratio 
threshold.
    In response to questions from two commenters regarding the 
Council's data source for the threshold relating to credit default 
swaps outstanding, the Council currently intends to calculate this 
threshold using data available through the Trade Information Warehouse, 
which is operated by a subsidiary of the Depository Trust & Clearing 
Corporation. If other sources for this data become available, the 
Council may use those sources instead of, or in addition to, this 
source.
    Further, to respond to comments, the interpretive guidance 
clarifies that in calculating the derivative liabilities threshold for 
nonbank financial companies that disclose the effects of master netting 
agreements and cash collateral held with the same counterparty on a net 
basis, the Council intends to calculate derivative liabilities after 
taking into account the effects of these arrangements. For nonbank 
financial companies that do not disclose the effects of these 
arrangements, derivative liabilities will equal the fair value of 
derivative contracts in a negative position. For Stages 2 and 3, the 
impact of netting will be considered as appropriate.
    Several commenters suggested that embedded derivatives be excluded 
from the definition of derivative liabilities, particularly for 
insurance companies or insurance products. Under statutory accounting 
principles (``SAP''), derivative features within insurance products are 
not accounted for separately from the host contract. Under generally 
accepted accounting principles in the United States (``GAAP''), 
derivative features that are combined with traditional insurance 
products may be accounted for separately and included in a company's 
derivative liabilities, depending on whether the contract as a whole is 
carried at fair value and other criteria. The Council is cognizant of 
these differences between reporting under GAAP and SAP. Embedded 
derivatives will be included in the calculation of the Stage 1 
derivative liabilities threshold, in accordance with GAAP, when such 
information is available. The Council will, as appropriate, assess 
embedded derivatives in Stages 2 and 3 with respect to particular 
nonbank financial companies. The relative importance of embedded 
derivatives tied to insurance products will depend on their type and 
how they may contribute to the risk posed by a nonbank financial 
company, regardless of how they are reported.
    A number of commenters questioned how the Council will calculate 
the Stage 1 thresholds for asset managers and investment advisers. The 
Council has included in the interpretive guidance a clarification that 
while the Council expects that its determinations will apply to 
individual legal entities, the Council has authority to assess nonbank 
financial companies in a manner that addresses the statutory 
considerations and such other factors as the Council deems appropriate. 
For example, in applying the Stage 1 thresholds to funds (whether or 
not they are registered investment companies), the interpretive 
guidance states that the Council may consider the aggregate risks posed 
by separate funds that are managed by the

[[Page 21645]]

same adviser, particularly if the funds' investments are identical or 
highly similar. When applying the Stage 1 thresholds to an asset 
manager, the Council's analysis will appropriately reflect the distinct 
nature of assets under management compared to the asset manager's own 
assets. As discussed above, the Council may in the future issue 
additional guidance regarding additional metrics and thresholds, 
potentially including factors related to assets under management, 
regarding asset managers.
    With respect to the application of the Stage 1 thresholds to 
foreign nonbank financial companies, several commenters requested that 
the thresholds be calculated based solely on the companies' U.S. 
operations. To respond to this request, the interpretive guidance 
specifies that for purposes of evaluating any U.S. nonbank financial 
company, the Council intends to apply each of the Stage 1 thresholds 
based on the global assets, liabilities and operations of the company 
and its subsidiaries. In contrast, for foreign nonbank financial 
companies, the Council intends to calculate the Stage 1 thresholds 
based solely on the U.S. assets, liabilities and operations of the 
foreign nonbank financial company and its subsidiaries.
    Several commenters also suggested that a nonbank financial 
company's subsidiaries should not be included in the Council's 
evaluation of the company, including for purposes of calculating the 
Stage 1 thresholds. Similarly, these commenters requested that the 
Stage 1 thresholds, as applied to foreign nonbank financial companies, 
should exclude the operations of any U.S. subsidiary that meets the 
definition of ``U.S. nonbank financial company.'' The Dodd-Frank Act 
requires the Council to consider subsidiaries of nonbank financial 
companies in its analysis, and thus, the references to subsidiaries in 
the rule and interpretive guidance include subsidiaries. This 
conclusion is based in part on the statutory definition of ``nonbank 
financial company,'' which is based on a calculation of the revenues or 
assets of the relevant company ``and all of its subsidiaries.'' \14\ 
Further, in light of the purposes of section 113 of the Dodd-Frank Act 
and the broad statutory considerations set forth in that provision, and 
the types of prudential standards to which nonbank financial companies 
subject to Council determinations are subject, a meaningful analysis 
must include not only a nonbank financial company's own operations, but 
also those of its subsidiaries. To determine whether a subsidiary of a 
nonbank financial company should be included for purposes of 
calculating the Stage 1 thresholds, the interpretive guidance, as 
described below, specifies that the Council intends generally to apply 
the Stage 1 thresholds using applicable accounting standards or such 
other data as are available to the Council.
---------------------------------------------------------------------------

    \14\ See 12 U.S.C. 5311(a)(6).
---------------------------------------------------------------------------

    Numerous commenters suggested that the levels of the Stage 1 
thresholds should be adjusted periodically over time, based on indexes 
such as inflation or economic growth. The Council believes that 
automatic adjustments to the threshold levels based on one or more 
particular indexes such as inflation could result in threshold levels 
that do not indicate the potential for a nonbank financial company to 
pose a threat to financial stability. Therefore, the interpretive 
guidance states that the Council intends to review the levels of the 
Stage 1 thresholds that are specified in dollars at least every five 
years and to adjust those thresholds as the Council may deem advisable.
    A number of commenters requested a clarification of the calculation 
date for the Stage 1 thresholds, with several proposing that the 
calculations be based on multi-period averages to reduce volatility and 
mitigate the effects of any unusual or one-time items. The Council 
recognizes that certain events that may cause a nonbank financial 
company briefly to exceed one or more Stage 1 thresholds may not 
indicate an increased threat to U.S. financial stability. However, 
because such an analysis is by its nature fact-specific, the Council 
believes that the appropriate framework for consideration of such 
factors is in Stage 2. Therefore, the interpretive guidance provides 
that the Council intends to reapply the Stage 1 thresholds using the 
most recently available data on a quarterly basis, or less frequently 
for nonbank financial companies with respect to which quarterly data 
are unavailable.
    Several commenters also requested a clarification of the financial 
reporting standards that the Council will apply in Stage 1. In response 
to this request, the Council has revised the interpretive guidance to 
provide that the Council intends generally to apply the Stage 1 
thresholds using GAAP when such information is available, or otherwise 
to rely on SAP, international financial reporting standards, or such 
other data as are available to the Council. While commenters suggested 
that the Council should rely on SAP when analyzing insurance companies, 
the Council has determined generally to rely on GAAP when such data are 
available in order to promote consistency and uniformity in the 
application of the Stage 1 thresholds. The Council expects to review 
financial statements prepared in accordance with SAP in Stages 2 and 3, 
if applicable.
4. Analysis and Procedures in Stages 2 and 3
    After a subset of nonbank financial companies has been identified 
in Stage 1, the Council intends in Stage 2 to conduct a robust analysis 
of the potential threat that each of those nonbank financial companies 
could pose to U.S. financial stability primarily based on information 
available to the Council through existing public and regulatory 
sources, including information possessed by the company's primary 
financial regulatory agency or home country supervisor, as appropriate. 
The evaluation of the risk profile and characteristics of each nonbank 
financial company in Stage 2 will be based on a wide range of 
quantitative and qualitative industry- and company-specific factors. 
This analysis will use the six-category analytic framework described 
above under ``Analytic Framework for Determinations.'' To the extent 
data are available, the Council also intends in Stage 2 to consider the 
impact that resolving the nonbank financial company could have on U.S. 
financial stability.
    Following Stage 2, nonbank financial companies that are selected 
for additional review in Stage 3 will receive notice that they are 
being considered for a proposed determination. Several commenters 
suggested that this notice should include an explanation of the basis 
of the Council's consideration, so that the nonbank financial company 
may present the Council with pertinent information. The Council 
believes that it would be premature to explain the basis of the nonbank 
financial company's identification for further consideration because 
the decision to review a nonbank financial company in Stage 3 does not 
represent a formal determination. The Council will provide the company 
with a written explanation of the basis of any proposed determination 
that it makes regarding the nonbank financial company after the Stage 3 
review.
    As discussed in greater detail in the interpretive guidance, during 
the Stage 3 review, the Council intends to analyze the nonbank 
financial company's potential to pose a threat to financial stability 
based on information obtained directly from the nonbank financial 
company and the information

[[Page 21646]]

previously obtained by the Council during prior stages of review. In 
Stage 3, the Council likely will consider qualitative factors, 
including considerations that could mitigate or aggravate the potential 
of the nonbank financial company to pose a threat to U.S. financial 
stability, such as the nonbank financial company's resolvability, the 
opacity of its operations, its complexity, and the extent and nature of 
its existing regulatory scrutiny.
    Several commenters requested an additional description of how the 
Council will perform its analysis in Stages 2 and 3, including a 
timetable for evaluations in Stages 2 and 3 and the relative weighting 
of particular metrics in the analysis. Commenters also suggested a 
variety of additional types of analysis the Council could perform in 
Stages 2 and 3, including trend analysis, risk-weighting of criteria, 
and analysis of economic cyclicality. Due to the diverse types of 
nonbank financial companies that may be evaluated in Stages 2 and 3 and 
the unique threats that these nonbank financial companies may pose to 
U.S. financial stability, the analysis and timing of review will depend 
on the particular circumstances of each nonbank financial company under 
consideration and the unique nature of the threat it may pose to U.S. 
financial stability.
    While the interpretive guidance describes many metrics and factors 
that the Council may consider in evaluating nonbank financial 
companies, one commenter suggested that the Council should publicly 
disclose the use of any factors that are not specified in the 
interpretive guidance. The Council will include in any written notice 
of a proposed or final determination the basis of the proposed or final 
determination, whether or not the relevant metrics and factors are 
specified in the interpretive guidance. In accordance with section 
112(a)(2)(N)(iv) of the Dodd-Frank Act, the basis for the Council's 
final determinations will be specified in the Council's annual report 
to Congress.
    Commenters also cited a nonbank financial company's internal risk 
management program as a factor that the Council either should or should 
not consider in its evaluations. The interpretive guidance notes, as 
proposed, that the Council may analyze a nonbank financial company's 
risk-management procedures as one of many factors in Stage 3.
    Several commenters also requested a clarification of the Council's 
assessment of resolvability. The interpretive guidance has been revised 
to clarify that the evaluation of a nonbank financial company's 
resolvability may mitigate or aggravate the potential of a nonbank 
financial company to pose a threat to U.S. financial stability.
    In response to a commenter's request for a clarification of one of 
the sample metrics specified in the Proposed Guidance, the interpretive 
guidance clarifies that the Council may consider total consolidated 
assets or liabilities as determined under GAAP or the nonbank financial 
company's applicable financial reporting standards, depending on the 
availability of data and the stage of the Determination Process.
    Several commenters also requested that nonbank financial companies 
that are evaluated in Stage 2 receive notices at the beginning of Stage 
2, or be permitted to participate in Stage 2 by submitting information 
to the Council. Pursuant to the rule, the Council will provide every 
nonbank financial company that will be reviewed in Stage 3 a notice of 
consideration and an opportunity to submit written materials to contest 
the Council's consideration of the nonbank financial company for a 
proposed determination. Stage 2 is intended to comprise the Council's 
initial company-specific analysis, based primarily on existing public 
and regulatory sources, and the Council believes that Stage 3 provides 
a sufficient opportunity for nonbank financial companies to participate 
in the Determination Process. In addition, commenters requested that a 
nonbank financial company be notified if it is evaluated in Stage 2 and 
will not be considered in Stage 3. Due to the preliminary nature of the 
Council's evaluation of a nonbank financial company in Stage 2, the 
Council does not currently intend to provide for such notices in Stage 
2. The Council may, at its discretion, adjust its process for providing 
notifications to nonbank financial companies as it gains experience 
with the Determination Process.
    Based on the analysis performed in Stages 2 and 3, the Council may 
consider whether to vote to subject a nonbank financial company to a 
proposed determination. Prior to making a proposed determination, the 
Council may (i) consult with the nonbank financial company's primary 
financial regulatory agency or home country supervisor, as appropriate, 
and (ii) consider the views of such entities.\15\ Commenters urged the 
Council to consult closely with the primary state regulator for any 
U.S. nonbank financial company or the primary home country supervisor 
for any foreign nonbank financial company under consideration for a 
determination. Such consultation and coordination will be an important 
part of the Determination Process, and the Council believes this 
process is sufficiently incorporated into paragraphs (b), (c), and (d) 
of Sec.  1310.20 of the rule.
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    \15\ However, the concurrence of the primary financial 
regulatory agency is not required prior to the Council's proposed or 
final determination with respect to a nonbank financial company. The 
Council's consultation with a nonbank financial company's primary 
financial regulatory agency does not create any rights on the part 
of the nonbank financial company under consideration.
---------------------------------------------------------------------------

    As noted in the interpretive guidance, the Council expects to 
notify a nonbank financial company that has been evaluated in Stage 3 
if the company, either before or after a proposed determination, ceases 
to be considered for determination.
5. Process and Procedures Following a Proposed Determination
    Following a proposed determination, the Council will issue a 
written notice of the proposed determination to the nonbank financial 
company that will provide an explanation of the basis of the proposed 
determination. The nonbank financial company may request a hearing to 
contest the proposed determination in accordance with section 113(e) of 
the Dodd-Frank Act and Sec.  1310.21(c) of the rule.
    In response to the public comments requesting more transparency 
regarding the Determination Process, the rule and interpretive guidance 
reflect certain clarifying changes.
    Several commenters made suggestions as to whether the Council 
should publish the names of nonbank financial companies under 
consideration for a determination. Due to the preliminary nature of the 
Council's evaluation of a nonbank financial company prior to a final 
determination, and the potential for market participants to 
misinterpret such an announcement, the Council does not intend to 
publicly announce or otherwise disclose the name of any nonbank 
financial company that is under evaluation for a determination prior to 
a final determination with respect to such company. A statement that 
this is the Council's intention has been included in the interpretive 
guidance. In addition, in response to comments, the interpretive 
guidance specifies that, when practicable and consistent with the 
purposes of the Determination Process, the Council intends to provide a 
nonbank financial company with a notice of a final determination at 
least one business day before publicly announcing the final

[[Page 21647]]

determination. This minimum time period is intended to allow nonbank 
financial companies to prepare any public communications and 
disclosures, but is relatively brief in order to avoid any potential 
market impact after the nonbank financial company is informed of the 
determination and before the determination is publicly announced.
    One commenter recommended that the Council specify, in every notice 
of proposed and final determination, the regulatory approach the 
Council recommends to the Board of Governors with respect to the 
nonbank financial company. Under the Dodd-Frank Act, while the Council 
is authorized to make determinations regarding nonbank financial 
companies, the establishment of prudential standards applicable to such 
companies is within the purview of the Board of Governors, subject to 
any recommendations by the Council under section 115 of the Dodd-Frank 
Act. Therefore, in accordance with its statutory authority, the Council 
does not generally intend to make company-specific regulatory 
recommendations to the Board of Governors in connection with 
determinations.
    One commenter requested that the Council clarify the registration 
procedures for companies that are subject to a final determination. 
Under section 114 of the Dodd-Frank Act, the Board of Governors is 
authorized to prescribe the forms for registration, including such 
information as the Board of Governors, in consultation with the 
Council, may deem necessary or appropriate. It is therefore appropriate 
for the registration procedures to be established by the Board of 
Governors, rather than by the Council.

D. Status of the Interpretive Guidance and Other Legal Issues

    Several commenters questioned the Council's authority to issue the 
proposed rule and interpretive guidance, while other commenters 
requested that the Council clarify the legal status of the interpretive 
guidance. Section 111(e)(2) of the Dodd-Frank Act explicitly authorizes 
the Council to issue rules necessary for the conduct of the business of 
the Council, and specifies that such rules will constitute rules of 
agency organization, procedure, or practice. In accordance with this 
authority, the rule sets forth the procedures and practices that the 
Council will follow in the Determination Process and the manner in 
which nonbank financial companies may present themselves and their 
views to the Council.
    Moreover, as the agency charged by Congress with responsibility for 
acting under section 113 of the Dodd-Frank Act, the Council has the 
inherent authority to promulgate interpretive rules and interpretive 
guidance that explain and interpret the statutory factors that the 
Council will consider in the Determination Process.\16\ The 
interpretive guidance simply describes the Council's interpretation of 
the statutory factors and provides transparency to the public as to how 
the Council intends to exercise its statutory grant of discretionary 
authority. The interpretive guidance does not impose duties on, or 
alter the rights or interests of, any company, nor does it relieve the 
Council of making specific determinations in accordance with the Dodd-
Frank Act. Rather, the Council must review and determine whether to 
subject any particular nonbank financial company to Board of Governors 
supervision on a company-specific basis after review of all of the 
relevant factors. Moreover, by providing for transparency in the 
Determination Process, the rule and interpretive guidance promote an 
accountability that benefits the public and the nonbank financial 
companies subject to evaluation. Thus, notwithstanding arguments to the 
contrary by a small number of commenters, the Council has the necessary 
authority to issue the rule and interpretive guidance.
---------------------------------------------------------------------------

    \16\ 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, Production Tool v. Employment & Training 
Administration, 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.'' See U.S. v. Mead, 533 U.S. 218, 227 (2001).
---------------------------------------------------------------------------

    Some commenters requested either that the interpretive guidance be 
incorporated into the rule text, or that the Council commit to 
providing the public with notice and an opportunity to comment on any 
proposed changes to the interpretive guidance. These commenters sought 
to ensure that the Council's actions would be made consistently and 
fairly and that the public would have notice of any changes to the 
interpretive guidance. If the Council revises the interpretive guidance 
in the future, the Council may provide the public with notice and an 
opportunity to comment on those changes, as the Council determines 
appropriate.
    One commenter argued that Title I of the Dodd-Frank Act violates 
the U.S. Constitution based on (i) the limited judicial review of 
Council determinations under section 113(h) of the Dodd-Frank Act and 
(ii) the scope of the delegation of Congressional authority embodied by 
the regulation of nonbank financial companies under Title I of the 
statute. The Council disagrees with this assessment and does not 
believe that this rulemaking is the appropriate context to address 
these issues.
    One commenter asserted that the Council had not satisfied the 
requirements of the Congressional Review Act (5 U.S.C. 801) in 
connection with this rulemaking. That statute provides that before a 
rule can take effect, the federal agency promulgating it must submit 
certain information to Congress and to the Comptroller General. No 
action was required to be taken by the Council in connection with the 
issuance of the NPR and Proposed Guidance, and the Council will comply 
fully with the statutory requirements in connection with the issuance 
of the rule and interpretive guidance.

IV. Section-by-Section Analysis

A. Subpart A--General

1. Sec.  1310.1 Authority and Purpose
    This section sets forth the authority for and purpose of the rule.
2. Sec.  1310.2 Definitions
    This section defines the terms relevant to the rule. One commenter 
requested a clarification of the definition of ``member agencies.'' 
That term is defined, unchanged from the NPR, as an agency represented 
by a voting member of the Council under section 111(b)(1) of the Dodd-
Frank Act.

B. Subpart B--Determinations

1. Sec.  1310.10 Council Determinations Regarding Nonbank Financial 
Companies
    This section sets forth the Council's authority to make proposed 
and final determinations with respect to nonbank financial companies, 
pursuant to sections 113(a) and (b) of the Dodd-Frank Act. It sets 
forth the two standards for determinations, the requirements for a 
Council vote with respect to proposed and final determinations, and the 
Council's ability pursuant to section 112(d)(4) of the Dodd-Frank Act 
to request that the Board of Governors conduct an examination to 
determine whether a U.S. nonbank financial company should be supervised 
by the Board of Governors for purposes of Title I of the Dodd-Frank 
Act.
    Two commenters suggested that the Council clarify the circumstances 
under

[[Page 21648]]

which the Council will enlist the Board of Governors as an examiner 
under Sec.  1310.10(c)(1) of the rule. In order to maintain consistency 
with section 112(d)(4) of the Dodd-Frank Act, the Council is adopting 
this section of the rule as proposed.
2. Sec.  1310.11 Considerations in Making Proposed and Final 
Determinations
    This section sets forth the considerations that the Council must 
consider in making a proposed or final determination with respect to a 
U.S. nonbank financial company or foreign nonbank financial company. 
These considerations reflect the statutory factors set forth in 
sections 113(a)(2) and (b)(2) of the Dodd-Frank Act.
3. Sec.  1310.12 Anti-Evasion Provision
    This section sets forth the Council's authority to require that the 
financial activities of a company that is not a nonbank financial 
company be supervised by the Board of Governors and be subject to 
prudential standards if the Council determines that material financial 
distress related to, or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of, the financial activities conducted 
directly or indirectly by a company would pose a threat to the 
financial stability of the United States, and the company is organized 
or operates in such a manner as to evade the application of Title I of 
the Dodd-Frank Act. This section defines ``financial activities'' as 
that term is defined in section 113(c)(5) of the Dodd-Frank Act.
    Paragraph (d) is intended to clarify the application of subpart C. 
This section provides that, in accordance with section 113(c)(4) of the 
Dodd-Frank Act, the provisions of subpart C governing information 
collection (including the confidentiality provisions), consultation, 
notice and opportunity for an evidentiary hearing, emergency waivers or 
modifications, and reevaluation and rescission of determinations will 
apply in the context of the Council's anti-evasion authority. The 
information-collection authority of the Council with respect to 
companies in this context derives from the authority of the Council to 
receive information from the OFR, member agencies, and the Federal 
Insurance Office, and from the authority of the OFR, on behalf of the 
Council, to require the submission of periodic and other reports from 
any financial company, under sections 112(a)(2)(A), 112(d)(1), (2), and 
(3), and 154(b) of the Dodd-Frank Act.
    Companies that are engaged in financial activities, but that are 
organized or operated in such a manner as to evade the application of 
Title I of the Dodd-Frank Act, may be subject to a determination by the 
Council under the anti-evasion authority in section 113(c) of the Dodd-
Frank Act. In exercising its anti-evasion authority with respect to a 
U.S. nonbank financial company or foreign nonbank financial company, 
the Council must consider the relevant statutory factors applicable to 
a U.S. or foreign nonbank financial company, respectively. The Council 
may make such a determination either on its own initiative or at the 
request of the Board of Governors. Commenters requested that the rule 
further define the scope of the Council's anti-evasion authority. In 
addition, one commenter recommended that the rules should permit the 
supervision of internal financial activities of a nonbank financial 
company that has been the subject of a Council determination under its 
anti-evasion authority. Because Sec.  1310.12 of the rule reflects the 
statutory authorities under section 113(c), and the Council believes 
such consistency is appropriate, the Council has not revised this 
section as suggested by commenters.

C. Subpart C--Information Collection; Proposed and Final 
Determinations; Evidentiary Hearings

1. Sec.  1310.20 Council Information Collection; Consultation; 
Coordination; Confidentiality
    This section sets forth the Council's authority to collect 
information with respect to nonbank financial companies and its 
responsibilities in consulting and coordinating with regulators and 
maintaining the confidentiality of submitted information. Paragraph (a) 
sets forth the Council's ability to collect information from the OFR, 
member agencies, the Federal Insurance Office, and other Federal and 
State financial regulatory agencies. Pursuant to its statutory 
authority, the Council may also receive and request the submission of 
data or information from its voting and non-voting members. Paragraph 
(b) sets forth the Council's ability to collect information from 
nonbank financial companies. These two paragraphs implement the 
provisions of section 112 of the Dodd-Frank Act relating to the 
Council's authority to obtain information and collect financial data. 
Paragraph (c), which has been revised for consistency with section 
113(g) of the Dodd-Frank Act, provides that the Council will consult 
with a nonbank financial company's primary financial regulatory agency 
in a timely manner. Paragraph (d) provides that the Council will 
consult with appropriate foreign regulatory authorities, to the extent 
appropriate, in accordance with section 113(i) of the Dodd-Frank Act. 
Paragraph (e) implements the confidentiality requirements provided in 
section 112(d)(5) of the Dodd-Frank Act.
    Several commenters requested that information submitted by nonbank 
financial companies be treated as exempt from disclosure under the 
FOIA. Commenters also requested that further confidentiality provisions 
be added to the rule, such as incorporating the Council's separate FOIA 
rule into the rule, committing to limiting the collection of sensitive 
information, and protections for information that has been collected. 
The Council is sensitive to these concerns. Under Sec.  1310.20(e)(3) 
of the rule, the FOIA and the applicable exemptions thereunder apply to 
any data or information submitted under the rule. In addition, the 
Council's FOIA rule will apply to data and information received by the 
Council. The Council expects that nonbank financial companies' 
submissions will likely contain or consist of ``trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential'' and information that is ``contained in or 
related to examination, operating, or condition reports prepared by, on 
behalf of, or for the use of an agency responsible for the regulation 
or supervision of financial institutions.'' These types of information 
are subject to withholding under exemptions 4 and 8 of the FOIA (5 
U.S.C. 552(b)(4) and (8)). To the extent that nonbank financial 
companies' submissions contain or consist of data or information not 
subject to an applicable FOIA exemption, that data or information would 
be releasable under the FOIA.
    In response to commenters' concerns regarding confidentiality, the 
Council has modified Sec.  1310.20 of the rule to clarify that the 
protections under that section apply to data, information, and reports 
(i) collected from federal and state financial regulatory agencies 
other than the OFR, member agencies, and the Federal Insurance Office 
and (ii) voluntarily submitted by any nonbank financial company that is 
being considered for a determination. This change also addresses 
another commenter's assertion that the Council lacks statutory 
authority to collect information from federal or state financial 
regulatory agencies other than the OFR, member agencies and the Federal 
Insurance Office,\17\ because the

[[Page 21649]]

Council expects that the OFR will participate as necessary in the 
information-collection and review process pursuant to its authority 
under sections 112(d) and 154(b) of the Dodd-Frank Act. Further, it 
should be noted that all members of the Council, including both its 
voting and non-voting members, will treat records of the Council in 
accordance with the Council's FOIA rule. When the Council and its 
members provide non-public information to each other in connection with 
Council functions and activities, the recipients generally intend to 
treat such information as confidential and not publicly to disclose 
such information without the consent of the providing party. However, 
such information may be used by the recipients for enforcement, 
examination, resolution planning, or other purposes, subject to any 
appropriate limitations on the disclosure of such information to third 
parties, taking into account factors including the need to preserve the 
integrity of the supervision and examination process. The Council 
believes that the additional confidentiality restrictions suggested by 
commenters generally would not materially increase the confidentially 
of information collected by the Council, due to requirements under the 
FOIA, or would harmfully constrain the Council's ability to perform its 
evaluations of nonbank financial companies.
---------------------------------------------------------------------------

    \17\ One of the statutory Council's duties, under section 
112(a)(2)(A), is to ``collect information from member agencies, 
other Federal and State financial regulatory agencies [and] the 
Federal Insurance Office.''
---------------------------------------------------------------------------

    Commenters also recommended that the Council rely to the extent 
possible on existing regulatory sources and on information in the form 
it is reported to regulators, to minimize the burden of information 
requests. The Council generally agrees with these comments, and in 
accordance with the Council's statutory obligation under section 
112(d)(3)(B) of the Dodd-Frank Act intends, whenever possible, to rely 
on information available from the OFR or any 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 the collection of information under 
this section of the rule will be performed in a manner that attempts to 
minimize burdens for affected nonbank financial companies.
2. Sec.  1310.21 Proposed and Final Determinations; Notice and 
Opportunity for an Evidentiary Hearing
    This section sets forth the procedural rights of a nonbank 
financial company being considered for a proposed or final 
determination, the time period within which the Council will act after 
it notifies the nonbank financial company that it is being considered 
for a proposed determination, and the nonbank financial company's 
rights to a hearing after a proposed determination. Paragraph (a) 
provides that the Council will deliver written notice to a nonbank 
financial company that it is being considered for a proposed 
determination and will provide the nonbank financial company an 
opportunity to submit written materials to contest the proposed 
determination. Paragraph (a) clarifies that the nonbank financial 
company may submit any written materials to contest the proposed 
determination, including materials concerning whether the nonbank 
financial company meets the standards for a determination. In response 
to comments, paragraph (a) provides that the Council will provide a 
nonbank financial company at least 30 days to respond to the notice of 
consideration. Commenters had requested a longer minimum period for 
responses, but based on the types and volume of information the Council 
expects to request, the subsequent opportunity for a nonbank to provide 
additional information following any proposed determination, and the 
Council's authority in individual cases to grant a longer period for a 
response, the Council believes a 30-day minimum is appropriate.
    Paragraph (b) provides that the Council will provide a nonbank 
financial company with written notice of a proposed determination, 
including an explanation of the basis of the proposed determination. 
Paragraphs (c), (d), and (e) set forth the procedures for an 
evidentiary hearing following a proposed determination, pursuant to 
section 113(e) of the Dodd-Frank Act, and provide the time period 
within which the Council will make a final determination. These 
paragraphs also provide that the Council will make public any final 
determination that it makes. While not specified in the rule, the 
Council expects to notify the relevant nonbank financial company if the 
Council has not made a final determination with respect to the company 
within the time period set forth in paragraph (d) or (e), as 
applicable. In response to comments, the Council has clarified 
paragraph (c) to provide that the hearing would be nonpublic. However, 
the Council has not revised the rule as requested by several commenters 
to provide a nonbank financial company with a right to an oral hearing. 
Instead, the rule maintains consistency with section 113(e)(2) of the 
Dodd-Frank Act, which grants the Council sole discretion as to the 
format of any hearing. Paragraph (c)(1) has also been revised to 
clarify that, consistent with the definition of ``hearing date,'' a 
hearing may be before the Council or its representatives.
    Paragraph (f) sets forth the time period within which the Council 
may make a proposed determination with respect to a nonbank financial 
company that has received a notice of consideration of determination. 
Under paragraph (a)(3), the Council will notify a nonbank financial 
company that is being considered for a proposed determination of the 
date on which the Council deems its evidentiary record regarding that 
nonbank financial company to be complete. If the Council does not make 
a proposed determination with respect to that nonbank financial company 
within 180 days after that date, the Council will not make a proposed 
determination unless the Council issues a subsequent written notice of 
consideration of determination under paragraph (a) and thereafter 
complies with the other procedures set forth in that section. This 
paragraph is intended to provide clarity to a nonbank financial company 
that is subject to a notice of consideration of determination regarding 
the timing of any potential subsequent Council action. The Council 
expects to notify the relevant nonbank financial company upon 
expiration of this 180-day period.
3. Sec.  1310.22 Emergency Exception to Sec.  1310.21
    This section sets forth the process by which the Council may waive 
or modify any of the notice or other procedural requirements of the 
rule if the Council determines that the waiver or modification is 
necessary or appropriate to prevent or mitigate threats posed by the 
nonbank financial company to the financial stability of the United 
States, pursuant to section 113(f) of the Dodd-Frank Act. This section 
provides that a nonbank financial company will receive notice of the 
waiver or modification and an opportunity for a hearing to contest the 
waiver or modification, and sets forth the process by which the Council 
will make and publicly announce its final determination. This section 
incorporates the statutory requirement that the Council consult with 
the appropriate home country supervisor, if any, of a foreign nonbank 
financial company considered for a determination under this section. 
This section also requires the Council to consult with the primary 
financial regulatory agency, if any, of a nonbank financial company in

[[Page 21650]]

making a determination under this section. These consultations will be 
conducted in such time and manner as the Council may deem appropriate. 
Several commenters requested that the Council clarify or limit the 
scope of this section of the rule. To maintain consistency with the 
Council's statutory authority under section 113(f) of the Dodd-Frank 
Act, and to avoid imposing unwarranted restrictions on the Council's 
ability to respond to emergency situations, the Council is adopting 
this section as proposed. In response to comments, the Council has 
clarified paragraph (c) to provide that the hearing under this section 
would be nonpublic, and the Council has revised paragraph (d) to 
clarify that while the Council will publicly announce final 
determinations under Sec.  1310.10(a), the Council will not publicly 
announce determinations regarding waivers or modifications under Sec.  
1310.22(c). Paragraph (c)(1) has also been revised to clarify that, 
consistent with the definition of ``hearing date,'' a hearing may be 
before the Council or its representatives.
4. Sec.  1310.23 Council Reevaluation and Rescission of Determinations
    This section sets forth the Council's statutory responsibility, 
pursuant to section 113(d) of the Dodd-Frank Act, to reevaluate 
currently effective determinations and rescind any determination if the 
Council determines that the nonbank financial company no longer meets 
the standards for determination.
    In response to comments requesting clarification of the process for 
reevaluations, paragraph (b) provides new procedural protections for 
nonbank financial companies. Pursuant to paragraph (b), the Council 
will notify each nonbank financial company subject to a currently 
effective determination prior to the Council's annual reevaluation. The 
nonbank financial company will be provided an opportunity to submit 
written materials to the Council to contest the determination. Because 
increased information about any nonbank financial company subject to a 
previous determination will be available to the Council through the 
Board of Governors, and the Council will have previously performed a 
comprehensive analysis of any such company, a replication in full of 
the Council's evaluation in Stages 2 and 3 will not be necessary. 
Instead, the Council expects that its reevaluations will focus on any 
material changes with respect to the nonbank financial company or the 
markets in which it operates since the Council's previous review. 
Commenters also suggested that nonbank financial companies be permitted 
to request additional reevaluations. Due to the relatively frequent 
mandatory reevaluations, such additional reevaluations should rarely be 
necessary. In the event of an extraordinary change that materially 
decreases the threat a nonbank financial company poses to U.S. 
financial stability relatively soon after a previous reevaluation, the 
Council may, at its sole discretion, consider a request from such 
company for a reevaluation prior to the next annual reevaluation. New 
paragraph (d) provides that upon a rescission of a determination with 
respect to a nonbank financial company, the Council will notify the 
company and publicly announce the rescission.

V. Regulatory Flexibility Act

    The Council certifies that this final rule will not have a 
significant economic impact on a substantial number of small entities. 
The economic impact of this rule is not expected to be significant. The 
final rule would apply only to nonbank financial companies that could 
pose a threat to the financial stability of the United States. Size is 
an important factor, although not the exclusive factor, in assessing 
whether a nonbank financial company could pose a threat to financial 
stability. The Council expects that few, if any, small companies (as 
defined for purposes of the Small Business Act) could pose a threat to 
financial stability. Therefore, the Council does not expect the rule to 
directly affect a substantial number of small entities. Accordingly, a 
regulatory flexibility analysis under the Regulatory Flexibility Act (5 
U.S.C. 601-612) is not required.

VI. Paperwork Reduction Act

    The collection of information contained in this final rule has been 
reviewed and approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
under control 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.
    The collection of information in this final rule is found in Sec.  
1310.20, Sec.  1310.21, Sec.  1310.22, and Sec.  1310.23.
    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 this final rule is 1,000 hours. We estimate the cost associated with 
this information collection to be $450,000. 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 nonbank financial companies internally at an average cost 
of $400 per hour, and the remainder will be carried by outside 
professionals retained by nonbank financial companies at an average 
cost of $600 per hour. In addition, in determining these estimates, the 
Council considered its obligation under Sec.  1310.20(b) of the rule 
to, whenever possible, rely on information available from the OFR or 
any 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 rule will be performed in a manner 
that attempts to minimize burdens for affected nonbank financial 
companies. The aggregate burden will be subject to the number of 
nonbank financial companies that are evaluated in Stage 3, 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 nonbank financial companies provide to 
the Council during the Determination Process.
    Several commenters asserted that the Paperwork Reduction Act 
disclosure in the NPR did not comply with the statute, citing a 
requirement to provide the public with notice and an opportunity to 
comment on the proposed collection of information, including an 
estimate of the burden that will result from the collection of 
information. The NPR cited the sections of the proposed rule that 
related to the collection of information, described the types of 
information expected to be collected and the frequency of collections, 
provided an estimate of the total annual reporting burden, and enabled 
the public to assess the likely respondents. The NPR therefore complied 
with the requirements of the Paperwork Reduction Act.

VII. Executive Orders 12866 and 13563

    Presidential Executive Order 12866, ``Regulatory Planning and 
Review,'' \18\ and Executive Order 13563, ``Improving

[[Page 21651]]

Regulation and Regulatory Review,'' \19\ 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). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This rule has been designated a ``significant regulatory 
action'' although not economically significant under section 3(f) of 
Executive Order 12866. Accordingly, the rule has been reviewed by the 
Office of Management and Budget.
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    \18\ Available at http://www.gpo.gov/fdsys/pkg/WCPD-1993-10-04/pdf/WCPD-1993-10-04-Pg1925.pdf.
    \19\ Available at http://www.gpo.gov/fdsys/pkg/FR-2011-01-21/pdf/2011-1385.pdf.
---------------------------------------------------------------------------

    Several commenters suggested that the Council should, or is 
required to, conduct a cost-benefit analysis, such as a review of the 
impact of the rule on the economy and on different sectors of the 
financial services industry. These commenters argued that a cost-
benefit analysis would enhance transparency and ensure that costs are 
minimized, and may be required under Executive Orders 12866 and 13563. 
In addition, commenters questioned the determination that this rule is 
not economically significant under section 3(f) of Executive Order 
12866. That section defines ``significant regulatory action'' to 
include a regulatory action (which may include a proposed rule of 
agency procedure or practice) that is likely to result in a rule that 
may raise certain novel legal or policy issues. Based on this 
determination, which is made by the Office of Management and Budget, 
the Council is not required to conduct a cost-benefit analysis in 
connection with this rulemaking. The rule and the interpretive guidance 
are limited to descriptions of the processes and procedures that the 
Council intends to follow in making determinations under section 113 of 
the Dodd-Frank Act, the manner in which nonbank financial companies may 
present themselves and their views to the Council, the Council's 
interpretation of the statutory factors, and how the Council intends to 
exercise its statutory grant of discretionary authority. The rights and 
obligations of nonbank financial companies that the Council is 
considering for a determination, or for a reevaluation and potential 
rescission of a determination, arise directly from section 113 of the 
Dodd-Frank Act. The rights and obligations of nonbank financial 
companies that the Council has been determined shall be supervised by 
the Board of Governors arise from other sections of the Dodd-Frank Act 
and the rules promulgated thereunder, such as the enhanced prudential 
standards to be established by the Board of Governors and the 
resolution plans required under section 165 of the Dodd-Frank Act. 
Based on data currently available to the Council through existing 
public and regulatory sources, the Council has estimated that fewer 
than 50 nonbank financial companies meet the Stage 1 thresholds.

List of Subjects in 21 CFR Part 1310

    Nonbank financial companies.

Financial Stability Oversight Council

Authority and Issuance

    For the reasons set forth in the preamble, the Financial Stability 
Oversight Council adds a new part 1310 to Title 12 of the Code of 
Federal Regulations, to read as follows:

PART 1310--AUTHORITY TO REQUIRE SUPERVISION AND REGULATION OF 
CERTAIN NONBANK FINANCIAL COMPANIES

Sec.
Subpart A--General
1310.1 Authority and purpose.
1310.2 Definitions.
Subpart B--Determinations
1310.10 Council determinations regarding nonbank financial 
companies.
1310.11 Considerations in making proposed and final determinations.
1310.12 Anti-evasion provision.
Subpart C--Information Collection; Proposed and Final Determinations; 
Evidentiary Hearings
1310.20 Council information collection; consultation; coordination; 
confidentiality.
1310.21 Proposed and final determinations; notice and opportunity 
for an evidentiary hearing.
1310.22 Emergency exception to Sec.  1310.21.
1310.23 Council reevaluation and rescission of determinations.
Appendix A to Part 1310--Financial Stability Oversight Council 
Guidance for Nonbank Financial Company Determinations

    Authority:  12 U.S.C. 5321; 12 U.S.C. 5322; 12 U.S.C. 5323.

Subpart A--General


Sec.  1310.1  Authority and purpose.

    (a) Authority. This part is issued by the Council under sections 
111, 112 and 113 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') (12 U.S.C. 5321, 5322, and 5323).
    (b) Purpose. The principal purposes of this part are to set forth 
the standards and procedures governing Council determinations under 
section 113 of the Dodd-Frank Act (12 U.S.C. 5323), including whether 
material financial distress at a nonbank financial company, or the 
nature, scope, size, scale, concentration, interconnectedness, or mix 
of the activities of the nonbank financial company, could pose a threat 
to the financial stability of the United States, and whether a nonbank 
financial company shall be supervised by the Board of Governors and 
shall be subject to prudential standards in accordance with Title I of 
the Dodd-Frank Act.


Sec.  1310.2  Definitions.

    The terms used in this part have the following meanings--
    Board of Governors. The term ``Board of Governors'' means the Board 
of Governors of the Federal Reserve System.
    Commission. The term ``Commission'' means the Securities and 
Exchange Commission, except in the context of the Commodity Futures 
Trading Commission.
    Council. The term ``Council'' means the Financial Stability 
Oversight Council.
    Federal Insurance Office. The term ``Federal Insurance Office'' 
means the office established within the Department of the Treasury by 
section 502(a) of the Dodd-Frank Act (31 U.S.C. 301 (note)).
    Foreign nonbank financial company. The term ``foreign nonbank 
financial company'' means a company (other than a company that is, or 
is treated in the United States as, a bank holding company) that is--
    (1) Incorporated or organized in a country other than the United 
States; and
    (2) ``Predominantly engaged in financial activities,'' as that term 
is defined in section 102(a)(6) of the Dodd-Frank Act (12 U.S.C. 
5311(a)(6)) and pursuant to any requirements for determining if a 
company is predominantly engaged in financial activities as established 
by regulation of the Board of Governors pursuant to section 102(b) of 
the Dodd-Frank Act (12 U.S.C. 5311(b)), including through a branch in 
the United States.
    Hearing date. The term ``hearing date'' means the latest of--
    (1) The date on which the Council has received all of the written 
materials timely submitted by a nonbank financial company for a hearing 
that is conducted without oral testimony pursuant to Sec.  1310.21 or 
Sec.  1310.22, as applicable;

[[Page 21652]]

    (2) The final date on which the Council or its representatives 
convene to hear oral testimony presented by a nonbank financial company 
pursuant to Sec.  1310.21 or Sec.  1310.22, as applicable; and
    (3) The date on which the Council has received all of the written 
materials timely submitted by a nonbank financial company to supplement 
any oral testimony and materials presented by the nonbank financial 
company pursuant to Sec.  1310.21 or Sec.  1310.22, as applicable.
    Member agency. The term ``member agency'' means an agency 
represented by a voting member of the Council under section 111(b)(1) 
of the Dodd-Frank Act (12 U.S.C. 5321).
    Nonbank financial company. The term ``nonbank financial company'' 
means a U.S. nonbank financial company or a foreign nonbank financial 
company.
    Office of Financial Research. The term ``Office of Financial 
Research'' means the office established within the Department of the 
Treasury by section 152 of the Dodd-Frank Act (12 U.S.C. 5342).
    Primary financial regulatory agency. The term ``primary financial 
regulatory agency'' means--
    (1) The appropriate Federal banking agency, with respect to 
institutions described in section 3(q) of the Federal Deposit Insurance 
Act (12 U.S.C. 1813(q)), except to the extent that an institution is or 
the activities of an institution are otherwise described in paragraph 
(2), (3), (4), or (5) of this definition;
    (2) The Commission, with respect to--
    (i) Any broker or dealer that is registered with the Commission 
under the Securities Exchange Act of 1934, with respect to the 
activities of the broker or dealer that require the broker or dealer to 
be registered under that Act;
    (ii) Any investment company that is registered with the Commission 
under the Investment Company Act of 1940, with respect to the 
activities of the investment company that require the investment 
company to be registered under that Act;
    (iii) Any investment adviser that is registered with the Commission 
under the Investment Advisers Act of 1940, with respect to the 
investment advisory activities of such company and activities that are 
incidental to such advisory activities;
    (iv) Any clearing agency registered with the Commission under the 
Securities Exchange Act of 1934, with respect to the activities of the 
clearing agency that require the agency to be registered under such 
Act;
    (v) Any nationally recognized statistical rating organization 
registered with the Commission under the Securities Exchange Act of 
1934;
    (vi) Any transfer agent registered with the Commission under the 
Securities Exchange Act of 1934;
    (vii) Any exchange registered as a national securities exchange 
with the Commission under the Securities Exchange Act of 1934;
    (viii) Any national securities association registered with the 
Commission under the Securities Exchange Act of 1934;
    (ix) Any securities information processor registered with the 
Commission under the Securities Exchange Act of 1934;
    (x) The Municipal Securities Rulemaking Board established under the 
Securities Exchange Act of 1934;
    (xi) The Public Company Accounting Oversight Board established 
under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.);
    (xii) The Securities Investor Protection Corporation established 
under the Securities Investor Protection Act of 1970 (15 U.S.C. 78aaa 
et seq.); and
    (xiii) Any security-based swap execution facility, security-based 
swap data repository, security-based swap dealer or major security-
based swap participant registered with the Commission under the 
Securities Exchange Act of 1934, with respect to the security-based 
swap activities of the person that require such person to be registered 
under such Act;
    (3) The Commodity Futures Trading Commission, with respect to--
    (i) Any futures commission merchant registered with the Commodity 
Futures Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 
et seq.), with respect to the activities of the futures commission 
merchant that require the futures commission merchant to be registered 
under that Act;
    (ii) Any commodity pool operator registered with the Commodity 
Futures Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 
et seq.), with respect to the activities of the commodity pool operator 
that require the commodity pool operator to be registered under that 
Act, or a commodity pool, as defined in that Act;
    (iii) Any commodity trading advisor or introducing broker 
registered with the Commodity Futures Trading Commission under the 
Commodity Exchange Act (7 U.S.C. 1 et seq.), with respect to the 
activities of the commodity trading advisor or introducing broker that 
require the commodity trading advisor or introducing broker to be 
registered under that Act;
    (iv) Any derivatives clearing organization registered with the 
Commodity Futures Trading Commission under the Commodity Exchange Act 
(7 U.S.C. 1 et seq.), with respect to the activities of the derivatives 
clearing organization that require the derivatives clearing 
organization to be registered under that Act;
    (v) Any board of trade designated as a contract market by the 
Commodity Futures Trading Commission under the Commodity Exchange Act 
(7 U.S.C. 1 et seq.);
    (vi) Any futures association registered with the Commodity Futures 
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.);
    (vii) Any retail foreign exchange dealer registered with the 
Commodity Futures Trading Commission under the Commodity Exchange Act 
(7 U.S.C. 1 et seq.), with respect to the activities of the retail 
foreign exchange dealer that require the retail foreign exchange dealer 
to be registered under that Act;
    (viii) Any swap execution facility, swap data repository, swap 
dealer, or major swap participant registered with the Commodity Futures 
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.) with respect to the swap activities of the person that require 
such person to be registered under that Act; and
    (ix) Any registered entity as defined in section 1a of the 
Commodity Exchange Act (7 U.S.C. 1a), with respect to the activities of 
the registered entity that require the registered entity to be 
registered under that Act;
    (4) The State insurance authority of the State in which an 
insurance company is domiciled, with respect to the insurance 
activities and activities that are incidental to such insurance 
activities of an insurance company that is subject to supervision by 
the State insurance authority under State insurance law; and
    (5) The Federal Housing Finance Agency, with respect to Federal 
Home Loan Banks or the Federal Home Loan Bank System, and with respect 
to the Federal National Mortgage Association or the Federal Home Loan 
Mortgage Corporation.
    Prudential standards. The term ``prudential standards'' means 
enhanced supervision and regulatory standards established by the Board 
of Governors under section 165 of the Dodd-Frank Act (12 U.S.C. 5365).
    Significant companies. The terms ``significant nonbank financial

[[Page 21653]]

company'' and ``significant bank holding company'' have the meanings 
ascribed to such terms by regulation of the Board of Governors issued 
under section 102(a)(7) of the Dodd-Frank Act (12 U.S.C. 5311(a)(7)).
    U.S. nonbank financial company. The term ``U.S. nonbank financial 
company'' means a company (other than a bank holding company; a Farm 
Credit System institution chartered and subject to the provisions of 
the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.); a national 
securities exchange (or parent thereof), clearing agency (or parent 
thereof, unless the parent is a bank holding company), security-based 
swap execution facility, or security-based swap data repository 
registered with the Commission; a board of trade designated as a 
contract market by the Commodity Futures Trading Commission (or parent 
thereof); or a derivatives clearing organization (or parent thereof, 
unless the parent is a bank holding company), swap execution facility, 
or swap data repository registered with the Commodity Futures Trading 
Commission), that is--
    (1) Incorporated or organized under the laws of the United States 
or any State; and
    (2) ``Predominantly engaged in financial activities,'' as that term 
is defined in section 102(a)(6) of the Dodd-Frank Act (12 U.S.C. 
5311(a)(6)), and pursuant to any requirements for determining if a 
company is predominantly engaged in financial activities as established 
by regulation of the Board of Governors pursuant to section 102(b) of 
the Dodd-Frank Act (12 U.S.C. 5311(b)).

Subpart B--Determinations


Sec.  1310.10  Council determinations regarding nonbank financial 
companies.

    (a) Determinations. The Council may determine that a nonbank 
financial company shall be supervised by the Board of Governors and 
shall be subject to prudential standards, in accordance with Title I of 
the Dodd-Frank Act, if the Council determines that material financial 
distress at the nonbank financial company, or the nature, scope, size, 
scale, concentration, interconnectedness, or mix of the activities of 
the nonbank financial company, could pose a threat to the financial 
stability of the United States.
    (b) Vote required. Any proposed or final determination under 
paragraph (a) of this section shall--
    (1) Be made by the Council and shall not be delegated by the 
Council; and
    (2) Require the vote of not fewer than two-thirds of the voting 
members of the Council then serving, including the affirmative vote of 
the Chairperson of the Council.
    (c) Back-up examination by the Board of Governors. (1) If the 
Council is unable to determine whether the financial activities of a 
U.S. nonbank financial company, including a U.S. nonbank financial 
company that is owned by a foreign nonbank financial company, pose a 
threat to the financial stability of the United States, based on 
information or reports obtained by the Council under Sec.  1310.20, 
including discussions with management, and publicly available 
information, the Council may request the Board of Governors, and the 
Board of Governors is authorized, to conduct an examination of the U.S. 
nonbank financial company and its subsidiaries for the sole purpose of 
determining whether the nonbank financial company should be supervised 
by the Board of Governors for purposes of Title I of the Dodd-Frank Act 
(12 U.S.C. 5311-5374).
    (2) The Council shall review the results of the examination of a 
nonbank financial company, including its subsidiaries, conducted by the 
Board of Governors under this paragraph (c) in connection with any 
proposed or final determination under paragraph (a) of this section 
with respect to the nonbank financial company.


Sec.  1310.11  Considerations in making proposed and final 
determinations.

    (a) Considerations for U.S. nonbank financial companies. In making 
a proposed or final determination under Sec.  1310.10(a) with respect 
to a U.S. nonbank financial company, the Council shall consider--
    (1) The extent of the leverage of the U.S. nonbank financial 
company and its subsidiaries;
    (2) The extent and nature of the off-balance-sheet exposures of the 
U.S. nonbank financial company and its subsidiaries;
    (3) The extent and nature of the transactions and relationships of 
the U.S. nonbank financial company and its subsidiaries with other 
significant nonbank financial companies and significant bank holding 
companies;
    (4) The importance of the U.S. nonbank financial company and its 
subsidiaries 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;
    (5) The importance of the U.S. nonbank financial company and its 
subsidiaries as a source of credit for low-income, minority, or 
underserved communities, and the impact that the failure of such U.S. 
nonbank financial company would have on the availability of credit in 
such communities;
    (6) The extent to which assets are managed rather than owned by the 
U.S. nonbank financial company and its subsidiaries, and the extent to 
which ownership of assets under management is diffuse;
    (7) The nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the U.S. nonbank 
financial company and its subsidiaries;
    (8) The degree to which the U.S. nonbank financial company and its 
subsidiaries are already regulated by 1 or more primary financial 
regulatory agencies;
    (9) The amount and nature of the financial assets of the U.S. 
nonbank financial company and its subsidiaries;
    (10) The amount and types of the liabilities of the U.S. nonbank 
financial company and its subsidiaries, including the degree of 
reliance on short-term funding; and
    (11) Any other risk-related factor that the Council deems 
appropriate, either by regulation or on a case-by-case basis.
    (b) Considerations for foreign nonbank financial companies. In 
making a proposed or final determination under Sec.  1310.10(a) with 
respect to a foreign nonbank financial company, the Council shall 
consider--
    (1) The extent of the leverage of the foreign nonbank financial 
company and its subsidiaries;
    (2) The extent and nature of the United States related off-balance-
sheet exposures of the foreign nonbank financial company and its 
subsidiaries;
    (3) The extent and nature of the transactions and relationships of 
the foreign nonbank financial company and its subsidiaries with other 
significant nonbank financial companies and significant bank holding 
companies;
    (4) The importance of the foreign nonbank financial company and its 
subsidiaries as a source of credit for United States households, 
businesses, and State and local governments and as a source of 
liquidity for the United States financial system;
    (5) The importance of the foreign nonbank financial company and its 
subsidiaries as a source of credit for low-income, minority, or 
underserved communities in the United States, and the impact that the 
failure of such foreign nonbank financial company would have on the 
availability of credit in such communities;
    (6) The extent to which assets are managed rather than owned by the 
foreign nonbank financial company and its subsidiaries and the extent 
to which

[[Page 21654]]

ownership of assets under management is diffuse;
    (7) The nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of the foreign nonbank 
financial company and its subsidiaries;
    (8) The extent to which the foreign nonbank financial company and 
its subsidiaries are subject to prudential standards on a consolidated 
basis in the foreign nonbank financial company's home country that are 
administered and enforced by a comparable foreign supervisory 
authority;
    (9) The amount and nature of the United States financial assets of 
the foreign nonbank financial company and its subsidiaries;
    (10) The amount and nature of the liabilities of the foreign 
nonbank financial company and its subsidiaries used to fund activities 
and operations in the United States, including the degree of reliance 
on short-term funding; and
    (11) Any other risk-related factor that the Council deems 
appropriate, either by regulation or on a case-by-case basis.


Sec.  1310.12  Anti-evasion provision.

    (a) Determinations. In order to avoid evasion of Title I of the 
Dodd-Frank Act (12 U.S.C. 5311-5374) or this part, the Council, on its 
own initiative or at the request of the Board of Governors, may require 
that the financial activities of a company shall be supervised by the 
Board of Governors and subject to prudential standards if the Council 
determines that--
    (1) Material financial distress related to, or the nature, scope, 
size, scale, concentration, interconnectedness, or mix of, the 
financial activities conducted directly or indirectly by a company 
incorporated or organized under the laws of the United States or any 
State or the financial activities in the United States of a company 
incorporated or organized in a country other than the United States 
would pose a threat to the financial stability of the United States, 
based on consideration of the factors in--
    (i) Sec.  1310.11(a) if the company is incorporated or organized 
under the laws of the United States or any State; or
    (ii) Sec.  1310.11(b) if the company is incorporated or organized 
in a country other than the United States; and
    (2) The company is organized or operates in such a manner as to 
evade the application of Title I of the Dodd-Frank Act (12 U.S.C. 5311-
5374) or this part.
    (b) Vote required. Any proposed or final determination under 
paragraph (a) of this section shall--
    (1) Be made by the Council and shall not be delegated by the 
Council; and
    (2) Require the vote of not fewer than two-thirds of the voting 
members of the Council then serving, including the affirmative vote of 
the Chairperson of the Council.
    (c) Definition of covered financial activities. For purposes of 
this section, the term ``financial activities''--
    (1) Means activities that are financial in nature (as defined in 
section 4(k) of the Bank Holding Company Act of 1956);
    (2) Includes the ownership or control of one or more insured 
depository institutions; and
    (3) Does not include internal financial activities conducted for 
the company or any affiliate thereof, including internal treasury, 
investment, and employee benefit functions.
    (d) Application of other provisions. Sections 1310.20(a), 
1310.20(b), 1310.20(c), 1310.20(e), 1310.21, 1310.22, and 1310.23, and 
the definitions referred to therein, shall apply to proposed and final 
determinations of the Council with respect to the financial activities 
of a company pursuant to this section in the same manner as such 
sections apply to proposed and final determinations of the Council with 
respect to nonbank financial companies.

Subpart C--Information Collection; Proposed and Final 
Determinations; Evidentiary Hearings


Sec.  1310.20  Council information collection; consultation; 
coordination; confidentiality.

    (a) Information collection from the Office of Financial Research, 
member agencies, the Federal Insurance Office, and other Federal and 
State financial regulatory agencies. The Council may receive, and may 
request the submission of, such data or information from the Office of 
Financial Research, member agencies, the Federal Insurance Office, and 
(acting through the Office of Financial Research, to the extent the 
Council determines necessary) other Federal and State financial 
regulatory agencies as the Council deems necessary to carry out the 
provisions of Title I of the Dodd-Frank Act (12 U.S.C. 5311-5374) or 
this part.
    (b) Information collection from nonbank financial companies. (1) 
The Council may, to the extent the Council determines appropriate, 
direct the Office of Financial Research to require the submission of 
periodic and other reports from any nonbank financial company, 
including a nonbank financial company that is being considered for a 
proposed or final determination under Sec.  1310.10(a), for the purpose 
of assessing the extent to which a nonbank financial company poses a 
threat to the financial stability of the United States.
    (2) Before requiring the submission of reports under this paragraph 
(b) from any nonbank financial company that is regulated by a member 
agency or any primary financial regulatory agency, the Council, acting 
through the Office of Financial Research, shall coordinate with such 
agency or agencies and shall, whenever possible, rely on information 
available from the Office of Financial Research or such agency or 
agencies.
    (3) Before requiring the submission of reports under this paragraph 
(b) from a company that is a foreign nonbank financial company, the 
Council shall, acting through the Office of Financial Research, to the 
extent appropriate, consult with the appropriate foreign regulator of 
such foreign nonbank financial company and, whenever possible, rely on 
information already being collected by such foreign regulator, with 
English translation.
    (4) The Council may, to the extent the Council determines 
appropriate, accept the submission of any data, information, and 
reports voluntarily submitted by any nonbank financial company that is 
being considered for a proposed or final determination under Sec.  
1310.10(a), for the purpose of assessing the extent to which a nonbank 
financial company poses a threat to the financial stability of the 
United States.
    (c) Consultation. The Council shall 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 supervision by the Board of Governors under Sec.  1310.10(a) in a 
timely manner before the Council makes any final determination under 
Sec.  1310.10(a) with respect to such nonbank financial company.
    (d) International coordination. In exercising its duties under this 
part with respect to foreign nonbank financial companies and cross-
border activities and markets, the Council, acting through its 
Chairperson or other authorized designee, shall consult with 
appropriate foreign regulatory authorities, to the extent appropriate.
    (e) Confidentiality--(1) In general. The Council shall maintain the 
confidentiality of any data, information, and reports submitted under 
this part.
    (2) Retention of privilege. The submission of any non-publicly 
available data or information under this part shall not constitute a 
waiver of, or otherwise affect, any privilege arising under Federal or 
State law (including

[[Page 21655]]

the rules of any Federal or State court) to which the data or 
information is otherwise subject.
    (3) Freedom of Information Act. Section 552 of Title 5, United 
States Code, including the exceptions thereunder, and any regulations 
thereunder adopted by the Council, shall apply to any data, 
information, and reports submitted under this part.


Sec.  1310.21  Proposed and final determinations; notice and 
opportunity for an evidentiary hearing.

    (a) Written notice of consideration of determination; submission of 
materials. Before providing a nonbank financial company written notice 
of a proposed determination pursuant to paragraph (b) of this section, 
the Council shall provide the nonbank financial company--
    (1) Written notice that the Council is considering whether to make 
a proposed determination with respect to the nonbank financial company 
under Sec.  1310.10(a);
    (2) An opportunity to submit written materials, within such time as 
the Council determines to be appropriate (which shall be not less than 
30 days after the date of receipt by the nonbank financial company of 
the notice described in paragraph (a)(1)), to the Council to contest 
the Council's consideration of the nonbank financial company for a 
proposed determination, including materials concerning whether, in the 
nonbank financial company's view, material financial distress at the 
nonbank financial company, or the nature, scope, size, scale, 
concentration, interconnectedness, or mix of the activities of the 
nonbank financial company, could pose a threat to the financial 
stability of the United States; and
    (3) Notice when the Council deems its evidentiary record regarding 
such nonbank financial company to be complete.
    (b) Notice of proposed determination. If the Council determines 
under Sec.  1310.10(a) that a nonbank financial company should be 
supervised by the Board of Governors and be subject to prudential 
standards, the Council shall provide to the nonbank financial company 
written notice of the proposed determination, including an explanation 
of the basis of the proposed determination and the date by which an 
evidentiary hearing may be requested by the nonbank financial company 
under paragraph (c) of this section.
    (c) Evidentiary hearing. (1) Not later than 30 days after the date 
of receipt by a nonbank financial company of the notice of proposed 
determination under paragraph (b) of this section, the nonbank 
financial company may request, in writing, an opportunity for a 
nonpublic, written or oral evidentiary hearing before the Council or 
its representatives to contest the proposed determination under Sec.  
1310.10(a).
    (2) Upon receipt by the Council of a timely request under paragraph 
(c)(1), the Council shall fix a time (not later than 30 days after the 
date of receipt by the Council of the request) and place at which such 
nonbank financial company may appear, personally or through counsel, 
for a nonpublic evidentiary hearing at which the nonbank financial 
company may submit written materials (or, at the sole discretion of the 
Council, oral testimony and oral argument) to contest the proposed 
determination under Sec.  1310.10(a), including materials concerning 
whether, in the nonbank financial company's view, material financial 
distress at the nonbank financial company, or the nature, scope, size, 
scale, concentration, interconnectedness, or mix of the activities of 
the nonbank financial company, could pose a threat to the financial 
stability of the United States.
    (d) Final determination after evidentiary hearing. If the nonbank 
financial company makes a timely request for an evidentiary hearing 
under paragraph (c) of this section, the Council shall, not later than 
60 days after the hearing date--
    (1) Determine whether to make a final determination under Sec.  
1310.10(a);
    (2) Notify the nonbank financial company, in writing, of any final 
determination of the Council under Sec.  1310.10(a), which notice shall 
contain a statement of the basis for the decision of the Council; and
    (3) If the Council makes a final determination under Sec.  
1310.10(a), publicly announce the final determination of the Council.
    (e) No evidentiary hearing requested. If a nonbank financial 
company does not make a timely request for an evidentiary hearing under 
paragraph (c) of this section or notifies the Council in writing that 
it is not requesting an evidentiary hearing under paragraph (c) of this 
section, the Council shall, not later than 10 days after the date by 
which the nonbank financial company could have requested a hearing 
under paragraph (c) of this section or 10 days after the date on which 
the Council receives notice from the nonbank financial company that it 
is not requesting an evidentiary hearing, as applicable--
    (1) Determine whether to make a final determination under Sec.  
1310.10(a);
    (2) Notify the nonbank financial company, in writing, of any final 
determination of the Council under Sec.  1310.10(a), which notice shall 
contain a statement of the basis for the decision of the Council; and
    (3) If the Council makes a final determination under Sec.  
1310.10(a), publicly announce the final determination of the Council.
    (f) Time period for consideration. (1) If the Council does not make 
a proposed determination under Sec.  1310.10(a) with respect to a 
nonbank financial company within 180 days after the date on which the 
nonbank financial company receives the notice of completion of the 
Council's evidentiary record described in paragraph (a)(3) of this 
section, the nonbank financial company shall not be eligible for a 
proposed determination under Sec.  1310.10(a) unless the Council issues 
a subsequent written notice of consideration of determination under 
paragraph (a) of this section to such nonbank financial company.
    (2) This paragraph (f) shall not limit the Council's ability to 
issue a subsequent written notice of consideration of determination 
under Sec.  1310.21(a) to any nonbank financial company that, within 
180 days after the date on which such nonbank financial company 
received a notice described in paragraph (a)(3) of this section, does 
not become subject to a proposed determination under Sec.  1310.10(a).


Sec.  1310.22  Emergency exception to Sec.  1310.21.

    (a) Exception to Sec.  1310.21. Notwithstanding anything to the 
contrary in Sec.  1310.21, the Council may waive or modify any or all 
of the notice and other procedural requirements of Sec.  1310.21 with 
respect to a nonbank financial company if--
    (1) The Council determines that such waiver or modification is 
necessary or appropriate to prevent or mitigate threats posed by the 
nonbank financial company to the financial stability of the United 
States; and
    (2) The Council provides written notice of the waiver or 
modification under this section to the nonbank financial company as 
soon as practicable, but not later than 24 hours after the waiver or 
modification is granted. Any such notice shall set forth the manner and 
form for transmitting a request for an evidentiary hearing under 
paragraph (c) of this section.
    (b) Consultation. (1) In making a determination under paragraph (a) 
of this section with respect to a nonbank financial company, the 
Council shall consult with the primary financial regulatory agency, if 
any, for such nonbank financial company, in such

[[Page 21656]]

time and manner as the Council may deem appropriate.
    (2) In making a determination under paragraph (a) of this section 
with respect to a foreign nonbank financial company, the Council shall 
consult with the appropriate home country supervisor, if any, of such 
foreign nonbank financial company, in such time and manner as the 
Council may deem appropriate.
    (c) Opportunity for evidentiary hearing. (1) If the Council, 
pursuant to paragraph (a) of this section, waives or modifies any of 
the notice or other procedural requirements of Sec.  1310.21 with 
respect to a nonbank financial company, the nonbank financial company 
may request, in writing, an opportunity for a nonpublic, written or 
oral evidentiary hearing before the Council or its representatives to 
contest such waiver or modification, not later than 10 days after the 
date of receipt by the nonbank financial company of the notice 
described in paragraph (a)(2) of this section.
    (2) Upon receipt of a timely request for an evidentiary hearing 
under paragraph (c)(1), the Council shall fix a time (not later than 15 
days after the date of receipt by the Council of the request) and place 
at which the nonbank financial company may appear, personally or 
through counsel, for a nonpublic evidentiary hearing at which the 
nonbank financial company may submit written materials (or, at the sole 
discretion of the Council, oral testimony and oral argument) regarding 
the waiver or modification under this section.
    (d) Notice of final determination. If the nonbank financial company 
makes a timely request for an evidentiary hearing under paragraph (c) 
of this section, the Council shall, not later than 30 days after the 
hearing date--
    (1) Make a final determination regarding the waiver or modification 
under this Sec.  1310.22;
    (2) Notify the nonbank financial company, in writing, of the final 
determination of the Council regarding the waiver or modification under 
this Sec.  1310.22, which notice shall contain a statement of the basis 
for the final decision of the Council; and
    (3) If the Council makes a final determination under Sec.  
1310.10(a), publicly announce the final determination of the Council.
    (e) Vote required. Any determination of the Council under paragraph 
(a)(1) of this section to waive or modify any of the notice or other 
procedural requirements of Sec.  1310.21 shall--
    (1) Be made by the Council and shall not be delegated by the 
Council; and
    (2) Require the vote of not fewer than two-thirds of the voting 
members of the Council then serving, including the affirmative vote of 
the Chairperson of the Council.


Sec.  1310.23  Council reevaluation and rescission of determinations.

    (a) Reevaluation and rescission. The Council shall, not less 
frequently than annually--
    (1) Reevaluate each currently effective determination made under 
Sec.  1310.10(a); and
    (2) Rescind any such determination, if the Council determines that 
the nonbank financial company no longer meets the standard under Sec.  
1310.10(a), taking into account the considerations in Sec.  1310.11(a) 
or Sec.  1310.11(b), as applicable.
    (b) Notice of reevaluation; submission of materials. The Council 
shall provide written notice to each nonbank financial company subject 
to a currently effective determination prior to the Council's 
reevaluation of such determination under paragraph (a) of this section 
and shall provide such nonbank financial company an opportunity to 
submit written materials, within such time as the Council determines to 
be appropriate (which shall be not less than 30 days after the date of 
receipt by the nonbank financial company of such notice), to the 
Council to contest the determination, including materials concerning 
whether, in the nonbank financial company's view, material financial 
distress at the nonbank financial company, or the nature, scope, size, 
scale, concentration, interconnectedness, or mix of the activities of 
the nonbank financial company, could pose a threat to the financial 
stability of the United States.
    (c) Vote required. Any determination of the Council under paragraph 
(a)(2) of this section to rescind a determination made with respect to 
a nonbank financial company shall--
    (1) Be made by the Council and shall not be delegated by the 
Council; and
    (2) Require the vote of not fewer than two-thirds of the voting 
members of the Council then serving, including the affirmative vote of 
the Chairperson of the Council.
    (d) Notice of rescission. If the Council rescinds a determination 
with respect to any nonbank financial company under paragraph (a) of 
this section, the Council shall notify the nonbank financial company, 
in writing, of such rescission and publicly announce such rescission.

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 ``Board of Governors'') 
and be subject to prudential standards in accordance with Title I of 
the Dodd-Frank Act if either of two standards is met. Under the 
first standard, the Council may subject a nonbank financial company 
to supervision by the Board of Governors and prudential standards if 
the Council determines that ``material financial distress'' at the 
nonbank financial company could pose a threat to the financial 
stability of the United States. Under the second standard, the 
Council may determine that a nonbank financial company will be 
supervised by the Board of Governors and subject to prudential 
standards if 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 also lists 10 considerations that 
the Council must take into account in making a determination.\2\
---------------------------------------------------------------------------

    \1\ See 12 U.S.C. 5323.
    \2\ In addition to these considerations, the Council may 
consider any other risk-related factors that the Council deems 
appropriate. 12 U.S.C. 5323(a)(2)(K) and (b)(2)(K).
---------------------------------------------------------------------------

    Section II of this document describes the manner in which the 
Council intends to apply the statutory standards and considerations 
in making determinations under section 113 of the Dodd-Frank Act. 
First, section II defines ``threat to the financial stability of the 
United States'' and describes channels through which a nonbank 
financial company could pose such a threat. Second, it discusses 
each of the two statutory standards for determination. Third, it 
describes the six-category framework that the Council intends to use 
to evaluate nonbank financial companies under each of the 10 
statutory considerations. Section II also includes lists of sample 
metrics that may be used to evaluate individual nonbank financial 
companies under each of the six categories.
    Section III of this document outlines the process that the 
Council intends to follow in non-emergency situations when 
determining whether to subject a nonbank financial company to Board 
of Governors supervision and prudential standards. Section III also 
provides a detailed description of the analysis that the Council 
intends to conduct during each stage of its review. In the first 
stage of the process, the Council will apply six uniform 
quantitative thresholds to nonbank financial companies to identify 
those nonbank financial companies that will be subject to further 
evaluation by the Council. Because the Council is relying in the 
first stage on quantitative thresholds using

[[Page 21657]]

information available through existing public and regulatory 
sources, nonbank financial companies should be able to assess 
whether they will be subject to further evaluation by the Council. 
During the second stage of the evaluation process, the Council will 
analyze the identified nonbank financial companies using a broad 
range of information available to the Council primarily through 
existing public and regulatory sources. The third stage of the 
process will involve a comprehensive analysis of those nonbank 
financial companies using information collected directly from the 
nonbank financial company, as well as the information used in the 
first two stages.

II. Council Determination Authority and Framework

    As noted above, the Council may determine that a nonbank 
financial company will be supervised by the Board of Governors and 
be subject to prudential standards if the Council determines that 
(i) material financial distress at the nonbank financial company 
could pose a threat to the financial stability of the United States 
(the ``First Determination Standard'') or (ii) the nature, scope, 
size, scale, concentration, interconnectedness, or mix of the 
activities of the nonbank financial company could pose a threat to 
the financial stability of the United States (the ``Second 
Determination Standard,'' and, together with the First Determination 
Standard, the ``Determination Standards'').
    The Council intends to interpret the term ``company'' broadly 
with respect to nonbank financial companies and other companies in 
connection with section 113 of the Dodd-Frank Act, to include any 
corporation, limited liability company, partnership, business trust, 
association, or similar organization.
    This section provides definitions of the terms ``threat to the 
financial stability of the United States'' and ``material financial 
distress'' and describes how the Council expects to apply the 
Determination Standards.

a. Threat to the Financial Stability of the United States

    The Determination Standards require the Council to determine 
whether a nonbank financial company could pose a threat to the 
financial stability of the United States. 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.
    In evaluating a nonbank financial company under one of the 
Determination Standards, the Council intends to assess how a nonbank 
financial company's material financial distress or activities could 
be transmitted to, or otherwise affect, other firms or markets, 
thereby causing a broader impairment of financial intermediation or 
of financial market functioning. An impairment of financial 
intermediation and financial market functioning can occur through 
several channels. The Council has identified the following channels 
as 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:
    <bullet> Exposure. A nonbank financial company's creditors, 
counterparties, investors, or other market participants have 
exposure to the nonbank financial company that is significant enough 
to materially impair those creditors, counterparties, investors, or 
other market participants and thereby pose a threat to U.S. 
financial stability. In its initial analysis of nonbank financial 
companies with respect to this channel, the Council expects to 
consider metrics including total consolidated assets, credit default 
swaps outstanding, derivative liabilities, total debt outstanding, 
and leverage ratio.
    <bullet> Asset liquidation. A nonbank financial company holds 
assets that, if liquidated quickly, would cause a fall in asset 
prices and thereby significantly disrupt trading or funding in key 
markets or cause significant losses or funding problems for other 
firms with similar holdings. This channel would likely be most 
relevant for a nonbank financial company whose funding and liquid 
asset profile makes it likely that it would be forced to liquidate 
assets quickly when it comes under financial pressure. For example, 
this could be the case if a large nonbank financial company relies 
heavily on short-term funding. In its initial analysis of nonbank 
financial companies with respect to this channel, the Council 
expects to consider metrics including total consolidated assets and 
short-term debt ratio.
    <bullet> Critical function or service. A nonbank financial 
company is no longer able or willing to provide a critical function 
or service that is relied upon by market participants and for which 
there are no ready substitutes. The analysis of this channel will 
incorporate a review of the competitive landscape for markets in 
which a nonbank financial company participates and for the services 
it provides (including the provision of liquidity to the U.S. 
financial system, the provision of credit to low-income, minority, 
or underserved communities, or the provision of credit to 
households, businesses and state and local governments), the nonbank 
financial company's market share, and the ability of other firms to 
replace those services. Due to the unique ways in which a nonbank 
financial company may provide a critical function or service to the 
market, the Council expects to apply company-specific analyses with 
respect to this channel, rather than applying a broadly applicable 
quantitative metric.
    The Council believes that the threat a nonbank financial company 
may pose to U.S. financial stability through the impairment of 
financial intermediation and financial market functioning is likely 
to be exacerbated if the nonbank financial company is sufficiently 
complex, opaque, or difficult to resolve in bankruptcy such that its 
resolution in bankruptcy would disrupt key markets or have a 
material adverse impact on other financial firms or markets.
    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.

b. First Determination Standard: Material Financial Distress

    Under the First Determination Standard, the Council may subject 
a nonbank financial company to supervision by the Board of Governors 
and prudential standards if the Council determines that ``material 
financial distress'' at the nonbank financial company could pose a 
threat to U.S. financial stability. The Council believes that 
material financial distress exists when a nonbank financial company 
is in imminent danger of insolvency or defaulting on its financial 
obligations.
    For purposes of considering whether a nonbank financial company 
could pose a threat to U.S. financial stability under this 
Determination Standard, the Council intends to assess the impact of 
the nonbank financial company's material financial distress in the 
context of a period of overall stress in the financial services 
industry and in a weak macroeconomic environment. The Council 
believes this is appropriate because in such a context, a nonbank 
financial company's distress may have a greater effect on U.S. 
financial stability.

c. Second Determination Standard: Nature, Scope, Size, Scale, 
Concentration, Interconnectedness, or Mix of Activities

    Under the Second Determination Standard, the Council may subject 
a nonbank financial company to supervision by the Board of Governors 
and prudential standards if the Council determines that 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 Council believes that this 
Determination Standard will be met if the Council determines that 
the nature of a nonbank financial company's business practices, 
conduct, or operations could pose a threat to U.S. financial 
stability, regardless of whether the nonbank financial company is 
experiencing financial distress. The Council expects that there 
likely will be significant overlap between the outcome of an 
assessment of a nonbank financial company under the First and Second 
Determination Standards, because, in many cases, a nonbank financial 
company that could pose a threat to U.S. financial stability because 
of the nature, scope, size, scale, concentration, 
interconnectedness, or mix of its activities could also pose a 
threat to U.S. financial stability if it were to experience material 
financial distress.

d. Analytic Framework for Statutory Considerations

    As required by section 113 of the Dodd-Frank Act, the Council's 
determination will be based on its judgment that a firm meets one of 
the Determination Standards described above. In evaluating whether a 
firm meets one of the Determination Standards, the Council will 
consider each of the statutory considerations. The discussion below 
outlines the analytic framework that

[[Page 21658]]

the Council intends to use to organize its evaluation of a nonbank 
financial company under the statutory considerations and provides 
additional detail on the key data and analyses that the Council 
intends to use to assess the considerations.

1. Grouping of Statutory Considerations Into Six-Category Framework

    The Dodd-Frank Act requires the Council to consider 10 
considerations (described below) when evaluating the potential of a 
nonbank financial company to pose a threat to U.S. financial 
stability. The statute also authorizes the Council to consider ``any 
other risk-related factors that the Council deems appropriate.'' 
These statutory considerations will help the Council to evaluate 
whether one of the Determination Standards, as described in sections 
II.b and II.c above, has been met. The Council has developed an 
analytic framework that groups all relevant factors, including the 
10 statutory considerations and any additional risk-related factors, 
into six categories: size, interconnectedness, substitutability, 
leverage, liquidity risk and maturity mismatch, and existing 
regulatory scrutiny. The Council expects to use these six categories 
to guide its evaluation of whether a particular nonbank financial 
company meets either Determination Standard. However, the Council's 
ultimate determination decision regarding a nonbank financial 
company will not be based on a formulaic application of the six 
categories. Rather, the Council intends to analyze a nonbank 
financial company using quantitative and qualitative data relevant 
to each of the six categories, as the Council determines is 
appropriate with respect to the particular nonbank financial 
company.
    Each of the six categories reflects a different dimension of a 
nonbank financial company's potential to pose a threat to U.S. 
financial stability. Three of the six categories--size, 
substitutability, and interconnectedness--seek to assess the 
potential impact of the nonbank financial company's financial 
distress on the broader economy. Material financial distress at 
nonbank financial companies that are large, provide critical 
financial services for which there are few substitutes, or are 
highly interconnected with other financial firms or markets are more 
likely to have a financial or operational impact on other companies, 
markets, and consumers that could pose a threat to the financial 
stability of the United States. The remaining three categories--
leverage, liquidity risk and maturity mismatch, and existing 
regulatory scrutiny of the nonbank financial company--seek to assess 
the vulnerability of a nonbank financial company to financial 
distress. Nonbank financial companies that are highly leveraged, 
have a high degree of liquidity risk or maturity mismatch, and are 
under little or no regulatory scrutiny are more likely to be more 
vulnerable to financial distress.
    Each of the statutory considerations in sections 113(a)(2) and 
(b)(2) of the Dodd-Frank Act would be considered as part of one or 
more of the six categories. This is reflected in the following 
table, using the considerations relevant to a U.S. nonbank financial 
company for illustrative purposes.\3\
---------------------------------------------------------------------------

    \3\ The corresponding statutory considerations for a foreign 
nonbank financial company would be considered under the relevant 
categories indicated in the table.

----------------------------------------------------------------------------------------------------------------
                                                        Category or categories in which this consideration would
              Statutory considerations:                                      be addressed:
----------------------------------------------------------------------------------------------------------------
(A) The extent of the leverage of the company........  Leverage.
(B) The extent and nature of the off-balance-sheet     Size; interconnectedness.
 exposures of the company.
(C) The extent and nature of the transactions and      Interconnectedness.
 relationships of the company with other significant
 nonbank financial companies and significant bank
 holding companies.
(D) The importance of the company as a source of       Size; substitutability.
 credit for households, businesses, and State and
 local governments and as a source of liquidity for
 the United States financial system.
(E) The importance of the company as a source of       Substitutability.
 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.
(F) The extent to which assets are managed rather      Size; interconnectedness; substitutability.
 than owned by the company, and the extent to which
 ownership of assets under management is diffuse.
(G) The nature, scope, size, scale, concentration,     Size; interconnectedness; substitutability.
 interconnectedness, and mix of the activities of the
 company.
(H) The degree to which the company is already         Existing regulatory scrutiny.
 regulated by 1 or more primary financial regulatory
 agencies.
(I) The amount and nature of the financial assets of   Size; interconnectedness.
 the company.
(J) The amount and types of the liabilities of the     Liquidity risk and maturity mismatch; size;
 company, including the degree of reliance on short-    interconnectedness.
 term funding.
(K) Any other risk-related factors that the Council    Appropriate category or categories based on the nature of
 deems appropriate.                                     the additional risk-related factor.
----------------------------------------------------------------------------------------------------------------

2. Six-Category Framework

    The discussion below describes each of the six categories and 
how these categories relate to a firm's likelihood to pose a threat 
to financial stability. The sample metrics set forth below under 
each category are representative, not exhaustive, and may not apply 
to all nonbank financial companies under evaluation. The Council may 
apply the sample metrics in the context of stressed market 
conditions.

Interconnectedness

    Interconnectedness captures direct or indirect linkages between 
financial companies that may be conduits for the transmission of the 
effects resulting from a nonbank financial company's material 
financial distress or activities. Examples of the key conduits 
through which the effects may travel are a nonbank financial 
company's direct or indirect exposures to counterparties (including 
creditors, trading and derivatives counterparties, investors, 
borrowers, and other participants in the financial markets). 
Interconnectedness depends not only on the number of counterparties 
that a nonbank financial company has, but also on the importance of 
that nonbank financial company to its counterparties and the extent 
to which the counterparties are interconnected with other financial 
firms, the financial system and the broader economy. The Council's 
assessment of interconnectedness is intended to determine whether a 
nonbank financial company's exposure to its counterparties would 
pose a threat to U.S. financial stability if that company 
encountered material financial distress.
    For example, metrics that may be used to assess 
interconnectedness include:
    <bullet> Counterparties' exposures to a nonbank financial 
company, including derivatives, reinsurance, loans, securities 
borrowing and lending, and lines of credit that facilitate 
settlement and clearing activities.
    <bullet> Number, size, and financial strength of a nonbank 
financial company's counterparties, including the proportion of its 
counterparties' exposure to the nonbank financial company relative 
to the counterparties' capital.
    <bullet> Identity of a nonbank financial company's principal 
contractual counterparties, which reflects the concentration of the 
nonbank financial

[[Page 21659]]

company's assets financed by particular firms and the importance of 
the nonbank financial company's counterparties to the market.
    <bullet> Aggregate amounts of a nonbank financial company's 
gross or net derivatives exposures and the number of its derivatives 
counterparties.
    <bullet> The amount of gross notional credit default swaps 
outstanding for which a nonbank financial company or its parent is 
the reference entity.
    <bullet> Total debt outstanding, which captures a nonbank 
financial company's sources of funding.
    <bullet> Reinsurance obligations, which measure the reinsurance 
risk assumed from non-affiliates net of retrocession.

Substitutability

    Substitutability captures the extent to which other firms could 
provide similar financial services in a timely manner at a similar 
price and quantity if a nonbank financial company withdraws from a 
particular market. Substitutability also captures situations in 
which a nonbank financial company is the primary or dominant 
provider of services in a market that the Council determines to be 
essential to U.S. financial stability. An example of the manner in 
which the Council may determine a nonbank financial company's 
substitutability is to consider its market share. The Council's 
evaluation of a nonbank financial company's market share regarding a 
particular product or service will include assessments of the 
ability of the nonbank financial company's competitors to expand to 
meet market needs; the costs that market participants would incur if 
forced to switch providers; the timeframe within which a disruption 
in the provision of the product or service would materially affect 
market participants or market functioning; and the economic 
implications of such a disruption. Concern about a potential lack of 
substitutability could be greater if a nonbank financial company and 
its competitors are likely to experience stress at the same time 
because they are exposed to the same risks. The Council may also 
analyze a nonbank financial company's core operations and critical 
functions and the importance of those operations and functions to 
the U.S. financial system and assess how those operations and 
functions would be performed by the nonbank financial company or 
other market participants in the event of the nonbank financial 
company's material financial distress. The Council also intends to 
consider substitutability with respect to any nonbank financial 
company with global operations to identify the substitutability of 
critical market functions that the company provides in the United 
States in the event of material financial distress of a foreign 
parent company.
    For example, metrics that may be used to assess substitutability 
include:
    <bullet> The market share, using the appropriate quantitative 
measure (such as loans originated, loans outstanding, and notional 
transaction volume) of a nonbank financial company and its 
competitors in the market under consideration.
    <bullet> The stability of market share across the firms in the 
market over time.
    <bullet> The market share of the company and its competitors for 
products or services that serve a substantially similar economic 
function as the primary market under consideration.

Size

    Size captures the amount of financial services or financial 
intermediation that a nonbank financial company provides. Size also 
may affect the extent to which the effects of a nonbank financial 
company's financial distress are transmitted to other firms and to 
the financial system. For example, financial distress at an 
extremely large nonbank financial company that is highly 
interconnected likely would transmit risk on a larger scale than 
would financial distress at a smaller nonbank financial company that 
is similarly interconnected. Size is conventionally measured by the 
assets, liabilities and capital of the firm. However, such measures 
of size may not provide complete or accurate assessments of the 
scale of a nonbank financial company's risk potential. Thus, the 
Council also intends to take into account off-balance sheet assets 
and liabilities and assets under management in a manner that 
recognizes the unique and distinct nature of these classes. Other 
measures of size, such as numbers of customers and counterparties, 
may also be relevant.
    For example, metrics that may be used to assess size include:
    <bullet> Total consolidated assets or liabilities, as determined 
under generally accepted accounting principles in the United States 
(``GAAP'') or the nonbank financial company's applicable financial 
reporting standards, depending on the availability of data and the 
stage of the determination process.
    <bullet> Total risk-weighted assets, as appropriate for 
different industry sectors.
    <bullet> Off-balance sheet exposures where a nonbank financial 
company has a risk of loss, including, for example, lines of credit. 
For foreign nonbank financial companies, this would be evaluated 
based on the extent and nature of U.S.-related off-balance sheet 
exposures.
    <bullet> The extent to which assets are managed rather than 
owned by a nonbank financial company and the extent to which 
ownership of assets under management is diffuse.
    <bullet> Direct written premiums, as reported by insurance 
companies. This is the aggregate of direct written premiums reported 
by insurance entities under all lines of business and serves as a 
proxy for the amount of insurance underwritten by the insurance 
entities.
    <bullet> Risk in force, which is the aggregate risk exposure 
from risk underwritten in insurance related to certain financial 
risks, such as mortgage insurance.
    <bullet> Total loan originations, by loan type, in number and 
dollar amount.

Leverage

    Leverage captures a company's exposure or risk in relation to 
its equity capital. Leverage amplifies a company's risk of financial 
distress in two ways. First, by increasing a company's exposure 
relative to capital, leverage raises the likelihood that a company 
will suffer losses exceeding its capital. Second, by increasing the 
size of a company's liabilities, leverage raises a company's 
dependence on its creditors' willingness and ability to fund its 
balance sheet. Leverage can also amplify the impact of a company's 
distress on other companies, both directly, by increasing the amount 
of exposure that other firms have to the company, and indirectly, by 
increasing the size of any asset liquidation that the company is 
forced to undertake as it comes under financial pressure. Leverage 
can be measured by the ratio of assets to capital, but it can also 
be defined in terms of risk, as a measure of economic risk relative 
to capital. The latter measurement can better capture the effect of 
derivatives and other products with embedded leverage on the risk 
undertaken by a nonbank financial company.
    For example, metrics that may be used to assess leverage 
include:
    <bullet> Total assets and total debt measured relative to total 
equity, which is intended to measure financial leverage.
    <bullet> Gross notional exposure of derivatives and off-balance 
sheet obligations relative to total equity or to net assets under 
management, which is intended to show how much off-balance sheet 
leverage a nonbank financial company may have.
    <bullet> The ratio of risk to statutory capital, which is 
relevant to certain insurance companies and is intended to show how 
much risk exposure a nonbank financial company has in relation to 
its ability to absorb loss.
    <bullet> Changes in leverage ratios, which may indicate that a 
nonbank financial company is rapidly increasing its risk profile.

Liquidity Risk and Maturity Mismatch

    Liquidity risk generally refers to the risk that a company may 
not have sufficient funding to satisfy its short-term needs, either 
through its cash flows, maturing assets, or assets salable at prices 
equivalent to book value, or through its ability to access funding 
markets. For example, if a company holds assets that are illiquid or 
that are subject to significant decreases in market value during 
times of market stress, the company may be unable to liquidate its 
assets effectively in response to a loss of funding. In order to 
assess liquidity, the Council may examine a nonbank financial 
company's assets to determine if it possesses cash instruments or 
readily marketable securities, such as Treasury securities, which 
could reasonably be expected to have a liquid market in times of 
distress. The Council may also review a nonbank financial company's 
debt profile to determine if it has adequate long-term funding, or 
can otherwise mitigate liquidity risk. Liquidity problems also can 
arise from a company's inability to roll maturing debt or to satisfy 
margin calls, and from demands for additional collateral, depositor 
withdrawals, draws on committed lines, and other potential draws on 
liquidity.
    A maturity mismatch generally refers to the difference between 
the maturities of a company's assets and liabilities. A maturity 
mismatch affects a company's ability to survive a period of stress 
that may limit its access to funding and to withstand shocks in the 
yield curve. For example, if a company relies on short-term funding 
to finance

[[Page 21660]]

longer-term positions, it will be subject to significant refunding 
risk that may force it to sell assets at low market prices or 
potentially suffer through significant margin pressure. However, 
maturity mismatches are not confined to the use of short-term 
liabilities and can exist at any point in the maturity schedule of a 
nonbank financial company's assets and liabilities. For example, in 
the case of a life insurance company, liabilities may have 
maturities of 30 years or more, whereas the market availability of 
equivalently long-term assets may be limited, exposing the company 
to interest rate fluctuations and reinvestment risk.
    For example, metrics that may be used to assess liquidity and 
maturity mismatch include:
    <bullet> Fraction of assets that are classified as level 2 and 
level 3 under applicable accounting standards, as a measure of how 
much of a nonbank financial company's balance sheet is composed of 
hard-to-value and potentially illiquid securities.
    <bullet> Liquid asset ratios, which are intended to indicate a 
nonbank financial company's ability to repay its short-term debt.
    <bullet> The ratio of unencumbered and highly liquid assets to 
the net cash outflows that a nonbank financial company could 
encounter in a short-term stress scenario.
    <bullet> Callable debt as a fraction of total debt, which 
provides one measure of a nonbank financial company's ability to 
manage its funding position in response to changes in interest 
rates.
    <bullet> Asset-backed funding versus other funding, to determine 
a nonbank financial company's susceptibility to distress in 
particular credit markets.
    <bullet> Asset-liability duration and gap analysis, which is 
intended to indicate how well a nonbank financial company is 
matching the re-pricing and maturity of the nonbank financial 
company's assets and liabilities.
    <bullet> Short-term debt as a percentage of total debt and as a 
percentage of total assets, which indicates a nonbank financial 
company's reliance on short-term debt markets.

Existing Regulatory Scrutiny

    The Council will consider the extent to which nonbank financial 
companies are already subject to regulation, including the 
consistency of that regulation across nonbank financial companies 
within a sector, across different sectors, and providing similar 
services, and the statutory authority of those regulators.
    For example, metrics that may be used to assess existing 
regulatory scrutiny include:
    <bullet> The extent of state or federal regulatory scrutiny, 
including processes or systems for peer review; inter-regulatory 
coordination and cooperation; and whether existing regulators have 
the ability to impose detailed and timely reporting obligations, 
capital and liquidity requirements, and enforcement actions, and to 
resolve the company.
    <bullet> Existence and effectiveness of consolidated 
supervision, and a determination of whether and how non-regulated 
entities and groups within a nonbank financial company are 
supervised on a group-wide basis.
    <bullet> For entities based outside the United States, the 
extent to which a nonbank financial company is subject to prudential 
standards on a consolidated basis in its home country that are 
administered and enforced by a comparable foreign supervisory 
authority.

III. The Determination Process

    The Council expects generally to follow a three-stage process of 
increasingly in-depth evaluation and analysis leading up to a 
proposed determination (a ``Proposed Determination'') that a nonbank 
financial company could pose a threat to the financial stability of 
the United States. Quantitative metrics, together with qualitative 
analysis, will inform the judgment of the Council when it is 
evaluating a nonbank financial company for a Proposed Determination. 
The purpose of this process is to help determine whether a nonbank 
financial company could pose a threat to the financial stability of 
the United States.
    In the first stage of the process (``Stage 1''), a set of 
uniform quantitative metrics will be applied to a broad group of 
nonbank financial companies in order to identify nonbank financial 
companies for further evaluation and to provide clarity for nonbank 
financial companies that likely will not be subject to further 
evaluation. In Stage 1, the Council will rely solely on information 
available through existing public and regulatory sources. The 
purpose of Stage 1 is to enable the Council to identify a group of 
nonbank financial companies that are most likely to satisfy one of 
the Determination Standards.
    In the second stage (``Stage 2''), the nonbank financial 
companies identified in Stage 1 will be analyzed and prioritized, 
based on a wide range of quantitative and qualitative information 
available to the Council primarily through public and regulatory 
sources. The Council will also begin the consultation process with 
the primary financial regulatory agencies or home country 
supervisors, as appropriate. As part of that consultation process, 
the Council intends to 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. The 
Council also intends to fulfill its statutory obligation to rely 
whenever possible on information available through the Office of 
Financial Research (the ``OFR''), member agencies, or the nonbank 
financial company's primary financial regulatory agencies before 
requiring the submission of reports from any nonbank financial 
company.\4\
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    \4\ See 12 U.S.C. 5322(d)(3).
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    Following Stage 2, nonbank financial companies that are selected 
for additional review will receive notice that they are being 
considered for a Proposed Determination and will be subject to in-
depth evaluation during the third stage of review (``Stage 3''). 
Stage 3 will involve the evaluation of information collected 
directly from the nonbank financial company, in addition to the 
information considered during Stages 1 and 2. At the end of Stage 3, 
the Council may consider whether to make a Proposed Determination 
with respect to the nonbank financial company. If a Proposed 
Determination is made by the Council, 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.\5\
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    \5\ See 12 CFR 1310.21(c).
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    The Council expects to follow this three-stage process and to 
consider the categories, metrics, thresholds, and channels described 
in this guidance to assess a nonbank financial company's potential 
to pose a threat to U.S. financial stability. In addition to the 
information described herein that the Council generally expects to 
consider, the Council also will consider quantitative and 
qualitative information that it deems relevant to a particular 
nonbank financial company, as each determination will be made on a 
company-specific basis. The Council may consider any nonbank 
financial company for a Proposed Determination at any point in the 
three-stage evaluation process described in this guidance if the 
Council believes such company could pose a threat to U.S. financial 
stability.

a. Stage 1: Initial Identification of Nonbank Financial Companies 
for Evaluation

    In Stage 1, the Council will seek to identify a set of nonbank 
financial companies that merit company-specific evaluation. In this 
stage, the Council intends to apply quantitative thresholds to a 
broad group of nonbank financial companies. A nonbank financial 
company that is selected for further evaluation during Stage 1 will 
be assessed during Stage 2. During the Stage 1 process, the Council 
will evaluate nonbank financial companies using only data available 
to the Council, such as publicly available information and 
information member agencies possess in their supervisory capacities.
    In the Stage 1 quantitative analysis, the Council intends to 
apply thresholds that relate to the framework categories of size, 
interconnectedness, leverage, and liquidity risk and maturity 
mismatch. These thresholds were selected based on (1) their 
applicability to nonbank financial companies that operate in 
different types of financial markets and industries, (2) the 
meaningful initial assessment that such thresholds provide regarding 
the potential for a nonbank financial company to pose a threat to 
financial stability in diverse financial markets, and (3) the 
current availability of data. These thresholds are intended to 
measure both the susceptibility of a nonbank financial company to 
financial distress and the potential for that nonbank financial 
company's financial distress to spread throughout the financial 
system. A nonbank financial company will be evaluated further in 
Stage 2 if it meets both the total consolidated assets threshold and 
any one of the other thresholds.\6\ The thresholds are:
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    \6\ While the Council expects that its determinations under 
section 113 of the Dodd-Frank Act will be with respect to individual 
legal entities, the Council has authority to assess nonbank 
financial companies, and their relationships with other nonbank 
financial companies and market participants, in a manner that 
addresses the statutory considerations and such other factors as the 
Council deems appropriate. For example, for purposes of applying the 
six thresholds to investment funds (including private equity firms 
and hedge funds), the Council may consider the aggregate risks posed 
by separate funds that are managed by the same adviser, particularly 
if the funds' investments are identical or highly similar. In 
performing this analysis, the Council may use data reported on Form 
PF with the Securities and Exchange Commission or the Commodity 
Futures Trading Commission.

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[[Page 21661]]

    <bullet> Total Consolidated Assets. The Council intends to apply 
a size threshold of $50 billion in total consolidated assets. This 
threshold is consistent with the Dodd-Frank Act threshold of $50 
billion in assets for subjecting bank holding companies to enhanced 
prudential standards.
    <bullet> Credit Default Swaps Outstanding. The Council intends 
to apply a threshold of $30 billion in gross notional credit default 
swaps (``CDS'') outstanding for which a nonbank financial company is 
the reference entity. Gross notional value equals the sum of CDS 
contracts bought (or equivalently sold). If the amount of CDS sold 
on a particular nonbank financial company is greater than $30 
billion, this indicates that a large number of institutions may be 
exposed to that nonbank financial company and that if the nonbank 
financial company fails, a significant number of financial market 
participants may be affected. This threshold was selected based on 
an analysis of the distribution of outstanding CDS data for nonbank 
financial companies included in a list of the top 1,000 CDS 
reference entities.
    <bullet> Derivative Liabilities. The Council intends to apply a 
threshold of $3.5 billion of derivative liabilities. Derivative 
liabilities equal the fair value of derivative contracts in a 
negative position. For nonbank financial companies that disclose the 
effects of master netting agreements and cash collateral held with 
the same counterparty on a net basis, the Council intends to 
calculate derivative liabilities after taking into account the 
effects of these arrangements. This threshold serves as a proxy for 
interconnectedness, as a nonbank financial company that has a 
greater level of derivative liabilities would have higher 
counterparty exposure throughout the financial system.
    <bullet> Total Debt Outstanding. The Council intends to apply a 
threshold of $20 billion in total debt outstanding. The Council will 
define total debt outstanding broadly and regardless of maturity to 
include loans (whether secured or unsecured), bonds, repurchase 
agreements, commercial paper, securities lending arrangements, 
surplus notes (for insurance companies), and other forms of 
indebtedness. This threshold serves as a proxy for 
interconnectedness, as nonbank financial companies with a large 
amount of outstanding debt are generally more interconnected with 
the broader financial system, in part because financial institutions 
hold a large proportion of outstanding debt. An analysis of the 
distribution of debt outstanding for a sample of nonbank financial 
companies was performed to determine the $20 billion threshold. 
Historical testing of this threshold demonstrated that it would have 
captured many of the nonbank financial companies that encountered 
material financial distress during the financial crisis in 2007-
2008, including Bear Stearns, Countrywide, and Lehman Brothers.
    <bullet> Leverage Ratio. The Council intends to apply a 
threshold leverage ratio of total consolidated assets (excluding 
separate accounts) to total equity of 15 to 1. The Council intends 
to exclude separate accounts from this calculation because separate 
accounts are not available to claims by general creditors of a 
nonbank financial company. Measuring leverage in this manner 
benefits from simplicity, availability and comparability across 
industries. An analysis of the distribution of the historical 
leverage ratios of large financial institutions was used to identify 
the 15 to 1 threshold. Historical testing of this threshold 
demonstrated that it would have captured the major nonbank financial 
companies that encountered material financial distress and posed a 
threat to U.S. financial stability during the financial crisis, 
including Bear Stearns, Countrywide, IndyMac Bancorp, and Lehman 
Brothers.
    <bullet> Short-Term Debt Ratio. The Council intends to apply a 
threshold ratio of total debt outstanding (as defined above) with a 
maturity of less than 12 months to total consolidated assets 
(excluding separate accounts) of 10 percent. An analysis of the 
historical distribution of the short-term debt ratios of large 
financial institutions was used to determine the 10 percent 
threshold. Historical testing of this threshold demonstrated that it 
would have captured a number of the nonbank financial companies that 
faced short-term funding issues during the financial crisis, 
including Bear Stearns and Lehman Brothers.
    The Council intends generally to apply the Stage 1 thresholds 
using GAAP when such information is available. If GAAP information 
with respect to a nonbank financial company is not available, the 
Council may rely on data reported under statutory accounting 
principles, international financial reporting standards, or such 
other data as are available to the Council.
    For purposes of evaluating any U.S. nonbank financial company, 
the Council intends to apply each of the Stage 1 thresholds based on 
the global assets, liabilities and operations of the company and its 
subsidiaries. In contrast, for purposes of evaluating any foreign 
nonbank financial company, the Council intends to calculate the 
Stage 1 thresholds based solely on the U.S. assets, liabilities and 
operations of the foreign nonbank financial company and its 
subsidiaries.
    The Council intends to reapply the Stage 1 thresholds to nonbank 
financial companies using the most recently available data on a 
quarterly basis, or less frequently for nonbank financial companies 
with respect to which quarterly data are unavailable.
    The Council intends to review the appropriateness of both the 
Stage 1 thresholds and the levels of the thresholds that are 
specified in dollars as needed, but at least every five years, and 
to adjust the thresholds and levels as the Council may deem 
advisable.
    The Stage 1 thresholds are intended to identify nonbank 
financial companies for further evaluation by the Council and to 
help a nonbank financial company predict whether such company will 
be subject to additional review. Because the uniform quantitative 
thresholds may not capture all types of nonbank financial companies 
and all of the potential ways in which a nonbank financial company 
could pose a threat to financial stability, the Council may 
initially evaluate any nonbank financial company based on other 
firm-specific qualitative or quantitative factors, irrespective of 
whether such company meets the thresholds in Stage 1.
    A nonbank financial company that is identified for further 
evaluation in Stage 1 would be further assessed during Stage 2 (the 
``Stage 2 Pool'').

b. Stage 2: Review and Prioritization of Stage 2 Pool

    After the Stage 2 Pool has been identified, the Council intends 
to conduct a robust analysis of the potential threat that each of 
those nonbank financial companies could pose to U.S. financial 
stability. In general, this analysis will be based on information 
already available to the Council through existing public and 
regulatory sources, including information possessed by the company's 
primary financial regulatory agency or home country supervisor, as 
appropriate, and information voluntarily submitted by the company. 
In contrast to the application of uniform quantitative thresholds to 
a broad group of nonbank financial companies in Stage 1, the Council 
intends to evaluate the risk profile and characteristics of each 
individual nonbank financial company in the Stage 2 Pool based on a 
wide range of quantitative and qualitative industry-specific and 
company-specific factors. This analysis will use the six-category 
analytic framework described in section II.d above. In addition, the 
Stage 2 evaluation will include a review, based on available data, 
of qualitative factors, including whether the resolution of a 
nonbank financial company, as described below, could pose a threat 
to U.S. financial stability, and the extent to which the nonbank 
financial company is subject to regulation.
    Based on this analysis, the Council intends to contact those 
nonbank financial companies that the Council believes merit further 
evaluation in Stage 3 (the ``Stage 3 Pool'').

c. Stage 3: Review of Stage 3 Pool

    In Stage 3, the Council, working with the OFR, will conduct a 
review of each nonbank financial company in the Stage 3 Pool using 
information collected directly from the nonbank financial company, 
as well as the information used in the first two stages. The review 
will focus on whether the nonbank financial company could pose a 
threat to U.S. financial stability because of the company's material 
financial distress or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the activities of the company. The 
transmission channels discussed above, and other appropriate 
factors, will be used to evaluate a nonbank financial company's 
potential to pose a threat

[[Page 21662]]

to U.S. financial stability. The analytic framework consisting of 
the six categories set forth above, and the metrics used to measure 
each of the six categories, will assist the Council in assessing the 
extent to which the transmission of material financial distress is 
likely to occur.
    Each nonbank financial company in the Stage 3 Pool will receive 
a notice (a ``Notice of Consideration'') that the nonbank financial 
company is under consideration for a Proposed Determination. The 
Notice of Consideration likely will include a request that the 
nonbank financial 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.\7\ This information will generally be collected by 
the OFR.\8\ Before requiring the submission of reports from any 
nonbank financial company that is regulated by a member agency or 
any 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.
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    \7\ See section 1310.21(a) of the rule.
    \8\ Under section 112(d) of the Dodd-Frank Act, if the Council 
is unable to determine whether a U.S. nonbank financial company 
poses a threat to U.S. financial stability based on such 
information, the Council may request that the Board of Governors 
conduct an examination of the nonbank financial company to determine 
whether it should be supervised by the Board of Governors.
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    Information requests likely will involve both qualitative and 
quantitative data. Information relevant to the Council's analysis 
may include confidential business information such as internal 
assessments, internal risk management procedures, funding details, 
counterparty exposure or position data, strategic plans, 
resolvability, potential acquisitions or dispositions, and other 
anticipated changes to the nonbank financial company's business or 
structure that could affect the threat to U.S. financial stability 
posed by the nonbank financial company.
    In evaluating qualitative factors during Stage 3, the Council 
expects to have access, to a greater degree than during earlier 
stages of review, to information relating to factors that are not 
easily quantifiable or that may not directly cause a company to pose 
a threat to financial stability, but could mitigate or aggravate the 
potential of a nonbank financial company to pose a threat to the 
United States. Such factors may include the opacity of the nonbank 
financial company's operations, its complexity, and the extent to 
which it is subject to existing regulatory scrutiny and the nature 
of such scrutiny.
    The Stage 3 analysis will also include an evaluation of a 
nonbank financial company's resolvability, which may mitigate or 
aggravate the potential of a nonbank financial company to pose a 
threat to U.S. financial stability. An evaluation of a nonbank 
financial company's resolvability entails an assessment of the 
complexity of the nonbank financial company's legal, funding, and 
operational structure, and any obstacles to the rapid and orderly 
resolution of the nonbank financial company in a manner that would 
mitigate the risk that the nonbank financial company's failure would 
have a material adverse effect on financial stability. In addition 
to the factors described above, a nonbank financial company's 
resolvability is also a function of legal entity and cross-border 
operations issues. These factors include the ability to separate 
functions and spin off services or business lines; the likelihood of 
preserving franchise value in a recovery or resolution scenario, and 
of maintaining continuity of critical services within the existing 
or in a new legal entity or structure; the degree of the nonbank 
financial company's intra-group dependency for liquidity and 
funding, payment operation, and risk management needs; and the size 
and nature of the nonbank financial company's intra-group 
transactions.
    The Council anticipates that the information necessary to 
conduct an in-depth analysis of a particular nonbank financial 
company may vary significantly based on the nonbank financial 
company's business and activities and the information already 
available to the Council from existing public sources and domestic 
or foreign regulatory authorities. The Council will also consult 
with the primary financial regulatory agency, if any, for each 
nonbank financial company or subsidiary of a nonbank financial 
company under consideration in a timely manner before the Council 
makes any final determination with respect to such nonbank financial 
company, and with appropriate foreign regulatory authorities, to the 
extent appropriate.
    Before making a Proposed Determination, the Council intends to 
notify each nonbank financial company in the Stage 3 Pool when the 
Council believes that the evidentiary record regarding such nonbank 
financial company is complete.
    Based on the analysis performed in Stages 2 and 3, a nonbank 
financial company will be considered for a Proposed Determination. 
Before a vote of the Council with respect to a particular nonbank 
financial company, the Council members will review information 
relevant to the consideration of the nonbank financial company for a 
Proposed Determination. After this review, the Council may, by a 
vote of two-thirds of its members (including an affirmative vote of 
the Council Chairperson), make a Proposed Determination with respect 
to the nonbank financial company. Following a Proposed 
Determination, the Council intends to 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. 
The Council expects to notify any nonbank financial company in the 
Stage 3 Pool if the nonbank financial company, either before or 
after a Proposed Determination of such nonbank financial company, 
ceases to be considered for determination. Any nonbank financial 
company that ceases to be considered at any time in the Council's 
determination process may be considered for a Proposed Determination 
in the future at the Council's discretion.
    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. If the nonbank financial company requests a hearing 
in accordance with the procedures set forth in Sec.  1310.21(c) of 
the Council's rule,\9\ the Council will set a time and place for 
such hearing. The Council will (after a hearing, if a hearing is 
requested), determine by a vote of two-thirds of the voting members 
of the Council (including the affirmative vote of the Chairperson) 
whether to subject such company to supervision by the Board of 
Governors and prudential standards. The Council will provide the 
nonbank financial company with written notice of the Council's final 
determination, including an explanation of the basis for the 
Council's decision. When practicable and consistent with the 
purposes of the determination process, the Council intends to 
provide a nonbank financial company with a 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.\10\ The 
Council does not intend to publicly announce the name of any nonbank 
financial company that is under evaluation for a determination prior 
to a final determination with respect to such company. In accordance 
with section 113(h) of 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.
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    \9\ See 12 CFR 1310.21(c).
    \10\ See 12 CFR 1310.21(d)(3), 1310.21(e)(3) and 1310.22(d)(3).

    Dated: April 3, 2012.
Rebecca Ewing,
Acting Executive Secretary, Department of the Treasury.
[FR Doc. 2012-8627 Filed 4-10-12; 8:45 am]
BILLING CODE 4810-25-P-P