71740 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Rules and Regulations 

12 CFR Part 228 

Banks, Banking, Community 

development, Credit, Investments, 

Reporting and recordkeeping 

requirements. 

12 CFR Part 345 

Banks, Banking, Community 

development, Credit, Investments, 

Reporting and recordkeeping 

requirements. 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

12 CFR Chapter I 

For the reasons discussed in the 

SUPPLEMENTARY INFORMATION section, 12 

CFR parts 25 and 195 are amended as 

follows: 

PART 25—COMMUNITY 

REINVESTMENT ACT AND 

INTERSTATE DEPOSIT PRODUCTION 

REGULATIONS 

■ 1. The authority citation for part 25 

continues to read as follows: 

Authority: 12 U.S.C. 21, 22, 26, 27, 30, 36, 

93a, 161, 215, 215a, 481, 1814, 1816, 1828(c), 

1835a, 2901 through 2908, and 3101 through 

3111. 

■ 2. Section 25.12 is amended by 

revising paragraph (u)(1) to read as 

follows: 

§ 25.12 Definitions. 

* * * * * 

(u) * * * 

(1) Definition. Small bank means a 

bank that, as of December 31 of either 

of the prior two calendar years, had 

assets of less than $1.305 billion. 

Intermediate small bank means a small 

bank with assets of at least $326 million 

as of December 31 of both of the prior 

two calendar years and less than $1.305 

billion as of December 31 of either of the 

prior two calendar years. 

* * * * * 

PART 195—COMMUNITY 

REINVESTMENT 

■ 3. The authority citation for part 195 

continues to read as follows: 

Authority: 12 U.S.C. 1462a, 1463, 1464, 

1814, 1816, 1828(c), 2901 through 2908, and 

5412(b)(2)(B). 

■ 4. Section 195.12 is amended by 

revising paragraph (u)(1) to read as 

follows: 

§ 195.12 Definitions. 

* * * * * 

(u) * * * 

(1) Definition. Small savings 

association means a savings association 

that, as of December 31 of either of the 

prior two calendar years, had assets of 

less than $1.305 billion. Intermediate 

small savings association means a small 

savings association with assets of at 

least $326 million as of December 31 of 

both of the prior two calendar years and 

less than $1.305 billion as of December 

31 of either of the prior two calendar 

years. 

* * * * * 

FEDERAL RESERVE SYSTEM 

12 CFR Chapter II 

For the reasons set forth in the 

SUPPLEMENTARY INFORMATION section, the 

Board of Governors of the Federal 

Reserve System amends part 228 of 

chapter II of title 12 of the Code of 

Federal Regulations as follows: 

PART 228—COMMUNITY 

REINVESTMENT (REGULATION BB) 

■ 5. The authority citation for part 228 

continues to read as follows: 

Authority: 12 U.S.C. 321, 325, 1828(c), 

1842, 1843, 1844, and 2901 et seq. 

■ 6. Section 228.12 is amended by 

revising paragraph (u)(1) to read as 

follows: 

§ 228.12 Definitions. 

* * * * * 

(u) * * * 

(1) Definition. Small bank means a 

bank that, as of December 31 of either 

of the prior two calendar years, had 

assets of less than $1.305 billion. 

Intermediate small bank means a small 

bank with assets of at least $326 million 

as of December 31 of both of the prior 

two calendar years and less than $1.305 

billion as of December 31 of either of the 

prior two calendar years. 

* * * * * 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Chapter III 

Authority and Issuance 

For the reasons set forth in the 

SUPPLEMENTARY INFORMATION section, the 

Board of Directors of the Federal 

Deposit Insurance Corporation amends 

part 345 of chapter III of title 12 of the 

Code of Federal Regulations to read as 

follows: 

PART 345—COMMUNITY 

REINVESTMENT 

■ 7. The authority citation for part 345 

continues to read as follows: 

Authority: 12 U.S.C. 1814–1817, 1819– 

1820, 1828, 1831u and 2901–2908, 3103– 

3104, and 3108(a). 

■ 8. Section 345.12 is amended by 

revising paragraph (u)(1) to read as 

follows: 

§ 345.12 Definitions. 

* * * * * 

(u) * * * 

(1) Definition. Small bank means a 

bank that, as of December 31 of either 

of the prior two calendar years, had 

assets of less than $1.305 billion. 

Intermediate small bank means a small 

bank with assets of at least $326 million 

as of December 31 of both of the prior 

two calendar years and less than $1.305 

billion as of December 31 of either of the 

prior two calendar years. 

* * * * * 

Dated: December 11, 2019. 

Jonathan V. Gould, 

Senior Deputy Comptroller and Chief 

Counsel. 

By order of the Board of Governors of the 

Federal Reserve System, acting through the 

Secretary of the Board under delegated 

authority, December 11, 2019. 

Ann E. Misback, 

Secretary of the Board. 

Dated at Washington, DC, December 11, 

2019. 

Federal Deposit Insurance Corporation. 

Annmarie H. Boyd, 

Assistant Executive Secretary. 

[FR Doc. 2019–27288 Filed 12–27–19; 8:45 am] 

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P 

FINANCIAL STABILITY OVERSIGHT 

COUNCIL 

12 CFR Part 1310 

RIN 4030–ZA00 

Authority To Require Supervision and 

Regulation of Certain Nonbank 

Financial Companies 

AGENCY: Financial Stability Oversight 

Council. 

ACTION: Final interpretive guidance. 

SUMMARY: This final interpretive 

guidance, which replaces the Financial 

Stability Oversight Council’s existing 

interpretive guidance on nonbank 

financial company determinations, 

describes the approach the Council 

intends to take in prioritizing its work 

to identify and address potential risks to 

U.S. financial stability using an 

activities-based approach, and 

enhancing the analytical rigor and 

transparency in the processes the 

Council intends to follow if it were to 

consider making a determination to 

subject a nonbank financial company to 

supervision by the Board of Governors 

of the Federal Reserve System. 


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Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Rules and Regulations 71741 

1 ‘‘Primary financial regulatory agency’’ is defined 

in section 2(12) of the Dodd-Frank Act, 12 U.S.C. 

5301(12). 

2Section 113 of the Dodd-Frank Act, 12 U.S.C. 

5323, refers to a Council ‘‘determination’’ regarding 

a nonbank financial company. This release refers to 

‘‘determination’’ and ‘‘designation’’ interchangeably 

for ease of reading. 

3The 2012 Final Rule and Interpretive Guidance 

added a new part 1310 to title 12 of the Code of 

Federal Regulations, consisting of final rules (12 

CFR 1310.1–1310.23) and interpretive guidance 

(Appendix A to Part 1310-Financial Stability 

Oversight Council Guidance for Nonbank Financial 

Company Designations). See 12 CFR part 1310, app. 

A (2012). 

4 77 FR 31855 (May 30, 2012); 78 FR 22546 (April 

16, 2013); 83 FR 12010 (March 19, 2018). 

5Financial Stability Oversight Council 

Supplemental Procedures Relating to Nonbank 

Financial Company Determinations (February 4, 

2015), available at https://www.treasury.gov/ 

initiatives/fsoc/designations/Documents/ 

Supplemental%20Procedures%20Related%20

to%20Nonbank%20Financial%20Company%20

Determinations%20-%20February%202015.pdf. 

6See Council, Staff Guidance Methodologies 

Relating to Stage 1 Thresholds (June 8, 2015), 

available at https://www.treasury.gov/initiatives/ 

fsoc/designations/Documents/FSOC%20Staff%20

Guidance%20-%20Stage%201%20Thresholds.pdf. 

7Treasury, Report to the President of the United 

States in Response to the Presidential Memorandum 

Issued April 21, 2017: Financial Stability Oversight 

Council Designations (November 17, 2017), 

available at https://www.treasury.gov/press-center/ 

press-releases/documents/pm-fsoc-designationsmemo-11-17.pdf. 

8 84 FR 9028 (March 13, 2019). On the same date, 

the Council adopted a final rule stating that the 

Council shall not amend or rescind its interpretive 

guidance on nonbank financial company 

determinations without providing the public with 

notice and an opportunity to comment in 

accordance with the procedures applicable to 

legislative rules under the Administrative 

Procedure Act. See 84 FR 8958 (March 13, 2019). 

DATES: Effective Date: January 29, 2020. 

FOR FURTHER INFORMATION CONTACT: 

Howard Adler, Office of Domestic 

Finance, Treasury, at (202) 622–2409; 

Eric Froman, Office of the General 

Counsel, Treasury, at (202) 622–1942; or 

Mark Schlegel, Office of the General 

Counsel, Treasury, at (202) 622–1027. 

SUPPLEMENTARY INFORMATION:

I. Background 

The statutory purposes of the 

Financial Stability Oversight Council 

(the ‘‘Council’’) are to identify risks to 

U.S. financial stability, promote market 

discipline, and respond to emerging 

threats to the stability of the U.S. 

financial system. The Council’s 

authorities to accomplish these statutory 

purposes include authorities to facilitate 

information sharing and coordination 

among regulators, monitor the financial 

services marketplace, make 

recommendations to regulators, and 

require supervision by the Board of 

Governors of the Federal Reserve 

System (the ‘‘Federal Reserve’’) for 

nonbank financial companies that may 

pose risks to U.S. financial stability. 

Section 111 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (12 U.S.C. 5321) (the ‘‘Dodd-Frank 

Act’’) established the Council. 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. 

As a threshold matter, the Council 

emphasizes the importance of market 

discipline, rather than government 

intervention, as a mechanism for 

addressing potential risks to U.S. 

financial stability posed by financial 

companies. The Dodd-Frank Act gives 

the Council broad discretion to 

determine how to respond to potential 

threats to U.S. financial stability. The 

Council’s duties under section 112 of 

the Dodd-Frank Act include monitoring 

the financial services marketplace in 

order to identify potential threats to U.S. 

financial stability, and recommending to 

the Council member agencies general 

supervisory priorities and principles 

reflecting the outcome of discussions 

among the member agencies. The 

Council’s duties under section 112 also 

include making recommendations to 

primary financial regulatory agencies 1

to apply new or heightened standards 

and safeguards for financial activities or 

practices that could create or increase 

risks of significant liquidity, credit, or 

other problems spreading among 

financial companies and markets. The 

Council intends to seek to identify, 

assess, and address potential risks and 

emerging threats on a system-wide basis 

by taking an activities-based approach 

to its work, as further explained below. 

The Dodd-Frank Act also authorizes 

the Council to determine that certain 

nonbank financial companies will be 

subject to supervision by the Federal 

Reserve and prudential standards. The 

Federal Reserve 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 2 under section 113 of the 

Dodd-Frank Act. The Council has 

previously issued rules, guidance, and 

other public statements regarding its 

process for evaluating nonbank financial 

companies for a potential 

determination. On April 11, 2012, the 

Council issued interpretive guidance 

(the ‘‘2012 Interpretive Guidance’’) 

regarding the manner in which the 

Council makes determinations under 

section 113 of the Dodd-Frank Act, as an 

appendix to a final rule (together, the 

‘‘2012 Final Rule and Interpretive 

Guidance’’).3 On May 22, 2012, the 

Council approved hearing procedures 

relating to the conduct of hearings 

before the Council in connection with 

proposed determinations regarding 

nonbank financial companies and 

financial market utilities and related 

emergency waivers or modifications 

under sections 113 and 804 of the DoddFrank Act (as amended in 2013 and 

2018, the ‘‘Hearing Procedures’’).4 On 

February 4, 2015, the Council adopted 

supplemental procedures (the ‘‘2015 

Supplemental Procedures’’) to the 2012 

Final Rule and Interpretive Guidance.5

In June 2015, the Council published 

staff guidance with details regarding the 

methodologies used in Stage 1 

thresholds in connection with the 

determination process under section 

113.6 On November 17, 2017, the 

Department of the Treasury issued a 

report to the President in response to a 

Presidential Memorandum directing the 

Secretary of the Treasury to conduct a 

thorough review of the determination 

and designation processes of the 

Council.7

On March 6, 2019, the Council 

approved proposed interpretive 

guidance (the ‘‘Proposed Guidance’’), 

which incorporated certain provisions 

of the 2015 Supplemental Procedures, to 

revise and update the 2012 Interpretive 

Guidance.8 The Proposed Guidance, 

which included a request for public 

comment and over 40 specific 

questions, was intended to enhance the 

Council’s transparency, analytical rigor, 

and public engagement. The comment 

period for the Proposed Guidance 

closed on May 13, 2019. 

The Council received 26 comment 

letters in response to the Proposed 

Guidance, of which nine were from 

companies or trade associations in the 

asset management industry, four were 

from trade associations in the insurance 

industry, three were from other trade 

associations, seven were from various 

advocacy groups, one was from two 

previous Chairpersons of the Council 

and two previous Chairmen of the 

Federal Reserve, one was from an 

association of state insurance regulators, 

and one was from a group of academics. 


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71742 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Rules and Regulations 

(Comment letters are available online at 

http://www.regulations.gov/ 

docket?D=FSOC-2019-0001.) Twenty of 

the commenters were generally 

supportive of the proposal, including 

the primary focus on the activities-based 

approach and analytical enhancements 

to the Council’s designation process. Six 

commenters were generally opposed to 

the proposal, arguing it unnecessarily 

limited the Council’s tools for 

addressing systemic risk. Some of the 

commenters generally opposed to the 

proposal nonetheless stated that an 

activities-based approach may be 

appropriate in certain circumstances. 

This final interpretive guidance (the 

‘‘Final Guidance’’) replaces in its 

entirety the 2012 Interpretive Guidance. 

In addition, in connection with the 

adoption of the Final Guidance, the 

Council has rescinded the 2015 

Supplemental Procedures and the 2015 

staff guidance regarding the Stage 1 

thresholds. The Council’s rules codified 

at 12 CFR 1310.1 to 1310.23 and the 

Council’s Hearing Procedures remain in 

effect. 

The Council expects that the Final 

Guidance will better enable the Council 

to: 

Æ Leverage the expertise of financial 

regulatory agencies; 

Æ Promote market discipline; 

Æ Maintain competitive dynamics in 

affected markets; 

Æ Appropriately tailor regulations to 

cost-effectively minimize burdens; and 

Æ Ensure the Council’s designation 

analyses are rigorous and transparent. 

II. Overview of Final Guidance 

The Final Guidance revises the 2012 

Interpretive Guidance to ensure that the 

Council’s work is clear, transparent, and 

analytically rigorous, and to enhance 

the Council’s engagement with 

companies, regulators, and other 

stakeholders. By issuing clear and 

transparent guidance, the Council seeks 

to provide the public with sufficient 

information to understand the Council’s 

concerns regarding risks to financial 

stability, while appropriately protecting 

information submitted by companies 

and regulators to the Council. 

A. Key Changes From 2012 Interpretive 

Guidance and Proposed Guidance 

1. Key Changes From 2012 Interpretive 

Guidance 

The Final Guidance substantially 

transforms the Council’s previous 

procedures. Following are high-level 

descriptions of several of the most 

important changes, which are explained 

in greater detail below. 

First, under the Final Guidance, the 

Council will prioritize its efforts to 

identify, assess, and address potential 

risks and threats to U.S. financial 

stability through a process that begins 

with an activities-based approach. This 

approach is consistent with the 

Council’s priorities of identifying and 

addressing potential risks and emerging 

threats on a system-wide basis, in order 

to reduce the potential for competitive 

market distortions that could arise from 

entity-specific determinations, and 

allow relevant financial regulatory 

agencies to address identified potential 

risks. The Council will pursue entityspecific determinations under section 

113 of the Dodd-Frank Act only if a 

potential risk or threat cannot be 

adequately addressed through an 

activities-based approach. This 

approach will enable the Council to 

effectively identify and address the 

underlying sources of risks to financial 

stability on a system-wide basis, rather 

than addressing risks only at a 

particular nonbank financial company 

that may be designated. 

Second, before issuing nonbinding 

recommendations to a primary financial 

regulatory agency under section 120 of 

the Dodd-Frank Act, the Council will 

ascertain whether the primary financial 

regulatory agency would be expected to 

perform a cost-benefit analysis of the 

actions it would take in response to the 

Council’s contemplated 

recommendation. In cases where the 

primary financial regulatory agency 

would not be expected to conduct such 

an analysis, the Council itself will— 

prior to making a final 

recommendation—conduct an analysis, 

using empirical data, to the extent 

available, of the benefits and costs of the 

actions that the primary financial 

regulatory agency would be expected to 

take in response to the contemplated 

recommendation. When the Council 

conducts its own analysis, the Council 

will make a recommendation under 

section 120 only if it believes that the 

results of its assessment of benefits and 

costs support the recommendation. 

Third, in the event the Council 

considers a nonbank financial company 

for a potential determination under 

section 113, the Council will perform a 

cost-benefit analysis prior to making a 

determination. The Council will make a 

determination under section 113 only if 

the expected benefits to financial 

stability from the determination justify 

the expected costs that the 

determination would impose. 

Fourth, under the Final Guidance, the 

Council will assess the likelihood of a 

nonbank financial company’s material 

financial distress when evaluating the 

firm for a potential determination, in 

order to evaluate the extent to which a 

determination may promote U.S. 

financial stability. 

Fifth, the Final Guidance condenses 

the prior three-stage process for a 

determination under section 113 into 

two stages, by eliminating prior stage 1 

(as established by the 2012 Interpretive 

Guidance). Under prior stage 1, a set of 

uniform quantitative metrics was 

applied to a broad group of nonbank 

financial companies in order to identify 

nonbank financial companies for further 

evaluation and to provide clarity for 

other nonbank financial companies that 

likely would not be subject to 

evaluation for a potential determination. 

The Final Guidance eliminates prior 

stage 1, because it generated confusion 

among firms and members of the public 

and is not compatible with the 

prioritization of an activities-based 

approach. 

Sixth, the Final Guidance further 

enhances the new, two-stage 

determination process by making 

numerous procedural improvements 

and incorporating several provisions of 

the 2015 Supplemental Procedures, 

which were intended to facilitate the 

Council’s engagement and transparency. 

The Final Guidance will increase the 

Council’s engagement with companies 

and their existing regulators during the 

determination process. One of the goals 

of this enhanced engagement is to 

provide a company under review with 

greater visibility into the aspects of its 

business that may pose risks to U.S. 

financial stability. Enhanced 

engagement will also allow the 

company to provide the Council with 

relevant information, which will help to 

ensure that the Council is making 

decisions based on a broad set of data 

and a rigorous analysis. By making a 

company aware early in the review 

process of the potential risks the 

Council has identified, the Council 

seeks to give the company more 

information and tools to mitigate those 

risks prior to any Council designation, 

thereby providing a potential predesignation ‘‘off-ramp.’’ 

The Final Guidance also includes 

procedures intended to clarify the postdesignation ‘‘off-ramp.’’ The Final 

Guidance provides that in the event the 

Council makes a final determination 

regarding a company, the Council 

intends to encourage the company or its 

regulators to take steps to mitigate the 

potential risks identified in the 

Council’s written explanation of the 

basis for its final determination. Except 

in cases where new material risks arise 

over time, if a company adequately 

addresses the potential risks identified 

in writing by the Council at the time of 

the final determination and in 


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Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Rules and Regulations 71743 

9See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 

5323(a)(2). 

10See section C(1) below for a list of the 10 

statutory considerations. 

11The Council’s Deputies Committee is 

composed of senior officials from each Council 

member and member agency. It coordinates and 

oversees the work of the Council’s other interagency 

staff committees. 

12Under 12 CFR 1310.10(b)(2), any proposed or 

final determination requires 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. 

subsequent reevaluations, the Council 

should generally be expected to rescind 

its determination regarding the 

company. By clarifying the ‘‘off-ramp’’ 

to rescission, and taking other steps to 

promote designated nonbank financial 

companies’ ability to reduce the threat 

they could pose to financial stability, 

the Council seeks to both protect the 

U.S. financial system and reduce the 

regulatory burden on the companies. 

Seventh, the Final Guidance 

eliminates the six-category framework 

described in the 2012 Interpretive 

Guidance. As noted in the 2012 

Interpretive Guidance, the Dodd-Frank 

Act requires the Council to take into 

account 10 considerations when 

evaluating a company for a potential 

determination, and authorizes the 

Council to consider ‘‘any other riskrelated factors that the Council deems 

appropriate.’’ 9 The 2012 Interpretive 

Guidance established an analytic 

framework that grouped all relevant 

factors, including the 10 statutory 

considerations 10 and any additional 

risk-related factors, into six categories 

(size, interconnectedness, 

substitutability, leverage, liquidity risk 

and maturity mismatch, and existing 

regulatory scrutiny). The six-category 

framework did not prove useful in 

guiding the Council’s evaluations, and 

unnecessarily complicated the 

framework for the Council’s analysis. As 

a result, the Final Guidance eliminates 

this six-category framework. 

2. Key Changes From Proposed 

Guidance 

Following are high-level descriptions 

of several changes in this Final 

Guidance from the Proposed Guidance. 

These changes are explained in greater 

detail below. 

First, in response to comments that 

the Council should provide more detail 

on how it will conduct its analysis 

under the activities-based approach, the 

Final Guidance clarifies that the Council 

will consult with relevant financial 

regulatory agencies and will take into 

account existing laws and regulations 

that may mitigate a potential risk to U.S. 

financial stability. Among other factors, 

the Final Guidance provides that the 

Council will also take into account the 

risk profiles and business models of 

market participants engaging in the 

products, activities, or practices under 

evaluation. 

Second, the Final Guidance provides 

additional clarity on the process by 

which the Council may issue 

recommendations under section 120, 

including the Council’s analysis of the 

costs and benefits associated with such 

recommendations. 

Third, the Final Guidance has been 

revised in response to comments 

regarding the proposed interpretation of 

‘‘nonbank financial company’’ as 

including any successor of a company 

that is subject to a final determination 

of the Council. In response to comments 

that the proposed interpretation was 

overly broad, the Final Guidance has 

been revised to state, more narrowly, 

that the Council intends to interpret the 

statutory term ‘‘nonbank financial 

company supervised by the Board of 

Governors’’ as including any nonbank 

financial company that acquires, 

directly or indirectly, a majority of the 

assets or liabilities of a company that is 

subject to a final determination of the 

Council. As a result, if a nonbank 

financial company subject to a final 

determination of the Council sells or 

otherwise transfers a majority of its 

assets or liabilities, the acquirer will 

succeed to, and become subject to, the 

Council’s determination. As noted 

below and in section V of the Final 

Guidance, the Council may grant a 

designated nonbank financial 

company’s request for a reevaluation of 

the determination before the next 

annual reevaluation, in appropriate 

cases. 

Fourth, the Final Guidance has been 

revised to add greater specificity 

regarding the Council’s assessment of 

costs and benefits in connection with a 

determination under section 113 of the 

Dodd-Frank Act. For example, the Final 

Guidance states that when possible, the 

Council will quantify reasonably 

estimable benefits and costs, using 

ranges, as appropriate, and based on 

empirical data when available. 

Fifth, the description of the Council’s 

analytic process for assessing the 

likelihood of a company’s material 

financial distress has been revised. The 

Final Guidance provides that to conduct 

this assessment, the Council may 

consider factors such as leverage (both 

on and off balance sheet), potential risks 

associated with asset reevaluations 

(whether such reevaluations arise from 

market disruptions or severe 

macroeconomic conditions), reliance on 

short-term funding or other fragile 

funding markets, maturity 

transformation, and risks from 

exposures to counterparties or other 

market participants. 

Sixth, the Proposed Guidance stated 

that the Council or its Deputies 

Committee 11 would vote to commence 

review of a nonbank financial company 

in Stage 1 of the determination process. 

In response to public comments, the 

Final Guidance provides that the 

Council will vote to commence any 

review of a nonbank financial company 

in Stage 1. The table below provides a 

summary of several key transition 

points under the Final Guidance: 

Transition point Persons voting Voting threshold 

Begin step one of ABA ...................................... No required vote ............................................... N/A. 

Begin step two of ABA ...................................... No required vote ............................................... N/A. 

Begin Stage 1 of Determination Process .......... Council member vote ....................................... Majority. 

Begin Stage 2 of Determination Process .......... Council member vote ....................................... Majority. 

Make Proposed Determination .......................... Council member vote ....................................... Two-thirds.12

Make Final Determination ................................. Council member vote ....................................... Two-thirds. 

The following sections provide 

detailed descriptions of (1) the 

activities-based approach (section B); (2) 

the analytic framework for the Council’s 

evaluation of nonbank financial 

companies for a potential determination 

under section 113 of the Dodd-Frank 

Act (section C); and (3) the process that 

the Council will generally follow when 

determining whether to designate, or 

rescind the designation of, a nonbank 

financial company (section D). 


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13References in this preamble and guidance to 

‘‘relevant financial regulatory agencies’’ may 

encompass a broader range of regulators than those 

included in the statutory definition of ‘‘primary 

financial regulatory agency.’’ See Dodd-Frank Act 

section 2(12), 12 U.S.C. 5301(12). 

14For example, the Council’s 2018 annual report 

noted risks such as cybersecurity events associated 

with the increased use of information technology, 

the concentrations of activities and exposures in 

central counterparties, and transition issues related 

to the move away from LIBOR to an alternative, 

sustainable reference rate. 

B. Activities-Based Approach 

1. Overview 

Under the Final Guidance, the 

Council will prioritize its efforts to 

identify, assess, and address potential 

risks and threats to U.S. financial 

stability through a process that begins 

with an activities-based approach. The 

Council will pursue entity-specific 

determinations under section 113 of the 

Dodd-Frank Act only if a potential risk 

or threat cannot be adequately 

addressed through an activities-based 

approach. This approach reflects two 

priorities: (1) Identifying and 

addressing, in consultation with 

relevant financial regulatory agencies,13

potential risks and emerging threats on 

a system-wide basis, thereby reducing 

the potential for competitive distortions 

among financial companies and in 

markets that could arise from entityspecific determinations, and (2) 

allowing relevant financial regulatory 

agencies, which generally possess 

greater information and expertise with 

respect to company, product, and 

market risks, to address potential risks, 

rather than subjecting the companies to 

new regulatory authorities. The 2012 

Final Rule and Interpretive Guidance 

did not address the concept of an 

activities-based approach. 

As part of its activities-based 

approach, the Council will examine a 

diverse range of financial products, 

activities, and practices that could pose 

risks to U.S. financial stability. The 

Council’s annual reports highlight the 

types of activities the Council will 

evaluate, including activities related to 

the extension of credit, maturity and 

liquidity transformation, market making 

and trading, and other key functions 

critical to support the functioning of 

financial markets.14

Most commenters supported the 

activities-based approach, stating that it 

is the most effective means to address 

potential risks that may arise in 

particular industries and would avoid 

competitive distortions from the entityspecific approach. Some commenters 

supportive of alternatives to the entityspecific approach stated that 

designating individual nonbank 

financial companies could create 

inefficiencies and competitive 

disadvantages in capital markets. One 

commenter stated that primary 

regulators should tailor their regulations 

based on the unique attributes of each 

company and consider the cumulative 

effects of regulations on companies. By 

relying on the experience and expertise 

of relevant financial regulatory agencies 

during the activities-based approach, 

the Council expects that any response to 

an identified risk to financial stability 

will be tailored in a manner that reflects 

the unique attributes of affected 

companies and their existing regulatory 

framework. One commenter stated that 

the activities-based approach should 

cover activities, but not products and 

practices. The Council believes that the 

activities-based approach would be 

rendered less effective if it excluded 

products and practices, because 

activities that may pose risks to 

financial stability often involve the 

issuance of products or the conduct of 

practices. 

Other commenters stated that there 

should be a high bar to Council actions. 

These commenters stated that the 

Council and primary regulators should 

bear the burden of proof in establishing 

the existence of a risk to financial 

stability and of demonstrating that the 

Council’s proposed response to the risk 

is optimal from an effectiveness and 

efficiency standpoint. The Council 

expects that its analyses will sufficiently 

establish the existence of any potential 

risk or emerging threat to financial 

stability to which the Council seeks to 

respond. Further, any regulation 

adopted by relevant financial regulatory 

agencies in response to the Council’s 

activities-based approach would 

generally be subject to existing federal 

or state administrative law 

requirements. 

Several commenters opposed the 

prioritization of the activities-based 

approach, based on various legal, 

procedural, analytical, and other 

objections. Some commenters noted that 

the Council does not have authority to 

regulate financial activities, or stated 

that the proposal to rely on primary 

regulators to address potential risks has 

no basis in the Dodd-Frank Act. One 

commenter stated that Congress did not 

intend the Council’s designation 

authority to be subordinate to or 

contingent upon an activities-based 

approach, and two other commenters 

stated that the Council’s authority to 

make recommendations under section 

120 of the Dodd-Frank Act cannot serve 

as a substitute for designations under 

section 113. One commenter stated that 

the Council’s analysis should begin with 

an activities-based approach, but that 

the activities-based approach should not 

be undertaken at the expense of 

designation, which the commenter 

stated is an important tool that should 

be used when warranted. 

The Dodd-Frank Act gives the Council 

broad discretion to determine how to 

respond to potential threats to U.S. 

financial stability. The activities-based 

approach is consistent with the 

Council’s priorities of identifying and 

addressing potential risks and emerging 

threats on a system-wide basis, allowing 

relevant financial regulatory agencies to 

address identified potential risks. The 

Council retains the authority to 

designate nonbank companies under the 

Final Guidance. The Council recognizes 

that its authority under section 120 of 

the Dodd-Frank Act is not a substitute 

for designations in all circumstances. 

However, consistent with the Council’s 

prioritization of an activities-based 

approach, the Council’s authority under 

section 120 may be a more effective 

means of addressing certain types of 

potential risks than designating one or 

more individual companies. 

Two commenters stated that the 

activities-based approach cannot 

address risks that are tied to the funding 

and leverage or combination of activities 

within a specific firm. Another 

commenter stated that the Federal 

Reserve’s regulatory authorities with 

respect to designated nonbank financial 

companies, such as capital and liquidity 

requirements, risk management 

requirements, and stress testing, are not 

available through an activities-based 

approach. In the activities-based 

approach, the Council anticipates 

identifying risks from activities such as 

the use of leverage, and working with 

relevant financial regulatory agencies to 

respond to identified risks. The Council 

expects that in many cases, relevant 

financial regulatory agencies will have 

authority to address risks identified by 

the Council in the activities-based 

approach. However, if a potential threat 

to U.S. financial stability cannot be 

adequately addressed through an 

activities-based approach, the Council 

may consider a nonbank financial 

company for a potential determination 

under section 113 of the Dodd-Frank 

Act. 

One commenter stated that although 

the Proposed Guidance suggests that the 

activities-based approach will minimize 

competitive distortions that arise from 

firm-specific decisions, large, 

systemically important firms actually 

create competitive distortions, because 

of the perception that they will receive 

a bailout in a situation where their 

failure could create systemic risk. 


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15The Council has a statutory duty to monitor the 

financial services marketplace in order to identify 

potential threats to U.S. financial stability. See 

Dodd-Frank Act section 112(a)(2)(C), 12 U.S.C. 

5322(a)(2)(C). 

16The 2012 Final Rule and Interpretive Guidance 

did not define ‘‘risk to financial stability.’’ 

Another commenter stated that 

competitive market distortions are not 

among the statutory factors that the 

Council is required to consider when 

evaluating specific companies for a 

determination. One of the Council’s 

priorities is to identify and address 

potential risks and emerging threats to 

financial stability on a system-wide 

basis, which, in turn, reduces the 

potential for competitive market 

distortions that could arise from entityspecific determinations. The activitiesbased approach is consistent with this 

system-wide perspective. 

One commenter objected to the 

activities-based approach on the basis 

that it is easier for regulators to identify 

systemic firms ex ante than to predict 

which activities will threaten financial 

stability. Another commenter stated that 

jurisdictional gaps will impede the 

activities-based approach, including 

with respect to insurance companies, 

hedge funds, and nonbank financial 

technology companies. By leveraging 

the expertise and regulatory authorities 

of relevant financial regulatory agencies 

as part of its collaborative engagement 

in the activities-based approach, the 

Council expects to identify products, 

activities, and practices that may raise 

concerns and effectively address any 

jurisdictional gaps. Council members 

can, at their discretion, raise potential 

risks for consideration by the Council, 

including with respect to risks that are, 

or are migrating, outside a particular 

regulator’s jurisdiction. Another 

commenter stated that the activitiesbased approach will incentivize firms to 

engage in regulatory arbitrage by seeking 

out activities that have not been 

identified or appropriately regulated. 

However, actions taken to address 

potential risks across an entire industry 

or market under the activities-based 

approach may be more effective in 

discouraging regulatory arbitrage than 

company-specific determinations under 

section 113. Two commenters stated 

that it would not be possible for the 

Council to undertake an activities-based 

approach effectively, given the 

reduction in funding and staff for the 

Office of Financial Research (OFR). The 

Council has confidence that Council 

members and member agencies, 

including the OFR, will be able to 

conduct the market monitoring, risk 

identification, information sharing, and 

analysis contemplated by the activitiesbased approach. 

2. First Step of Activities-Based 

Approach 

The Final Guidance establishes a twostep process for the Council’s activitiesbased approach. In the first step, in an 

effort to identify potential risks to U.S. 

financial stability, the Council intends 

to monitor diverse financial markets and 

market developments, in consultation 

with relevant financial regulatory 

agencies, to identify products, activities, 

or practices that could pose risks to 

financial stability.15 The Council 

intends to continue to monitor a broad 

scope of financial markets and market 

developments, which may include 

corporate and sovereign debt and loan 

markets, equity markets, new or 

evolving financial products, activities, 

and practices, and developments 

affecting the resiliency of financial 

market participants. If the Council’s 

monitoring of markets and market 

developments identifies a product, 

activity, or practice that could pose a 

potential risk to U.S. financial stability, 

the Council, in consultation with the 

relevant financial regulatory agencies, 

will evaluate the potential risk to 

determine whether it merits further 

review or action. The Final Guidance 

defines a ‘‘risk to financial stability’’ as 

a risk of an event or development that 

could impair financial intermediation or 

financial market functioning to a degree 

that would be sufficient to inflict 

significant damage on the broader 

economy.16 One commenter stated that 

the Council should amend the proposed 

definition of ‘‘risk to financial stability’’ 

by evaluating the impact and likelihood 

of a potential risk, among other 

attributes. The definition in the Final 

Guidance is unchanged from the 

proposal, because the definition already 

addresses the scale of the risk by 

reference to the impact on the broader 

economy. The likelihood of the risk 

arising is more relevant to the 

consideration of any appropriate 

regulatory response than to this 

definition. 

In its analysis in the first step of the 

activities-based approach, the Council 

will evaluate the extent to which certain 

characteristics could amplify potential 

risks to U.S. financial stability arising 

from products, activities, or practices. 

While these characteristics may not 

themselves present risks to U.S. 

financial stability, the Council will 

consider whether the combination or 

prominence of such characteristics in 

the products, activities, or practices 

under evaluation warrants further 

scrutiny. Such characteristics include 

asset valuation risk or credit risk; 

leverage, including leverage arising from 

debt, derivatives, off-balance sheet 

obligations, and other arrangements; 

and the transparency of financial 

markets, such as growth in financial 

transactions occurring outside of 

regulated sectors, among others. When 

evaluating the potential risks associated 

with a product, activity, or practice, the 

Council will take into account these 

characteristics and various other factors 

that may exacerbate or mitigate the 

risks. For example, activities may pose 

greater risks if they are complex or 

opaque, are conducted without effective 

risk-management practices, are 

significantly correlated with other 

financial products, or are either highly 

concentrated or significant and 

widespread. A trading activity in a 

market subject to a significant amount of 

asset valuation risk, for instance, may 

pose a greater threat to financial 

stability if the activity is also opaque. In 

contrast, regulatory requirements or 

market practices may mitigate risks by, 

for example, limiting exposures or 

leverage, enhancing risk-management 

practices, or restricting excessive risktaking. Regulatory requirements 

associated with a lending activity, such 

as an asset concentration limit or 

repayment test, may reduce the 

potential risk to financial stability 

stemming from the activity. Council 

members can, at their discretion, raise 

potential risks for consideration by the 

Council, including with respect to risks 

that are, or are migrating, outside a 

particular regulator’s jurisdiction. 

Commenters offered numerous views 

regarding the proposed analytical 

components of the first step of the 

activities-based approach. Several 

commenters stated that the Final 

Guidance should take into account 

existing regulations implemented since 

the financial crisis, or consider the 

existing regulatory framework and work 

with the primary regulator to harmonize 

an approach to evaluating risk. As 

discussed below, the Final Guidance 

has been revised to make clear that the 

Council will consult with relevant 

financial regulatory agencies and will 

take into account existing laws and 

regulations that may mitigate a potential 

risk to U.S. financial stability. One 

commenter stated that the Council 

should tailor regulation to firms’ risk 

profiles. The Council itself does not 

adopt financial services regulations, but 

it expects that actions that relevant 

financial regulatory agencies take to 

address potential risks to financial 

stability will be tailored to respond 

effectively and efficiently to the relevant 

risk. Further, the Final Guidance has 


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been revised to state that the Council 

will take into account the risk profiles 

and business models of market 

participants engaging in the products, 

activities, or practices under evaluation. 

Other commenters recommended that 

the Council further specify how it will 

analyze potential risks in the activitiesbased approach, such as by clarifying 

the criteria or standards the Council will 

apply, or establishing an empirical 

connection between an identified risk 

and measures to address the risk. As 

discussed below, the Final Guidance 

has been revised to make clear that the 

Council will consider available 

evidence regarding the potential risk 

and the behavior of financial market 

participants. At the same time, 

empirical data may not be available 

regarding all potential risks, and the 

type and scope of the Council’s analysis 

will be tailored to the potential risk 

under consideration. 

Several commenters provided 

recommendations on the types of risks 

that the Council should focus on. 

Commenters stated that the Council 

should focus on new or emerging risks, 

or on substantially changed activities. 

Other commenters stated that the 

Council should focus on risks such as: 

Key service providers or market 

participants that could introduce new 

threats; cross-jurisdictional risks; or 

historical sources of financial 

disruptions. The Council expects that 

such risks and activities will be 

reviewed as part of the activities-based 

approach. One commenter stated that 

the activities-based approach should 

consider risks from sovereign entities, 

central banks, government agencies, and 

cyber threats. The activities-based 

approach will be sufficiently flexible to 

enable the Council to consider any 

relevant risks that may arise from these 

sources. One commenter stated that the 

Council should consider how to address 

risks that arise rapidly and require an 

expedited response from the Council 

and regulators. The Council will act 

expeditiously, as appropriate, to address 

emerging risks to financial stability. 

One commenter stated that the 

Council should solicit public comment 

when identifying potential risks during 

the activities-based approach. During 

the activities-based approach, the 

Council will engage extensively with 

relevant financial regulatory agencies, 

which are generally in close contact 

with market participants and other 

stakeholders. In addition, the Final 

Guidance notes that the Council may 

engage with industry participants and 

other members of the public as it 

assesses potential risks. Further, as 

described below, if the Council 

proposes to issue recommendations 

under section 120 of the Dodd-Frank 

Act, the Council will provide public 

notice and an opportunity to comment 

on proposed recommendations in 

accordance with its statutory 

obligations. 

Several commenters raised 

considerations specific to certain 

industries. One commenter stated that 

insurance is not inherently a source of 

systemic risk and can be an effective 

tool of risk mitigation. Another 

commenter stated that property and 

casualty insurers do not create systemic 

risk due to their low levels of leverage 

and liquidity risk. 

Several commenters discussed the 

application of the activities-based 

approach to the asset management 

industry. Commenters stated that 

private equity and private credit do not 

pose risks to financial stability, and 

highlighted the existing federal 

regulation of such firms. Another 

commenter stated that the Final 

Guidance should state that there is no 

historical evidence demonstrating that 

traditional asset management activities 

have threatened U.S. financial stability. 

One commenter stated that when the 

Council evaluates leverage in the 

investment funds sector, it should defer 

to existing regulation regarding funds’ 

asset segregation and derivatives use. 

One of the priorities of the activitiesbased approach is to allow relevant 

financial regulatory agencies, which 

generally possess greater information 

and expertise with respect to company, 

product, and market risks, to address 

potential risks, rather than subjecting 

companies to new regulatory 

authorities. The Council believes that 

this approach will enable the Council, 

working together with financial 

regulatory agencies, to appropriately 

consider specific attributes of particular 

industries, business models, and 

existing regulatory frameworks, 

including the factors highlighted in the 

public comments regarding insurance 

and asset management. 

Several commenters provided 

additional views regarding the Council’s 

analysis of specific risk factors. One 

commenter stated that the activitiesbased approach should consider risks 

and mitigants for each relevant industry, 

since each industry has distinct riskmitigation techniques. Another 

commenter stated that leverage alone 

does not equal risk, and that some 

leverage can decrease risk. One 

commenter stated that the Final 

Guidance should distinguish between 

investor protection concerns and 

financial stability concerns. The Council 

expects to collaborate with relevant 

financial regulatory agencies when 

evaluating the extent to which certain 

characteristics could amplify potential 

risks to U.S. financial stability arising 

from products, activities, or practices. 

Such characteristics include leverage, 

such as leverage arising from debt, 

derivatives, off-balance sheet 

obligations, and other arrangements. 

The Council will give due consideration 

to the attributes of particular risks 

during this collaboration. 

One commenter stated that the 

Council should regularly survey 

financial firms on their sources of shortterm funding. While the Council does 

not believe it is appropriate at this time 

to impose this additional reporting 

requirement on market participants, the 

Council will regularly rely on a wide 

range of data, research, and analysis 

from Council member agencies, the 

OFR, and public sources to inform its 

actions. 

3. Four Framing Questions in First Step 

of Activities-Based Approach 

The Council’s analysis in the first step 

of the activities-based approach will 

generally focus on four framing 

questions, which analyze (1) triggers of 

potential risks (for example, sharp 

reductions in the valuation of particular 

classes of financial assets or significant 

credit losses); (2) how adverse effects of 

the potential risk may be transmitted to 

financial markets or market participants 

(for example, through direct or indirect 

exposures in financial markets to the 

potential risk or funding or trading 

pressures that may result from 

associated declines in asset prices); (3) 

the effects the potential risk could have 

on the U.S. financial system (for 

example, the scale and magnitude of 

adverse effects on other companies and 

markets, and whether such effects could 

be concentrated or diffused among 

market participants); and (4) whether 

the adverse effects of the potential risk 

could impair the U.S. financial system 

in a manner that could harm the nonfinancial sector of the U.S. economy (for 

example, through curtailed or 

interrupted provision of credit to nonfinancial companies). 

Commenters that expressed a view on 

the four framing questions generally 

supported the proposed framework, in 

some cases with suggestions for 

additional factors or steps the Council 

should consider. Two commenters 

stated that the Council should consult 

with primary regulators regarding new 

dynamics that could fuel a financial 

crisis, such as risks that start in the 

broader economy and propagate to the 

financial system. Another commenter 

stated that the Council should provide 


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17The Council has a statutory duty to 

‘‘recommend to the member agencies general 

supervisory priorities and principles reflecting the 

outcome of discussions among the member 

agencies.’’ See Dodd-Frank Act section 112(a)(2)(F), 

12 U.S.C. 5322(a)(2)(F). 

18 Dodd-Frank Act section 120(a), 12 U.S.C. 

5330(a). 

19See Dodd-Frank Act section 112(d)(3)(B), 12 

U.S.C. 5322(d)(3)(B). 

more detail on how it will analyze data 

under the four framing questions. In 

addition, three commenters stated that 

the Council’s analysis under the four 

framing questions should be based on 

empirical and historical evidence. The 

Final Guidance has been revised to 

clarify that in its evaluation of the four 

framing questions, the Council will 

consult with relevant financial 

regulatory agencies and will take into 

account existing laws and regulations 

that may mitigate a potential risk to U.S. 

financial stability. The Council will also 

take into account the risk profiles and 

business models of market participants 

engaging in the products, activities, or 

practices under evaluation. The Council 

will consider available evidence 

regarding potential risks. However, the 

Final Guidance notes that empirical 

data may not be available regarding all 

potential risks, and the type and scope 

of the Council’s analysis will be tailored 

to the potential risk under 

consideration. 

Several other commenters stated that 

the analysis under the four framing 

questions should include an assessment 

of the likelihood, significance, dollar 

value, or magnitude of a potential risk 

to financial stability. The Council 

expects that the scale of the adverse 

effects a potential risk could have on 

companies and markets will be part of 

its evaluation under the four framing 

questions—particularly the third 

question, regarding the effects the 

potential risk could have on the U.S. 

financial system. However, the Council 

does not intend to introduce a separate 

assessment of the likelihood of a 

particular risk, which could 

unnecessarily restrict its ability to 

evaluate the framing questions. 

4. Second Step of Activities-Based 

Approach 

If the Council identifies a potential 

risk to U.S. financial stability in step 

one of the activities-based approach, 

then in the second step, the Council will 

work with the relevant financial 

regulatory agencies at the federal and 

state levels to seek the implementation 

of appropriate actions to address the 

identified potential risk.17 The goal of 

this step is for these regulators to take 

appropriate actions such as modifying 

their regulation or supervision of 

companies or markets under their 

jurisdiction in order to mitigate 

potential risks to U.S. financial stability 

identified by the Council. Measures that 

regulators can take to address a 

particular risk may vary widely, based 

on their authorities and the urgency of 

the risk. The Council will seek to take 

advantage of these regulators’ expertise 

and their regulatory and supervisory 

authorities to address the potential risk 

identified by the Council. Two 

commenters stated that the Council 

should vote on advancing from step one 

to step two of the activities-based 

approach. Because of the continued 

preliminary nature of any analysis and 

interagency collaboration at the outset 

of step two, the Council is not adopting 

a requirement to hold a vote at that 

time. 

The Council expects that much of its 

initial identification and assessment of 

risks, and engagement with regulators, 

will be informal and nonpublic in 

nature. The staffs of Council members 

and member agencies will be 

responsible for much of the market 

monitoring, risk identification, 

information sharing, and analysis in the 

activities-based approach. This 

engagement may yield a range of diverse 

outcomes, including the sharing of data, 

research, and analysis among the 

Council and regulators, or the public 

issuance of recommendations by the 

Council in its annual reports. Potential 

risks that merit further attention may be 

raised at meetings of the Council 

members or with other stakeholders, 

and, as appropriate, may result in public 

statements or recommendations by the 

Council, as described above. 

The Council anticipates that 

appropriate measures it may take to 

address an identified potential risk will 

also typically take the form of relatively 

informal actions, such as information 

sharing among regulators, but as 

deemed appropriate could also include 

more formal measures, such as the 

Council’s public issuance of 

recommendations to regulators or the 

public. Such recommendations could be 

made in the Council’s annual report. 

Alternatively, if after engaging with 

relevant financial regulatory agencies, 

the Council finds that those regulators’ 

actions are inadequate to address the 

identified potential risk to U.S. financial 

stability, the Council has authority 

under section 120 of the Dodd-Frank 

Act to ‘‘provide for more stringent 

regulation of a financial activity’’ by 

publicly issuing nonbinding 

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 

their jurisdictions.18 The Council’s 

authority under section 120 of the 

Dodd-Frank Act is discussed below. 

Several commenters provided views 

regarding the Council’s process and 

engagement with primary regulators in 

the activities-based approach. One 

commenter stated that the Council 

should separate responsibility among 

the Council staff for investigating an 

activity from responsibility for 

determining that the activity poses a 

systemic risk. The Council has limited 

staff and also relies on the resources of 

its members and member agencies, and 

therefore does not propose to restructure 

its staff in this manner. Two 

commenters stated that the Council 

should rely as much as possible on 

public or existing regulatory data. The 

Council will regularly rely on data, 

research, and analysis from Council 

member agencies, the OFR, industry 

participants, and other public sources to 

inform its actions. Consistent with its 

statutory obligations, the Council will, 

whenever possible, rely on information 

available from the OFR or primary 

financial regulatory agencies before 

requiring the submission of reports from 

any nonbank financial company or bank 

holding company that is regulated by a 

member agency or primary financial 

regulatory agency.19 One commenter 

stated that the Council should report 

publicly on its activities-based approach 

evaluations and other Council activities, 

and include this reporting in the 

Council annual report. The issues the 

Council is likely to consider in the 

activities-based approach are often 

discussed in the Council’s annual 

reports. In the event the Council issues 

recommendations in connection with 

the activities-based approach, such 

recommendations could also be made in 

the Council’s annual report, which 

includes the Council’s 

recommendations to enhance the 

integrity, efficiency, competitiveness, 

and stability of U.S. financial markets, 

to promote market discipline, and to 

maintain investor confidence. 

One commenter stated that the 

Council should consider whether new 

regulatory requirements could have an 

unintended adverse impact on financial 

stability. The Council will coordinate 

among its members and member 

agencies and will follow up on 

supervisory or regulatory actions to 

ensure the potential risk is adequately 

addressed, with due consideration for 


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20 Dodd-Frank Act section 120(a), 12 U.S.C. 

5330(a). 

any identified, unintended adverse 

impact. 

One commenter stated that the 

Council should further clarify the 

process it will follow during the 

activities-based approach. The Council 

believes the process set forth in the 

Final Guidance provides an appropriate 

level of specificity while also permitting 

sufficient flexibility for informal 

collaboration among financial regulators 

to identify, assess, and address potential 

risks. One commenter stated that the 

Council should publicly issue a written 

provisional determination regarding any 

identified potential risk to financial 

stability. The Council’s collaboration 

with relevant financial regulatory 

agencies in the activities-based 

approach may yield a range of diverse 

outcomes, including the sharing of data, 

research, and analysis among the 

Council and these regulators, or the 

public issuance of recommendations by 

the Council in its annual reports. The 

approach described in the Final 

Guidance will enable robust analysis 

and collaboration, without unduly 

restricting the Council’s ability to 

respond to potential risks to U.S. 

financial stability. 

A number of commenters provided 

recommendations about the Council’s 

engagement with regulators or industry 

stakeholders in the activities-based 

approach. Several commenters stated 

that engagement with primary regulators 

and companies should be a key 

component of the activities-based 

approach, and another stated that the 

Council should strengthen the role of 

the primary regulator in activities-based 

approach step one, with a presumption 

supporting the primary regulator’s 

findings. The Final Guidance makes 

clear that the Council will seek to take 

advantage of existing regulators’ 

expertise and regulatory authorities to 

address any potential risk identified by 

the Council during the activities-based 

approach. One commenter stated that 

the Council should communicate with 

the primary regulator about existing 

regulations applicable to companies 

engaged in financial activities that may 

be evaluated in connection with the 

activities-based approach, any possible 

changes to such regulations, and 

whether it can address the identified 

risk on an industry-wide basis. As 

discussed above, the Final Guidance has 

been revised to clarify that in its 

evaluation, the Council will consult 

with relevant financial regulatory 

agencies and will take into account 

existing laws and regulations that may 

mitigate a potential risk to U.S. financial 

stability. Several commenters stated that 

the Council should coordinate with 

various other parties during the 

activities-based approach, including 

state insurance regulators, the National 

Association of Insurance Commissioners 

(NAIC), and other industry stakeholders. 

If the Council identifies a potential risk 

to U.S. financial stability in step one of 

the activities-based approach, then in 

the second step, the Council will work 

with the relevant financial regulatory 

agencies, including state regulators, to 

seek the implementation of appropriate 

actions to address the identified 

potential risk. 

Several commenters stated that the 

Council or the relevant primary 

regulator should undertake a costbenefit analysis in connection with the 

activities-based approach. Because the 

Council will not itself be adopting 

regulations or taking supervisory actions 

to address potential risks to U.S. 

financial stability identified in the 

activities-based approach, a cost-benefit 

analysis by the Council during the 

activities-based approach would not 

generally be appropriate. In addition, 

several commenters recommended that 

the Council undertake a cost-benefit 

analysis in connection with any 

recommendation the Council may issue 

under section 120 of the Dodd-Frank 

Act. As described below, the Council 

made changes to the Final Guidance in 

response to these comments, because it 

has determined that such an analysis 

would increase the rigor of the Council’s 

recommendations under section 120. 

5. Recommendations Under Section 120 

of the Dodd-Frank Act 

Under section 120 of the Dodd-Frank 

Act, the Council has authority to 

‘‘provide for more stringent regulation 

of a financial activity’’ by publicly 

issuing nonbinding recommendations to 

primary financial regulatory agencies to 

apply new or heightened standards and 

safeguards for a financial activity or 

practice conducted by certain financial 

companies.20

The authority to issue 

recommendations to primary financial 

regulatory agencies under section 120 is 

one of the Council’s most formal tools 

for responding to potential risks to U.S. 

financial stability. Given the importance 

of this tool, and consistent with the 

public comments on the Proposed 

Guidance, the Council believes that a 

cost-benefit analysis should be 

performed and made public in 

connection with any recommendations 

issued under section 120. The Final 

Guidance has been revised to provide 

additional clarity on the process by 

which the Council may issue 

recommendations under section 120, 

and how the costs and benefits 

associated with such recommendations 

will be analyzed. Consistent with 

section 120, the Council will make these 

recommendations only if it determines 

that the conduct, scope, nature, size, 

scale, concentration, or 

interconnectedness of the 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. 

In its recommendations under section 

120, the Council may suggest broad 

approaches to address the risks it has 

identified. When appropriate, the 

Council may make a more specific 

recommendation. To promote analytical 

rigor and avoid duplication, before 

making any recommendation under 

section 120, the Council will ascertain 

whether the relevant primary financial 

regulatory agency would be expected to 

perform a cost-benefit analysis of the 

actions it would take in response to the 

Council’s contemplated 

recommendation. In cases where the 

primary financial regulatory agency 

would not be expected to conduct such 

an analysis, the Council itself will— 

prior to making a final 

recommendation—conduct an analysis, 

using empirical data, to the extent 

available, of the benefits and costs of the 

actions that the primary financial 

regulatory agency would be expected to 

take in response to the contemplated 

recommendation. Where the Council 

conducts its own such analysis, the 

specificity of its assessment of benefits 

and costs would be commensurate with 

the specificity of the contemplated 

recommendation. In general, such an 

assessment by the Council will include 

a consideration of the benefits and costs 

to market participants and to the U.S. 

financial system and long-term 

economic growth. Where the Council 

conducts its own analysis, the Council 

will make a recommendation under 

section 120 only if it believes that the 

results of its assessment of benefits and 

costs support the recommendation. 

Primary financial regulatory agencies 

have significant experience, knowledge, 

and expertise that can be useful in 

determining the most efficient way to 

address a particular risk within their 

regulatory jurisdiction. In every case, 

prior to issuing a recommendation 

under section 120, the Council will 

consult with the relevant primary 

financial regulatory agency and provide 


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21See Dodd-Frank Act section 120(d)(3), 12 

U.S.C. 5330(d)(3). 

22See also the chart of Council votes that would 

occur at significant transition points in the 

Council’s analysis, in section II(A)(2) above. 

23See Dodd-Frank Act section 102(a)(4), 12 U.S.C. 

5311(a)(4). 

notice to the public and opportunity for 

comment as required by section 120. 

In any case in which no primary 

financial regulatory agency exists for 

one or more nonbank financial 

companies conducting financial 

activities or practices identified by the 

Council as posing risks, the Council can 

consider reporting to Congress on 

recommendations for legislation that 

would prevent such activities or 

practices from threatening U.S. financial 

stability.21 The Council intends to make 

recommendations under section 120 of 

the Dodd-Frank Act only to the extent 

that its recommendations are consistent 

with the statutory mandate of the 

relevant primary financial regulatory 

agency. 

One commenter stated that the 

Council should use its authority under 

section 120 of the Dodd-Frank Act after 

informal and nonpublic actions have 

been tried and deemed insufficient. As 

noted above, if the Council, after 

engaging with relevant financial 

regulatory agencies, believes those 

regulators’ actions are inadequate to 

address an identified potential risk to 

U.S. financial stability, the Council may 

make formal public recommendations to 

primary financial regulatory agencies 

under section 120. Another commenter 

stated that the consent of the primary 

financial regulatory agency should be 

required before the Council issues a 

recommendation under section 120. The 

Council expects to issue 

recommendations under section 120 

only after engaging with relevant 

financial regulatory agencies, but the 

primary financial regulatory agency’s 

consent is not required under section 

120, and the Council believes that its 

consultation with regulators will be 

more effective than the commenter’s 

proposed restriction on the Council’s 

discretion. 

6. Transition From Activities-Based 

Approach to Determination Process 

The Proposed Guidance stated that if 

the activities-based approach did not 

adequately address a potential risk 

identified by the Council, the Council 

may evaluate one or more individual 

nonbank financial companies for an 

entity-specific determination under 

section 113 of the Dodd-Frank Act. 

Commenters provided various 

recommendations on the procedural 

steps that should be required for the 

Council to advance beyond the 

activities-based approach and 

commence an evaluation of a nonbank 

financial company for a potential 

determination under section 113 of the 

Dodd-Frank Act. One commenter 

requested that the Council clarify that 

the activities-based approach is distinct 

from the determination process. The 

Final Guidance reflects the fact that the 

process for evaluating a nonbank 

financial company for a potential 

determination under section 113 of the 

Dodd-Frank Act is distinct from the 

process for an activities-based approach 

under section 112 of the Dodd-Frank 

Act. Commenters made a number of 

comments intended to ensure that 

sufficient analysis is conducted in the 

activities-based approach before the 

Council initiates a designation analysis. 

One commenter stated that before 

considering a nonbank financial 

company for a potential determination, 

the Council should explain in writing 

the empirical basis why the activitiesbased approach is insufficient. Several 

other commenters stated that the 

Council should only move from the 

activities-based approach to a 

designation analysis if the primary 

regulator of the relevant nonbank 

financial company states in writing that 

it cannot address the risk through an 

activities-based approach. Other 

commenters recommended that the 

Council and relevant primary regulator 

prepare a list of the regulator’s findings 

in connection with the transition from 

the activities-based approach to a 

designation analysis and that the 

Council should make a ‘‘written 

finding’’ that it is moving to a 

designation analysis. 

The Proposed Guidance stated that 

the Council or its Deputies Committee 

would vote to commence review of a 

nonbank financial company in Stage 1. 

Several commenters stated that the 

Council should vote on any decision to 

commence the review of a nonbank 

financial company for a potential 

determination, and that such a vote 

should not be delegable to the Deputies 

Committee. In light of the significance 

of a Council determination, the Council 

agrees with these comments. 

Accordingly, the Final Guidance has 

been revised to provide that the Council 

will vote to commence review of a 

nonbank financial company in Stage 1. 

The Council’s vote before considering a 

nonbank financial company for a 

potential determination will help ensure 

that sufficient analysis has been 

conducted in the activities-based 

approach.22

C. Analytic Framework for Nonbank 

Financial Company Determinations 

The Proposed Guidance stated that 

the Council expects to advance beyond 

the activities-based approach, and 

evaluate a nonbank financial company 

for a potential determination under 

section 113 of the Dodd-Frank Act, only 

in a limited set of circumstances— 

namely, if (1) the Council’s 

collaboration and engagement with the 

relevant financial regulatory agencies 

using an activities-based approach does 

not adequately address the potential risk 

identified by the Council, or if the 

potential threat to U.S. financial 

stability is outside the jurisdiction or 

authority of financial regulatory 

agencies, and (2) the potential threat 

identified by the Council is one that 

could be addressed by a Council 

determination regarding one or more 

nonbank financial companies. Two 

commenters stated that the Final 

Guidance should be modified to state 

that the Council may consider a 

nonbank financial company for a 

potential determination only if a 

potential threat ‘‘can only be adequately 

addressed’’ through designation. While 

the Council believes that the 

commenters’ proposed language would 

unduly restrict the Council’s ability to 

respond to potential threats to financial 

stability, the Final Guidance has been 

revised, with respect to clause (2) above, 

to add that the Council will only 

evaluate a company for a designation if 

the potential threat identified is one that 

could be effectively addressed by a 

Council determination. 

Following is a description of the 

substantive analysis the Council would 

undertake regarding any nonbank 

financial company under review for a 

potential determination. 

1. Statutory Standards and 

Considerations 

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.23 The Dodd-Frank Act provides 

that a company is ‘‘predominantly 

engaged’’ in financial activities if either 

(1) 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 (2) the consolidated assets of the 


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24See Dodd-Frank Act section 102(a)(6), 12 U.S.C. 

5311(a)(6). 

25See Dodd-Frank Act section 102(b), 12 U.S.C. 

5311(b). The Federal Reserve published a final rule 

in April 2013 establishing the requirements for 

determining if a company is ‘‘predominantly 

engaged in financial activities.’’ See 12 CFR 242.3. 

26See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 

5323(a)(2). 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. 

27See Dodd-Frank Act section 115, 12 U.S.C. 

5325. 

28See Dodd-Frank Act section 113(f), 12 U.S.C. 

5323(f), 12 CFR 1310.22. 

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.24

The Dodd-Frank Act requires the 

Federal Reserve to establish the 

requirements for determining whether a 

company is ‘‘predominantly engaged in 

financial activities’’ for this purpose.25

Section 113 of the Dodd-Frank Act 

authorizes the Council to subject a 

nonbank financial company to 

supervision by the Federal Reserve and 

prudential standards if the Council 

determines that (1) material financial 

distress at the nonbank financial 

company could pose a threat to U.S. 

financial stability (the ‘‘First 

Determination Standard’’), or (2) 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 ‘‘Second 

Determination Standard’’). The analytic 

framework in the Final Guidance 

focuses primarily on the First 

Determination Standard, because risks 

to financial stability (such as asset fire 

sales or financial market disruptions) 

are most commonly propagated through 

a nonbank financial company when it is 

in distress. 

The Council is statutorily required to 

take into account the following 

considerations in making a 

determination under section 113 of the 

Dodd-Frank Act: 26

• The extent of the leverage of the 

company; 

• The extent and nature of the off–balancesheet exposures of the company; 

• The extent and nature of the transactions 

and relationships of the company with other 

significant nonbank financial companies and 

significant bank holding companies; 

• 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; 

• 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; 

• 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; 

• The nature, scope, size, scale, 

concentration, interconnectedness, and mix 

of the activities of the company; 

• The degree to which the company is 

already regulated by one or more primary 

financial regulatory agencies; 

• The amount and nature of the financial 

assets of the company; 

• The amount and types of the liabilities 

of the company, including the degree of 

reliance on short-term funding; and 

• Any other risk-related factors that the 

Council deems appropriate. 

One commenter stated that the 

Council should make clear that 

designation of certain entities, like 

mutual funds and their managers, is 

inappropriate. Another commenter 

stated that designation is the wrong 

approach for capital markets firms, 

because it applies rules designed for 

banks to non-banks. Several 

commenters stated that the Federal 

Reserve should exempt from 

designation certain types of nonbank 

financial companies that do not exhibit 

certain risk factors, pursuant to section 

170 of the Dodd-Frank Act. The Council 

does not intend to provide industrybased exemptions from potential 

determinations under section 113 of the 

Dodd-Frank Act. The Council would 

evaluate industry- or firm-specific 

factors as part of the assessment of any 

nonbank financial company for 

potential designation. Therefore, based 

on these comments, the Final Guidance 

has been revised to make clear that the 

information relevant to an in-depth 

analysis of a nonbank financial 

company may vary based on the 

nonbank financial company’s 

characteristics. One commenter stated 

that the Council should consider how 

the enhanced prudential standards that 

apply to designated nonbank financial 

companies should be tailored to specific 

types of nonbank financial companies. 

The Council has statutory authority to 

make recommendations to the Federal 

Reserve concerning the establishment 

and refinement of prudential standards 

and other requirements applicable to 

designated nonbank financial 

companies; 27 the Council may consider, 

at a future date, whether to issue such 

recommendations. 

Several other commenters generally 

opposed to the proposal stated that the 

Council’s designation authority is a vital 

tool that should not be de-emphasized 

in favor of the activities-based approach. 

One commenter stated that Congress 

intended that designation be the 

mandatory and primary mechanism for 

addressing risks to financial stability. 

Another stated that the Proposed 

Guidance imposed conditions that 

conflicted with section 113 of the DoddFrank Act. Several commenters stated 

that the proposed changes would make 

designation unworkably lengthy, or 

would preclude its use to address 

potential risks in advance of an 

emergency. Other commenters made 

similar arguments regarding the benefits 

of nonbank financial company 

designations. The Final Guidance is 

intended to ensure that the Council’s 

work is clear, transparent and 

analytically rigorous, and to enhance 

the Council’s engagement with 

companies, regulators, and other 

stakeholders. By issuing clear and 

transparent guidance, the Council seeks 

to provide the public with sufficient 

information to understand the Council’s 

concerns regarding risks to U.S. 

financial stability, while appropriately 

protecting information submitted by 

companies and regulators to the 

Council. The Final Guidance does not 

prohibit the Council from considering a 

nonbank financial company for 

potential designation, in appropriate 

circumstances. The Final Guidance 

makes clear that the Council may 

pursue entity-specific determinations 

under section 113 of the Dodd-Frank 

Act if a potential risk or threat cannot 

be adequately addressed through an 

activities-based approach. The Council 

anticipates it would consider a nonbank 

financial company for a potential 

determination under section 113 only in 

rare instances, such as if the products, 

activities, or practices of a company that 

pose a potential threat to U.S. financial 

stability are outside the jurisdiction or 

authority of financial regulatory 

agencies. Further, the Final Guidance 

does not limit the ability of the Council 

to waive or modify the procedural 

requirements related to nonbank 

financial company designations if the 

Council determines that such action is 

necessary or appropriate to prevent or 

mitigate threats posed by a nonbank 

financial company to U.S. financial 

stability.28

The Final Guidance clarifies several 

terms used in the Dodd-Frank Act that 

are not defined in the Act, including 

‘‘company,’’ ‘‘material financial 

distress,’’ and ‘‘threat to the financial 

stability of the United States.’’ The Final 

Guidance defines ‘‘threat to the 


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29The statutory definition of ‘‘nonbank financial 

company’’ excludes bank holding companies and 

certain other types of companies. Dodd-Frank Act 

section 102(a)(4), 12 U.S.C. 5311(a)(4). 

30 In narrowing and clarifying its interpretation of 

‘‘nonbank financial company supervised by the 

Board of Governors,’’ the Council is guided by 

general principles of corporate law under which an 

acquirer of another company’s assets may be liable 

for obligations of the seller in certain situations, 

including if the purchaser is merely a continuation 

of the seller. 

financial stability of the United States’’ 

by reference to the potential for ‘‘severe 

damage on the broader economy,’’ in 

contrast to the definition in the 2012 

Interpretive Guidance, which refers to 

‘‘significant’’ damage. The Council 

intends to interpret the term ‘‘company’’ 

to include any corporation, limited 

liability company, partnership, business 

trust, association, or similar 

organization.29 The Proposed Guidance 

stated that the Council intends to 

interpret ‘‘nonbank financial company’’ 

as including any successor of a 

company that is subject to a final 

determination of the Council. Several 

commenters stated that the Council 

should either eliminate the ‘‘successor’’ 

language, or limit successors to those 

entities that succeed to substantially all 

the designated company’s assets and 

liabilities. 

The Council agrees with commenters 

that the proposed interpretation of 

‘‘nonbank financial company’’ was 

overly broad. The Final Guidance has 

therefore been revised to narrow the 

proposed interpretation and further 

clarify which entity would be subject to 

a Council determination in the event of 

a sale that involves the transfer of a 

majority, but not all, of a designated 

nonbank financial company’s assets or 

liabilities. The Final Guidance states 

that the Council intends to interpret the 

statutory term ‘‘nonbank financial 

company supervised by the Board of 

Governors’’ as including any nonbank 

financial company that acquires, 

directly or indirectly, a majority of the 

assets or liabilities of a company that is 

subject to a final determination of the 

Council. As a result, if a nonbank 

financial company subject to a final 

determination of the Council sells or 

otherwise transfers a majority of its 

assets or liabilities, the acquirer, rather 

than the remaining small entity, will 

succeed to and become subject to the 

Council’s determination.30 This new 

definition has the benefit of clarity, 

because it relies on a simple balance 

sheet-related test to determine whether 

an entity succeeds to, and becomes 

subject to, a Council determination. 

This definition also makes clear that the 

acquirer of a minority of a designated 

nonbank financial company’s assets or 

liabilities will not be deemed to become 

subject to the Council determination. At 

the request of the designated nonbank 

financial company, the Council may 

engage in discussions with the company 

to evaluate the structure of any 

transaction involving a potential 

successor. Further, as discussed in 

section V of the Final Guidance, a 

nonbank financial company that is 

subject to a final determination of the 

Council may request a reevaluation of 

the determination before the next 

required annual reevaluation, in 

appropriate cases. The Final Guidance 

has been revised to make clear that if a 

nonbank financial company subject to a 

final determination of the Council sells 

or otherwise transfers a majority of its 

assets or liabilities, the acquirer can use 

this reevaluation process to seek a 

rescission of the determination upon 

consummation of its transaction. 

Several commenters stated that the 

Council should add specificity 

regarding certain definitions in the 

Proposed Guidance, such as 

‘‘impairment of financial intermediation 

or of financial market functioning,’’ 

‘‘severe damage on the broader 

economy,’’ ‘‘overall stress in the 

financial services industry,’’ and ‘‘weak 

macroeconomic environment.’’ The 

Council believes that these definitions 

accurately reflect the statutory 

requirements and the nature of the 

threat that the Council’s authority under 

the Dodd-Frank Act seeks to mitigate. 

Attempting to define them with greater 

specificity could unacceptably limit the 

Council’s discretion in a situation that 

is not precisely foreseeable. 

The Council received a number of 

comments regarding its analysis in the 

designation context. One commenter 

stated that the Council should defer to 

the nonbank financial company’s 

primary regulator during the analysis, 

and another stated that the Council 

should provide a key role on the 

Council analytic team to staff of the 

primary regulator, and solicit input from 

industry and academic economists. The 

Council will consult with a company’s 

primary financial regulatory agency (if 

any) when assessing a company for 

potential designation. A company under 

review in Stage 1 or Stage 2 may 

voluntarily submit to the Council any 

information it deems relevant to the 

Council’s evaluation. In consideration of 

the benefits that the Council will derive 

from extensive engagement with a 

company’s primary financial regulatory 

agency, the Council will actively solicit 

the regulator’s views regarding risks at 

the company and potential means to 

mitigate those risks, and will share its 

preliminary views regarding potential 

risks at the company with the regulator. 

During the determination process, the 

Council will continue to encourage the 

regulator to address relevant risks using 

the regulator’s existing authorities. 

Other commenters provided specific 

analytical recommendations to the 

Council, including that the Council 

should consider market risks in 

conjunction with the analysis of a 

nonbank financial company’s liquidity 

risk; the Council should assess the 

ability of financial markets to absorb 

asset fire sales; and, when analyzing 

leverage, the Council should distinguish 

between long and short exposures. The 

Council has not revised the Final 

Guidance to address these comments 

but intends to consider such factors in 

its analyses as appropriate. 

2. Transmission Channels 

The Final Guidance explains that the 

Council’s evaluation of a nonbank 

financial company for a potential 

determination will focus primarily on 

how the negative effects of the 

company’s material financial distress, or 

of the nature, scope, size, scale, 

concentration, interconnectedness, or 

mix of the company’s activities, could 

be transmitted to or affect other firms or 

markets, thereby causing a broader 

impairment of financial intermediation 

or of financial market functioning. The 

Council has identified three 

transmission channels as most likely to 

facilitate the transmission of these 

negative effects. These transmission 

channels are: (1) The exposure 

transmission channel; (2) the asset 

liquidation transmission channel; and 

(3) the critical function or service 

transmission channel. While these 

transmission channels were also 

described in the 2012 Interpretive 

Guidance, the Final Guidance 

substantially enhances and clarifies the 

Council’s analyses under these three 

channels. The Council may also 

consider other relevant channels 

through which risks could be 

transmitted from a particular nonbank 

financial company and thereby pose a 

threat to U.S. financial stability. 

a. Exposure Transmission Channel 

Under the exposure transmission 

channel, the Council will evaluate 

whether a nonbank financial company’s 

creditors, counterparties, investors, or 

other market participants have direct or 

indirect exposure to the nonbank 

financial company that is significant 

enough to materially and adversely 

affect those or other creditors, 

counterparties, investors, or other 

market participants and thereby pose a 

threat to U.S. financial stability. Among 


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other factors, the Council expects to 

evaluate the amounts of exposures, the 

degree of protection for the counterparty 

under the terms of transactions, whether 

the largest counterparties include large 

financial institutions, and the 

company’s leverage and size. The 

Council will also consider the exposures 

that counterparties and other market 

participants have to a nonbank financial 

company arising from the company’s 

capital markets activities. The Council 

expects to consider a variety of factors 

in connection with this analysis, such as 

the amount and nature of, and 

counterparties to, the company’s 

outstanding debt (regardless of term) 

and other liabilities, derivatives 

transactions (which may be measured 

on the basis of gross notional amount, 

net fair value, or potential future 

exposures), and securities financing 

transactions, among others. The Council 

will also consider applicable factors, 

including existing regulatory 

requirements, that may mitigate 

potential risks under the exposure 

transmission channel. The Final 

Guidance notes that the Council will 

consider the extent to which assets are 

managed rather than owned by the 

company, in recognition of the distinct 

nature of exposure risks when the 

company is acting as an agent rather 

than as principal. In particular, in the 

case of a nonbank financial company 

that manages assets on behalf of 

customers or other third parties, the 

third parties’ direct financial exposures 

are often to the issuers of the managed 

assets, rather than to the nonbank 

financial company managing those 

assets. Finally, the Council will evaluate 

the potential for contagion in 

conjunction with other factors 

summarized above when evaluating risk 

under this channel. As part of this 

assessment, the Council will consider 

relevant industry-specific historical 

examples, the scope of the company’s 

interconnectedness with large financial 

institutions, and market-based or 

regulatory factors that may mitigate the 

risk of contagion, among other factors. 

b. Asset Liquidation Transmission 

Channel 

Under the asset liquidation 

transmission channel, the Council will 

consider whether a nonbank financial 

company holds assets that, if liquidated 

quickly, could pose a threat to U.S. 

financial stability by, for example, 

causing a fall in asset prices that 

significantly disrupts trading or funding 

in key markets or causes significant 

losses or funding problems for other 

firms with similar holdings. The 

Council may also consider whether a 

deterioration in asset pricing or market 

functioning could pressure other 

financial firms to sell their holdings of 

affected assets in order to maintain 

adequate capital and liquidity, which, 

in turn, could produce a cycle of asset 

sales that could lead to further market 

disruptions. The Council will also 

consider the extent to which assets are 

managed rather than owned by the 

company. The Council’s analysis of the 

asset liquidation transmission channel 

will focus on three central factors: (1) 

Liquidity of the company’s liabilities; 

(2) liquidity of the company’s assets; 

and (3) potential fire sale impacts. 

When analyzing the liquidity of the 

company’s liabilities, the Council will 

assess the company’s liquidity risk by 

reviewing factors such as the company’s 

short-term financial obligations, 

financial arrangements that can be 

terminated by counterparties and 

therefore become short-term, and longterm liabilities that may come due in a 

short-term period, among other factors. 

The Council will also evaluate the 

company’s leverage (for example, by 

assessing total assets and total debt 

measured relative to total equity, and 

derivatives liabilities and off-balance 

sheet obligations relative to total 

equity), as well as the company’s shortterm debt ratio. When analyzing the 

liquidity of the company’s assets, the 

Council will consider which assets the 

company could rapidly liquidate, if 

necessary, to satisfy its obligations. 

Finally, when analyzing potential fire 

sale impacts, the Council will consider 

the potential effects of the company’s 

asset liquidation on markets and market 

participants. 

c. Critical Function or Service 

Transmission Channel 

Finally, under the critical function or 

service transmission channel, the 

Council will consider the potential for 

a nonbank financial company to become 

unable or unwilling to provide a critical 

function or service that is relied upon 

by market participants and for which 

there are no ready substitutes and 

thereby pose a threat to U.S. financial 

stability. This analysis considers 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, a 

factor commonly known as 

‘‘substitutability.’’ 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. 

When evaluating this transmission 

channel, the Council may consider the 

nonbank financial company’s activities 

and critical functions and the 

importance of those activities and 

functions to the U.S. financial system, 

including how those activities and 

functions would be performed by the 

company or other market participants in 

the event of the company’s material 

financial distress; the competitive 

landscape for markets in which a 

nonbank financial company participates 

and for the services it provides; the 

company’s market share in specific 

product lines; and the ability of 

substitutes to replace a service or 

function provided by the company, 

among other factors. 

The Council received a number of 

comments regarding the transmission 

channels. One commenter stated that 

the transmission channels should refer 

to existing regulations or policies that 

relate to financial stability. The Council 

is statutorily required to take into 

account the degree to which the 

nonbank financial company is already 

regulated by one or more primary 

financial regulatory agencies, and this 

analysis will focus on the extent to 

which existing regulation of the 

company mitigates the potential risks to 

financial stability identified by the 

Council. 

One commenter stated that in the 

asset liquidation transmission channel, 

the Council should establish a basis for 

concluding that a decline in asset 

prices, and resulting disruptions or 

losses, poses a threat to financial 

stability. The Final Guidance has been 

revised to clarify that, under the asset 

liquidation channel, the Council will 

consider whether a nonbank financial 

company holds assets that, if liquidated 

quickly, could pose a threat to U.S. 

financial stability by, for example, 

causing a fall in asset prices that 

significantly disrupts trading or funding 

in key markets or causes significant 

losses or funding problems for other 

firms with similar holdings. 

Commenters also stated that the Council 

should establish a basis for concluding 

that the risks identified under each 

transmission channel could pose a 

threat to financial stability, and should 

take into account mitigating factors. The 

Final Guidance has been revised to 

provide that the analysis under each 

transmission channel relates to the 

potential threat to U.S. financial 

stability, and that the Council will 

consider applicable factors that may 

mitigate potential threats under each 

transmission channel. 

Several commenters provided 

industry-specific comments with 

respect to the transmission channels. 


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31See MetLife, Inc. v. Financial Stability 

Oversight Council, 177 F. Supp.3d 219, 242 (D.D.C. 

2016) (quoting 12 U.S.C. 5323(a)(2)(K) and 

Michigan v. Environmental Protection Agency, 135 

S. Ct. 2699, 2707 (2015)). 

32See Office of Management and Budget Circular 

A–4 (Sept. 17, 2003). 

One commenter stated that the Council 

should include examples of riskmitigating features of the insurance 

sector, such as recognizing insurance 

separate accounts, and mechanisms that 

mitigate potential fire sales of assets 

resulting from policyholder withdrawals 

or surrenders. The Final Guidance has 

been revised to make clear that the 

Council will consider applicable factors 

that may mitigate potential risks under 

the exposure transmission channel, 

such as the use of insurance funds to 

limit counterparty exposures or other 

transactions that reallocate risk to wellcapitalized entities. Several commenters 

supported the statement in the Proposed 

Guidance that the Council will consider 

the extent to which assets are managed 

rather than owned by the company. 

Other comments highlighted factors that 

may limit potential risks to financial 

stability arising from asset managers. 

The Final Guidance has been revised to 

make clear that in its analyses under the 

transmission channels, the Council will 

consider applicable factors that may 

limit the transmission of risk, such as 

existing regulatory requirements, 

collateralization, bankruptcy-remote 

structures, or guarantee funds that 

reduce counterparties’ exposures to the 

nonbank financial company or mitigate 

incentives for customers or 

counterparties to withdraw funding or 

assets. 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, and any other riskrelated factors that the Council deems 

appropriate. While the Council does not 

intend to provide industry-based 

exemptions from potential 

determinations under section 113 of the 

Dodd-Frank Act, the Council intends to 

give these types of mitigating factors 

due consideration in its analysis of any 

nonbank financial company for a 

potential determination. 

3. Complexity, Opacity, and 

Resolvability 

In addition to the three transmission 

channels, the Final Guidance explains 

that the Council also intends to consider 

a nonbank financial company’s 

complexity, opacity, and resolvability 

when evaluating whether the company 

poses a risk to U.S. financial stability. 

As part of this analysis, the Council may 

assess the complexity of the nonbank 

financial company’s legal, funding, and 

operational structure, and any obstacles 

to the rapid and orderly resolution of 

the company. One commenter requested 

that the Final Guidance state that the 

Council expects to discuss these matters 

with the regulatory agency. The Final 

Guidance notes that the Council will 

consult with the relevant primary 

financial regulatory agency during both 

Stage 1 and Stage 2. When consulting 

with a company’s primary financial 

regulatory agency (if any), the Council 

expects to discuss the company’s 

complexity, opacity, and resolvability, 

as well as the likelihood of its material 

financial distress, taking into account a 

period of overall stress in the financial 

services industry and a weak 

macroeconomic environment (discussed 

in detail below). 

4. Existing Regulatory Scrutiny 

Consistent with section 113 of the 

Dodd-Frank Act, the Final Guidance 

explains that the Council will consider 

the degree to which a nonbank financial 

company is already regulated by one or 

more primary financial regulatory 

agencies. When considering existing 

regulatory scrutiny, the Council may 

weigh factors such as the 

comprehensiveness of the regulatory 

regime, the extent to which the 

company’s primary financial regulatory 

agency has imposed risk-management 

standards as relevant to the type of 

company, regulators’ processes for interregulator coordination, and the extent to 

which existing regulation of the 

company has mitigated the potential 

risks to financial stability identified by 

the Council. 

5. Cost-Benefit Analysis and Likelihood 

of Material Financial Distress 

a. Cost-Benefit Analysis 

Under the Final Guidance, the 

Council will perform a cost-benefit 

analysis before making any 

determination under section 113. The 

Council proposes to make a 

determination under section 113 only if 

the expected benefits justify the 

expected costs that the determination 

would impose.31 The key elements of 

regulatory analysis include (1) a 

statement of the need for the proposed 

action, (2) an examination of alternative 

approaches, and (3) an evaluation of the 

benefits and costs of the proposed 

action and the main alternatives.32 The 

Council will conduct this analysis only 

in cases where the Council is 

concluding that the company meets one 

of the standards for a determination by 

the Council under section 113 of the 

Dodd-Frank Act, because in other cases 

doing so would not affect the outcome 

of the Council’s analysis. 

The Council will consider the benefits 

of a determination to the U.S. financial 

system, long-term economic growth, and 

the nonbank financial company due to 

additional regulatory and supervisory 

requirements resulting from the 

determination, including the benefits of 

the prudential standards adopted by the 

Federal Reserve under section 165 of the 

Dodd-Frank Act. When evaluating 

potential benefits to the U.S. financial 

system and long-term economic growth 

arising from a determination, the 

Council may consider whether the 

determination enhances U.S. financial 

stability and mitigates the severity of 

economic downturns by reducing the 

likelihood or severity of a potential 

financial crisis, among other factors. 

With respect to company-specific 

benefits, a company subject to a 

determination may derive benefits from 

anticipated new or increased 

requirements, including, for example, a 

lower cost of capital or higher credit 

ratings upon meeting its postdesignation regulatory and supervisory 

requirements. 

When evaluating the costs of a 

determination, the Council will 

consider not only the cost to the 

nonbank financial company from 

anticipated new or increased regulatory 

and supervisory requirements in 

connection with a determination, but 

also costs to the U.S. economy. Relevant 

costs to the company will likely include 

costs related to risk-management 

requirements, supervision and 

examination, and liquidity 

requirements. When evaluating the costs 

of a determination to the U.S. economy, 

the Council will assess the impact of the 

determination on the availability and 

cost of credit or financial products in 

relevant U.S. markets, among other 

factors. 

The majority of the commenters 

supported the proposal to perform a 

cost-benefit analysis before making any 

determination under section 113. 

Several commenters provided 

recommendations regarding the 

Council’s analysis, including that the 

Council’s analysis should be empirically 

based or use historical data (not 

assumptions), with estimates of indirect 

costs. The Final Guidance has been 

revised to add greater specificity 

regarding the Council’s cost-benefit 

analysis. The Final Guidance makes 

clear that when possible, the Council 

will quantify reasonably estimable 

benefits and costs, using ranges, as 

appropriate, and based on empirical 


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data when available. If such benefits or 

costs cannot be quantified in this 

manner, the Council will explain why 

such benefits or costs could not be 

quantified or estimated. The Council 

also expects to consider benefits and 

costs qualitatively. To the extent 

feasible, the Council will attempt to 

assess the relative importance of any 

such qualitative elements. At the same 

time, the Final Guidance recognizes that 

it may not be possible to assess with any 

degree of certainty certain potential 

benefits or costs, including indirect 

benefits or costs. 

One commenter stated that the 

Council should not designate a nonbank 

financial company unless the Council 

can demonstrate that designation would 

effectively mitigate the risk posed by the 

firm. Another stated that the Council 

should make clear that the Council will 

not designate a nonbank financial 

company unless designation mitigates 

the risk to financial stability better than 

available alternatives. The Council 

believes these concerns are adequately 

addressed by the activities-based 

approach, as well as the Council’s 

approach to making a determination 

under section 113 only if the expected 

benefits justify the expected costs that 

the determination would impose. 

Several commenters stated that the 

Council should conduct its cost-benefit 

analysis based on the specific 

regulations that would apply to a 

nonbank financial company if it were 

designated. The Council declines to 

incorporate this requirement into its 

cost-benefit analysis, because it is not 

logistically practicable for the Federal 

Reserve, which must establish such 

prudential standards by rule or order, to 

provide this information to the Council 

before the relevant company has been 

designated. Another commenter stated 

that the Council should apply a costbenefit analysis to any additional 

regulation the Council considers. 

However, the Council itself does not 

adopt regulations applicable to 

designated nonbank financial 

companies. 

Several commenters opposed the 

proposal to perform a cost-benefit 

analysis before making determinations 

under section 113. Several commenters 

noted that the Dodd-Frank Act does not 

discuss a cost-benefit analysis in 

connection with section 113. Two 

commenters stated that the costs that 

will apply to a particular firm will 

depend on the supervisory and 

regulatory regime the Federal Reserve 

establishes after the designation. One 

commenter stated that cost-benefit 

analysis is a burdensome, timeconsuming, and imprecise methodology. 

One commenter stated that the costs and 

benefits of designation are difficult to 

predict in advance, in part because it is 

impossible to estimate the likelihood, 

magnitude, or timing of a future 

financial crisis. The Council believes 

that rigorous cost-benefit analysis is 

consistent with thoughtful decisionmaking, and that it is an important step 

to ensure that the Council makes a 

determination under section 113 only if 

the expected benefits justify the 

expected costs of the determination. 

Finally, two commenters stated that 

requiring cost-benefit analysis will make 

it easier for a designated company to 

litigate its designation. The Council will 

strive to perform analytically robust 

cost-benefit analysis in a timely manner. 

b. Likelihood of Material Financial 

Distress 

Consistent with sound risk regulation, 

the Council will consider not only the 

impact of an identifiable risk, but also 

the likelihood that the risk will be 

realized. The Council will therefore 

assess the likelihood of a company’s 

material financial distress, based on its 

vulnerability to a range of factors, when 

evaluating the overall impact of a 

Council determination for any company 

under review under the First 

Determination Standard. The 

description of the Council’s analytical 

process for assessing the likelihood of a 

company’s material financial distress 

has been revised based on public 

comments. The Final Guidance provides 

that factors the Council may consider 

include leverage (both on and off 

balance sheet), potential risks associated 

with asset reevaluations (whether such 

reevaluations arise from market 

disruptions or severe macroeconomic 

conditions), reliance on short-term 

funding or other fragile funding 

markets, maturity transformation, and 

risks from exposures to counterparties 

or other market participants. The 

Council’s assessment may rely upon 

historical examples regarding the 

characteristics of financial companies 

that have experienced financial distress, 

but may also consider other risks that do 

not have historical precedent. The 

Council’s analysis of the vulnerability of 

a nonbank financial company to 

material financial distress will be 

conducted taking into account a period 

of overall stress in the financial services 

industry and a weak macroeconomic 

environment. 

Several commenters supported the 

proposal that the Council will assess the 

likelihood of a company’s material 

financial distress. One commenter 

stated that for any determination, the 

Council should be required to determine 

that distress is reasonably likely to 

occur and that the distress is reasonably 

likely to inflict severe damage on the 

economy as a whole, using empirical 

and historical data. The criterion is not 

included in the Final Guidance, because 

it would impose an unduly high burden 

on the Council’s ability to designate a 

nonbank financial company. 

Several other commenters opposed 

the proposal that the Council will assess 

the likelihood of a company’s material 

financial distress. Three commenters 

stated that the Dodd-Frank Act does not 

require that the Council assess the 

likelihood of a company’s material 

financial distress. However, the Council 

believes that performing such a 

likelihood assessment is an important 

part of the Council’s assessment of the 

extent to which a determination may 

promote U.S. financial stability. Several 

commenters stated that the Dodd-Frank 

Act requires the Council to assume the 

material financial distress of a nonbank 

financial company. One commenter 

stated that the Council has a duty to 

designate a nonbank financial company 

when the Council determines that the 

company could pose a risk to financial 

stability if it fails, and that the Council 

does not need to predict the probability 

of failure or the mechanism for that 

failure. The Council has authority under 

section 113 of the Dodd-Frank Act, 

including under section 113(a)(2)(K), 

which authorizes the Council to 

consider ‘‘any other risk-related factors 

that the Council deems appropriate,’’ to 

consider the vulnerability of a nonbank 

financial company to material financial 

distress as part of the Council’s analysis. 

Commenters opposed to the Council’s 

assessment of the likelihood of material 

financial distress raised a number of 

other objections, including that this 

assessment will be a significant barrier 

to designation; no accurate metrics exist 

that would enable the Council to 

measure the likelihood of a company’s 

material financial distress; and it is 

difficult to anticipate the catalyst, 

dynamics, or timing of a financial crisis. 

The Council believes that its analysis, 

including its consultations with a 

company’s primary financial regulatory 

agency and its assessment of the 

statutory considerations, will enable the 

Council to evaluate the likelihood of the 

company’s material financial distress. 

Several commenters also stated that the 

Council’s determination regarding the 

likelihood of a company’s material 

financial distress could publicly signal 

concern regarding a firm’s health, which 

could harm the company. The Council 

believes that the marketplace will, in 

most cases, consider the same 

fundamental factors that the Council 


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33 177 F. Supp.3d 219 (D.D.C. 2016). 

34The U.S. District Court for the District of 

Columbia in MetLife v. FSOC held that the Council 

had acted in an arbitrary and capricious manner. 

Specifically, the court stated that ‘‘FSOC 

purposefully omitted any consideration of the cost 

of designation to MetLife. Thus, FSOC assumed the 

upside benefits of designation (even without 

specific standards from the Federal Reserve) but not 

the downside costs of its decision.’’ 177 F.Supp.3d 

219, 230. The Final Guidance seeks to ensure that 

future Council determinations comport with the 

court’s decision and consider costs. 

35As noted above, the Council anticipates it 

would consider a determination under section 113 

only in rare instances, such as if the products, 

activities, or practices of a company that pose a 

potential threat to U.S. financial stability are 

outside the jurisdiction or authority of financial 

regulatory agencies. 

36As discussed in section II(A)(1) above, the 

Proposed Guidance eliminates the six-category 

framework described in the 2012 Interpretive 

Guidance. 

evaluates for purposes of independently 

assessing the likelihood of material 

financial distress at a company that is 

being evaluated for a potential 

determination. Finally, several 

commenters argued that the Council 

should interpret section 113 of the 

Dodd-Frank Act in a manner that is 

consistent with MetLife v. FSOC,33

while several others argued it should 

not. Where appropriate, the Final 

Guidance reflects the Council’s view 

regarding the extent to which it should 

adopt the analysis from that judicial 

decision.34

D. Determination and Annual 

Reevaluation Process 

As noted above, the Council will 

prioritize an activities-based approach 

for identifying, assessing, and 

addressing potential risks to financial 

stability. The Council may, however, 

subject a nonbank financial company to 

review for an entity-specific 

determination under section 113 of the 

Dodd-Frank Act if the activities-based 

approach would not adequately address 

potential risks to U.S. financial 

stability.35 As noted above, the Final 

Guidance provides that the Council will 

vote to commence review of a nonbank 

financial company in Stage 1. 

As proposed, the Final Guidance 

condenses the prior three-stage 

determination process into two stages 

by eliminating prior stage 1, makes 

other procedural improvements, and 

incorporates certain provisions of the 

2015 Supplemental Procedures.36

Following is a description of the 

processes set forth in the Final 

Guidance for the Council’s evaluation of 

a nonbank financial company for a 

potential determination under section 

113 and the Council’s annual 

reevaluations of any such 

determinations. 

1. Stage 1: Preliminary Evaluation of 

Nonbank Financial Companies 

In the first stage of the determination 

process, the Council will notify 

nonbank financial companies identified 

as potentially posing risks to U.S. 

financial stability. Under the Final 

Guidance, the Council will engage 

extensively with the relevant company 

and its financial regulators during Stage 

1. The Council’s preliminary analysis 

will be based on quantitative and 

qualitative information available to the 

Council primarily through public and 

regulatory sources. In addition, a 

company under review in Stage 1 may 

voluntarily submit to the Council any 

information it deems relevant to the 

Council’s evaluation and may, upon 

request, meet with staff of Council 

members and member agencies who are 

leading the Council’s analysis. In order 

to reduce the burdens of review on the 

company, the Council will not require 

the company to submit information 

during Stage 1. 

In consideration of the benefits that 

the Council will derive from extensive 

engagement with a company’s primary 

financial regulatory agency, the Council 

will actively solicit the regulator’s views 

regarding risks at the company and 

potential means to mitigate those risks, 

and will share its preliminary views 

regarding potential risks at the company 

with the regulator. The Final Guidance 

notes that the Council will consult with 

the primary financial regulatory agency 

during both Stage 1 and Stage 2. Several 

commenters expressed support for this 

approach, and stated that engagement 

with primary regulators should be a key 

component of the determination 

process. 

Enhanced engagement in Stage 1 is 

intended to allow a company under 

review to provide the Council with 

relevant information, which will help to 

ensure that the Council is making 

decisions based on a diverse array of 

data and rigorous analysis, and to 

provide the company with greater 

visibility into the aspects of its business 

that may pose risks to U.S. financial 

stability. Another goal of the enhanced 

engagement in Stage 1 is to enable the 

company to take actions in response to 

the Council’s concerns, thereby 

providing a pre-designation ‘‘off-ramp,’’ 

while not burdening a company with 

the relatively higher costs that may be 

incurred during a Stage 2 evaluation. By 

making a company aware of the 

potential risks the Council has 

identified during its preliminary review, 

the Council seeks to give the company 

more information and tools to mitigate 

those risks prior to any Council 

determination. One commenter 

recommended that the Final Guidance 

provide greater detail regarding the predesignation ‘‘off-ramp.’’ The Final 

Guidance has been revised to clarify 

that the Council will seek to enable a 

company under review to understand 

the focus of the Council’s analysis, 

which may enable the company to act 

to mitigate any threats to U.S. financial 

stability and thereby potentially avoid 

becoming subject to a Council 

determination. One commenter stated 

that the Council should undertake early 

engagement with firms during the 

designation process. The Council 

believes that its approach in Stage 1, as 

described above, addresses this 

comment. 

Following the preliminary evaluation 

in Stage 1, the Council may decide not 

to evaluate the company further, or it 

may vote to commence a more detailed 

analysis of the company by advancing it 

to Stage 2. One commenter 

recommended that if a Stage 1 review is 

terminated, there should be a waiting 

period before Stage 1 can be restarted. 

Because such a waiting period could 

prevent the Council from acting to 

address a potential threat to financial 

stability even if new developments or 

new information arose, this requested 

change has not been made. 

As noted above, the Final Guidance 

condenses the prior three-stage process 

for a determination under section 113 

into two stages, by eliminating prior 

stage 1, which had been established by 

the 2012 Interpretive Guidance. Under 

prior stage 1, a set of uniform 

quantitative metrics was applied to a 

broad group of nonbank financial 

companies in order to identify nonbank 

financial companies for further 

evaluation and to provide clarity for 

other nonbank financial companies that 

likely would not be subject to 

evaluation for a potential determination. 

Several commenters expressed views on 

the elimination of the stage 1 

thresholds. Prior stage 1 had generated 

confusion among firms and members of 

the public and was not compatible with 

the prioritization of an activities-based 

approach, so it has been eliminated. 

2. Transition From Stage 1 to Stage 2 

The Proposed Guidance did not 

specify whether a Council vote would 

be required to advance a nonbank 

financial company from Stage 1 to Stage 

2. Based on public comments, the Final 

Guidance has been revised to specify 

that a Council vote is required to 


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37Under the Dodd-Frank Act, unless otherwise 

specified in the statute, the Council must make all 

decisions that it is authorized or required to make 

by a majority vote of the voting members then 

serving. Dodd-Frank Act section 111(f), 12 U.S.C. 

5321(f). 

38See also the chart of Council votes that would 

occur at significant transition points in the 

Council’s analysis, in section II(A)(2) above. 

advance a company to Stage 2.37 For any 

company under review in Stage 1 that 

is regulated by a primary financial 

regulatory agency or home country 

supervisor, the Council will consult 

with the regulator, as appropriate, 

before the Council votes on whether to 

advance the company to Stage 2. One 

commenter stated that the primary 

regulator should have the primary role 

in advancing a firm from Stage 1 to 

Stage 2. As described above, the Final 

Guidance provides for extensive 

engagement between the Council and 

the primary financial regulatory agency 

during the determination process. The 

Council does not, however, believe it is 

appropriate to give the primary financial 

regulatory agency a specific additional 

role in advancing a firm from Stage 1 to 

Stage 2. 

One commenter requested that the 

Council clarify that there is no 

obligation to advance a nonbank 

financial company from Stage 1 to Stage 

2. The Council confirms that it will 

advance a nonbank financial company 

to Stage 2 only if the Council 

determines that the company merits 

further review after the analysis in Stage 

1.38

3. Stage 2: In-Depth Evaluation 

In Stage 2, the Council will conduct 

an in-depth evaluation of any company 

that the Council has determined in 

Stage 1 merits additional review. Under 

the Final Guidance, the Council would 

continue in Stage 2 to engage 

extensively with the relevant company 

and its existing regulators. 

In Stage 2, the Council will request 

that the company provide information 

that the Council deems relevant to its 

evaluation, which will involve both 

qualitative and quantitative data. The 

Council will take certain preliminary 

steps before requiring the submission of 

reports from any nonbank financial 

company that is regulated by a Council 

member agency or any primary financial 

regulatory agency; acting through the 

OFR, the Council will coordinate with 

these agencies and, whenever possible, 

rely on information available from the 

OFR or these agencies. 

The Council will take steps to 

facilitate a transparent review process 

with the company during Stage 2. 

During Stage 2, the company may 

submit any other information that it 

deems relevant to the Council’s 

evaluation, and the Council will make 

staff representing Council members 

available to meet with the 

representatives of the company, to 

explain the evaluation process and the 

framework for the Council’s analysis. If 

the analysis in Stage 1 has identified 

specific aspects of the company’s 

operations or activities as the primary 

focus for the evaluation, staff will notify 

the company of those issues. Several 

commenters stated that the Final 

Guidance should provide that Council 

members and their deputies are 

available to meet with nonbank 

financial companies in Stage 1 and 

Stage 2. The Final Guidance provides 

for the Council’s Deputies Committee to 

meet with a company in Stage 2, to 

allow the company to present any 

information or arguments it deems 

relevant to the Council’s evaluation. In 

addition, individual Council members 

may determine that it is appropriate to 

meet with a nonbank financial company 

under review, subject to the need to 

maintain a single administrative record 

and consistency in the information 

available to each of the Council 

members. In addition, the Council will 

seek to continue its consultation with 

the company’s primary financial 

regulatory agency or home country 

supervisor in a timely manner before the 

Council makes any proposed or final 

determination, encouraging the relevant 

financial regulator to address relevant 

risks using the regulator’s existing 

authorities. The Council will notify the 

company when the Council believes 

that the evidentiary record regarding the 

company is complete, before the 

Council either makes any proposed 

determination regarding the company, 

or alternatively, notifies the company 

that it is no longer being considered for 

a determination at that time. 

Several commenters provided 

recommendations regarding the 

transparency of the determination 

process and the Council’s procedures 

for providing information to nonbank 

financial companies under review. Two 

commenters stated that the Council 

should not consider information from 

primary regulators that cannot, due to 

confidentiality requirements, also be 

provided to the nonbank financial 

company under review. The Council 

expects to rely on data, research, and 

analysis from Council member agencies 

and the OFR, among other sources, in 

the determination process. Certain of 

these materials may include internal 

work product and analysis that are not 

intended for external distribution. 

However, the Council expects that any 

information that the Council relies on to 

support a determination regarding a 

nonbank financial company under 

section 113 of the Dodd-Frank Act will 

be included in the Council’s written 

explanation of the final determination, 

which will be provided to the company. 

Several other commenters stated that 

the Council should provide a nonbank 

financial company under evaluation 

with a written description of its 

potential threat to financial stability in 

Stage 1, or an explanation why an 

activities-based approach would not 

mitigate the potential threat. The Final 

Guidance provides that during Stage 1, 

the Council intends for staff of Council 

members and member agencies to 

explain to the company the key risks 

that have been identified in the analysis. 

However, because the review of the 

company is preliminary and continues 

to change until the Council makes a 

final determination, these identified 

risks may shift over time, so it is not 

practicable to provide a company with 

a written explanation of the potential 

threat to financial stability during Stage 

1. 

Several commenters stated that the 

Council should share all Council 

information with a nonbank financial 

company under review during Stages 1 

and 2, including any cost-benefit 

analysis, expert, or regulatory analysis. 

Due to the preliminary nature of the 

Council’s internal work product during 

Stages 1 and 2, sharing all of this 

information with the company under 

review would impose considerable 

burdens on the Council, while not 

necessarily providing the company with 

a clear understanding of the issues the 

Council is focusing on. Instead, the 

Final Guidance reflects numerous 

procedural improvements to the 

determination process compared to the 

2012 Interpretive Guidance, which are 

intended to facilitate the Council’s 

engagement and transparency. The Final 

Guidance increases the Council’s 

engagement with nonbank financial 

companies and their regulators during 

the determination process, balanced 

with the Council’s resources and need 

to perform the analysis in a timely 

manner. 

Several commenters stated that the 

Council should provide a nonbank 

financial company with a written 

explanation of the reasons for advancing 

it from Stage 1 to Stage 2, and an 

opportunity to respond, before 

advancing it to Stage 2. The process 

under the Final Guidance for Stage 1 

and Stage 2 provides extensive 

opportunities for a company to submit 

information to the Council and to 


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discuss that information with staff of 

Council members and member agencies. 

In particular, the Final Guidance 

provides that if the Council’s analysis in 

Stage 1 has identified specific aspects of 

the company’s operations or activities as 

the primary focus for the evaluation, 

staff will notify the company of those 

issues, although the issues will be 

subject to change based on the ongoing 

analysis. Further, during Stage 2, a 

company may submit any information 

that it deems relevant to the Council’s 

evaluation, and the Council will make 

staff representing Council members 

available to meet with the 

representatives of the company, to 

explain the evaluation process and the 

framework for the Council’s analysis. 

The Final Guidance also provides for 

the Council’s Deputies Committee to 

meet with a company in Stage 2, to 

allow the company to present any 

information or arguments it deems 

relevant to the Council’s evaluation. 

4. Proposed Determination; Hearing 

The procedural steps related to the 

Council’s proposed determinations, 

hearings, and final determinations are 

largely specified in section 113 of the 

Dodd-Frank Act. 

A nonbank financial company may be 

considered for a proposed 

determination based on the analysis 

performed in Stage 2. In the event the 

Council votes to make a proposed 

determination, the Council will issue a 

written notice and explanation of the 

proposed determination to the 

company, and will also provide the 

company’s primary financial regulatory 

agency or home country supervisor 

(subject to appropriate protections for 

confidential information) with the 

nonpublic written explanation of the 

basis for the proposed determination. In 

accordance with section 113(e) of the 

Dodd-Frank Act, a nonbank financial 

company that is subject to a proposed 

determination may request a nonpublic 

hearing before the Council to contest the 

proposed determination. 

Several commenters stated that the 

Council should provide the full 

evidentiary record to a nonbank 

financial company in Stage 2 at least 30 

days before a proposed determination, 

and give the company the opportunity 

to review and comment on the 

materials. The procedures under the 

Final Guidance provide extensive 

opportunities for engagement with 

companies under review, including 

during Stages 1 and 2 and after a 

proposed determination, so the Council 

is not adopting these recommended 

changes. 

Several commenters requested 

additional changes to the procedures for 

the Council’s hearings for nonbank 

financial companies subject to proposed 

determinations. The Council’s Hearing 

Procedures, which are not being 

amended at this time, provide for 

transparent engagement between the 

Council and nonbank financial 

companies. Further, under the Final 

Guidance, a company has extensive 

opportunities to submit information to 

the Council and meet with 

representatives of Council members and 

member agencies during the Council’s 

review in Stage 2, which will precede 

any proposed determination or hearing. 

The Council is therefore not adopting 

further changes related to its hearings. 

5. Final Determination 

After making a proposed 

determination and holding any 

requested written or oral hearing, the 

Council may make a final determination 

in accordance with the Dodd-Frank Act 

that the company will be subject to 

supervision by the Federal Reserve and 

prudential standards. If the Council 

makes a final determination regarding 

the company, the Council will provide 

the company with a written notice of 

the Council’s final determination, 

including an explanation of the basis for 

the Council’s decision, and will also 

provide the company’s primary 

financial regulatory agency or home 

country supervisor with the nonpublic 

written explanation of the basis of the 

Council’s final determination, subject to 

appropriate protections for confidential 

information. Under the Final Guidance, 

the Council expects that its explanation 

of the final basis for any determination 

will highlight the key risks that led to 

the determination and include clear 

guidance regarding the factors that were 

most important in the Council’s 

determination. 

One commenter recommended that 

the Final Guidance state that the 

Council will assess all available 

alternatives before considering any 

nonbank financial company for 

potential determination. Two 

commenters stated that the Council 

should only designate a nonbank 

financial company with the consent of 

its primary regulator. Under the Final 

Guidance, Stage 2 will include 

numerous procedures to facilitate a 

robust and transparent review process 

with the company and its primary 

financial regulatory agency. For 

example, during Stage 2, the company 

may submit any information that it 

deems relevant to the Council’s 

evaluation, and the Council will make 

staff representing Council members 

available to meet with the 

representatives of the company. In 

addition, the Council will seek to 

continue its consultation with the 

company’s primary financial regulatory 

agency or home country supervisor in a 

timely manner before the Council makes 

any proposed or final determination, 

encouraging the relevant financial 

regulator to address relevant risks using 

the regulator’s existing authorities. 

These procedures should ensure 

adequate engagement between the 

Council, the company under review, 

and its primary financial regulatory 

agency. 

Unchanged from the 2012 Interpretive 

Guidance, when practicable and 

consistent with the purposes of the 

determination process, the Council will 

provide a nonbank financial company 

with a notice of a final determination at 

least one business day before publicly 

announcing the determination. As a 

result, the Council generally will not 

issue any public notice regarding its 

determination vote on the day of the 

vote; instead, to enable the company 

adequately to prepare its public 

disclosures regarding the Council’s 

determination, the first public 

announcement by the Council will 

generally be the day after the Council’s 

vote. Although this approach will result 

in a short delay in the public 

announcement of a Council vote on a 

final determination, the benefit of 

enabling the company to prepare for the 

public announcement, and to review the 

Council’s materials for confidential, 

sensitive business information before 

their public release, warrants the delay. 

Other commenters provided 

recommendations related to the 

procedural steps for a final 

determination. Several commenters 

stated that the Council should separate 

Council staff responsible for reviewing a 

nonbank financial company from those 

responsible for determining whether 

designation is warranted, and one 

commenter stated that the Council 

should allow companies to examine the 

Council staff who conducted the 

analysis. While staff of the Council 

members and member agencies analyze 

nonbank financial companies, the 

decision makers are the voting members 

of the Council, and the Council is not 

adopting these recommendations 

regarding its staffing structure. One 

commenter stated that the Council 

should allow firms to appeal their 

designation to an ‘‘independent 

authority.’’ The Dodd-Frank Act 

provides that any nonbank financial 

company subject to a final 

determination may challenge the 

Council’s action in court, which 


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39 Dodd-Frank Act section 113(h), 12 U.S.C. 

5323(h). 

40 In a reevaluation of a determination, the 

Council may choose to consider only one 

Determination Standard, for example because 

changes that address the potential threats 

previously identified by the Council under one 

Determination Standard may also address potential 

threats relevant to the other Determination 

Standard. 

provides ample opportunity for an 

independent authority to review the 

determination.39 Two commenters 

stated that before making a final 

determination regarding a nonbank 

financial company, the Council should 

receive from the Federal Reserve a 

detailed, company-specific supervisory 

plan. One of these commenters stated 

that the Council should share the plan 

with the relevant nonbank financial 

company. This recommendation has not 

been incorporated into the Final 

Guidance because it is not logistically 

practicable for the Federal Reserve, 

which must establish such prudential 

standards by rule or order, to provide 

this information to the Council before 

the relevant company has been 

designated. 

Several commenters expressed 

support for the greater analytical rigor 

and process improvements reflected in 

the Proposed Guidance. For example, 

the Council will provide each 

designated nonbank financial company 

with an opportunity for an oral hearing 

before the Council once every five years 

at which the company can contest the 

determination. 

6. Annual Reevaluations of Nonbank 

Financial Company Determinations 

For any nonbank financial company 

that is subject to a final determination, 

the Council is required by statute to 

reevaluate the determination at least 

annually, and to rescind the 

determination if the Council determines 

that the company no longer meets the 

statutory standards for a determination. 

The Final Guidance incorporates a 

number of additional procedural steps, 

not mandated by the Dodd-Frank Act, 

for annual reevaluations, in order to 

enhance engagement with companies 

and their regulators, and to increase 

transparency. One of the goals of these 

changes is to clarify the postdesignation ‘‘off-ramp’’ process for a 

company, which would enable the 

company to identify changes it could 

consider making to address the potential 

threat to financial stability identified by 

the Council, and receive feedback 

regarding whether those changes may 

address the Council’s concerns. One 

commenter opposed to the off-ramp 

procedures stated that they would 

involve the Council in firms’ business 

decisions, thereby increasing litigation 

risk. The Council intends that this 

process should be flexible and tailored 

to the risks posed by designated 

companies, rather than hard-wired or 

overly prescriptive. The process is 

intended to incentivize designated 

companies to address the key factors 

that led to designation, which would 

promote the Council’s goal of reducing 

risks to U.S. financial stability. The 

Council believes that this flexible 

approach will limit its involvement in a 

designated company’s business 

decisions and allow the company, rather 

than the Council, to identify the most 

appropriate means to mitigate risks. 

The Final Guidance provides that in 

the event the Council makes a final 

determination regarding a company, the 

Council intends to encourage the 

company and, if appropriate, its 

regulators to take steps to mitigate the 

potential risks identified in the 

Council’s written explanation of the 

basis for its final determination. Except 

in cases where new material risks arise 

over time, if a company adequately 

addresses the potential risks identified 

in writing by the Council at the time of 

the final determination and in 

subsequent reevaluations, the Council 

should generally be expected to rescind 

its determination regarding the 

company. To facilitate this process, 

companies are encouraged during 

annual reevaluations to submit 

information regarding any changes 

related to the company’s risk profile that 

mitigate the potential risks identified in 

the Council’s final determination of the 

company and in reevaluations of the 

determination. If the company explains 

in detail potential changes it could 

make to its business to address the 

potential risks previously identified by 

the Council, staff of Council members 

and Council member agencies will 

endeavor to provide their feedback on 

the extent to which those changes may 

address the potential risks. Consistent 

with public comments, the Final 

Guidance provides that if a company 

contests the Council’s determination 

during the Council’s annual 

reevaluation, the Council will provide 

the company, its primary financial 

regulatory agency, and the primary 

financial regulatory agency of its 

significant subsidiaries with a notice 

explaining the primary basis for any 

decision not to rescind the 

determination. The notice will address 

each of the material factors raised by the 

company in its submissions to the 

Council contesting the determination 

during the annual reevaluation. 

Several commenters expressed 

support for both the pre-designation and 

post-designation ‘‘off-ramps’’. One 

commenter also stated that the Council 

should de-designate firms if the benefits 

of designation are not outweighing 

costs, and another stated that the 

Council should have a streamlined 

process for doing so. The Council 

believes that the post-designation offramp described above provides for a 

robust and streamlined review process. 

As part of its review of a designated 

company, the Council does not believe 

it is appropriate to perform another costbenefit analysis, in addition to the costbenefit analysis performed prior to the 

designation, in light of timing and 

resource constraints in the context of 

annual reevaluations of previous 

determinations. 

The Final Guidance also underscores 

that the Council applies the same 

standards of review in its annual 

reevaluations as the standard for an 

initial determination regarding a 

nonbank financial company: Either the 

company’s material financial distress, or 

the nature, scope, size, scale, 

concentration, interconnectedness, or 

mix of the company’s activities, could 

pose a threat to U.S. financial stability. 

If the Council determines that the 

company no longer meets those 

standards, the Council will rescind its 

determination. The Final Guidance also 

stresses that, while the Council’s annual 

reevaluation of a company subject to a 

final determination will generally focus 

on changes since the Council’s previous 

review, the ultimate question the 

Council will seek to assess is whether 

changes in the aggregate since the 

company’s designation have caused the 

company to cease meeting the 

Determination Standards.40

Several commenters stated that the 

Council should adopt a framework for 

evaluating the impact of its 

designations, and assess the 

effectiveness of designation regularly. 

For any nonbank financial company that 

is subject to a final determination, the 

Council is required by statute to 

reevaluate the determination at least 

annually, and to rescind the 

determination if the Council determines 

that the company no longer meets the 

statutory standards for a designation. 

The Final Guidance incorporates a 

number of additional procedural steps 

for annual reevaluations to enhance 

engagement with companies and their 

regulators, and to increase transparency. 

The measures should ensure that a 

nonbank financial company is 

designated, or remains designated, only 

if it meets the statutory standard for 

designation. 


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41See Dodd-Frank Act section 112(d)(5), 12 

U.S.C. 5322(d)(5); see also 2012 Final Rule and 

Interpretive Guidance at 21648–21649 and 12 CFR 

1310.20(e). 

42See 12 CFR 1310.20(e)(3). 

43 84 FR 8958 (March 13, 2019). 

44See, for example, Dodd-Frank Act sections 

112(a)(2), 113, 115, 120, 804, 12 U.S.C. 5322(a)(2), 

5323, 5325, 5330, 5463. 

45Courts 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). 

46See Dodd-Frank Act section 111(e)(2), 12 U.S.C. 

5321(e)(2). 

47See Association of Flight Attendants-CWA, 

AFL–CIO v. Huerta, 785 F.3d 710 (D.C. Cir. 2015). 

48See note 3 above. 

E. Other Comments Received 

Several commenters provided 

recommendations about international 

issues regarding the Proposed Guidance, 

including international regulatory 

coordination and the relationship 

between Council designations and the 

Financial Stability Board’s (FSB’s) 

identification of U.S. nonbank financial 

companies as global systemically 

important institutions. The Council 

supports the promotion of regulatory 

coordination at the international level, 

but is not expressing a view on its 

member agencies’ roles in international 

discussions. 

Several commenters stated that the 

Council should commit in the Final 

Guidance to ensuring the confidentiality 

of all collected information. The Final 

Guidance notes that the Council is 

subject to statutory and regulatory 

requirements to maintain the 

confidentiality of certain information 

submitted to it by a nonbank financial 

company or its regulators.41 Under 

applicable law and the Council’s rules, 

the Freedom of Information Act (FOIA) 

and the applicable exemptions 

thereunder apply to any data or 

information submitted under the rule. In 

addition, the Council’s FOIA rule 

applies to data and information received 

by the Council.42 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 addition, 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 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 confidentiality 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. 

Finally, other commenters raised 

various comments related to the 

operations of the Council. One 

commenter recommended that the Final 

Guidance should state that any 

departure from the Final Guidance 

should be treated as a modification that 

requires public comment (other than in 

emergency situations affecting a single 

company that require immediate 

action). The Council previously adopted 

a rule stating that it will not amend or 

rescind its interpretive guidance on 

nonbank financial company 

determinations without soliciting public 

notice and comment,43 which the 

Council believes addresses this concern. 

III. Legal Authority of Council and 

Status of the Final Guidance 

The Council has numerous authorities 

and tools under the Dodd-Frank Act to 

carry out its statutory purposes.44 The 

Council expects that its response to any 

potential risk or threat to U.S. financial 

stability will be based on an assessment 

of the circumstances. As the agency 

charged by Congress with broad-ranging 

responsibilities under sections 112 and 

113 of the Dodd-Frank Act, the Council 

has the inherent authority to promulgate 

interpretive guidance under those 

provisions that explains and interprets 

the statutory factors that the Council 

will consider when employing the 

activities-based approach and 

undertaking the determination 

process.45 The Council also has 

authority to issue procedural rules 46

and policy statements.47 The Final 

Guidance 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. Except to the 

extent that the Final Guidance sets forth 

rules of agency organization, procedure, 

or practice, the Council has concluded 

that the Final Guidance does not have 

binding effect; does not impose duties 

on, or alter the rights or interests of, any 

person; does not change the statutory 

standards for the Council’s decision 

making; and does not relieve the 

Council of the need to make entityspecific determinations in accordance 

with section 113 of the Dodd-Frank Act. 

IV. Paperwork Reduction Act 

The collection of information 

contained in the Final Guidance 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 under 

the Final Guidance is found in 12 CFR 

1310.20–1310.23, which were added 

pursuant to the 2012 Final Rule and 

Interpretive Guidance.48

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 the Final Guidance is 20 

hours, based on an estimate of one 

respondent. We estimate the cost 

associated with this information 

collection to be $9,000. These estimates 

are significantly lower than those in the 

Paperwork Reduction Act discussion in 

the 2012 Final Rule and Interpretive 

Guidance, because the Council expects 


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1See Dodd-Frank Act section 113, 12 U.S.C. 5323. 

2References in this appendix to ‘‘relevant 

financial regulatory agencies’’ may encompass a 

broader range of regulators than those included in 

the statutory definition of ‘‘primary financial 

regulatory agency,’’ which is defined in Dodd-Frank 

Act section 2(12), 12 U.S.C. 5301(12). 

3 Dodd-Frank Act section 112(a)(1), 12 U.S.C. 

5322(a)(1). 

that, notwithstanding any additional 

reporting burden that financial 

companies participating in the 

activities-based approach may incur, the 

aggregate reporting burden on 

companies will be significantly reduced 

as a result of the Council’s proposal to 

pursue entity-specific determinations 

under section 113 of the Dodd-Frank 

Act only if a potential risk or threat 

cannot be adequately addressed through 

an activities-based approach. 

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 financial 

companies internally at an average cost 

of $400 per hour, and the remainder 

will be carried by outside professionals 

retained by financial companies at an 

average cost of $600 per hour. In 

addition, in determining these 

estimates, the Council considered its 

obligation under 12 CFR 1310.20(b) to, 

whenever possible, rely on information 

available from the OFR or any Council 

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 Final Guidance 

will be performed in a manner that 

attempts to minimize burdens for 

affected financial companies. The 

aggregate burden will be subject to the 

number of financial companies that 

participate in the activities-based 

approach or are evaluated in the 

determination process, 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 financial companies 

provide to the Council. The Proposed 

Guidance requested comment on the 

estimates and other assumptions in the 

proposed collection of information, but 

no comments were received in response 

to the questions presented. 

V. Executive Orders 12866 and 13563 

Executive Orders 12866 and 13563 

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. The Office 

of Information and Regulatory Affairs 

within the Office of Management and 

Budget has designated this interpretive 

guidance as a ‘‘significant regulatory 

action’’ under section 3(f) of Executive 

Order 12866. 

List of Subjects in 12 CFR Part 1310 

Brokers, Investments, Securities. 

The Financial Stability Oversight 

Council is amending 12 CFR part 1310 

as follows: 

PART 1310—AUTHORITY TO REQUIRE 

SUPERVISION AND REGULATION OF 

CERTAIN NONBANK FINANCIAL 

COMPANIES 

■ 1. The authority citation for part 1310 

continues to read as follows: 

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

12 U.S.C. 5323. 

■ 2. Appendix A is revised to read as 

follows: 

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 

‘‘Federal Reserve’’) 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 Federal 

Reserve 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 Federal Reserve 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 

considerations that the Council must take 

into account in making a determination. 

Section II of this document describes the 

approach the Council intends to take in 

prioritizing its work to identify and address 

potential risks to U.S. financial stability 

using an activities-based approach. This 

approach reflects the Council’s priorities of 

identifying potential risks on a system-wide 

basis, reducing the potential for competitive 

distortions that could arise from entityspecific determinations, and allowing 

relevant financial regulatory agencies 2 to 

address identified potential risks. First, the 

Council will monitor markets to identify 

potential risks to U.S. financial stability and 

to assess those risks on a system-wide basis. 

Second, the Council will then work with 

relevant financial regulatory agencies to seek 

the implementation of actions intended to 

address identified potential risks to financial 

stability. 

Section III of this appendix 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, if 

the Council determines that potential risks to 

U.S. financial stability are not adequately 

addressed through the activities-based 

approach. Section III defines key terms used 

in the statute, including ‘‘threat to the 

financial stability of the United States.’’ 

Section III also includes a detailed 

description of the analysis that the Council 

intends to conduct during its reviews, 

including a discussion of channels through 

which risks from a company may be 

transmitted to other companies or markets, 

and the Council’s assessment of the 

likelihood of the company’s material 

financial distress and the benefits and costs 

of a determination. 

Section IV of this appendix outlines a twostage process that the Council will follow in 

non-emergency situations when determining 

whether to subject a nonbank financial 

company to Federal Reserve supervision and 

prudential standards. In the first stage of the 

process, the Council will notify the company 

and its primary financial regulatory agency 

and conduct a preliminary analysis to 

determine whether the company should be 

subject to further evaluation by the Council. 

During the second stage of the evaluation 

process, the Council will conduct an indepth evaluation if it determines in the first 

stage that the nonbank financial company 

merits additional review. 

The Council’s practices set forth in this 

guidance to address potential risks to U.S. 

financial stability are intended to comply 

with its statutory purposes: (1) To identify 

risks to U.S. financial stability 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; (2) 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 (3) to respond to 

emerging threats to the stability of the U.S. 

financial system.3 Council actions seek to 

foster transparency and to avoid competitive 

distortions in markets for financial services 

and products. Further, nonbank financial 


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4See FCC v. Fox Television Stations, Inc., 556 

U.S. 502, 515 (2009). 

5For example, the Council has authority to make 

recommendations to the Federal Reserve 

concerning the establishment and refinement of 

prudential standards and reporting and disclosure 

requirements applicable to nonbank financial 

companies supervised by the Federal Reserve; make 

recommendations to primary financial regulatory 

agencies to apply new or heightened standards and 

safeguards for a financial activity or practice 

conducted by certain financial companies if the 

Council determines that such activity or practice 

could create or increase certain risks; and designate 

financial market utilities and payment, clearing, 

and settlement activities that the Council 

determines are, or are likely to become, 

systemically important. Dodd-Frank Act sections 

115, 120, 804, 12 U.S.C. 5325, 5330, 5463. 

6 Dodd-Frank Act section 112(a)(2), 12 U.S.C. 

5322(a)(2). 

7 Dodd-Frank Act section 112(d)(3), 12 U.S.C. 

5322(d)(3). 

companies should not benefit from an 

implicit federal financial safety net. 

Therefore, the Council emphasizes the 

importance of market discipline as a 

mechanism for addressing potential risks to 

U.S. financial stability posed by financial 

companies. 

This interpretive guidance is not a binding 

rule, except to the extent that it sets forth 

rules of agency organization, procedure, or 

practice. This guidance is intended to assist 

financial companies and other market 

participants in understanding how the 

Council expects to exercise certain of its 

authorities under Title I of the Dodd-Frank 

Act. The Council retains discretion, subject 

to applicable statutory requirements, to 

consider factors relevant to the assessment of 

a potential risk or threat to U.S. financial 

stability on a case-by-case basis. If the 

Council were to depart from the 

interpretative guidance, it would need to 

provide a reasoned explanation for its action, 

which would ordinarily require 

acknowledging the change in position.4

II. Activities-Based Approach 

The Dodd-Frank Act gives the Council 

broad discretion in determining how to 

respond to potential threats to U.S. financial 

stability. A determination to subject a 

nonbank financial company to Federal 

Reserve supervision and prudential 

standards under section 113 of the DoddFrank Act is only one of several Council 

authorities for responding to potential risks 

to U.S. financial stability.5 The Council will 

prioritize its efforts to identify, assess, and 

address potential risks and threats to U.S. 

financial stability through a process that 

begins with an activities-based approach, and 

will pursue entity-specific determinations 

under section 113 of the Dodd-Frank Act 

only if a potential risk or threat cannot be 

adequately addressed through an activitiesbased approach. The Council anticipates it 

would consider a nonbank financial 

company for a potential determination under 

section 113 only in rare instances, such as if 

the products, activities, or practices of a 

company that pose a potential threat to U.S. 

financial stability are outside the jurisdiction 

or authority of financial regulatory agencies. 

This approach reflects two priorities: (1) 

Identifying and addressing, in consultation 

with relevant financial regulatory agencies, 

potential risks and emerging threats on a 

system-wide basis and to reduce the potential 

for competitive distortions among financial 

companies and in markets that could arise 

from entity-specific determinations, and (2) 

allowing relevant financial regulatory 

agencies, which generally possess greater 

information and expertise with respect to 

company, product, and market risks, to 

address potential risks, rather than subjecting 

the companies to new regulatory authorities. 

As part of its activities-based approach, the 

Council will examine a range of financial 

products, activities, or practices that could 

pose risks to U.S. financial stability. These 

types of activities are often identified in the 

Council’s annual reports, such as activities 

related to (1) the extension of credit, (2) the 

use of leverage or short-term funding, (3) the 

provision of guarantees of financial 

performance, and (4) other key functions 

critical to support the functioning of 

financial markets. The Council considers a 

risk to financial stability to mean a risk of an 

event or development that could impair 

financial intermediation or financial market 

functioning to a degree that would be 

sufficient to inflict significant damage on the 

broader economy. The Council’s activitiesbased approach is intended to identify and 

address risks to financial stability using a 

two-step approach, described below. 

a. Step One of Activities-Based Approach: 

Identifying Potential Risks From Products, 

Activities, or Practices 

Monitoring Markets 

The Council has a statutory duty to 

monitor the financial services marketplace in 

order to identify potential threats to U.S. 

financial stability.6 In the first step of the 

activities-based approach, to enable the 

Council to identify potential risks to U.S. 

financial stability, the Council, in 

consultation with relevant financial 

regulatory agencies, intends to monitor 

diverse financial markets and market 

developments to identify products, activities, 

or practices that could pose risks to U.S. 

financial stability. When monitoring 

potential risks to financial stability, the 

Council intends to consider the linkages 

across products, activities, and practices, and 

their interconnectedness across firms and 

markets. 

For example, the Council’s monitoring may 

include: 

• Corporate and sovereign debt and loan 

markets; 

• equity markets; 

• markets for other financial products, 

including structured products and 

derivatives; 

• short-term funding markets; 

• payment, clearing, and settlement 

functions; 

• new or evolving financial products, 

activities, and practices; and 

• developments affecting the resiliency of 

financial market participants. 

To monitor markets and market 

developments, the Council will review 

information such as historical data, research 

regarding the behavior of financial market 

participants, and new developments that 

arise in evolving marketplaces. The Council 

will regularly rely on data, research, and 

analysis from Council member agencies, the 

Office of Financial Research, industry 

participants, and other public sources. 

Consistent with its statutory obligations, the 

Council will, whenever possible, rely on 

information available from primary financial 

regulatory agencies.7

Evaluating Potential Risks 

If the Council’s monitoring of markets and 

market developments identifies a product, 

activity, or practice that could pose a 

potential risk to U.S. financial stability, the 

Council, in consultation with relevant 

financial regulatory agencies, will evaluate 

the potential risk to determine whether it 

merits further review or action. The Council’s 

work in this step may include efforts such as 

sharing data, research, and analysis among 

Council members and member agencies and 

their staffs; consultations with regulators and 

other experts regarding the scope of potential 

risks and factors that may mitigate those 

risks; and the collaborative development of 

analyses for consideration by the Council. As 

part of this work, the Council may also 

engage with industry participants and other 

members of the public as it assesses potential 

risks. 

The Council will assess the extent to which 

characteristics such as the following could 

amplify potential risks to U.S. financial 

stability arising from products, activities, or 

practices: 

• Asset valuation risk or credit risk; 

• leverage, including leverage arising from 

debt, derivatives, off-balance sheet 

obligations, and other arrangements; 

• liquidity risk or maturity mismatch, such 

as reliance on funding sources that could be 

susceptible to dislocations; 

• counterparty risk and 

interconnectedness among financial market 

participants; 

• the transparency of financial markets, 

such as growth in financial transactions 

occurring outside of regulated sectors; 

• operational risks, such as cybersecurity 

and operational resilience; or 

• the risk of destabilizing markets for 

particular types of financial instruments, 

such as trading practices that substantially 

increase volatility in key markets. 

Various factors may exacerbate or mitigate 

each of these types of risks. For example, 

activities may pose greater risks if they are 

complex or opaque, are conducted without 

effective risk-management practices, are 

significantly correlated with other financial 

products, and are either highly concentrated 

or significant and widespread. In contrast, 

regulatory requirements or market practices 

may mitigate risks by, for example, limiting 

exposures or leverage, enhancing riskmanagement practices, or restricting 

excessive risk-taking. 

While the contours of the Council’s initial 

evaluation of any potential risk will depend 

on the type and scope of analysis relevant to 

the particular risk, the Council’s analyses 

will generally focus on four framing 

questions: 


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8The Dodd-Frank Act provides that the Council’s 

duties include to recommend to the member 

agencies general supervisory priorities and 

principles reflecting the outcome of discussions 

among the member agencies and to make 

recommendations to primary financial regulatory 

agencies to apply new or heightened standards and 

safeguards for financial activities or practices that 

could create or increase risks of significant 

liquidity, credit, or other problems spreading 

among bank holding companies, nonbank financial 

companies, and United States financial markets. 

Dodd-Frank Act sections 112(a)(2)(F), (K), 12 U.S.C. 

5322(a)(2)(F), (K). 

9 Dodd-Frank Act section 120(a), 12 U.S.C. 

5330(a). 

1. How could the potential risk be 

triggered? For example, could it be triggered 

by sharp reductions in the valuation of 

particular classes of financial assets? 

2. How could the adverse effects of the 

potential risk be transmitted to financial 

markets or market participants? For example, 

what are the direct or indirect exposures in 

financial markets to the potential risk? 

3. What impact could the potential risk 

have on the financial system? For example, 

what could be the scale of its adverse effects 

on other companies and markets, and would 

its effects be concentrated or distributed 

broadly among market participants? This 

analysis should take into account factors 

such as existing regulatory requirements or 

market practices that mitigate potential risks. 

4. Could the adverse effects of the potential 

risk impair the financial system in a manner 

that could harm the non-financial sector of 

the U.S. economy? 

In this evaluation, the Council will consult 

with relevant financial regulatory agencies 

and will take into account existing laws and 

regulations that may mitigate a potential risk 

to U.S. financial stability. The Council will 

also take into account the risk profiles and 

business models of market participants 

engaging in the products, activities, or 

practices under evaluation, and consider 

available evidence regarding the potential 

risk. Empirical data may not be available 

regarding all potential risks, and the type and 

scope of the Council’s analysis will be 

tailored to the potential risk under 

consideration. 

If a product, activity, or practice creating 

a potential risk to financial stability is 

identified, the Council will work with 

relevant financial regulatory agencies to 

address the identified risk, as described in 

section II.b of this appendix. 

b. Step Two of Activities-Based Approach: 

Working With Regulators To Address 

Identified Risks 

If the Council identifies a potential risk to 

U.S. financial stability in step one of the 

activities-based approach, the Council will 

work with the relevant financial regulatory 

agencies at the federal and state levels to seek 

the implementation of appropriate actions to 

address the identified potential risk. The 

Council will coordinate among its members 

and member agencies and will follow up on 

supervisory or regulatory actions to ensure 

the potential risk is adequately addressed. 

The goal of this step would be for existing 

regulators to take appropriate action, such as 

modifying their regulation or supervision of 

companies or markets under their 

jurisdiction in order to mitigate potential 

risks to U.S. financial stability identified by 

the Council.8 If a potential risk identified by 

the Council relates to a product, activity, or 

practice arising at a limited number of 

individual financial companies, the Council 

nonetheless will prioritize a remedy that 

addresses the underlying risk across all 

companies that engage in the relevant 

activity. If the Council finds that a particular 

type of financial product could present risks 

to U.S. financial stability, there may be 

different approaches existing regulators 

could take, based on their authorities and the 

urgency of the risk, such as restricting or 

prohibiting the offering of that product, or 

requiring market participants to take 

additional risk-management steps that 

address the risks. 

If, after engaging with relevant financial 

regulatory agencies, the Council believes 

those regulators’ actions are inadequate to 

address the identified potential risk to U.S. 

financial stability, the Council has authority 

to make formal public recommendations to 

primary financial regulatory agencies under 

section 120 of the Dodd-Frank Act. Under 

section 120, the Council may provide for 

more stringent regulation of a financial 

activity by issuing nonbinding 

recommendations, following consultation 

with the primary financial regulatory agency 

and public notice inviting comments on 

proposed recommendations, to the primary 

financial regulatory agency to apply new or 

heightened standards or safeguards for a 

financial activity or practice conducted by 

bank holding companies or nonbank 

financial companies under their 

jurisdiction.9 In addition, in any case in 

which no primary financial regulatory agency 

exists for the markets or companies 

conducting financial activities or practices 

identified by the Council as posing risks, the 

Council can consider reporting to Congress 

on recommendations for legislation that 

would prevent such activities or practices 

from threatening U.S. financial stability. The 

Council intends to make recommendations 

under section 120 only to the extent that its 

recommendations are consistent with the 

statutory mandate of the primary financial 

regulatory agency to which the Council is 

making the recommendation. 

The authority to issue recommendations to 

primary financial regulatory agencies under 

section 120 is one of the Council’s most 

formal tools for responding to potential risks 

to U.S. financial stability. The Council will 

make these recommendations only if it 

determines that the conduct, scope, nature, 

size, scale, concentration, or 

interconnectedness of the 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. 

In its recommendations under section 120, 

the Council may suggest broad approaches to 

address the risks it has identified. When 

appropriate, the Council may make a more 

specific recommendation. To promote 

analytical rigor and avoid duplication, before 

making any recommendation under section 

120, the Council will ascertain whether the 

relevant primary financial regulatory agency 

would be expected to perform a cost-benefit 

analysis of the actions it would take in 

response to the Council’s contemplated 

recommendation. In cases where the primary 

financial regulatory agency would not be 

expected to conduct such an analysis, the 

Council itself will—prior to making a final 

recommendation—conduct an analysis, using 

empirical data, to the extent available, of the 

benefits and costs of the actions that the 

primary financial regulatory agency would be 

expected to take in response to the 

contemplated recommendation. Where the 

Council conducts its own such analysis, the 

specificity of its assessment of benefits and 

costs would be commensurate with the 

specificity of the contemplated 

recommendation. Furthermore, where the 

Council conducts its own analysis, the 

Council will make a recommendation under 

section 120 only if it believes that the results 

of its assessment of benefits and costs 

support the recommendation. 

Primary financial regulatory agencies have 

significant experience, knowledge, and 

expertise that can be useful in determining 

the most efficient way to address a particular 

risk within their regulatory jurisdiction. In 

every case, prior to issuing a 

recommendation under section 120, the 

Council will consult with the relevant 

primary financial regulatory agency and 

provide notice to the public and opportunity 

for comment as required by section 120. 

III. Analytic Framework for Nonbank 

Financial Company Determinations 

If the Council’s collaboration and 

engagement with the relevant financial 

regulatory agencies during the activitiesbased approach does not adequately address 

a potential threat identified by the Council— 

or if a potential threat to U.S. financial 

stability is outside the jurisdiction or 

authority of financial regulatory agencies— 

and if the potential threat identified by the 

Council is one that could be effectively 

addressed by a Council determination 

regarding one or more nonbank financial 

companies, the Council may evaluate one or 

more nonbank financial companies for an 

entity-specific determination under section 

113 of the Dodd-Frank Act, applying the 

analytic framework described below. This 

section describes the analysis the Council 

will conduct in general regarding individual 

nonbank financial companies that are 

considered for a potential determination, and 

section IV of this appendix describes the 

Council’s process for those reviews. 

a. Statutory Standards and Considerations 

The Council may determine, by a vote of 

not fewer than two-thirds of the voting 

members of the Council then serving, 

including an affirmative vote by the 

Chairperson of the Council, that a nonbank 

financial company will be supervised by the 

Federal Reserve and be subject to prudential 

standards if the Council determines that (1) 

material financial distress at the nonbank 


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10 If the Council is unable to determine whether 

the financial activities of a U.S. nonbank financial 

company pose a threat to the financial stability of 

the United States based on certain information, the 

Council may request the Federal Reserve to conduct 

an examination of the U.S. nonbank financial 

company for the sole purpose of determining 

whether the company should be supervised by the 

Federal Reserve for purposes of Title I of the DoddFrank Act. Dodd-Frank Act section 112(d)(4), 12 

U.S.C. 5322(d)(4). 

11The statutory definition of ‘‘nonbank financial 

company’’ excludes bank holding companies and 

certain other types of companies. Dodd-Frank Act 

section 102(a)(4), 12 U.S.C. 5311(a)(4). 

12As a result, if a nonbank financial company 

subject to a final determination of the Council sells 

or otherwise transfers a majority of its assets or 

liabilities, the acquirer will succeed to, and become 

subject to, the Council’s determination. As 

discussed in section V below, a nonbank financial 

company that is subject to a final determination of 

the Council may request a reevaluation of the 

determination before the next required annual 

reevaluation, in appropriate cases. Such an acquirer 

can use this reevaluation process to seek a 

rescission of the determination upon consummation 

of its transaction. 

13 Dodd-Frank Act section 113(a)(2), 12 U.S.C. 

5323(a)(2). This list of considerations is applicable 

to U.S. nonbank financial companies. With respect 

to foreign nonbank financial companies, the 

Council is required to take into account a similar 

list of considerations, in some cases limited to the 

companies’ U.S. business or activities. See DoddFrank Act section 113(b)(2), 12 U.S.C. 5323(b)(2). 

financial company could pose a threat to the 

financial stability of the United States (the 

‘‘First Determination Standard’’) or (2) 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’’).10 The analytic framework 

described below focuses primarily on the 

First Determination Standard because threats 

to financial stability (such as asset fire sales 

or financial market disruptions) are most 

commonly propagated through a nonbank 

financial company when it is in distress. 

Several relevant terms used in the DoddFrank Act are not defined in the statute. The 

Council intends to interpret the term 

‘‘company’’ to include any corporation, 

limited liability company, partnership, 

business trust, association, or similar 

organization.11 In addition, the Council 

intends to interpret ‘‘nonbank financial 

company supervised by the Board of 

Governors’’ as including any nonbank 

financial company that acquires, directly or 

indirectly, a majority of the assets or 

liabilities of a company that is subject to a 

final determination of the Council.12 The 

Council intends to interpret the term 

‘‘material financial distress’’ as a nonbank 

financial company being in imminent danger 

of insolvency or defaulting on its financial 

obligations. The Council intends to interpret 

the term ‘‘threat to the financial stability of 

the United States’’ as meaning the threat of 

an impairment of financial intermediation or 

of financial market functioning that would be 

sufficient to inflict severe damage on the 

broader economy. For purposes of 

considering whether a nonbank financial 

company could pose a threat to U.S. financial 

stability under either Determination 

Standard, the Council intends to assess the 

company in the context of a period of overall 

stress in the financial services industry and 

in a weak macroeconomic environment, with 

market developments such as increased 

counterparty defaults, decreased funding 

availability, and decreased asset prices. The 

Council believes this is appropriate because 

in such a context, the risks posed by a 

nonbank financial company may have a 

greater effect on U.S. financial stability. 

The Dodd-Frank Act requires the Council 

to consider 10 specific considerations when 

determining whether a nonbank financial 

company satisfies either of the Determination 

Standards. These statutory considerations 

help the Council to evaluate whether one of 

the Determination Standards has been met: 13

• The extent of the leverage of the 

company; 

• the extent and nature of the off-balancesheet exposures of the company; 

• the extent and nature of the transactions 

and relationships of the company with other 

significant nonbank financial companies and 

significant bank holding companies; 

• 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; 

• 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; 

• 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; 

• the nature, scope, size, scale, 

concentration, interconnectedness, and mix 

of the activities of the company; 

• the degree to which the company is 

already regulated by one or more primary 

financial regulatory agencies; 

• the amount and nature of the financial 

assets of the company; and 

• the amount and types of the liabilities of 

the company, including the degree of 

reliance on short-term funding. 

The statute also requires the Council to 

take into account any other risk-related 

factors that the Council deems appropriate. 

Any determination by the Council 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 the Council deems 

relevant to a particular nonbank financial 

company. The Council anticipates that the 

information relevant to an in-depth analysis 

of a nonbank financial company may vary 

based on the nonbank financial company’s 

characteristics. 

The discussion below describes how the 

Council will apply the Determination 

Standards in its evaluation of a nonbank 

financial company, including how the 

Council will take into account the statutory 

considerations, and other risk-related factors 

that the Council will take into account. Due 

to the unique threat that each nonbank 

financial company could pose to U.S. 

financial stability and the nature of the 

inquiry required by the statutory 

considerations, the Council expects that its 

evaluations of nonbank financial companies 

will be firm-specific and may include 

quantitative and qualitative information that 

the Council deems relevant to a particular 

nonbank financial company. The 

transmission channels, sample metrics, and 

other factors set forth below are not 

exhaustive and may not apply to all nonbank 

financial companies under evaluation. 

b. Transmission Channels 

The Council’s evaluation of any nonbank 

financial company under section 113 of the 

Dodd-Frank Act will seek to determine 

whether a nonbank financial company meets 

one of the Determination Standards 

described above. In its analysis of a nonbank 

financial company, the Council will assess 

how the negative effects of the company’s 

material financial distress, or of the nature, 

scope, size, scale, concentration, 

interconnectedness, or mix of the company’s 

activities, could be transmitted to or affect 

other firms or markets, thereby causing a 

broader impairment of financial 

intermediation or of financial market 

functioning. Such a transmission of risk can 

occur through various mechanisms, or 

channels. The Council has identified three 

transmission channels as most likely to 

facilitate the transmission of the negative 

effects of a nonbank financial company’s 

material financial distress, or of the nature, 

scope, size, scale, concentration, 

interconnectedness, or mix of the company’s 

activities, to other financial firms and 

markets: Exposure; asset liquidation; and 

critical function or service. These three 

transmission channels are described below. 

The Council may also consider other relevant 

channels through which risks could be 

transmitted from a particular nonbank 

financial company and thereby pose a threat 

to U.S. financial stability. The Council will 

take into account the 10 statutory 

considerations and any other risk-related 

factors the Council deems appropriate as part 

of its evaluation of a nonbank financial 

company under the three transmission 

channels and the other factors described 

below. Further, in its analyses under the 

transmission channels, the Council will 

consider applicable factors that may limit the 

transmission of risk, such as existing 

regulatory requirements, collateralization, 

bankruptcy-remote structures, or guarantee 

funds that reduce counterparties’ exposures 

to the nonbank financial company or mitigate 

incentives for customers or counterparties to 

withdraw funding or assets. 

Exposure Transmission Channel 

Under this transmission channel, the 

Council will evaluate whether a nonbank 

financial company’s creditors, 

counterparties, investors, or other market 

participants have direct or indirect exposure 

to the nonbank financial company that is 

significant enough to materially and 

adversely affect those or other creditors, 


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14 Dodd-Frank Act section 113(a)(2)(F), 12 U.S.C. 

5323(a)(2)(F). 

counterparties, investors, or other market 

participants and thereby pose a threat to U.S. 

financial stability. 

The Council expects that its analyses under 

the exposure transmission channel will 

generally include the factors described 

below. The potential threat to U.S. financial 

stability will generally be greater if the 

amounts of the exposures are larger; if the 

terms of the transactions provide less 

protection for the counterparty; and if the 

largest counterparties include large financial 

institutions. 

The Council also will consider a 

company’s leverage and size. A company’s 

leverage can amplify the risks posed by 

exposures, including off-balance sheet 

exposures, by reducing the company’s ability 

to satisfy its obligations to creditors in the 

event of its material financial distress. Size 

is relevant to this analysis, as material 

financial distress at a larger nonbank 

financial company would generally transmit 

risk on a larger scale than distress at a 

smaller company. Size may be measured by 

the assets, liabilities, and capital of the firm. 

As required by statute, the Council will 

consider 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. The Council’s 

analysis will recognize the distinct nature of 

exposure risks when the company is acting 

as an agent rather than as principal.14 In 

particular, in the case of a nonbank financial 

company that manages assets on behalf of 

customers or other third parties, the third 

parties’ direct financial exposures are often to 

the issuers of the managed assets, rather than 

to the nonbank financial company managing 

those assets. 

The Council will consider the exposures 

that counterparties and other market 

participants have to a nonbank financial 

company arising from the company’s capital 

markets activities. This assessment includes 

an evaluation of the company’s relationships 

with other significant nonbank financial 

companies and significant bank holding 

companies. In most cases, the Council will 

consider factors such as the amount and 

nature of, and counterparties to, the 

company’s: 

• Outstanding debt (regardless of term) 

and other liabilities (such as guaranteed 

investment contracts issued by an insurance 

company or Federal Home Loan Bank loans). 

• Derivatives transactions (which may be 

measured on the basis of gross notional 

amount, net fair value, or potential future 

exposures). 

• Securities financing transactions (i.e., 

repurchase agreements and securities lending 

transactions). 

• Lines of credit. 

• Credit-default swaps outstanding for 

which the company or an affiliate is the 

reference entity (generally focusing on singlename credit-default swaps). 

Relevant metrics may include the 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. The potential risk 

arising under this transmission channel 

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. Therefore, the Council will 

focus on exposures of large financial 

institutions to the nonbank financial 

company under review. This analysis will 

take into account both individual 

counterparty exposures as well as aggregate 

exposures of other financial institutions to 

the company under review. The amount and 

types of other exposures that counterparties 

and other market participants have to a 

nonbank financial company is highly 

dependent on the nature of the company’s 

business. The Council’s analysis will take 

these other fact-specific considerations into 

account. 

The Council also will consider applicable 

factors, including existing regulatory 

requirements, that may mitigate potential 

risks under the exposure transmission 

channel. For example, collateralization by 

high-quality, highly liquid securities, such as 

U.S. Treasury securities, the use of insurance 

funds to limit counterparty exposures, or 

other transactions that reallocate risk to wellcapitalized entities, may reduce the potential 

for certain exposures to serve as a channel for 

the transmission of risk. 

Contagion. The negative effects of the 

material financial distress of a large, 

interconnected nonbank financial company 

are not necessarily limited to the amount of 

direct losses suffered by the firm’s creditors, 

counterparties, investors, or other market 

participants. In general, the wider and more 

interconnected a company’s network of 

financial counterparties, the greater the 

potential negative effect of the material 

financial distress of the company. Aggregate 

exposures to a nonbank financial company 

can create a potential threat to U.S. financial 

stability if they lead to contagion among 

financial institutions and financial markets 

more broadly. Contagion has the potential to 

spread distress quickly and seemingly 

unexpectedly. Such transmission is 

associated with opaque balance sheets, 

closely correlated markets, and coordination 

failures among investors. In such 

circumstances, fire sales by a highly 

leveraged and interconnected nonbank 

financial company may result in a loss of 

confidence in other financial companies that 

are perceived to have similar characteristics. 

The Council will seek evidence regarding the 

potential for contagion, including relevant 

industry-specific historical examples and the 

scope of the company’s interconnectedness 

with large financial institutions, among other 

factors. Various market-based or regulatory 

factors can strongly mitigate the risk of 

contagion. Contagion should be viewed in 

conjunction with other factors described 

above when evaluating risk under the 

exposure transmission channel. 

Asset Liquidation Transmission Channel 

Under this transmission channel, the 

Council will consider whether a nonbank 

financial company holds assets that, if 

liquidated quickly, could pose a threat to 

U.S. financial stability by, for example, 

causing a fall in asset prices that significantly 

disrupts trading or funding in key markets or 

causes significant losses or funding problems 

for other firms with similar holdings. This 

channel would likely be most relevant for a 

nonbank financial company that could be 

forced to liquidate assets quickly due to its 

funding and liquid asset profile. For 

example, this could be the case if a nonbank 

financial company relies heavily on shortterm funding. The Council may also consider 

whether a deterioration in asset pricing or 

market functioning could pressure other 

financial firms to sell their holdings of 

affected assets in order to maintain adequate 

capital and liquidity, which, in turn, could 

produce a cycle of asset sales that could lead 

to further market disruptions. This analysis 

includes an assessment of any maturity 

mismatch at the company—the difference 

between the maturities of the company’s 

assets and liabilities. A company’s reliance 

on short-term funding to finance longer-term 

positions can subject the company to rollover 

or refinancing risk that may force it to sell 

assets rapidly at low market prices. The 

Council will also consider applicable factors 

that may mitigate potential risks under the 

asset liquidation transmission channel. As 

part of its analysis, the Council will consider 

the extent to which assets are managed rather 

than owned by the company. 

The Council’s analyses of the asset 

liquidation transmission channel will focus 

on three central factors, described below. 

Liquidity of the company’s liabilities. The 

first factor in the Council’s assessment under 

this transmission channel is the amount and 

nature of the company’s liabilities that are, or 

could become, short-term in nature. This 

analysis involves an assessment of the 

company’s liquidity risk. Liquidity risk 

generally refers to the risk that a company 

may not have sufficient funding to satisfy its 

short-term needs. For example, relevant 

factors may include: 

• The company’s short-term financial 

obligations (including outstanding 

commercial paper). 

• Financial arrangements that can be 

terminated by counterparties and therefore 

become short-term (including callable debt, 

derivatives, securities lending, repurchase 

agreements, and off-balance-sheet exposures). 

• Long-term liabilities that may come due 

in a short-term period. 

• Financial transactions that may require 

the company to provide additional margin or 

collateral to the counterparty. 

• Products that allow customers rapidly to 

withdraw funds from the company. 

• Liabilities related to other collateralized 

borrowings and deposits. 

The Council will quantitatively identify 

the scale of potential liquidity needs that 

could plausibly arise at the company. As part 

of this analysis, the Council will apply 

counterparty and customer withdrawal rates 

based on historical examples and other 

relevant models to assess the scope of 


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plausible withdrawals. In addition, any 

ability of the company or its financial 

regulators to impose stays on counterparty 

terminations or withdrawals is relevant, 

because it may reduce the company’s 

liquidity needs in an event of material 

financial distress. The Council also will 

consider the company’s internal estimates of 

potential liquidity needs in a context of 

material financial distress. 

The company’s leverage and short-term 

debt ratios are relevant to this analysis, as 

high leverage and reliance on short-term 

funding can increase the potential for a 

company to be subject to sudden liquidity 

strains that force it rapidly to sell assets. 

Leverage can be measured by the ratio of 

assets to capital or 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. Comparisons 

of leverage to peer financial institutions can 

help indicate the level of risk at the 

company. Metrics that may be used to assess 

leverage include: 

• Total assets and total debt measured 

relative to total equity, which measures 

financial leverage. 

• Derivatives liabilities and off-balance 

sheet obligations relative to total equity, 

which may show how much off-balance sheet 

leverage a nonbank financial company may 

have. 

• Securities financing transactions and 

funding agreements that provide alternative 

sources of liquidity or operating income, 

which indicate the use of operating leverage. 

• Changes in leverage ratios, which may 

indicate that a nonbank financial company is 

increasing or decreasing its risk profile. 

Liquidity of the company’s assets. The 

second factor under the asset liquidation 

transmission channel is an analysis of the 

company’s assets that the company could 

rapidly liquidate, if necessary, to satisfy its 

obligations. In particular, the Council expects 

that this assessment will focus on the size 

and liquidity characteristics of the company’s 

investment portfolio. The Council will assess 

the company’s assets, grouped into categories 

such as highly liquid (for example, cash, U.S. 

Treasury securities, and U.S. agency 

mortgage-backed securities) and less-liquid 

(for example, corporate bonds, non-agency 

mortgage-backed securities, and mortgages 

and other loans) to determine if it holds cash 

instruments or readily marketable securities 

that could reasonably be expected to have a 

liquid market in times of broader market 

stress. To the extent that the company’s 

assets are encumbered, those assets would 

generally not be considered to be available to 

satisfy short-term obligations. 

Potential fire sale impacts. The third factor 

in the asset liquidation transmission channel 

analysis is the potential effects of the 

company’s asset liquidation on markets and 

market participants. As described above, the 

Council will assess the scale of potential 

liquidity needs that could plausibly arise at 

the company and the amount and nature of 

financial assets the company could sell to 

satisfy its obligations. In this step of the asset 

liquidation transmission channel analysis, 

the Council will apply quantitative models to 

assess how the company could satisfy the 

identified range of potential liquidity needs 

by rapidly selling its identified liquid assets. 

To assess this factor, the Council will 

compare the volume of the company’s 

potential liquidation of particular categories 

of financial instruments with the average 

daily trading volume in the United States of 

those types of instruments. In general, a rapid 

liquidation of a significant amount of 

relatively illiquid financial instruments, or 

instruments that are widely held by other 

market participants, will have a greater effect 

on the market than a liquidation of the same 

amount of highly liquid instruments or 

instruments that are not widely held. The 

Council may also conduct an analysis to 

assess the relative impact of negative shocks 

to the equity or assets of certain financial 

institutions on other financial institutions. 

The Council expects that its analysis will 

generally focus on potential asset liquidation 

periods of 30 to 90 days. 

The order in which a nonbank financial 

company may liquidate assets is a factor in 

the extent of any fire sale risk, but is subject 

to considerable uncertainties. A company 

could liquidate a significant portion of its 

highly liquid assets first, in order to reduce 

the likelihood that the company would be 

forced to liquidate illiquid assets in the event 

of its material financial distress. However, in 

the event of the company’s material financial 

distress, a company may also be expected to 

seek to maintain compliance with any 

applicable risk-based capital ratios and other 

requirements. Doing so might require a 

company to sell a mix of assets across a 

number of asset classes, rather than proceed 

with the sale of assets in order from most 

liquid to least liquid. Further, in the event of 

a significant market disruption, there could 

be a meaningful first-mover advantage to 

selling less-liquid assets first. For example, 

markets for less-liquid assets, such as private 

and public corporate bonds and asset-backed 

securities, could be prone to disruption in 

the event that a seller liquidated a large 

portion of its portfolio of those assets. Given 

these potential discounts, in some 

circumstances a company may be 

incentivized to sell a portion of its less-liquid 

assets first and to hold U.S. government 

securities and agency mortgage-backed 

securities, which tend to increase in value 

during a period of market turmoil. To the 

extent that a company’s highly liquid assets 

are encumbered (for example, under 

securities financing transactions or as 

collateral for loans), the company would also 

need to sell less-liquid assets to satisfy its 

liquidity needs. Further, a company’s 

holdings of liquid assets could be reduced 

before the company enters material financial 

distress. As a result, the Council may take 

into account company-specific factors in 

assessing the order in which the company 

might liquidate assets. One approach the 

Council may take is to assess the potential 

effects if the company sells pro rata portions 

of the more-liquid segments of its investment 

portfolio (such as cash and highly liquid 

instruments, U.S. agency securities, 

investment-grade public corporate debt 

securities, publicly traded equity securities, 

and asset backed-securities). 

Critical Function or Service Transmission 

Channel 

Under this transmission channel, the 

Council will consider the potential for a 

nonbank financial company to become 

unable or unwilling to provide a critical 

function or service that is relied upon by 

market participants and for which there are 

no ready substitutes and thereby pose a 

threat to U.S. financial stability. This factor 

is commonly referred to as ‘‘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. A risk 

under this transmission channel may be 

identified if a company provides a critical 

function or service that may not easily be 

substitutable. The Council’s analysis will 

also consider applicable factors that may 

mitigate potential risks under the critical 

function or service transmission channel. 

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 the nonbank 

financial company’s activities and critical 

functions and the importance of those 

activities and functions to the U.S. financial 

system and assess how those activities 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 will consider 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. 

The analysis of this channel incorporates 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 ability of other 

firms to replace those services, and the 

nonbank financial company’s market share. 

This analysis may focus on the company’s 

market share in specific product lines and 

the ability of substitutes to replace a service 

or function provided by the company. The 

Council’s evaluation of a nonbank financial 

company’s market share regarding a 

particular product or service may include 

assessments of the ability of the nonbank 

financial company’s competitors to expand to 

meet market needs during a period of overall 

stress in the financial services industry or in 

a weak macroeconomic environment; 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 


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15 Dodd-Frank Act section 113(a)(2)(H), 12 U.S.C. 

5323(a)(2)(H). 

16See MetLife, Inc. v. Financial Stability 

Oversight Council, 177 F. Supp.3d 219, 242 (D.D.C. 

2016) (quoting 12 U.S.C. 5323(a)(2)(K) and 

Michigan v. Environmental Protection Agency, 135 

S. Ct. 2699, 2707 (2015)). 

17The Council will also consider non-quantified 

benefits and costs. See Office of Management and 

Budget Circular A–4 (Sept. 17, 2003), section (E) 

(Developing Benefit and Cost Estimates) (7). 

18See Office of Management and Budget Circular 

A–4 (Sept. 17, 2003). 

19 Dodd-Frank Act section 112(a)(1)(C), 12 U.S.C. 

5322(a)(1)(C). 

functioning; and the economic implications 

of such a disruption. 

c. Complexity and Resolvability 

The potential threat a nonbank financial 

company could pose to U.S. financial 

stability may be mitigated or aggravated by 

the company’s complexity, opacity, or 

resolvability. In particular, a risk may be 

aggravated if a nonbank financial company’s 

resolution under ordinary insolvency regimes 

could disrupt key markets or have a material 

adverse impact on other financial firms or 

markets. An evaluation of a nonbank 

financial company’s complexity and 

resolvability entails an assessment of (1) the 

complexity of the nonbank financial 

company’s legal, funding, and operational 

structure, and (2) any obstacles to the rapid 

and orderly resolution of the nonbank 

financial company: 

• Legal structure factors may include the 

number of jurisdictions the company 

operates in, the number of subsidiaries, and 

the organizational structure. 

• Funding structure factors may include 

the degree of interaffiliate dependency for 

liquidity and funding (such as intercompany 

loans or other affiliate support arrangements), 

payment operation (such as treasury 

operations), and risk-management. 

• Operational structure factors may 

include the number of employees, the 

number of U.S. and non-U.S. locations, and 

the degree of inter-company dependency in 

regard to financial guarantees and support 

arrangements, the ability to separate 

functions and spin off services or business 

lines, the complexity and resiliency of 

intercompany and outsourced services and 

arrangements in resolution, and the 

likelihood of preserving franchise value in a 

recovery or resolution scenario. 

• Cross-border operational factors may 

include size and complexity of the 

company’s cross-border operations and 

impact of potential ring-fencing on an orderly 

resolution. 

Factors that would tend to increase the risk 

associated with a company’s complexity and 

resolvability include large size or scope of 

activities; a complex legal or operational 

structure; multi-jurisdictional operations and 

regulatory regimes; complex funding 

structures; the potential impact of a loss of 

key personnel; and shared services among 

affiliates. The opacity of a firm’s structure— 

if the firm’s structure and operations cannot 

readily or easily be determined—may present 

an obstacle to resolution. 

d. Existing Regulatory Scrutiny 

As noted above, one of the considerations 

the Council is statutorily required to take into 

account in making a determination under 

section 113 of the Dodd-Frank Act is the 

degree to which the nonbank financial 

company is already regulated by one or more 

primary financial regulatory agencies.15 In its 

analysis of this statutory consideration, the 

Council will focus on the extent to which 

existing regulation of the company has 

mitigated the potential risks to financial 

stability identified by the Council. For 

example, factors that may be used to assess 

existing regulatory scrutiny include: 

• The extent to which the company’s 

primary financial regulator has imposed riskmanagement standards such as capital, 

liquidity, and reporting requirements, as 

relevant to the type of company, and has 

authority to supervise, examine, and bring 

enforcement actions, with respect to the 

company and its affiliates. 

• Regulators’ processes for inter-regulator 

coordination. 

• For non-U.S. entities, the extent to which 

the company is supervised and subject to 

prudential standards on a consolidated basis 

in its home country that are administered 

and enforced by a comparable foreign 

supervisory authority. 

e. Benefits and Costs of Determination; 

Likelihood of Material Financial Distress 

Determining whether the expected benefits 

of a potential Council determination justify 

the expected costs is necessary to ensure that 

the Council’s actions are expected to provide 

a net benefit to U.S. financial stability and 

are consistent with thoughtful 

decisionmaking.16 Financial stability benefits 

may be difficult to quantify, and some of the 

costs may be difficult to forecast with 

precision. When possible, the Council will 

quantify reasonably estimable benefits and 

costs, using ranges, as appropriate, and based 

on empirical data when available. If such 

benefits or costs cannot be quantified in this 

manner, the Council will explain why such 

benefits or costs could not be quantified. The 

Council also expects to consider benefits and 

costs qualitatively.17 To the extent feasible, 

the Council will attempt to assess the relative 

importance of any such qualitative elements. 

The Council will make a determination 

under section 113 only if the expected 

benefits to financial stability from Federal 

Reserve supervision and prudential 

standards justify the expected costs that the 

determination would impose. As part of this 

analysis, the Council will assess the 

likelihood of a firm’s material financial 

distress, in order to assess the extent to 

which a determination may promote U.S. 

financial stability. 

The key elements of regulatory analysis 

include (1) a statement of the need for the 

proposed action, (2) an examination of 

alternative approaches, and (3) an evaluation 

of the benefits and costs (quantitative and 

qualitative) of the proposed action and the 

main alternatives.18 The Council will 

conduct this analysis only in cases where the 

Council is concluding that the company 

meets one of the standards for a 

determination by the Council under section 

113 of the Dodd-Frank Act, because in other 

cases doing so would not affect the outcome 

of the Council’s analysis. 

Benefits. With respect to the benefits of a 

Council determination, the Council will 

consider the benefits of the determination 

itself, both to (1) the U.S. financial system 

and long-term economic growth and (2) the 

nonbank financial company due to additional 

regulatory requirements resulting from the 

determination, particularly the prudential 

standards adopted by the Federal Reserve 

under section 165 of the Dodd-Frank Act. 

One of the Council’s statutory purposes is 

to respond to emerging threats to the stability 

of the U.S. financial system.19 The primary 

intended benefit of a determination under 

section 113 of the Dodd-Frank Act is a 

reduction in the likelihood or severity of a 

financial crisis. Therefore, the Council will 

consider potential benefits to the U.S. 

financial system and the U.S. economy 

arising from a Council determination. To the 

extent that a Council determination reduces 

the likelihood or severity of a potential 

financial crisis, the determination could 

enhance financial stability and mitigate the 

severity of economic downturns. The Council 

may use various measures of systemic risk to 

assess any improvement in financial stability. 

Such measures include S-Risk (which 

attempts to quantify the amount of capital a 

financial firm would need to raise in order 

to function normally in the event of a severe 

financial crisis), conditional value at risk, 

and certain estimates of fire sale risk, among 

others. To assess the benefit to the U.S. 

financial system and the U.S. economy from 

a determination, the Council may also 

consider historical analogues to the nonbank 

under review. In addition, the Council may 

compare the risks to financial stability posed 

by a particular nonbank to the risks posed by 

large bank holding companies, in order to 

produce an assessment of the relative risks 

the company may pose. Further, the loss of 

any implicit ‘‘too big to fail’’ or similar 

subsidy would be considered a benefit to the 

economy, even if it increases the nonbank 

financial company’s cost of capital. 

Analysis of the benefits of a determination 

for the relevant nonbank financial company 

may include those arising directly from the 

Council’s determination as well as any 

benefits arising from anticipated new or 

increased requirements resulting from the 

determination, such as additional 

supervision and enhanced capital, liquidity, 

or risk-management requirements. For 

example, a nonbank financial company 

subject to a Council determination may 

benefit from a lower cost of capital or higher 

credit ratings upon meeting its postdetermination regulatory requirements. 

Costs. With respect to the costs of a 

Council determination, the Council will 

consider the costs of the determination itself, 

both to (1) the nonbank financial company 

due to additional regulatory requirements 

resulting from the determination, including 

the costs of the prudential standards adopted 

by the Federal Reserve under section 165 of 

the Dodd Frank Act; and (2) the U.S. 

economy. 


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20 Dodd-Frank Act section 165, 12 U.S.C. 5365. 

21See Dodd-Frank Act section 112(d)(3), 12 

U.S.C. 5322(d)(3). 22See 12 CFR 1310.21(c). 

The Council will consider costs to the 

company arising from anticipated new or 

increased regulatory requirements resulting 

from the determination related to: 

• Risk-management requirements, such as 

the costs of capital planning and stress 

testing. 

• Supervision and examination, such as 

compliance costs to the firm of additional 

examination and supervision. 

• Increased capital requirements, after 

accounting for offsetting benefits to taxpayers 

and to the holders of the firm’s other 

liabilities. 

• Liquidity requirements, such as the 

opportunity cost from any requirement to 

hold additional high-quality liquid assets, 

relative to the company’s current investment 

portfolio. 

Because the Federal Reserve is required to 

tailor prudential standards to a nonbank 

financial company subject to a Council 

determination after the Council has made a 

determination regarding the company, the 

new regulatory requirements that result from 

the Council’s determination will not be 

known to the Council during its analysis of 

the company. In cases where the nonbank 

financial company under review primarily 

engages in bank-like activities, the Council 

may consider, as a proxy, the costs that 

would be imposed on the nonbank if the 

Federal Reserve imposed prudential 

standards similar to those imposed on bank 

holding companies with at least $250 billion 

in total consolidated assets under section 165 

of the Dodd-Frank Act.20

The Council also will consider the cost of 

a determination under section 113 of the 

Dodd-Frank Act to the U.S. economy by 

assessing the impact of the determination on 

the availability and cost of credit or financial 

products in relevant U.S. markets. To the 

extent that the markets in which the relevant 

nonbank participates have low concentration, 

the impact that the determination regarding 

one firm would have on credit conditions 

would generally be immaterial. However, if 

the relevant markets are concentrated, a 

Council determination regarding a significant 

market participant could have a material 

impact on credit conditions in that market. 

As part of this analysis, the Council may also 

consider the extent to which any reduction 

in financial services provided by the 

nonbank financial company under review 

would be offset by other market participants. 

Likelihood of Material Financial Distress. 

As part of the assessment of the overall 

impact of a Council determination for any 

company under review under the First 

Determination Standard, the Council will 

assess the likelihood of the company’s 

material financial distress based on its 

vulnerability to a range of factors. For 

example, these factors may include leverage 

(both on- and off-balance sheet), potential 

risks associated with asset reevaluations 

(whether such reevaluations arise from 

market disruptions or severe macroeconomic 

conditions), reliance on short-term funding 

or other fragile funding markets, maturity 

transformation, and risks from exposures to 

counterparties or other market participants. 

This assessment may rely upon historical 

examples regarding the characteristics of 

financial companies that have experienced 

financial distress, but may also consider 

other risks that do not have historical 

precedent. The Council’s analysis of the 

vulnerability of a nonbank financial company 

to material financial distress will be 

conducted taking into account a period of 

overall stress in the financial services 

industry and a weak macroeconomic 

environment. The Council may also consider 

the results of any stress tests that have 

previously been conducted by the company 

or by its primary financial regulatory agency. 

IV. The Determination Process 

As described in section II above, the 

Council will prioritize an activities-based 

approach for identifying, assessing, and 

addressing potential risks to financial 

stability. However, if a potential risk or threat 

to U.S. financial stability cannot be 

adequately addressed through an activitiesbased approach, the Council may consider a 

nonbank financial company for a potential 

determination under section 113 of the DoddFrank Act. The Council anticipates it would 

consider a nonbank financial company for a 

potential determination under section 113 

only in rare instances, such as if the 

products, activities, or practices of a 

company that pose a potential threat to U.S. 

financial stability are outside the jurisdiction 

or authority of financial regulatory agencies. 

The Council expects generally to follow a 

two-stage process of evaluation and analysis, 

as described below. 

In the first stage of the process (‘‘Stage 1’’), 

nonbank financial companies identified as 

potentially posing risks to U.S. financial 

stability will be notified and subject to a 

preliminary analysis, based on quantitative 

and qualitative information available to the 

Council primarily through public and 

regulatory sources. During Stage 1, the 

Council will permit, but not require, the 

company to submit relevant information. The 

Council will also consult with the primary 

financial regulatory agency or home country 

supervisor, as appropriate. This approach 

will enable the Council to fulfill its statutory 

obligation to rely whenever possible on 

information available through the Office of 

Financial Research (the ‘‘OFR’’), Council 

member agencies, or the nonbank financial 

company’s primary financial regulatory 

agencies before requiring the submission of 

reports from any nonbank financial 

company.21

Following Stage 1, nonbank financial 

companies that are selected for additional 

review will receive notice that they are being 

considered for a proposed determination that 

the company could pose a threat to U.S. 

financial stability (a ‘‘Proposed 

Determination’’) and will be subject to indepth evaluation during the second stage of 

review (‘‘Stage 2’’). Stage 2 will involve the 

evaluation of additional information 

collected directly from the nonbank financial 

company. At the end of Stage 2, 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 § 1310.21(c) of the 

Council’s rule.22 After making a Proposed 

Determination and holding any written or 

oral hearing if requested, the Council may 

vote to make a final determination. 

a. Stage 1: Preliminary Evaluation of 

Nonbank Financial Companies 

Stage 1 involves a preliminary analysis of 

nonbank financial companies to assess the 

risks they could pose to U.S. financial 

stability. 

Identification of Company for Review in 

Stage 1 

If, as described in section II, the Council’s 

consultation with and any recommendations 

to a nonbank financial company’s primary 

financial regulatory agency do not adequately 

address a potential risk identified by the 

Council, the Council may evaluate one or 

more individual nonbank financial 

companies for an entity-specific 

determination under section 113 of the DoddFrank Act. The Council will vote to 

commence review of a nonbank financial 

company in Stage 1. When evaluating the 

potential risks associated with a nonbank 

financial company, the Council may consider 

the company and its subsidiaries together. 

This approach enables the Council to 

consider potential risks arising across the 

consolidated organization, while retaining 

the ability to make a determination regarding 

either the parent or any individual nonbank 

financial company subsidiary (or neither), 

depending on which entity the Council 

determines could pose a threat to financial 

stability. 

Engagement With Company and Regulators 

in Stage 1 

The Council will provide a notice to any 

nonbank financial company under review in 

Stage 1. In Stage 1, the Council will consider 

available public and regulatory information; 

in addition, a company under review in Stage 

1 may submit to the Council any information 

it deems relevant to the Council’s evaluation 

and may, upon request, meet with staff of 

Council members and member agencies who 

are leading the Council’s analysis. In order to 

reduce the burdens of review on the 

company, the Council will not require the 

company to submit information during Stage 

1. In addition, staff representing Council 

members will, upon request, provide the 

company with a list of the primary public 

sources of information being considered 

during the Stage 1 analysis, so that the 

company has an opportunity to understand 

the information the Council may rely upon 

during Stage 1. Through this engagement, the 

Council will seek to enable the company 

under review to understand the focus of the 

Council’s analysis, which may enable the 

company to act to mitigate any risks to 

financial stability and thereby potentially 

avoid becoming subject to a Council 

determination. 


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71768 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Rules and Regulations 

23 Dodd-Frank Act section 113(g), 12 U.S.C. 

5323(g). 24See 12 CFR 1310.21(a). 

25The Council’s Deputies Committee is 

composed of senior officials from each Council 

member and member agency. It coordinates and 

oversees the work of the Council’s other interagency 

staff committees. 

26 12 CFR 1310.10(b). 

27 Dodd-Frank Act section 113(e)(1), 12 U.S.C. 

5323(e)(1). 

During the discussions in Stage 1 with the 

company, the Council intends for staff of 

Council members and member agencies to 

explain to the company the key risks that 

have been identified in the analysis. Because 

the review of the company is preliminary and 

continues to change until the Council makes 

a final determination, these identified risks 

may shift over time. 

The Council will also consider in Stage 1 

information available from relevant existing 

regulators of the company. Under the DoddFrank Act, the Council is required to 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 a 

determination before the Council makes any 

final determination with respect to such 

company.23 For any company under review 

in Stage 1 that is regulated by a primary 

financial regulatory agency or home country 

supervisor, the Council will notify the 

regulator or supervisor that the company is 

under review no later than such time as the 

company is notified. As part of that 

consultation process, the Council will 

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 in 

Stage 1. The Council will actively solicit the 

regulator’s views regarding risks at the 

company and potential mitigants. In order to 

enable the regulator to provide relevant 

information, the Council will share its 

preliminary views regarding potential risks at 

the company, and request that the regulator 

provide information regarding those specific 

risks, including whether the risks are 

adequately mitigated by factors such as 

existing regulation or the company’s business 

practices. During the determination process, 

the Council will continue to encourage the 

regulator to address any risks to U.S. 

financial stability using the regulator’s 

existing authorities; if the Council believes 

the regulator’s actions adequately address the 

potential risks to U.S. financial stability the 

Council has identified, the Council may 

discontinue its consideration of the firm for 

a potential determination under section 113 

of the Dodd-Frank Act. 

Based on the preliminary evaluation in 

Stage 1, the Council may vote to commence 

a more detailed analysis of the company by 

advancing the company to Stage 2, or it may 

decide not to evaluate the company further. 

If the Council determines not to advance a 

company that has been reviewed in Stage 1 

to Stage 2, the Council will notify the 

company in writing of the Council’s decision. 

The notice will clarify that a decision not to 

advance the company from Stage 1 to Stage 

2 at that time does not preclude the Council 

from reinitiating review of the company in 

Stage 1. For example, the Council may 

reinitiate review of the company if material 

changes affecting the firm merit further 

evaluation. 

b. Stage 2: In-Depth Evaluation 

Stage 2 involves an in-depth evaluation of 

any company that the Council has 

determined merits additional review. 

In Stage 2, the Council will review the 

relevant company using information 

collected directly from the nonbank financial 

company, through the OFR, as well as public 

and regulatory information. 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 

Council expects that the transmission 

channels and the other factors described 

above will be used to evaluate a nonbank 

financial company’s potential to pose a threat 

to U.S. financial stability. 

Engagement With Company and Regulators 

in Stage 2 

Each nonbank financial company to be 

evaluated in Stage 2 will receive a notice (a 

‘‘Notice of Consideration’’) that the nonbank 

financial company is under consideration for 

a Proposed Determination. The Council also 

will submit to the company a request that the 

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.24

This information will generally be collected 

by the OFR. Before requiring the submission 

of reports from any nonbank financial 

company that is regulated by a Council 

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. During Stage 

2, the company may also submit any other 

information that it deems relevant to the 

Council’s evaluation. Information considered 

by the Council includes details regarding the 

company’s financial activities, legal 

structure, liabilities, counterparty exposures, 

resolvability, and existing regulatory 

oversight. 

Information requests likely will involve 

both qualitative and quantitative data. 

Information relevant to the Council’s analysis 

may include confidential business 

information such as detailed information 

regarding financial assets, terms of funding 

arrangements, counterparty exposure or 

position data, strategic plans, and 

interaffiliate transactions. 

The Council will make staff representing 

Council members available to meet with the 

representatives of any company that enters 

Stage 2, to explain the evaluation process and 

the framework for the Council’s analysis. If 

the analysis in Stage 1 has identified specific 

aspects of the company’s operations or 

activities as the primary focus for the 

evaluation, staff will notify the company of 

those issues, although the issues will be 

subject to change based on the ongoing 

analysis. In addition, the Council expects 

that its Deputies Committee 25 will grant a 

request to meet with a company in Stage 2 

to allow the company to present any 

information or arguments it deems relevant 

to the Council’s evaluation. 

During Stage 2 the Council will also seek 

to continue its consultation with the 

company’s primary financial regulatory 

agency or home country supervisor in a 

timely manner before the Council makes any 

proposed or final determination with respect 

to such nonbank financial company. The 

Council will continue to encourage the 

regulator during the determination process to 

address any risks to U.S. financial stability 

using the regulator’s existing authorities; as 

noted above, if the Council believes the 

regulator’s actions adequately address the 

potential risks to U.S. financial stability the 

Council has identified, the Council may 

discontinue its consideration of the firm for 

a potential determination under section 113 

of the Dodd-Frank Act. 

Before making a Proposed Determination 

regarding a nonbank financial company, the 

Council will notify the company when the 

Council believes that the evidentiary record 

regarding such nonbank financial company is 

complete. The Council will notify any 

nonbank financial company in Stage 2 if the 

nonbank financial company ceases to be 

considered for a 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, consistent with the 

processes described above. 

c. Proposed and Final Determination 

Proposed Determination 

Based on the analysis performed in Stage 

2, a nonbank financial company may be 

considered for a Proposed Determination. A 

proposed determination requires a vote of 

two-thirds of the voting members of the 

Council then serving, including an 

affirmative vote by the Chairperson of the 

Council.26 Following a Proposed 

Determination, the Council will 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.27 Promptly after 

the Council votes to make a proposed 

determination regarding a company, the 

Council will provide the company’s primary 

financial regulatory agency or home country 

supervisor (subject to appropriate protections 

for confidential information) with the 

nonpublic written explanation of the basis of 

the Council’s proposed or final 

determination. The Council also will publish 

the explanation of the basis of the Proposed 

Determination, subject to redactions to 


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Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Rules and Regulations 71769 

28See 12 CFR 1310.21(c). 

29Financial Stability Oversight Council Hearing 

Procedures for Proceedings Under Title I or Title 

VIII of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, available at https://

www.treasury.gov/initiatives/fsoc/designations/ 

Pages/Hearing-Procedures.aspx. 

30 Dodd-Frank Act section 113(e)(3), 12 U.S.C. 

5323(e)(3); see also 12 CFR 1310.21(d)(2) and (e)(2). 

31See 12 CFR 1310.21(d)(3) and (e)(3) and 

1310.22(d)(3). 

32See Dodd-Frank Act section 112(d)(5), 12 

U.S.C. 5322(d)(5); see also 12 CFR 1310.20(e). 

33See note 12 above. 

protect confidential information from the 

company or its regulators. 

Hearing 

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 § 1310.21(c) of the Council’s 

rule,28 the Council will set a time and place 

for such hearing. The Council has published 

hearing procedures on its website.29 In light 

of the short statutory timeframe for 

conducting a hearing, and the fact that the 

purpose of the hearing is to benefit the 

company, if a company requests that the 

Council waive the statutory deadline for 

conducting the hearing, the Council may do 

so in appropriate circumstances. 

Final Determination 

After making a Proposed Determination 

and holding any requested written or oral 

hearing, the Council may, by a vote of not 

fewer than two-thirds of the voting members 

of the Council then serving (including an 

affirmative vote by the Chairperson of the 

Council), make a final determination that the 

company will be subject to supervision by 

the Federal Reserve and prudential 

standards. If the Council makes a final 

determination, it will provide the company 

with a written notice of the Council’s final 

determination, including an explanation of 

the basis for the Council’s decision.30 The 

Council will also provide the company’s 

primary financial regulatory agency or home 

country supervisor (subject to appropriate 

protections for confidential information) with 

the nonpublic written explanation of the 

basis of the Council’s final determination. 

The Council expects that its explanation of 

the final basis for any determination will 

highlight the key risks that led to the 

determination and include clear guidance 

regarding the factors that were most 

important in the Council’s determination. 

When practicable and consistent with the 

purposes of the determination process, the 

Council will provide a nonbank financial 

company with a notice of a final 

determination at least one business day 

before publicly announcing the 

determination pursuant to § 1310.21(d)(3), 

§ 1310.21(e)(3), or § 1310.22(d)(3) of the 

Council’s rule.31 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. 

The Council does not intend to publicly 

announce the name of any nonbank financial 

company that is under evaluation prior to a 

final determination with respect to such 

company. However, if a company that is 

under review in Stage 1 or Stage 2 publicly 

announces the status of its review by the 

Council, the Council intends, upon the 

request of a third party, to confirm the status 

of the company’s review. In addition, the 

Council will publicly release the explanation 

of the Council’s basis for any nonbank 

financial company determination or 

rescission of a determination. The Council is 

subject to statutory and regulatory 

requirements to maintain the confidentiality 

of certain information submitted to it by a 

nonbank financial company or its 

regulators.32 In light of these confidentiality 

obligations, such confidential information 

will be redacted from the materials that the 

Council makes publicly available. 

V. Annual Reevaluations of Nonbank 

Financial Company Determinations 

After the Council makes a final 

determination regarding a company, the 

Council intends to encourage the company or 

its regulators to take steps to mitigate the 

potential risks identified in the Council’s 

written explanation of the basis for its final 

determination. Except in cases where new 

material risks arise over time, if a company 

adequately addresses the potential risks 

identified in writing by the Council at the 

time of the final determination and in 

subsequent reevaluations, the Council should 

generally be expected to rescind its 

determination regarding the company. 

For any nonbank financial company that is 

subject to a final determination, the Council 

is required to reevaluate the determination at 

least annually, and to rescind the 

determination if the Council determines that 

the company no longer meets the statutory 

standards for a determination. The Council 

may also consider a request from a company 

for a reevaluation before the next required 

annual reevaluation, in the case of an 

extraordinary change that materially 

decreases the threat the nonbank financial 

company could pose to U.S. financial 

stability.33

The Council applies the same standards of 

review in its annual reevaluations as the 

standard for an initial determination 

regarding a nonbank financial company: 

Either the company’s material financial 

distress, or the nature, scope, size, scale, 

concentration, interconnectedness, or mix of 

the company’s activities, could pose a threat 

to U.S. financial stability. If the Council 

determines that the company no longer meets 

those standards, the Council will rescind its 

determination. 

The Council’s annual reevaluations 

generally assess whether any material 

changes since the previous reevaluation and 

since the determination justify a rescission of 

the determination, based on the same 

transmission channels and other factors that 

are considered during a determination 

decision. The Council expects that its 

reevaluation process will focus on whether 

any material changes—including changes at 

the company, changes in its markets or its 

regulation, changes in the Council’s own 

analysis, or otherwise—result in the 

company no longer meeting the standard for 

a determination. In light of the frequent 

reevaluations, the Council’s analyses will 

generally focus on changes since the 

Council’s previous review, but the ultimate 

question the Council will seek to assess is 

whether changes in the aggregate since the 

Council’s determination regarding the 

company have caused the company to cease 

meeting the Determination Standards. The 

Council expects that its analysis in its annual 

reevaluations will generally be organized 

around the three transmission channels 

described above as well as existing regulatory 

scrutiny and the company’s complexity and 

resolvability. 

Before the Council’s annual reevaluation of 

a determination regarding a nonbank 

financial company, the Council will provide 

the company with an opportunity to meet 

with staff of Council members and member 

agencies to discuss the scope and process for 

the review and to present information 

regarding any change that may be relevant to 

the threat the company could pose to 

financial stability. Staff of Council members 

and member agencies will also be available 

to meet with the company during the annual 

reevaluation, at the company’s request. In 

addition, during an annual reevaluation, a 

company may submit any written 

information to the Council the company 

considers relevant to the Council’s analysis. 

During annual reevaluations, companies are 

encouraged to submit information regarding 

any changes related to the company’s risk 

profile that mitigate the potential risks 

previously identified by the Council. Such 

changes could include updates regarding 

company restructurings, regulatory 

developments, market changes, or other 

factors. If the company has taken steps to 

address the potential risks previously 

identified by the Council, the Council will 

assess whether those risks have been 

adequately mitigated to merit a rescission of 

the determination regarding the company. If 

the company explains in detail potential 

changes it could make to its business to 

address the potential risks previously 

identified by the Council, staff of Council 

members and member agencies will endeavor 

to provide their feedback on the extent to 

which those changes may address the 

potential risks. 

If a company contests the Council’s 

determination during the Council’s annual 

reevaluation, the Council will vote on 

whether to rescind the determination and 

provide the company, its primary financial 

regulatory agency, and the primary financial 

regulatory agency of its significant 

subsidiaries with a notice explaining the 

primary basis for any decision not to rescind 

the determination. If the Council does not 

rescind the determination, the written notice 

provided to the company will address each 

of the material factors raised by the company 

in its submissions to the Council contesting 

the determination during the annual 

reevaluation. The written notice from the 

Council will also explain in detail why the 


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71770 Federal Register / Vol. 84, No. 249 / Monday, December 30, 2019 / Rules and Regulations 

Council did not find that the company no 

longer met the standard for a determination 

under section 113 of the Dodd-Frank Act. In 

general, due to the sensitive nature of its 

analyses in annual reevaluations, the Council 

may not in all cases publicly release the 

written findings that it provides to the 

company. 

Finally, the Council will provide each 

nonbank financial company subject to a 

Council determination with an opportunity 

for an oral hearing before the Council once 

every five years at which the company can 

contest the determination. 

Dated: December 9, 2019. 

Howard Adler, 

Deputy Assistant Secretary for the Financial 

Stability Oversight Council, Department of 

the Treasury. 

[FR Doc. 2019–27108 Filed 12–27–19; 8:45 am] 

BILLING CODE 4810–25–P–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2019–0912; Product 

Identifier 2019–NE–33–AD; Amendment 39– 

21011; AD 2019–25–13] 

RIN 2120–AA64 

Airworthiness Directives; Engine 

Alliance Turbofan Engines 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final rule; request for 

comments. 

SUMMARY: The FAA is adopting a new 

airworthiness directive (AD) for all 

Engine Alliance (EA) GP7270 and 

GP7277 model turbofan engines with a 

certain low-pressure compressor (LPC) 

1st-stage fan blade installed. This AD 

requires an ultrasonic inspection of the 

affected LPC 1st-stage fan blades and 

replacement of any affected fan blades 

that fail the inspection. This AD was 

prompted by a report of an in-flight 

shutdown (IFSD) of an engine due to the 

fracture of multiple fan blades. The FAA 

is issuing this AD to address the unsafe 

condition on these products. 

DATES: This AD is effective January 14, 

2020. 

The Director of the Federal Register 

approved the incorporation by reference 

of a certain publication listed in this AD 

as of January 14, 2020. 

The FAA must receive comments on 

this AD by February 13, 2020. 

ADDRESSES: You may send comments, 

using the procedures found in 14 CFR 

11.43 and 11.45, by any of the following 

methods: 

• Federal eRulemaking Portal: Go to 

https://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: 202–493–2251. 

• Mail: U.S. Department of 

Transportation, Docket Operations, M– 

30, West Building Ground Floor, Room 

W12–140, 1200 New Jersey Avenue SE, 

Washington, DC 20590. 

• Hand Delivery: U.S. Department of 

Transportation, Docket Operations, M– 

30, West Building Ground Floor, Room 

W12–140, 1200 New Jersey Avenue SE, 

Washington, DC 20590, between 9 a.m. 

and 5 p.m., Monday through Friday, 

except Federal holidays. 

For service information identified in 

this final rule, contact Engine Alliance, 

411 Silver Lane, East Hartford, CT, 

06118; phone: 800–565–0140; email: 

help24@pw.utc.com; website: 

www.engineallianceportal.com. You 

may view this service information at the 

FAA, Engine and Propeller Standards 

Branch, 1200 District Avenue, 

Burlington, MA 01803. For information 

on the availability of this material at the 

FAA, call 781–238–7759. It is also 

available on the internet at https://

www.regulations.gov by searching for 

and locating Docket No. FAA–2019– 

0912. 

Examining the AD Docket 

You may examine the AD docket on 

the internet at https://

www.regulations.gov by searching for 

and locating Docket No. FAA–2019– 

0912; or in person at Docket Operations 

between 9 a.m. and 5 p.m., Monday 

through Friday, except Federal holidays. 

The AD docket contains this final rule, 

the regulatory evaluation, any 

comments received, and other 

information. The street address for the 

Docket Operations is listed above. 

Comments will be available in the AD 

docket shortly after receipt. 

FOR FURTHER INFORMATION CONTACT: 

Matthew Smith, Aerospace Engineer, 

ECO Branch, FAA, 1200 District 

Avenue, Burlington, MA 01803; phone: 

781–238–7735; fax: 781–238–7199; 

email: Matthew.C.Smith@faa.gov. 

SUPPLEMENTARY INFORMATION: 

Discussion 

The FAA received a report of an IFSD 

that occurred during a revenue flight on 

March 10, 2019. The IFSD resulted from 

the fracture of two LPC 1st-stage fan 

blades. After an analysis of these 

fractures, the manufacturer determined 

the fan blades experienced cracks that 

originated on the internal surface of the 

convex airfoil and propagated to the 

point of failure. The cracks originated in 

a microtexture area that can result in a 

low-cycle fatigue debit that may allow a 

crack to initiate and propagate to failure. 

This condition, if not addressed, could 

result in uncontained fan blade release, 

damage to the engine, and damage to the 

airplane. The FAA is issuing this AD to 

address the unsafe condition on these 

products. 

Related Service Information Under 1 

CFR Part 51 

The FAA reviewed EA Service 

Bulletin (SB) EAGP7–A72–426, dated 

September 30, 2019. The SB describes 

procedures for performing an ultrasonic 

inspection of the LPC 1st-stage fan 

blades. This service information is 

reasonably available because the 

interested parties have access to it 

through their normal course of business 

or by the means identified in the 

ADDRESSES section. 

FAA’s Determination 

The FAA is issuing this AD because 

the FAA evaluated all the relevant 

information and determined the unsafe 

condition described previously is likely 

to exist or develop in other products of 

the same type design. 

AD Requirements 

This AD requires an ultrasonic 

inspection of the affected LPC 1st-stage 

fan blades and replacement of any 

affected fan blades that fail the 

inspection. 

Interim Action 

The FAA considers this AD interim 

action. The root cause of the LPC 1ststage fan blade fracture is still 

undetermined and the FAA will 

consider further rulemaking depending 

on the results of the investigation. 

FAA’s Justification and Determination 

of the Effective Date 

Since there are currently no domestic 

operators of this product, notice and 

opportunity for public comment before 

issuing this AD are unnecessary. In 

addition, for the reason stated above, the 

FAA finds that good cause exists for 

making this amendment effective in less 

than 30 days. 

Comments Invited 

This AD is a final rule that involves 

requirements affecting flight safety and 

was not preceded by notice and an 

opportunity for public comment. 

However, the FAA invites you to send 

any written data, views, or arguments 

about this final rule. Send your 

comments to an address listed under the 

ADDRESSES section. Include the docket 

number FAA–2019–0912 and Product 

Identifier 2019–NE–33–AD at the 


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