Source: https://www.federalregister.gov/documents/2011/01/26/2011-1551/authority-to-require-supervision-and-regulation-of-certain-nonbank-financial-companies
Timestamp: 2017-08-16 20:01:58
Document Index: 317129410

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A Proposed Rule by the Financial Stability Oversight Council on 01/26/2011
76 FR 4555
4555-4567 (13 pages)
4030-AA00
2011-1551
II. Summary of Public Responses to ANPR
C. Other Aspects of Proposed Rule
PART 1310—SUPERVISION AND REGULATION OF CERTAIN NONBANK FINANCIAL COMPANIES
Subpart B—Determinations
Subpart C—Information Collection and Hearings
https://www.federalregister.gov/d/2011-1551 https://www.federalregister.gov/d/2011-1551
Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”) provides the Financial Stability Oversight Council (the “Council”) the authority to require that a nonbank financial company be supervised by the Board of Governors of the Federal Reserve System (“Board of Governors”) and be subject to prudential standards in accordance with Title I of the DFA if the Council determines that material financial distress at such a firm, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the firm, could pose a threat to the financial stability of the United States. The proposed rule describes the criteria that will inform, and the processes and procedures established under the DFA for, the Council's designation of nonbank financial companies under the DFA. The Council, on October 6, 2010, issued an advance notice of proposed rulemaking regarding the designation criteria in section 113.
Lance Auer, Deputy Assistant Secretary (Financial Institutions), Treasury, at (202) 622-1262, or Jeff King, Senior Counsel, Office of the General Counsel, Treasury, at (202) 622-1978. All responses to this Notice should be submitted via http://www.regulations.gov to ensure consideration.
Section 111 of the DFA (12 U.S.C. 5321) established the Financial Stability Oversight Council. Among the purposes of the Council under section 112 of the DFA (12 U.S.C. 5322), are: “(A) * * * identify[ing] risk to the financial Start Printed Page 4556stability 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) * * * promot[ing] 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) * * * respond[ing] to emerging threats to the stability of the United States financial system.”
Specifically, section 113 of the DFA (12 U.S.C. 5323) gives the Council the authority to require that a nonbank financial company be supervised by the Board of Governors and be subject to enhanced prudential standards if the Council determines that material financial distress at such a firm, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the firm, could pose a threat to the financial stability of the United States.[1] Section 113 of the DFA sets forth a number of factors or criteria that the Council must consider in determining whether to designate a nonbank financial company for supervision by the Board of Governors.
These comments addressed the Council's specific questions, as well as a range of other issues. Commenters generally encouraged further development of the framework for designations under section 113, and most supported the overall direction of the ANPR. Commenters, however, raised a number of conceptual and technical issues that they believed required additional consideration. Some commenters provided specific proposed frameworks for applying the criteria in section 113, and provided feedback on particular metrics and considerations that should be used in the designation process. In addition, some commenters provided views on the process of designation itself, emphasizing transparency and clear communication surrounding all designation decisions. The questions asked by the Council in the ANPR are provided below, along with an overview of the comments received on each question.
1. What metrics should the Council use to measure the factors it is required to consider when making determinations under Section 113 of DFA?
3. Since foreign nonbank financial companies can be designated, what role should international considerations play in designating companies? Are there unique considerations for foreign Start Printed Page 4557nonbank companies that should be taken into account?
b. Should the Council give special consideration to the relationships (including exposures and dependencies) between a nonbank financial company and other important financial firms or markets? If so, what metrics and thresholds should be used to identify Start Printed Page 4558what financial firms or markets should be considered significant for these purposes? What metrics and thresholds should be used in assessing the importance of a nonbank financial company's relationships with these other firms and markets?
Some commenters argued that the extension of financial assistance to nonbank financial companies should not be considered determinative of which entities present systemic risk. Instead, these commenters argued that the assistance must be viewed in light of the facts and circumstances under which it was provided; whether the assistance was drawn upon; whether such assistance was permitted to expire; Start Printed Page 4559and any new regulatory changes that have been implemented since the assistance was initially extended.
Considering the cost of designation. Some commenters argued that designation of a nonbank would subject it to regulatory burdens without providing the company the same benefits that a regulated bank would enjoy. Thus, the commenters argued, the cost of designation could reduce the competitiveness of the designated nonbank institution and could also potentially cause an exit or flight of businesses to less regulated products or jurisdictions.
The proposed rule lays out the framework that the Council proposes to use to determine whether a nonbank financial company could pose a threat to the financial stability of the United States. It also implements the process set forth in the DFA that the Council would use when considering whether to subject a firm to supervision by the Board of Governors and prudential standards.
As discussed in Part I, there were several themes in the ANPR commentary regarding how the Council should analyze these factors in the designation process.
Almost all commenters emphasized the importance of examining the liquidity profile of a firm, taking into consideration the quality and tenor of funding, diversity and mix of the sources of funding, the strength of the liquidity providers, and the degree of maturity mismatch. Many also suggested risk-weighting liabilities to better evaluate the quality and strength of the liquidity sources.Start Printed Page 4560
Commenters viewed both the degree to which a firm is already subjected to regulation or consolidated regulation, as well as the substitutability of an institution and its activities, as important factors in making a determination. It was generally argued that firms already subject to prudential regulation are less likely to pose systemic risk than those that operate outside a formal regulatory umbrella.
As discussed previously, section 113 of the DFA provides the Council the authority to require that a nonbank financial company be supervised by the Board of Governors and subject to prudential standards if the Council determines that material financial distress at such a firm, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the firm, could pose a threat to the financial stability of the United States.
As noted above, each of the statutory factors in sections 113(a)(2) and (b)(2) of the DFA would be considered as part of one or more the six analytical categories. This is reflected in the following table, using the factors relevant to a U.S. nonbank financial company for illustrative purposes.[2]
Start Printed Page 4561
Category or categories in which this factor would be considered
(A) the extent of the leverage of the company; Leverage.
(B) the extent and nature of the off-balance-sheet exposures of the company; Size; Interconnectedness.
(C) the extent and nature of the transactions and relationships of the company with other significant nonbank financial companies and significant bank holding companies; Interconnectedness.
(D) the importance of the company as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the United States financial system; Size; Lack of substitutes.
(E) the importance of the company as a source of credit for low-income, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities; Lack of substitutes.
(F) the extent to which assets are managed rather than owned by the company, and the extent to which ownership of assets under management is diffuse; Size; Interconnectedness.
(G) the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company; Size; Lack of substitutes; Interconnectedness.
(H) the degree to which the company is already regulated by 1 or more primary financial regulatory agencies; Existing regulatory scrutiny.
(I) the amount and nature of the financial assets of the company; Size; Interconnectedness.
(J) the amount and types of the liabilities of the company, including the degree of reliance on short-term funding; Liquidity risk and maturity mismatch; Size; Interconnectedness.
(K) any other risk-related factors that the Council deems appropriate Appropriate category or categories based on the nature of the additional risk-related factor.
The Council expects to begin assessing the systemic importance of nonbank financial companies under the proposed framework shortly after adopting a final rule. Subsequently, and on a regular basis, the Council expects to screen nonbank financial companies using the six categories to identify companies whose material financial distress, or the nature, scope, size, scale, concentration, interconnectedness, or mix of activities, could pose a threat to the financial stability of the United States. In addition, under the DFA, the Council must review each designation of a nonbank financial company at least once a year. The review would follow the same framework as the initial designation and would consider current data on the six categories described above.
The proposed rule also implements the other provisions of section 113 of the DFA, including (i) the anti-evasion authority of the Council set forth in section 113(c) of the DFA; (ii) the provisions governing notice of, and the opportunity for a hearing on, a proposed determination; and (iii) the provisions regarding consultation, coordination and judicial review in connection with a determination.
Given the importance of this rulemaking and the fact that the Council already published and received comment on the ANPR, we are providing a 30-day comment period for this NPR.
It is hereby certified that this rule will not have a significant economic impact on a substantial number of small entities. The rule would apply only to nonbank financial companies whose failure could pose a threat to the financial stability of the United States. Size is an important factor, although not the exclusive factor, in assessing whether a company's failure could pose a threat to financial stability. The Council does not expect the rule to directly affect a substantial number of small entities. Accordingly, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) is not required.
The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Financial Stability Oversight Council, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to Michael Tae, Department of the Treasury, Washington, DC 20220. Comments on the collection of information must be received by March 28, 2011. Comments are specifically requested concerning:Start Printed Page 4562
The collection of information in these proposed regulations are found in § 1310.20, § 1310.21 and § 1310.22.
It has been determined that this regulation is a significant regulatory action as defined in section 3 of Executive Order 12866 (“Regulatory Planning and Review”) and it has been reviewed by the Office of Management and Budget.
For the reasons set forth in the preamble, the Financial Stability Oversight Council proposes to establish a new chapter XIII consisting of part 1310 in Title 12 of the Code of Federal Regulations, to read as follows:
Emergency exception to § 1310.21.
(xii) The Securities Investor Protection Corporation established under the Securities Investor Protection Start Printed Page 4563Act of 1970 (15 U.S.C. 78aaa et seq.); and
(2) Predominantly engaged in financial activities as defined by regulation of the Board of Governors under section 102(a)(6) of the Dodd-Frank Act.
(6) The extent to which assets are managed rather than owned by the company and its subsidiaries, and the extent to which ownership of assets under management is diffuse;Start Printed Page 4564
(d) Consultations. The Council shall consult with the primary financial regulatory agency, if any, for each nonbank financial company that is being considered for supervision by the Board of Governors under this § 1310.10 and with the primary financial regulatory agency, if any, of any subsidiary of such nonbank financial company before the Council makes any final determination under this § 1310.10 with respect to such nonbank financial company.
(e) Back-up examination by the Board of Governors. (1) If the Council is unable to determine whether the financial activities of a U.S. nonbank financial company, including a U.S. nonbank financial company that is owned by a foreign nonbank financial company, pose a threat to the financial stability of the United States, based on information or reports otherwise obtained by the Council, including discussions with management and publicly available information, the Council may request the Board of Governors, and the Board of Governors is authorized, to conduct an examination of the U.S. nonbank financial company and its subsidiaries for the sole purpose of determining whether the nonbank financial company or foreign nonbank financial company should be designated under this section or § 1310.11, as applicable, for supervision by the Board of Governors.
(2) The Council shall review the results of the examination of a nonbank financial company (including its subsidiaries) conducted by the Board of Governors under this subsection in connection with any determination by the Council under paragraph (a) of this section or § 1310.11 with respect to the company.
(d) Consultation. The Council shall consult with the primary financial regulatory agency, if any, for each foreign nonbank financial company that is being considered for supervision by the Board of Governors under this § 1310.11 and with the primary financial regulatory agency, if any, of any subsidiary of such foreign nonbank financial company before the Council makes any final determination under this § 1310.11 with respect to such foreign nonbank financial company.
(ii) Section 1310.11(b) if the company is incorporated or organized in a Start Printed Page 4565country other than the United States; and
(f) International coordination. In exercising its duties under this section with respect to a company that is incorporated or organized in a country other than the United States, the Council, acting through its Chairperson or other authorized designee, shall consult with appropriate foreign regulatory authorities, to the extent appropriate.
(b) Information Collection from Nonbank Financial Companies. (1) The Council may, to the extent the Council determines appropriate, direct the Office of Financial Research to require the submission of periodic, special or other reports concerning one or more nonbank financial companies, including a nonbank financial company that is being considered for potential designation by the Council under § 1310.10, § 1310.11, or § 1310.12, for the purpose of assessing whether a nonbank financial company poses a threat to the financial stability of the United States.
(b) Written notice of proposed determination. If the Council determines under § 1310.10, § 1310.11, or § 1310.12 that a nonbank financial company or the financial activities of a company should be supervised by the Board of Governors and be subject to prudential standards, the Council shall provide to the nonbank financial company or company written notice of the proposed determination of the Council, including an explanation of the basis of the proposed determination of the Council.
(2) Any such request from a nonbank financial company or company for an opportunity for a written or oral hearing before the Council shall be transmitted to the Council's Legal Counsel.Start Printed Page 4566
(1) Make a final determination under § 1310.10, § 1310.11, or § 1310.12 regarding whether the nonbank financial company or the financial activities of the company shall be supervised by the Board of Governors and subject to prudential standards; and
(a) Exception to § 1310.21. Notwithstanding § 1310.21, the Council may waive or modify any or all of the notice, hearing and other requirements of § 1310.21 with respect to a nonbank financial company or company if—
(2) The Council provides notice of the waiver or modification under this section and the proposed determination of the Council under § 1310.10, § 1310.11, or § 1310.12 to the nonbank financial company or company as soon as practicable, but not later than 24 hours after the waiver or modification is granted.
(b) Opportunity for hearing. (1) If the Council pursuant to paragraph (a) of this section waives or modifies the requirements of § 1310.21 with respect to a nonbank financial company or company, the Council shall allow the nonbank financial company or company, not later than 10 days after the date of receipt of the notice described in paragraph (a)(2) of this section, to request, in writing, an opportunity for a written or oral hearing before the Council to contest—
(ii) The proposed determination of the Council under § 1310.10, § 1310.11, or § 1310.12, as applicable
(A) Any waiver or modifications under this § 1310.22; and
(B) Whether the nonbank financial company or the financial activities of the company shall be supervised by the Board of Governors and subject to prudential standards under § 1310.10, § 1310.11, or § 1310.12, as applicable; and
(2) The Council may not make a final determination regarding any waiver or modifications under this § 1310.22 or whether the nonbank financial company or the financial activities of the company shall be supervised by the Board of Governors and subject to prudential standards under § 1310.10, § 1310.11, or § 1310.12, as applicable, prior to the earlier of—
(d) Vote required. Any determination by the Council under paragraph (a)(1) of this section to waive or modify the requirements of § 1310.21 shall—
(1) Reevaluate each currently effective determination made under § 1310.10(a), § 1310.11(a), or § 1310.12(a); and
(2) Rescind any such determination, if the Council determines that the nonbank financial company no longer meets the standards under § 1310.10(a), or § 1310.11(a), as applicable.
§ 1310.24
(a) In accordance with 12 U.S.C. 5323(h), if the Council makes a final Start Printed Page 4567determination under this part that a nonbank financial company, or the financial activities of a company, shall be subject to supervision by the Board of Governors and subject to prudential standards, such nonbank financial company or company may, not later than 30 days after the date of receipt of the notice of final determination under § 1310.21(d) or (e) or § 1310.22(e), or § 1310.23(a)(2), bring an action in the United States district court for the judicial district in which the home office of such nonbank financial company or company is located, or in the United States District Court for the District of Columbia, for an order requiring that the final determination be rescinded.
1. The Council's decision requires the vote of at least two-thirds of the voting members of the Council then serving, including the affirmative vote of the Chairperson of the Council (the Secretary of the Treasury).
2. The corresponding statutory factors for a foreign nonbank financial company would be considered under the relevant category or categories indicated in the table.
[FR Doc. 2011-1551 Filed 1-25-11; 8:45 am]