Regulatory Developments; Council Activities 97

Over the last year, Dodd-Frank Act implementation included introducing 

stronger supervision, risk management, stress testing, and disclosure standards; 

establishing resolution plans and an orderly liquidation regime for financial 

companies; regulating the derivatives markets to reduce risk and increase 

transparency; reforming the securitization markets; enhancing standards and 

disclosure requirements for hedge fund advisers; and implementing measures to 

enhance consumer and investor protection.

In addition, the Council has continued to make progress in fulfilling its mandate. 

It has issued a final rule and guidance relating to the designation of nonbank 

financial companies for Federal Reserve supervision and enhanced prudential 

standards, and has finalized the designation of an initial set of eight systemically 

important financial market utilities that will be subject to enhanced riskmanagement standards. The Council also continued to monitor potential risks 

to U.S. financial stability; fulfilled explicit statutory requirements, including 

the completion of three reports; and served as a forum for discussion and 

coordination among the member agencies implementing the Dodd-Frank Act.

The following is a discussion of the significant implementation progress the 

Council and its member agencies have achieved since the Council’s previous 

annual report.

6.1 Safety and Soundness

6.1.1 Enhanced Prudential Standards and Dodd-Frank Act Stress Tests

Sections 165 and 166 of the Dodd-Frank Act require the Federal Reserve to establish 

enhanced prudential standards and early remediation requirements for certain large 

bank holding companies (BHCs) and for nonbank financial companies designated 

for Federal Reserve supervision. In December 2011, the Federal Reserve issued, 

for public comment, a proposal to implement the enhanced prudential standards 

and early remediation requirements. The Dodd-Frank Act requires the enhanced 

standards established by the Federal Reserve for covered companies under Section 

165 to (1) be more stringent than those standards applicable to other BHCs and 

nonbank financial companies that do not present similar risks to U.S. financial 

stability and (2) increase in stringency based on the systemic footprint and risk 

characteristics of individual covered companies. 

The Federal Reserve’s proposal includes risk-based capital, leverage, liquidity, singlecounterparty credit exposure limits, supervisory and company-run stress testing, 

risk management and a risk committee, and early remediation requirements. 

The proposal would generally apply to all U.S. BHCs with consolidated assets of 

$50 billion or more and any nonbank financial company that is designated by the 

Council for supervision by the Federal Reserve. The requirements to establish a 

risk committee of the board of directors and to conduct a company-run stress test 

6 Regulatory Developments; Council Activities
98 2012 FSOC // Annual Report

would also apply to BHCs with total consolidated assets of $10 billion or more. With 

the exception of the requirements related to company-run stress tests, savings and 

loan holding companies (SLHCs) that are not designated by the Council would not 

be subject to the requirements under this proposal. The Federal Reserve’s proposal 

addresses the following:

Risk-based capital and leverage requirements. These rules would be 

implemented in two phases. In the first phase, the institutions would be subject 

to the Federal Reserve’s capital plan rule, which was published in December 2011. 

That rule requires covered companies to develop annual capital plans, conduct 

stress tests, and maintain adequate capital, including a tier one common riskbased capital ratio greater than 5 percent, under both expected and stressed 

conditions. In the second phase, the Federal Reserve would issue a proposal 

to implement a risk-based capital surcharge based on the framework and 

methodology developed by the Basel Committee on Banking Supervision (BCBS). 

Liquidity requirements. These measures would also be implemented in multiple 

phases. First, covered companies would be subject to qualitative liquidity 

risk-management standards generally based on the interagency liquidity riskmanagement guidance issued in March 2010. These standards would require 

covered companies to conduct internal liquidity stress tests and set internal 

quantitative limits to manage liquidity risk. In the second phase, the Federal 

Reserve would issue one or more proposals to implement quantitative liquidity 

requirements based on the Basel III liquidity requirements. 

Stress tests. Stress tests of the covered companies would be conducted annually 

by the Federal Reserve using three economic and financial market scenarios. A 

summary of the results, including company-specific information, would be made 

public. In addition, the proposal would require covered companies to conduct 

one or more company-run stress tests each year and to make a summary of their 

results public.

Single-counterparty credit limits. These requirements would limit credit 

exposure of a covered financial company to a single counterparty as a percentage 

of the firm’s regulatory capital. Credit exposure between the largest financial 

companies would be subject to a tighter limit.

Risk management requirements. The proposal would require covered 

companies to establish a stand-alone risk committee of the board of directors, 

and appoint a chief risk officer to oversee enterprise-wide risk management. 

BHCs with $10 billion or more in consolidated assets would also be required to 

establish an independent risk committee of the board.

Early remediation requirements. These measures would be put in place for all 

firms subject to the proposal so that financial weaknesses are addressed at an early 

stage. The Federal Reserve has proposed a number of triggers for remediation—

such as capital levels, stress test results, and risk-management weaknesses—in 

some cases calibrated to be forward-looking. Required actions would vary based 
Regulatory Developments; Council Activities 99

on the severity of the situation but could include restrictions on growth, capital 

distributions, and executive compensation, as well as capital raising or asset sales.

The Federal Reserve consulted with members of the Council in developing this 

proposal. The comment period for the proposal closed on April 30, 2012.

In addition to the stress-testing requirements to be conducted by the Federal 

Reserve, Section 165(i)(2) of the Dodd-Frank Act also requires certain financial 

institutions to conduct stress tests based on regulations issued by that institution’s 

primary federal regulator. In January 2012, the OCC, Federal Reserve, and FDIC 

issued proposed rules to implement these stress test requirements for institutions 

where they are the primary federal regulator. The comment period on these rules 

closed in April 2012. The Federal Reserve, OCC, and FDIC are coordinating their 

respective rulemakings to implement these provisions.

6.1.2 Transfer of Office of Thrift Supervision Functions

Title III of the Dodd-Frank Act transferred various powers and functions of 

the former Office of Thrift Supervision (OTS) to the OCC, FDIC, and Federal 

Reserve. This transfer of functions occurred on July 21, 2011, with the Federal 

Reserve assuming responsibilities for SLHCs, the OCC assuming responsibilities 

for federal savings associations, and the FDIC for state savings associations. The 

OCC, FDIC, and Federal Reserve coordinated their efforts to help ensure a smooth 

transfer of these functions and affected OTS employees. To clarify which agency 

will be enforcing the OTS rules, the Dodd-Frank Act required the OCC, FDIC, 

and Federal Reserve to publish a notice in the Federal Register identifying those 

regulations of the OTS that the agencies will enforce. The FDIC and OCC issued 

a joint notice on July 6, 2011, and the Federal Reserve issued its notice on July 21, 

2011. The OCC has taken a number of additional actions to incorporate applicable 

OTS regulations in the OCC’s chapter of the Code of Federal Regulations and 

to integrate OTS and OCC regulations and supervisory guidance. The Federal 

Reserve has similarly taken several steps to establish regulations and supervisory 

guidance for SLHCs. On July 21, 2011, the Federal Reserve issued supervisory 

guidance discussing the Federal Reserve’s transitional supervisory approach for 

SLHCs. The Federal Reserve also published an interim rule to incorporate SLHCs 

into the Federal Reserve’s chapter of the Code of Federal Regulations and notices 

outlining the regulatory reporting requirements for SLHCs.

As of December 31, 2011, there were 417 top tier SLHCs with estimated 

total consolidated assets of approximately $3 trillion. These SLHCs include 

approximately 48 companies engaged primarily in nonbanking activities, such 

as insurance underwriting (approximately 27 SLHCs), commercial activities 

(approximately 11 SLHCs), and securities brokerage (10 SLHCs). 

The 25 largest SLHCs accounted for more than $2.6 trillion of total consolidated 

assets. Of the SLHCs engaged primarily in depository activities, only five 

institutions were in the top 25, yet approximately 88 percent of the total SLHCs 

were engaged primarily in depository activities. The depository firms, however, held 

only 13 percent or $388 billion of the total SLHC consolidated assets.
100 2012 FSOC // Annual Report

6.1.3 Capital Standards, Comprehensive Capital Analysis and Review, and 

Supervisory Guidance Regarding Stress-Testing Practices 

In June 2012, the federal banking agencies invited comment on three joint 

proposed rules that would revise and replace the agencies’ current capital 

rules. The proposals would implement, in the United States, certain aspects 

of Basel II and 2.5, the Basel III capital reforms, and the Dodd-Frank Act, and 

would address shortcomings in regulatory capital requirements that became 

apparent during the recent financial crisis. The first Basel III notice of proposed 

rulemaking (NPR) would apply to all insured banks and savings associations, 

top-tier BHCs domiciled in the United States with more than $500 million in 

assets, and SLHCs that are domiciled in the United States. Provisions of this NPR 

that would apply to these banking organizations include implementation of a new 

common equity tier one minimum capital requirement, a higher minimum tier 

one capital requirement, and, for banking organizations subject to the advanced 

approaches capital rules, a supplementary leverage ratio that incorporates a 

broader set of exposures. Additionally, consistent with Basel III, the agencies 

propose to apply limits on a banking organization’s capital distributions and 

certain discretionary bonus payments if the banking organization does not hold a 

specified “buffer” of common equity tier one capital in addition to the minimum 

risk-based capital requirements. This NPR also would revise the agencies’ 

prompt corrective action framework by incorporating the new regulatory capital 

minimums and introducing common equity tier one capital as a new regulatory 

capital component. Prompt corrective action is an enforcement framework that 

constrains the activities of an insured depository institution based on its level of 

regulatory capital.

In the second capital NPR, also known as the “standardized approach,” the 

agencies propose to revise and harmonize rules for calculating risk-weighted 

assets to enhance risk sensitivity and address weaknesses identified over recent 

years, including by incorporating aspects of the Basel II standardized framework, 

and alternatives to credit ratings, consistent with Section 939A of the DoddFrank Act. The revisions include methods for determining risk-weighted assets 

for residential mortgages, securitization exposures, and counterparty credit risk. 

The NPR also would introduce disclosure requirements that would apply to U.S. 

banking organizations with $50 billion or more in total assets. This NPR would 

apply to the same set of institutions as the first NPR.

The third Basel III NPR would revise the advanced approaches risk-based capital 

rules consistent with Basel III and other changes to the BCBS’s capital standards. 

The agencies also propose revising the advanced approaches risk-based capital 

rules to be consistent with Section 939A and Section 171 of the Dodd-Frank Act. 

Additionally, in this NPR, the OCC and FDIC propose that the market risk capital 

rules apply to federal and state savings associations, and the Federal Reserve 

proposes that the advanced approaches and market risk capital rules apply to 

top-tier SLHCs domiciled in the United States if stated thresholds for trading 

activity are met. Generally, the advanced approaches rules would apply to such 

institutions with $250 billion or more in consolidated assets or $10 billion or more 
Regulatory Developments; Council Activities 101

in foreign exposure, and the market risk capital rule would apply to SLHCs with 

significant trading activity.

In March 2012, the Federal Reserve disclosed summary results of the 2012 

Comprehensive Capital Analysis and Review (CCAR). The CCAR is an exercise 

to evaluate the capital planning processes and capital adequacy of the largest 

BHCs. This exercise includes both company-run and supervisory stress tests to 

evaluate whether firms would have sufficient capital in times of severe economic 

and financial stress to continue to lend to households and businesses. The Federal 

Reserve estimated revenue and losses under the stress scenario based on detailed 

data provided by the firms and verified by supervisors. (See Section 5.2 for a more 

detailed discussion of the CCAR.)

As a part of the CCAR, the Federal Reserve evaluates institutions’ capital plans 

across a range of criteria, including a stress test that examines whether a firm 

could make all the capital distributions included in its plan, such as dividends 

and stock repurchases, while still maintaining capital above the Federal Reserve’s 

standards in a hypothetical supervisory stress scenario. Other considerations for 

capital distributions include an evaluation of the firms’ capital planning processes 

and plans to meet the new Basel III requirements that are scheduled to be phased 

in beginning 2013, assuming the final adoption of the Basel III NPR.

Under the Federal Reserve’s proposed stress-testing rules (noted in Section 

6.1.1), the results of the company-run stress test would be incorporated into the 

analysis supporting a company’s capital plan submission. The supervisory stress 

test would be conducted by the Federal Reserve during the annual capital plan 

review process and would be used as a tool to help the Federal Reserve assess the 

adequacy of the company’s capital plan. 

In April 2012, the Federal Reserve announced the formation of the Model 

Validation Council (MVC). The MVC will provide the Federal Reserve with 

expert and independent advice on its process to rigorously assess the models 

used in stress tests of banking institutions. The MVC is intended to improve the 

quality of the Federal Reserve’s model assessment program and to strengthen the 

confidence in the integrity and independence of the program.

In May 2012, the Federal Reserve, OCC, and FDIC issued final supervisory 

guidance regarding stress-testing practices at banking organizations with 

total consolidated assets of more than $10 billion. The guidance highlights 

the importance of stress testing at banking organizations as an ongoing 

risk-management practice that supports a banking organization’s forwardlooking assessment of its risks and better equips it to address a range of 

adverse outcomes. While the guidance does not implement the stress-testing 

requirements of the Dodd-Frank Act for certain large BHCs and nonbank 

financial companies designated for supervision by the Federal Reserve (see 

Section 6.1.1), the guidance is intended to provide entities subject to the 

Dodd-Frank Act or other stress-testing requirements with principles to follow 
102 2012 FSOC // Annual Report

when conducting stress tests in accordance with the Dodd-Frank Act or other 

statutory or regulatory requirements.

6.1.4 Volcker Rule

Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, 

generally prohibits banking entities from engaging in proprietary trading and 

from investing in or sponsoring hedge funds and private equity funds, subject to 

certain exceptions.

Section 619 requires implementation in several stages. First, the Council was 

required to conduct a study and make recommendations on implementing 

the Volcker Rule. The Council study, which was issued on January 18, 2011, 

recommended principles for implementing the Volcker Rule and suggested a 

comprehensive framework for identifying activities prohibited by the rule, including 

an internal compliance regime, quantitative analysis, reporting, and supervisory 

review. Second, the Federal Reserve was required to publish a rule to implement 

the conformance period during which banking entities, and nonbank financial 

companies supervised by the Federal Reserve, must bring their activities and 

investments into compliance with Section 619 of the Dodd-Frank Act. The Federal 

Reserve published a final conformance rule on February 14, 2011. 

By statute, following completion of the Council’s study, authority to adopt 

implementing regulations is divided among the Federal Reserve, FDIC, OCC, SEC, 

and CFTC. The statute requires the rulemaking agencies to consult and coordinate 

with each other, as appropriate, for the purposes of assuring, to the extent 

possible, that their rules are comparable and provide for consistent application and 

implementation. The Chairperson of the Council is responsible for coordination 

of the regulations. On October 11 and 12, 2011, four of the rulemaking agencies 

invited the public to comment on proposed rules implementing the Volcker Rule’s 

prohibitions and requirements. The CFTC requested comment on a substantively 

identical proposal on January 11, 2012. The agencies received over 18,000 

comments from the public on the proposal and are working to finalize their rules. 

Pending issuance of final rules, the Federal Reserve issued a statement of policy on 

April 19, 2012, clarifying that entities subject to the Volcker Rule have the full twoyear conformance period provided by statute, which would be until July 21, 2014, 

to conform their activities and investments to the requirements of the Volcker Rule 

and the final implementing rules. By statute, that deadline may be extended by 

the Federal Reserve. The Federal Reserve’s statement of policy noted that banking 

entities should engage in good-faith planning efforts to enable them to comply 

with the Volcker Rule and final implementing rules by no later than the end of 

the statutory conformance period. The rulemaking agencies also announced that 

they plan to administer their oversight of banking entities under their respective 

jurisdictions in accordance with the Federal Reserve’s conformance rule and 

statement of policy.
Regulatory Developments; Council Activities 103

6.1.5 Resolution Plans and Orderly Liquidation Authority

Resolution Plans

Section 165(d) of the Dodd-Frank Act requires nonbank financial companies 

designated by the Council for supervision by the Federal Reserve and BHCs with 

total consolidated assets of $50 billion or more (“covered companies”) to prepare 

and submit to the Federal Reserve, the FDIC, and the Council plans—sometimes 

referred to as “living wills”—for their rapid and orderly resolution under the U.S. 

Bankruptcy Code. The Federal Reserve and the FDIC must review each plan and 

may jointly determine that a resolution plan is not credible or would not facilitate 

an orderly resolution of the company under the U.S. Bankruptcy Code. Failure 

to resubmit a credible plan within the timeframe set by the Federal Reserve and 

FDIC may result in the agencies jointly imposing more stringent capital, leverage, 

or liquidity requirements, or restrictions on the growth, activities, or operations 

of the company, or any subsidiary thereof, until the company resubmits a 

plan that remedies the deficiencies. If the company has failed to resubmit 

an acceptable plan within two years after the imposition of more stringent 

requirements or restrictions, the Federal Reserve and FDIC, in consultation with 

the Council, may jointly require divestiture of certain assets or operations to 

facilitate an orderly resolution under the U.S. Bankruptcy Code in the event of 

the company’s failure.

In November 2011, the FDIC and the Federal Reserve published a joint final rule 

that implements the resolution plan requirement. In accordance with the joint 

final rule, covered companies with $250 billion or more in total nonbank assets 

(or, in the case of a foreign-based covered company, $250 billion or more in total 

U.S. nonbank assets) were required to submit their resolution plans to the Federal 

Reserve and the FDIC by July 1, 2012. Covered companies with at least $100 

billion (but less than $250 billion) in total nonbank assets (or at least $100 billion 

but less than $250 billion in total U.S. nonbank assets, for a foreign-based covered 

company) must submit their initial plans by July 1, 2013. Covered companies with 

less than $100 billion in total nonbank assets must submit their initial plans by 

December 31, 2013. 

As a complement to this rulemaking, the FDIC issued a final rule requiring any 

FDIC-insured depository institution with assets of $50 billion or more to develop, 

maintain, and periodically submit plans outlining how the FDIC would resolve it 

through the FDIC’s resolution powers under the Federal Deposit Insurance Act. 

These two rulemakings are designed to work in tandem by covering the full range 

of business lines, legal entities, and capital structure combinations within a large 

financial firm. Their overarching objective is to promote stability, but they should 

also improve contingency planning and risk management at a covered institution 

and improve the outcomes for an institution’s constituencies and stakeholders if 

the institution fails. Importantly, as covered companies prepare and submit their 

living wills and those plans are reviewed, the process is expected to result in an 

ongoing dialogue between the supervisors and the firms that allows for continual 

improvements as the plans develop.
104 2012 FSOC // Annual Report

Orderly Liquidation Authority

Title II of the Dodd-Frank Act establishes a new framework—the orderly 

liquidation authority (OLA)—to address the potential failure of a BHC or other 

financial company when the failure of the financial company1 and its resolution 

under the bankruptcy code or otherwise applicable federal or state law would 

have serious adverse effects on financial stability in the United States. Under 

OLA, the FDIC would act as receiver of the financial company, and would resolve 

the company subject to OLA.2

In July 2011, the FDIC board approved a final rule implementing its Title II 

authority. The rulemaking, among other things, clarified the claims process and 

priorities for unsecured creditors as well as the treatment of secured creditors in 

a Title II resolution. In March 2012, the FDIC published a proposed rule setting 

forth the conditions and requirements that would govern the FDIC’s exercise 

of its authority under the OLA to enforce certain contracts of subsidiaries or 

affiliates of a financial company notwithstanding contract clauses that purport 

to terminate, accelerate, or provide for other remedies based on the insolvency, 

financial condition, or receivership of the financial company. The comment 

period on the proposed rule closed on May 29, 2012. It is anticipated that a final 

rule will be issued in the near future. 

Under Title II, the FDIC has the authority to borrow funds from the Treasury and 

to incur other obligations in connection with the orderly liquidation of a financial 

company, subject to a maximum obligation limitation (MOL). In June 2012, 

the FDIC and Treasury published, after notice and comment, a joint final rule 

governing the calculation of the MOL. Also, in April 2012, the FDIC adopted, 

after notice and comment, a final rule that sets forth the conditions under 

which a mutual insurance holding company would be treated as an insurance 

company for purposes of Title II. The FDIC also intends to propose additional 

rules to implement the OLA, including (1) rules governing the minimum right of 

recovery and (2) joint rules with the SEC, after consultation with the Securities 

Investor Protection Corporation, governing the orderly resolution of certain 

broker-dealers (BD).

Furthermore, Section 210 of the Dodd-Frank Act requires the FDIC “to 

coordinate, to the maximum extent possible” with appropriate foreign regulatory 

authorities in the event of a resolution of a covered company with cross-border 

operations. The FDIC has been working diligently on both multilateral and 

bilateral bases with foreign counterparts in supervision and resolution to 

address these crucial cross-border issues. Although U.S. firms have operations 

in many countries, those operations tend to be concentrated in a relatively small 

number of key jurisdictions, particularly, the UK. The FDIC and UK authorities 

have made substantial progress in identifying and overcoming impediments 

to resolution. To facilitate bilateral discussions and cooperation, the FDIC is 

negotiating memoranda of understanding with certain foreign counterparts 

that will provide a formal basis for information sharing and cooperation relating 

to resolution planning and implementation under the legal framework of the 

Dodd-Frank Act.
Regulatory Developments; Council Activities 105

6.1.6 Removal of References to Credit Ratings

Section 939 of the Dodd-Frank Act removes references to credit ratings in certain 

statutes, while Section 939A requires each federal agency to review its regulations 

that require the use of an assessment of creditworthiness of a security or money 

market instrument and any references to or requirements in such regulations 

regarding credit ratings. Each agency must modify its regulations as identified by 

the review to remove references to or requirements of reliance on credit ratings 

and to substitute appropriate standards of creditworthiness. 

As required by Section 939A, after enactment of the Dodd-Frank Act, federal 

agencies reported to Congress on the review of their regulations that use credit 

ratings and a description of any of the regulations. Numerous federal agencies 

have proposed or finalized rules that would modify their regulations to comply 

with the Section 939A requirements. For example, the federal banking regulators, 

in June 2012, finalized revisions to the market risk capital rules that implement 

alternatives to credit ratings for debt and securitization positions. Concurrently, 

the federal regulators invited public comment on three proposed rules to revise 

and replace the agencies’ current capital rules, including implementing the 

changes required by Section 939A. The SEC adopted rule amendments removing 

credit ratings as conditions for companies seeking to use short-form registration 

when registering non-convertible securities for public sale and proposed several 

other rules that would remove credit rating agency references from many of its 

investment company rules and its rules applicable to BD financial responsibility, 

distributions of securities, and confirmations of transactions; the FDIC issued 

a final rule removing credit ratings from the calculation of deposit insurance 

risk-based assessments for large insured depository institutions; and the OCC 

issued a final rule to remove references to credit ratings in the OCC’s rules for 

investments in securities, securities offerings and foreign bank capital equivalency 

deposit regulations. In December 2011, the FDIC proposed revisions to part 362 

of the FDIC’s regulations that would prohibit an insured savings association from 

acquiring and retaining any corporate debt security unless it determines, prior to 

acquiring such security and periodically thereafter, that the issuer has adequate 

capacity to meet all financial commitments under the security for the projected 

life of the investment. The FDIC’s December 2011 NPR is consistent with the 

OCC’s final rule noted above regarding permissible investments. 

6.1.7 Insurance

Section 111 of the Dodd-Frank Act, which established the Council, also 

provides that one of the ten voting members, in addition to the nine named 

heads of federal agencies, shall be “an independent member appointed by the 

President, by and with the advice and consent of the Senate, having insurance 

expertise.” On September 28, 2011, the President’s appointee, referred to as the 

“independent member,” was sworn in and seated as a member of the Council for a 

six-year term. Since that time, the independent member has established an office 

and has actively engaged in the work of the Council and its committees with the 

assistance of a staff of two employees with insurance expertise. The independent 

member has also actively consulted with state insurance regulators and Federal 

Reserve System staff responsible for the development and implementation of the 

supervisory framework for insurance companies. 
106 2012 FSOC // Annual Report

The Federal Insurance Office (FIO) within the Treasury was established by the 

Dodd-Frank Act with the authority, among others, to monitor all aspects of the 

insurance industry, including identifying issues or gaps in the regulation of 

insurers that could contribute to a systemic crisis in the insurance industry or the 

U.S. financial system. FIO is authorized to coordinate federal efforts and develop 

federal policy on prudential aspects of international insurance matters, including 

representing the United States, as appropriate, in the International Association 

of Insurance Supervisors (IAIS). In exercising its authorities, FIO consults with 

federal agencies, insurance regulators, and interested parties.

This past year, FIO joined the IAIS and its executive and other committees, all 

of which also include U.S. state insurance regulators as members. Through the 

IAIS, insurance regulators, supported by the National Association of Insurance 

Commissioners (NAIC), and FIO work with the insurance supervisors of other 

countries on international regulatory initiatives such as a common framework 

for regulating internationally active insurance groups. Through the IAIS, FIO 

and U.S. state insurance regulators are also working collaboratively with other 

insurance supervisors to develop a sound approach to the identification and 

oversight of global systemically important insurers.

In addition to its existing responsibility for supervision of a BHC that is a 

major life insurance company, on July 21, 2011, the Federal Reserve assumed 

responsibility for over 25 SLHCs that engage in significant volumes of life, 

property and casualty, or title insurance underwriting. The unique aspects of 

the insurance industry are addressed in various regulations that have been 

published for the BHC and SLHC populations. The Federal Reserve developed 

and implemented a specialized supervisory approach and customized supervisory 

guidance that reflects the risks and characteristics of the industry. This approach 

includes communication and coordination with state insurance regulators.

Insurance regulators, through the NAIC, continue work on updating the 

Insurance Financial Solvency Framework. Two of the more important initiatives 

relate to the continued work of the Solvency Modernization Initiative, which led 

to the adoption of the Own Risk and Solvency Assessment (ORSA) Guidance 

Manual in March 2012 and the revised Credit for Reinsurance Model Law in late 

2011. Later this year, state regulators are expected to finalize the ORSA Model 

Law to establish the ORSA filing requirement and the Valuation Manual, which 

will allow states to consider adoption of the Standard Valuation Law to implement 

principles-based reserving.

6.2 Financial Infrastructure, Markets, and Oversight

6.2.1 Over-the-Counter Derivatives Reform

Title VII of the Dodd-Frank Act establishes a comprehensive regulatory 

framework for the over-the-counter (OTC) derivatives marketplace. The 

regulatory structure for derivatives set forth in the Dodd-Frank Act is intended 

to promote, among other things, exchange trading and centralized clearing of 

swaps and security-based swaps, as well as greater transparency in the derivatives 

markets and enhanced monitoring of the entities that use these markets.
Regulatory Developments; Council Activities 107

The CFTC and SEC have proposed and begun to finalize numerous rules 

pursuant to the public notice and comment process and have engaged in 

extensive public outreach and interagency coordination, including public 

roundtables with agency staff, market participants, and other concerned members 

of the public; meetings involving staff from multiple regulators, both domestic 

and international; and agency staff meetings with members of the public. 

The SEC and CFTC have jointly adopted rules further defining the terms “swap,” 

“security-based swap,” “security-based swap agreement,” and have also adopted 

final joint rules defining the terms “swap dealer,” “security-based swap dealer,” 

“major swap participant,” and “major security-based swap participant.”

In addition, the CFTC and the federal banking agencies issued proposed 

rules on capital and margin requirements for entities within their respective 

jurisdictions (for the CFTC, certain swap dealers and major swap participants; 

for the federal banking agencies, certain securities-based swap dealers and major 

swap participants as well). The proposed rules would impose initial margin and 

variation margin requirements for uncleared swaps held by entities under each 

agency’s jurisdiction. With respect to capital requirements, the federal banking 

agencies’ existing regulatory capital rules take into account and address the 

unique risks arising from derivatives transactions and would apply to transactions 

in swaps and security-based swaps. The CFTC has proposed capital requirements 

for entities under its jurisdiction.

The CFTC has adopted several final rules, including reporting requirements 

to swap data repositories for swap dealers, major swap participants, and swap 

counterparties; rules that establish the process by which the CFTC will review 

swaps to determine whether the swaps are required to be cleared; and business 

conduct standards and other regulatory requirements for swap dealers and major 

swap participants.

The SEC has proposed rules to implement corresponding requirements for 

security-based swaps, and has adopted final rules that establish the process by 

which the SEC will review security-based swaps to determine whether the securitybased swaps are required to be cleared. 

The SEC and the CFTC are considering the structural and systems changes 

market participants will have to make to satisfy the new derivatives regulatory 

framework. The agencies are also considering a phased-in approach to 

implementing the new rules. In June 2012, the SEC issued a policy statement 

describing the order in which it expects the rules regulating the security-based 

swap market to take effect. This ordering is intended to give security-based swap 

market participants adequate, but not excessive, time to come into compliance 

with the new rules applicable to them.

On an international level, U.S. regulators are working as part of a group 

composed of representatives of the BCBS, the Committee on the Global 

Financial System, the Committee on Payment and Settlement Systems, and the 

International Organization of Securities Commissions to develop international 
108 2012 FSOC // Annual Report

standards for margin on non-centrally cleared derivatives. This group took an 

important first step when it issued a consultative report in July 2012.

6.2.2 Private Fund Adviser Registration and Oversight

Title IV of the Dodd-Frank Act closes a regulatory gap by making numerous 

changes to the registration, reporting, and recordkeeping requirements of the 

Investment Advisers Act of 1940 (Advisers Act). These provisions are designed to 

provide the SEC with oversight authority over previously unregistered investment 

advisers to certain types of private funds, including hedge funds and private 

equity funds, and the authority to require recordkeeping and reporting by 

advisers to venture capital funds.

Sections 404 and 406 of the Dodd-Frank Act authorize the SEC to collect data 

from investment advisers about their private funds to enable the Council to 

assess systemic risk and require a joint rulemaking of the SEC and CFTC for 

investment advisers that are registered with both the SEC and CFTC. The 

agencies implemented this provision in October 2011 by adopting a rule that 

requires certain advisers to hedge funds, private equity funds, and liquidity 

funds to report non-public data regarding their operations and the risk profiles 

of the private funds they manage. Under the rule, SEC-registered investment 

advisers with at least $150 million in private fund assets under management 

must periodically file a new reporting form (Form PF). Private fund advisers that 

are also registered with the CFTC as commodity pool operators or commodity 

trading advisers may satisfy systemic risk reporting requirements of the CFTC 

by filing Form PF with the SEC. The first filings of Form PF, covering private 

fund advisers with $5 billion or more in private fund assets, are due in July 2012 

for liquidity fund advisers and in August 2012 for hedge fund advisers. Smaller 

liquidity fund and hedge fund advisers, as well as private equity fund advisers, will 

be required to begin filing Form PF for the period ending December 31, 2012.

In addition, in June 2011, the SEC adopted a rule that requires advisers to certain 

types of private funds, including hedge funds and private equity funds, to register 

with the SEC. To enhance the SEC’s ability to oversee these advisers and enable 

the public to better assess the activities of private funds, the SEC requires private 

fund advisers to provide basic public information on Form ADV about the funds 

they manage, including information about the amount of assets held by the 

fund and identification of fund service providers (e.g., auditors, prime brokers, 

custodians, administrators, and marketers). In addition, the SEC requires all 

advisers to provide further information on Form ADV about an adviser’s clients, 

employees, and advisory activities. Investment advisers that had previously 

relied on the Investment Advisers Act exemption for private advisers, which was 

eliminated by the Dodd-Frank Act, were required to register with the SEC by 

March 2012. Registered investment advisers are required to adopt and implement 

policies and procedures to prevent violation of the Advisers Act and SEC rules.

6.2.3 Office of Financial Research

The purposes of the Office of Financial Research (OFR) are to support the 

Council in fulfilling the Council’s purposes and duties and to support the 

Council’s member agencies. The OFR serves as a data and research resource for 
Regulatory Developments; Council Activities 109

the Council and its member agencies, and it is working with those agencies to 

mitigate reporting burdens and increase market transparency. In this context, 

the OFR serves as a shared resource for Council members and their agencies 

and staffs. 

The OFR provides data and analysis to support that work, either as a participant 

in Council activities or in response to requests from Council members or their 

agencies or staffs. The OFR will have the capacity to provide in-depth, longterm research, as well as rapid analyses of significant financial events to inform 

the Council’s policy discussions. The OFR also has a responsibility to evaluate 

and report on stress tests and other stability-related assessments of financial 

entities overseen by member agencies, provide advice to member agencies on the 

impact of their policies as they relate to financial stability, investigate disruptions 

and failures in the financial markets, and provide its analysis to the Council, 

Congress, and the public. 

The OFR is working with Council member agencies to support an international 

initiative to establish a unique, global standard for identifying parties to 

financial transactions. This Legal Entity Identifier (LEI) will allow for a better 

understanding by both regulators and market participants of true exposures 

and counterparty risks across the system. In July, the OFR publishes its first 

annual report to Congress on its research and data-related work to assess risks to 

financial stability.

The Dodd-Frank Act provides that the OFR would be headed by a Director 

appointed by the President and confirmed by the U.S. Senate. In December 2011, 

President Obama nominated Richard B. Berner to serve as the first Director of 

the OFR. That nomination is pending before the Senate.

6.2.4 Market Structure

Over the past several years, the SEC has been considering a range of issues 

relating to developments in equity market structure. As a part of this process, the 

SEC issued a concept release in January 2010 to seek public comment on a wide 

range of market structure issues, including high-frequency trading, order routing, 

market data linkages, and undisplayed, or “dark,” liquidity. The SEC continues 

to consider the issues raised in the 2010 concept release and whether additional 

regulatory actions are needed in this area.

Recently, the SEC has taken specific actions to address market structure issues. 

For example, in July 2012, the SEC adopted a rule that would require SROs to 

develop a plan to create a consolidated audit trail. Such a consolidated audit 

trail would improve the timeliness and breadth of the information available 

to regulators for surveillance, investigations, and analysis of equity market 

activity. In June 2012, the SEC approved two proposals submitted by the national 

securities exchanges and FINRA that are designed to address extraordinary 

volatility in individual securities in the broader U.S. stock market. One initiative 

establishes a “limit-up” and “limit-down” mechanism that prevents trades in 

individual exchange-listed stocks from occurring outside of a specified price 

band. The second initiative updates existing market-wide circuit breakers that, 
110 2012 FSOC // Annual Report

when triggered, halt trading in all exchange-listed securities throughout the U.S. 

markets. The changes lower the percentage-decline threshold for triggering a 

market-wide trading halt and shorten the amount of time that trading is halted. 

The exchanges and FINRA will implement these changes by February 4, 2013; 

the SEC approved both proposals for a one-year pilot period, during which the 

exchanges, FINRA, and the SEC will assess their operation and consider whether 

any modifications are appropriate. 

Further, in July 2011, the SEC adopted a new large-trader reporting rule that is 

designed to provide the SEC with a valuable source of useful data to support its 

investigative and enforcement activities, to facilitate the SEC’s ability to assess 

the impact of large-trader activity on the securities markets, to reconstruct 

trading activity following periods of unusual market volatility, and to analyze 

significant market events for regulatory purposes. Additionally, in June 2011, the 

SEC adopted Rule 15c3-5, which, among other things, requires BDs to maintain 

a system of controls and supervisory procedures reasonably designed to limit 

the financial exposures arising from customers that access the markets directly 

through the BD. 

Recent CFTC actions have addressed risk controls by requiring futures 

exchanges to establish risk controls that prevent and reduce the potential for 

price distortions and market disruptions, including pauses or halts on trading 

when necessary. The CFTC has also required clearing member firms to conduct 

automated, pre-trade screening of orders and required futures exchanges to 

have automated, pre-trade systems that facilitate firms’ management of financial 

risk. The CFTC also adopted measures that require swap dealers and major swap 

participants to implement policies and procedures for testing and supervising 

trading programs and requires “straight-through processing” by futures 

commission merchants, swap dealers, and major swap participants of trades 

submitted for clearing. Each of these measures responds to the increased speed 

and automation of CFTC-regulated financial markets by requiring a parallel 

increase in the speed and automation of pre-trade risk controls, post-trade 

processing, and other steps designed to reduce risk and increase trade certainty. 

6.2.5 Financial Market Utilities 

Financial market utilities (FMUs) manage or operate multilateral systems for the 

purpose of transferring, clearing, or settling financial transactions. 

Title VIII of the Dodd-Frank Act establishes a new supervisory framework for 

systemically important FMUs. It authorizes the Council to designate an FMU as 

systemically important if the failure of or a disruption to the functioning of the 

FMU could create or increase the risk of significant liquidity or credit problems 

spreading among financial institutions or markets and thereby threaten the 

stability of the U.S. financial system. The Council proposed the designation of a 

set of FMUs as systemically important at its May 22, 2012, meeting. As discussed 

further in Section 6.4.1, the Council designated eight FMUs as systemically 

important at its July 18, 2012, meeting.
Regulatory Developments; Council Activities 111

The Federal Reserve, CFTC, and SEC, in consultation with each other and 

with the Council, have published proposed rules regarding risk-management 

standards for designated FMUs subject to their respective supervisory authority. 

The CFTC published its final rule with respect to all FMUs that are derivatives 

clearing organizations in November 2011. The Federal Reserve’s, CFTC’s, and 

SEC’s final rules on risk management standards that will apply to designated 

FMUs are expected in 2012.

6.2.6 Securitization

Risk Retention

Section 941 of the Dodd-Frank Act added a new Section 15G to the Securities 

Exchange Act of 1934, requiring a securitizer to retain at least 5 percent of the 

credit risk for loans or other assets that a securitizer, through the issuance of an 

asset-backed security (ABS), transfers, sells, or conveys to a third party. On April 

29, 2011, the OCC, Federal Reserve, FDIC, SEC, FHFA, and the Department of 

Housing and Urban Development (HUD) jointly published proposed rules to 

implement this risk-retention requirement. The rulewriting agencies are carefully 

assessing the provisions of the proposed rule in light of the public comments 

received and are working to develop a final rule. The Chairperson of the Council 

is coordinating the rulemaking.

As required by Section 15G, the proposed rules would, in general, require 

securitizers of ABS to retain at least 5 percent of the credit risk of the assets 

underlying the securitization. The credit risk retained generally could not 

be directly or indirectly transferred or hedged. The proposed rule includes a 

menu of risk-retention options designed to meet the statutory risk-retention 

requirement in a way that takes into account the wide variety of established 

securitization structures and market practices. Section 15G specifically provides 

that a securitizer is not required to retain the 5 percent credit risk if all of the 

loans that collateralize the ABS are qualified residential mortgages (QRMs), as 

defined by the rulewriting agencies. The definition of a QRM in the proposed 

rule takes into account underwriting standards and loan features that historically 

indicate a lower risk of default, as required by the statute. These include loan 

documentation and verification of the borrower’s ability to repay the loan, the 

loan-to-value ratio of the loan, and the debt-to-income ratio of the borrower. In 

addition, if certain other loan underwriting standards are met, the proposed rule 

would exempt ABS collateralized exclusively by commercial loans, commercial 

mortgages, or automobile loans from the 5 percent risk-retention requirement. 

In crafting the proposed rule, the agencies sought to ensure that the amount 

of credit risk retained is meaningful, while reducing the potential for the 

proposed rules to negatively affect the availability and cost of credit to consumers 

and businesses.

SEC Rules Related to ABS 

Other provisions of the Dodd-Frank Act require SEC rulemaking for ABS. 

Pursuant to Section 943 of the Dodd-Frank Act, the SEC adopted final rules 

in January 2011 that require securitizers to disclose, in tabular form, fulfilled 

and unfulfilled repurchase requests made in connection with outstanding 
112 2012 FSOC // Annual Report

ABS. Repurchases often result from a loan that does not comply with the 

representations and warranties made in an underlying transaction pooling 

agreement. The rules also require that nationally recognized statistical rating 

organizations include information regarding the representations, warranties, and 

enforcement mechanism available to investors in an ABS offering in any report 

accompanying a credit rating issued in connection with such offering. Pursuant 

to Section 945, the SEC also adopted final rules in January 2011 requiring an 

issuer of ABS registered under the Securities Act of 1933 to perform a review of 

the assets underlying the ABS and to disclose information about the nature of 

the review. Under the rules, the issuer must also disclose information about (1) 

how the loans in the pool differ from the loan underwriting criteria disclosed in 

the prospectus, (2) loans that did not meet the disclosed underwriting criteria 

but were included in the pool, and (3) the entity that made the determination 

that loans be included in the pool even though they did not meet the disclosed 

underwriting standards.

Section 942(b) of the Dodd-Frank Act requires the SEC to adopt regulations to 

require issuers of ABS, at a minimum, to disclose asset-level or loan-level data 

regarding the assets backing the ABS, if such data are necessary for investors 

independently to perform due diligence. In April 2010, the SEC had proposed 

significant revisions to rules regarding the offering process, disclosure, and 

reporting for asset-backed securities, including revisions to Regulation AB. 

As part of its April 2010 proposal, to augment existing pool-level disclosure 

requirements, the SEC had proposed to require that standardized asset-level 

data points regarding each asset in the underlying pool be provided at the 

time of securitization and on an ongoing basis. In July 2011, the SEC issued a 

release requesting additional comment on whether the April 2010 proposals 

appropriately implement Section 942(b) of the Dodd-Frank Act.

In September 2011, the SEC proposed rules under Section 621 of the Dodd-Frank 

Act that would prohibit securitization participants of an ABS for a designated 

time period from engaging in certain transactions that would involve or result in 

a material conflict of interest.

6.2.7 Audit Standards

In the last year, the Public Company Accounting Oversight Board (PCAOB) 

has engaged in several projects related to auditing and professional practice 

standards. The PCAOB proposed a new auditing standard, Related Parties, and 

amendments to existing standards regarding significant unusual transactions, 

intended to enhance audit procedures in areas that have, at times, been used 

to engage in fraudulent financial reporting; proposed a new standard and 

amendments intended to enhance the relevance and quality of the communications 

between an auditor and a company’s audit committee; proposed auditing and 

attestation standards that would apply to the audits of SEC-registered BDs and to 

the supplemental information accompanying audited financial statements; and 

proposed amendments to improve the transparency of public company audits 

by requiring the disclosure of the audit engagement partner’s name in the audit 

report and the disclosure of other independent public accounting firms and other 

persons that took part in the audit.
Regulatory Developments; Council Activities 113

In addition, on June 21, 2011, the PCAOB issued a concept release seeking public 

comment on the potential direction of a standard-setting project on the content 

and form of auditors’ reports on financial statements.

Finally, on August 16, 2011, the PCAOB issued a concept release seeking public 

comment on ways that auditor independence, objectivity, and professional 

skepticism can be enhanced, including through mandatory rotation of audit firms. 

Mandatory audit firm rotation would limit the number of consecutive years for 

which a registered public accounting firm could serve as the auditor of a public 

company. The PCAOB received over 600 public comments on its release and is 

continuing to evaluate these ideas.

6.2.8 Accounting

The Financial Accounting Standards Board (FASB) and International Accounting 

Standards Board (IASB) are continuing their work to finalize converged 

standards in several major areas, including revenue recognition, lease accounting, 

financial instruments, and insurance contracts. In their revenue-recognition 

project, the FASB and IASB are working to clarify and align the principles for 

recognizing revenue. The FASB and IASB are considering comments from 

constituents on their joint 2011 proposal, and a final joint standard on revenue 

recognition is expected by early 2013. In their lease-accounting project, the FASB 

and IASB are working to provide greater transparency to lease arrangements by 

requiring balance sheet recognition of the rights and obligations associated with 

leases. The FASB and IASB are considering comments on their 2010 proposal, 

and a new joint proposal for public comment is expected in the second half of 

2012. In the area of financial instruments, the FASB and IASB are seeking to 

more closely align key aspects of their classification and measurement models and 

to develop a new approach to impairment for financial instruments. The FASB 

and IASB are expected to release a new proposal on impairment for financial 

instruments in the second half of 2012. For insurance contracts, the IASB 

currently does not have a comprehensive insurance model in IFRS. The FASB is 

evaluating this issue, including joint discussions with the IASB regarding whether 

to propose changes to the existing U.S. insurance accounting model to provide 

users of financial statements with more useful information. Further documents or 

proposals from FASB and IASB are expected in the second half of 2012.

6.3 Consumer and Investor Protection

6.3.1 Consumer Protection

On January 4, 2012, President Obama appointed former Ohio Attorney General 

Richard Cordray as the Director of the CFPB. The CFPB is an independent 

bureau within the Federal Reserve System. It has rulemaking authority under 

specifically listed statutes, as well as specified supervisory and enforcement 

authority for very large depository institutions and non-depository (nonbank) 

entities and other duties relating to consumer financial products and services. 

The CFPB is the primary federal regulator exclusively focused on, and 

accountable to Congress and the public for, consumer financial protection. The 

CFPB has launched its supervision program for very large depository institutions 

(in coordination with prudential regulators) and for nonbanks; established its 
114 2012 FSOC // Annual Report

consumer response function; assumed rulemaking responsibility for federal 

consumer financial laws transferred to the CFPB on July 21, 2011; and issued a 

variety of rules and reports required under the Dodd-Frank Act. In addition, the 

CFPB continues to work to ensure that consumers have the information they need 

to understand the costs and risks of consumer financial products and services, so 

they can compare products and choose the ones that are best for them. Moreover, 

the CFPB is taking steps to clarify and streamline regulations and guidance 

to reduce unnecessary burdens on providers of consumer financial products 

and services.

One of the CFPB’s first rulemaking initiatives is consolidation of mortgage loan 

disclosure forms under the Truth in Lending Act (TILA) and the Real Estate 

Settlement Procedures Act (RESPA) to make the information more useful to 

consumers and to reduce burdens on lenders. The Dodd-Frank Act consolidates 

rulemaking authority for the two statutes in the CFPB. The CFPB proposed 

regulations and model disclosures in July 2012. As part of its “Know Before 

You Owe” initiative, the CFPB has been testing prototype disclosure forms that 

contain information required to be disclosed to consumers who apply for a loan 

to purchase a house or refinance an existing mortgage loan.

In addition, the CFPB has been testing a prototype for a monthly mortgage 

statement designed to make it easier for borrowers to understand costs and 

fees associated with mortgage loans. The Dodd-Frank Act amends the TILA 

and requires creditors, assignees, or servicers to send the borrower a periodic 

statement for each billing cycle; the statement must include information about 

the mortgage’s principal loan amount, current interest rate, date on which the 

interest rate may next reset, and a description of any late payment fees, among 

other items. The CFPB plans, in the summer of 2012, to propose a rule, including 

a proposed form, to implement this requirement and several other servicingrelated requirements under the Dodd-Frank Act.

The Dodd-Frank Act also amends the Electronic Fund Transfer Act to provide 

protections to consumers who transfer funds to recipients located in another 

country (remittance transfers), and the CFPB adopted a rule implementing 

these consumer protections. In general, the rule requires remittance transfer 

providers to disclose to a consumer the exchange rate, fees, and amount to be 

received by the recipient when the consumer sends a remittance transfer. The 

CFPB also requested public comment on whether the rule should include a safe 

harbor to exempt community banks, credit unions, and other companies that 

process less than a certain number of remittance transfers per year from the 

new requirements. The final rule, with any adjustments, will go into effect on 

February 7, 2013.

The CFPB has supervision authority over certain nonbank entities, including 

mortgage companies, private education lenders, payday lenders, and “larger 

participants” of a market for other consumer financial products or services. On 

February 17, 2012, the CFPB published its initial proposed rule to define larger 

participants in the consumer reporting and debt collection markets. The CFPB 

indicated that it will issue additional rules to define criteria for larger participants 
Regulatory Developments; Council Activities 115

in other consumer financial markets, selecting the appropriate criteria and 

thresholds for each of those markets.

The Federal Reserve, FDIC, OCC, and NCUA have worked closely with the CFPB 

to help ensure a smooth transition of the CFPB’s examination and rulemaking 

authorities. These activities have included the transfer of certain staff to the CFPB 

and the development of information and examination coordination memoranda 

of understanding. For its part, the CFPB consults actively with the Federal 

Reserve, FDIC, OCC, and NCUA in the rulemaking process to help promote 

regulatory effectiveness and to meet the goals and requirements of the DoddFrank Act regarding consultation.

6.3.2 Mortgage Transactions and Housing

Title XIV of the Dodd-Frank Act, the “Mortgage Reform and Anti-Predatory 

Lending Act,” contains several measures designed to protect consumers in 

mortgage transactions. Many of these measures were enacted as amendments 

to the TILA and the RESPA. Prior to July 21, 2011, the Federal Reserve was 

responsible for regulations implementing the TILA requirements and HUD was 

responsible for RESPA, but those rulemaking authorities transferred to the CFPB 

on that date. In addition to the CFPB’s efforts to develop improved mortgage 

servicing disclosure standards (see previous text), the prudential regulators are 

working to develop regulations under safety and soundness authority that address 

the servicing of performing and nonperforming mortgage loans, which would 

supplement the CFPB’s TILA and RESPA rulemaking. Certain additional rules 

concerning appraisals must be promulgated on an interagency basis. The CFPB 

expects to issue proposals to implement a number of Title XIV requirements in 

the summer of 2012 and to finalize several rules by January 2013, including the 

rules described in the following text.

Under new standards regarding residential mortgages, a lender is required to 

make a reasonable, good faith determination of an applicant’s ability to repay 

before issuing a closed-end mortgage loan. In general, the “ability to repay” 

standard can be met if the loan is a “qualified mortgage,” as defined under the 

Dodd-Frank Act and by regulation. A lender receives certain protections from 

liability if a loan is a “qualified mortgage.” The CFPB is responsible for finalizing 

a proposed rule that was issued by the Federal Reserve in May 2011. The DoddFrank Act also requires escrow accounts to be established for certain mortgage 

loans and mandates certain new disclosures regarding escrow accounts. The 

Federal Reserve issued a proposed rule to implement these requirements in 

March 2011, and the CFPB is responsible for finalizing that rule. In addition, 

the Dodd-Frank Act expands the range of mortgage loans that are subject to the 

Home Ownership and Equity Protection Act and imposes new requirements on 

high-cost mortgages. These include mandatory counseling and other protections. 

For mortgage servicers, there will be requirements concerning provision of 

monthly statements, disclosures for hybrid adjustable rate mortgages, force-placed 

insurance, prompt crediting of payments, pay-off amounts, and error resolution. 

There also will be new requirements concerning compensation and qualification 

of mortgage loan originators, such as brokers and loan officers, and, for certain 

purposes, the companies that hire them. The Dodd-Frank Act also amends the 
116 2012 FSOC // Annual Report

Equal Credit Opportunity Act to require mortgage lenders to provide certain 

disclosures and copies of appraisal documents to consumers.

Subtitle F of Title XIV of the Dodd-Frank Act relates to appraisal reform, and 

certain additional rules concerning appraisals must be promulgated on an 

interagency basis. For higher-risk mortgages, the Dodd-Frank Act generally 

requires written appraisals based on a physical inspection of the property and, in 

some cases, second appraisals. The FDIC, Federal Reserve, OCC, NCUA, FHFA, 

and CFPB have authority under the Dodd-Frank Act to issue joint regulations 

and guidance on appraiser independence and are required to issue regulations 

on the appraisal requirements for higher-risk mortgages, appraisal management 

companies, and automated valuation models.

6.3.3 Investor Protection

The Dodd-Frank Act includes various provisions to strengthen investor 

protection. These provisions include regulation of the over-the-counter 

derivatives markets and governance and compensation reform. Under Section 

926 of the Dodd-Frank Act, the SEC is required to adopt rules that disqualify 

securities offerings involving certain felons and other “bad actors” from relying 

on the safe harbor from Securities Act registration provided by Rule 506 of 

Regulation D. The SEC proposed rules to implement the requirements of 

this provision in May 2011. In addition, the SEC adopted rule amendments in 

December 2011 implementing Section 413(a) of the Dodd-Frank Act, which 

requires the value of an individual’s primary residence to be excluded when 

determining if that individual’s net worth exceeds the $1 million threshold 

required for “accredited investor” status.

The investing public should benefit from increased oversight of investment 

advisers. Approximately 2,500 investment advisers with assets under management 

between $25 million and $100 million are transitioning from oversight by the SEC 

to oversight by state securities regulators. This transition, mandated by Section 

410 of the Dodd-Frank Act and implemented by June 2011 rulemakings by the 

SEC, is expected to result in more frequent examinations of the approximately 

17,000 smaller, local advisers, while also allowing the SEC to focus its resources on 

the approximately 10,000 larger, national advisers.

The securities laws also were modified in a number of ways to facilitate SEC 

enforcement actions. These changes include enhancing the application of 

antifraud provisions and providing authority to bring actions against aiders 

and abettors. For example, the Dodd-Frank Act established a whistleblower 

program that requires the SEC to pay an award to eligible whistleblowers that 

voluntarily provide the SEC with original information about a violation of the 

federal securities laws that leads to the successful enforcement of certain judicial 

or administrative actions. In May 2011, the SEC adopted rules to implement this 

provision. Since the rules went into effect in August 2011, the SEC has received 

hundreds of tips through the program, and the quality of the information 

received has, in many instances, been particularly helpful to the SEC’s 

investigative staff.
Regulatory Developments; Council Activities 117

6.3.4 Governance and Compensation

To facilitate prudent risk management at financial institutions and to align 

the interests of executives and other employees with the long-term health of 

their organizations, Section 956 of the Dodd-Frank Act requires the Federal 

Reserve, FDIC, FHFA, NCUA, OCC, and SEC to jointly prescribe rules or 

guidelines that require certain covered financial institutions to disclose to their 

appropriate federal regulator the structure of the incentive-based compensation 

arrangements offered by such covered financial institution sufficient to determine 

whether the compensation structure (1) provides an executive officer, employee, 

director, or principal shareholder of the covered financial institution with 

excessive compensation, fees, or benefits; or (2) could lead to material financial 

loss to the covered financial institution. Further, Section 956 requires the 

appropriate federal regulators jointly to prescribe regulations or guidelines that 

prohibit any types of incentive-based payment arrangement, or any feature of 

such arrangement, that the regulators determine encourages inappropriate risks 

by providing an executive officer, employee, director, or principal shareholder of 

the covered financial institution with excessive compensation, fees, or benefits, or 

that could lead to material financial loss to the covered firm. The proposed rule 

would impose additional requirements on the payment of incentive compensation 

to executive officers of certain larger covered financial institutions.

In April 2011, the agencies published a three-part proposed rule for public 

comment. First, a financial institution with $1 billion or more in total 

consolidated assets (a covered financial institution) would be required to 

file an annual report with its appropriate federal regulator describing the 

structure of the firm’s incentive-based compensation arrangements. Second, the 

proposed rule would prohibit a covered financial institution from establishing 

or maintaining an incentive-based compensation arrangement that could lead 

to material financial loss or that encourages inappropriate risks by providing 

certain “covered persons” (which include all executives, employees, directors, and 

principal shareholders) with excessive compensation. Finally, the proposed rule 

would require each covered financial institution to adopt specific policies and 

procedures approved by its board to help ensure and monitor compliance with 

the rule.

Section 952 of the Dodd-Frank Act requires the SEC to, by rule, direct the 

national securities exchanges and national securities associations to prohibit 

the listing of any equity security of an issuer that does not comply with new 

compensation committee and compensation adviser requirements. In June 

2012, the SEC adopted rules to implement Section 952 that require, among 

other things, that the exchanges establish listing standards that require each 

member of a listed issuer’s compensation committee to be a member of the 

board of directors and to be “independent.” The SEC also is required by 

the Dodd-Frank Act to adopt several additional rules related to corporate 

governance and executive compensation, including rules mandating new 

listing standards relating to specified “clawback” policies, and new disclosure 

requirements about executive compensation and company performance, 

executive to median employee pay ratios, and employee and director hedging. 

These provisions of the Dodd-Frank Act do not contain rulemaking deadlines, 
118 2012 FSOC // Annual Report

but SEC staff is working to develop recommendations for the SEC concerning 

the implementation of these provisions.

6.4 Council Activities

6.4.1 Determination of Nonbank Financial Companies to Be Supervised by the 

Federal Reserve and Designation of Financial Market Utilities

Nonbank Financial Companies

One of the Council’s statutory purposes is to identify risks to financial stability 

that could arise from the material financial distress or failure, or ongoing 

activities, of nonbank financial companies. Under Section 113 of the Dodd-Frank 

Act, the Council is authorized to determine that a nonbank financial company’s 

material financial distress—or the nature, scope, size, scale, concentration, 

interconnectedness, or mix of its activities—could pose a threat to U.S. financial 

stability. Such companies will be subject to consolidated supervision by the 

Federal Reserve and enhanced prudential standards.

The Dodd-Frank Act provides a list of 10 considerations the Council must 

use in making determinations under Section 113. In fall 2010, the Council 

began a rulemaking process to further clarify these statutorily mandated 

considerations. The Council issued an advance notice of proposed rulemaking 

(ANPR) in October 2010 and an NPR in January 2011. The Council received 

significant input from market participants, nonprofits, academics, and members 

of the public about the need to develop an analytic framework for making 

determinations that would provide a consistent approach and incorporate both 

quantitative and qualitative judgments. In response to comments the Council 

received on the NPR, the Council sought public comment on a second NPR 

and proposed interpretive guidance in October 2011 to provide (1) additional 

details regarding the framework that the Council intends to use to assess whether 

the material financial distress or failure, or ongoing activities, of a nonbank 

financial company could pose a threat to U.S. financial stability; and (2) further 

opportunity for public comment on the Council’s proposed approach to the 

determination process. In April 2012, the Council adopted a final rule and 

interpretive guidance.

The Council’s interpretive guidance includes an analytic framework that 

organizes the 10 statutory considerations into six broad categories that reflect 

a company’s role in the financial system and its potential to experience 

material financial distress. In addition, the interpretive guidance describes the 

three-stage process that the Council intends to use in evaluating companies 

in non-emergency situations, defines key terms related to the Council’s 

determination authority, and sets forth uniform quantitative thresholds 

that the Council intends to use to identify companies for further evaluation. 

While the Council’s assessments of companies will be based on a fact-specific 

evaluation of the statutory considerations, the rule and interpretive guidance 

describe the characteristics of companies the Council likely will evaluate for 

potential determination and the factors the Council intends to use when 

analyzing companies.
Regulatory Developments; Council Activities 119

In non-emergency situations, before a Council vote on any proposed 

determination, the company under consideration will have an opportunity to 

submit written materials to the Council regarding the proposed determination. 

Council members will vote on a proposed determination only after they have 

reviewed that information, and the proposed determination will proceed only 

if approved by two-thirds of the Council, including the affirmative vote of the 

Chairperson. Upon a proposed determination, a company may request a hearing, 

and the determination will be finalized only after a subsequent two-thirds vote 

of the Council, including the affirmative vote of the Chairperson. Any final 

determination will be subject to judicial review, and the Council must submit 

a report to Congress on, among other things, all determinations made under 

Section 113 of the Dodd-Frank Act and the basis for such determinations.

As of the date of this report, the Council has not made any determinations under 

Section 113 of the Dodd-Frank Act.

Financial Market Utilities

The Dodd-Frank Act authorizes the Council to designate an FMU as “systemically 

important” if the Council determines that the failure of or a disruption to the 

functioning of the FMU could create or increase the risk of significant liquidity 

or credit problems spreading among financial institutions or markets and thereby 

threaten the stability of the U.S. financial system.

Designated FMUs will become subject to the heightened prudential and 

supervisory provisions of Title VIII, which promote robust risk management and 

safety and soundness, including conducting their operations in compliance with 

applicable risk-management standards; providing advance notice and review of 

changes to their rules, procedures, and operations that could materially affect 

the nature or level of their risks; and being subject to relevant examination 

and enforcement provisions. Title VIII also requires the supervisory agencies 

to consult with each other when they are prescribing their respective riskmanagement standards, jointly develop risk-management supervisory programs, 

and consult and coordinate in planning and conducting examinations. To further 

strengthen settlement processes, the Federal Reserve Board may authorize a 

Federal Reserve Bank to provide accounts and settlement services to designated 

FMUs. Additionally, under unusual or exigent circumstances, designated FMUs 

could potentially gain access to the Federal Reserve’s discount window.

Following the publication of its final rule outlining the criteria, processes, and 

procedures for the designation of FMUs on July 27, 2011, the Council proposed 

the designation of an initial set of FMUs on May 22, 2012. At its July 18, 2012, 

meeting, the Council voted unanimously to designate eight FMUs as systemically 

important under Title VIII of the Dodd-Frank Act. 

The FMUs that the Council designated perform a variety of functions in the 

market, including the clearance and settlement of cash, securities, and derivatives 

transactions; many of them are central counterparties and are responsible for 

clearing a large majority of trades in their respective markets. The Council 

believes that the completion of the FMU designations process for this initial set 
120 2012 FSOC // Annual Report

of FMUs is a major milestone in the implementation of the Dodd-Frank Act and 

that the designation of these entities will instill confidence in their respective 

markets. The basis for the Council’s designation determination for each of these 

systemically important FMUs is described in Appendix A. 

6.4.2 Risk Monitoring

One of the Council’s central purposes is the ongoing identification of risks to U.S. 

financial stability. To help identify risks, promote market discipline, and respond 

to emerging threats, the Council facilitates information sharing, coordination, 

and communication among member agencies, among other things.

In the past year, the Council examined significant market developments and 

structural issues within the financial system, including topics discussed elsewhere 

in this report. The Council will continue to monitor potential threats to financial 

stability, whether from external shocks or structural weaknesses.

To facilitate this risk monitoring process, the Council established the Systemic 

Risk Committee (SRC), composed primarily of member agency staff in 

supervisory, surveillance, examination, and policy roles. The SRC serves as a 

forum for member agency staff to identify and analyze potential risks that may 

extend beyond the jurisdiction of any one agency.

6.4.3 Reports Required Under the Dodd-Frank Act

Prompt Corrective Action

In December 2011, the Council released a report to Congress on prompt 

corrective action (PCA). Section 202(g)(4) of the Dodd-Frank Act required 

the Council to issue a report on actions taken in response to the Government 

Accountability Office (GAO) study on PCA required by Section 202(g)(1) of the 

Dodd-Frank Act. The Council’s report discusses the existing PCA framework 

and the findings and recommendations of the GAO study. The Council’s report 

also highlights some lessons learned from the financial crisis and outlines 

actions taken that could affect PCA, as well as additional steps to modify the PCA 

framework that could be considered.

Report on Actions Taken in Response to the GAO’s Report on the NCUA

In June 2012, the Council released a report to Congress on actions taken 

in response to a GAO report on the NCUA’s supervision of corporate credit 

unions and implementation of PCA, as required by the National Credit 

Union Authority Clarification Act. The report discusses the findings and 

recommendations of the GAO study and outlines NCUA activities that relate to 

the GAO’s recommendations.

Contingent Capital

Section 115(c) of the Dodd-Frank Act requires the Council to study the feasibility, 

benefits, costs, and structure of a contingent capital requirement for nonbank 

financial companies supervised by the Federal Reserve and large, interconnected 

bank holding companies. In July 2012, the Council submitted a report to 

Congress regarding the study, as required by Section 115(c). The Council’s report 
Regulatory Developments; Council Activities 121

concludes that contingent capital instruments should continue to be an area for 

private sector innovation, and encourages the Federal Reserve and other financial 

regulators to continue to study the advantages and disadvantages of including 

contingent capital and bail-in instruments in their regulatory capital frameworks.

6.4.4 Rulemaking Coordination

As Chairperson of the Council, the Treasury Secretary is required to coordinate 

two major rulemakings under the Dodd-Frank Act.

To facilitate the joint rulemaking on credit risk retention for asset-backed 

securities, as described previously, certain member agencies participated in 

an interagency working group to develop the NPR for public comment. The 

Federal Reserve, FDIC, SEC, OCC, HUD, and FHFA issued a joint NPR on March 

30, 2011, that proposes rules to implement this requirement and represents 

a significant step toward strengthening securitization markets. The agencies 

extended the comment period for the proposed rule from June 10, 2011, to 

August 1, 2011.

The Chairperson of the Council is also required to coordinate the issuance of 

final regulations implementing the Volcker Rule, as described in Section 6.1.4. 

The Chairperson has played an active role in coordinating the agencies’ work to 

develop regulations that are comparable and provide for consistent application, 

to the extent possible. The Federal Reserve, FDIC, OCC, and SEC sought public 

comment on a proposed rule in October 2011, and the CFTC requested comment 

on a substantively identical NPR in January 2012. The comment period closed 

February 13, 2012, for the proposed rules issued by the Federal Reserve, FDIC, 

OCC, and SEC, and closed on April 16, 2012, for the CFTC’s proposed rule. 

The Chairperson of the Council continues to coordinate the development of a 

final rule.

6.4.5 Operations of the Council

The Dodd-Frank Act requires the Council to convene no less than quarterly. In 

the last year, the Council met 12 times.3 The meetings bring Council members 

together to discuss and analyze emerging market developments and financial 

regulatory issues. The Council is committed to conducting its business as openly 

and transparently as practicable, given the confidential supervisory and sensitive 

information at the center of its work. Consistent with the Council’s transparency 

policy, the Council opens its meetings to the public whenever possible. The 

Council held a public session at three of its meetings in the last year.

Approximately every two weeks, the Council’s Deputies Committee, which 

is composed of senior representatives of Council members, has convened to 

discuss the Council’s agenda and to direct the work of the SRC and the five 

other functional committees. The other functional committees are organized 

around the Council’s ongoing statutory responsibilities: (1) identifying nonbank 

financial companies and financial market utilities for designation; (2) making 

recommendations to primary financial regulatory agencies regarding heightened 

prudential standards for financial firms; (3) consulting with the FDIC on 

orderly liquidation authority and reviewing the resolution plan requirements for 
122 2012 FSOC // Annual Report

designated nonbank financial firms and the largest BHCs; and (4) collecting data 

and improving data-reporting standards.

In the last year, the Council adopted regulations implementing its Freedom of 

Information Act obligations,4 adopted hearing procedures for nonbank financial 

companies and FMUs subject to proposed designations, and passed its second 

budget. The Council also complied with its transparency policy by conducting its 

business in an open and transparent manner whenever possible.5

Financial Research Fund Assessments

Section 155 of the Dodd-Frank Act requires the Treasury, with the approval 

of the Council, to establish assessments to fund the OFR’s budget, which 

includes the expenses of the Council and the FDIC’s implementation 

expenses associated with OLA. To implement this provision, on May 21, 2012, 

the Treasury issued a final rule that establishes an assessment schedule for 

semiannual collections from bank holding companies with total consolidated 

assets of $50 billion or greater and an interim final rule that applies to nonbank 

financial companies supervised by the Federal Reserve. The first payments 

under the rule will be made on July 20, 2012.

6.4.6 Section 119 of the Dodd-Frank Act

Section 119 of the Dodd-Frank Act provides that the Council may issue 

nonbinding recommendations to member agencies on disputes about the 

agencies’ respective jurisdiction over a particular BHC, nonbank financial 

company, or financial activity or product. (Certain consumer protection matters, 

for which another dispute mechanism is provided under Title X of the Act, are 

excluded). To date, no member agency has approached the Council to resolve a 

dispute under Section 119.