Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies

 
CONTENT
Federal Register, Volume 84 Issue 249 (Monday, December 30, 2019)
[Federal Register Volume 84, Number 249 (Monday, December 30, 2019)]
[Rules and Regulations]
[Pages 71740-71770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27108]
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FINANCIAL STABILITY OVERSIGHT COUNCIL
12 CFR Part 1310
RIN 4030-ZA00
Authority To Require Supervision and Regulation of Certain
Nonbank Financial Companies
AGENCY: Financial Stability Oversight Council.
ACTION: Final interpretive guidance.
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SUMMARY: This final interpretive guidance, which replaces the Financial
Stability Oversight Council's existing interpretive guidance on nonbank
financial company determinations, describes the approach the Council
intends to take in prioritizing its work to identify and address
potential risks to U.S. financial stability using an activities-based
approach, and enhancing the analytical rigor and transparency in the
processes the Council intends to follow if it were to consider making a
determination to subject a nonbank financial company to supervision by
the Board of Governors of the Federal Reserve System.
[[Page 71741]]
DATES: Effective Date: January 29, 2020.
FOR FURTHER INFORMATION CONTACT: Howard Adler, Office of Domestic
Finance, Treasury, at (202) 622-2409; Eric Froman, Office of the
General Counsel, Treasury, at (202) 622-1942; or Mark Schlegel, Office
of the General Counsel, Treasury, at (202) 622-1027.
SUPPLEMENTARY INFORMATION:
I. Background
    The statutory purposes of the Financial Stability Oversight Council
(the ``Council'') are to identify risks to U.S. financial stability,
promote market discipline, and respond to emerging threats to the
stability of the U.S. financial system. The Council's authorities to
accomplish these statutory purposes include authorities to facilitate
information sharing and coordination among regulators, monitor the
financial services marketplace, make recommendations to regulators, and
require supervision by the Board of Governors of the Federal Reserve
System (the ``Federal Reserve'') for nonbank financial companies that
may pose risks to U.S. financial stability.
    Section 111 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5321) (the ``Dodd-Frank Act'') established
the Council. The purposes of the Council under section 112 of the Dodd-
Frank Act (12 U.S.C. 5322) are (A) to identify risks to the financial
stability of the United States that could arise from the material
financial distress or failure, or ongoing activities, of large,
interconnected bank holding companies or nonbank financial companies,
or that could arise outside the financial services marketplace; (B) to
promote market discipline, by eliminating expectations on the part of
shareholders, creditors, and counterparties of such companies that the
Government will shield them from losses in the event of failure; and
(C) to respond to emerging threats to the stability of the United
States financial system.
    As a threshold matter, the Council emphasizes the importance of
market discipline, rather than government intervention, as a mechanism
for addressing potential risks to U.S. financial stability posed by
financial companies. The Dodd-Frank Act gives the Council broad
discretion to determine how to respond to potential threats to U.S.
financial stability. The Council's duties under section 112 of the
Dodd-Frank Act include monitoring the financial services marketplace in
order to identify potential threats to U.S. financial stability, and
recommending to the Council member agencies general supervisory
priorities and principles reflecting the outcome of discussions among
the member agencies. The Council's duties under section 112 also
include making recommendations to primary financial regulatory agencies
\1\ to apply new or heightened standards and safeguards for financial
activities or practices that could create or increase risks of
significant liquidity, credit, or other problems spreading among
financial companies and markets. The Council intends to seek to
identify, assess, and address potential risks and emerging threats on a
system-wide basis by taking an activities-based approach to its work,
as further explained below.
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    \1\ ``Primary financial regulatory agency'' is defined in
section 2(12) of the Dodd-Frank Act, 12 U.S.C. 5301(12).
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    The Dodd-Frank Act also authorizes the Council to determine that
certain nonbank financial companies will be subject to supervision by
the Federal Reserve and prudential standards. The Federal Reserve is
responsible for establishing the prudential standards that will be
applicable, under section 165 of the Dodd-Frank Act, to nonbank
financial companies subject to a Council determination \2\ under
section 113 of the Dodd-Frank Act. The Council has previously issued
rules, guidance, and other public statements regarding its process for
evaluating nonbank financial companies for a potential determination.
On April 11, 2012, the Council issued interpretive guidance (the ``2012
Interpretive Guidance'') regarding the manner in which the Council
makes determinations under section 113 of the Dodd-Frank Act, as an
appendix to a final rule (together, the ``2012 Final Rule and
Interpretive Guidance'').\3\ On May 22, 2012, the Council approved
hearing procedures relating to the conduct of hearings before the
Council in connection with proposed determinations regarding nonbank
financial companies and financial market utilities and related
emergency waivers or modifications under sections 113 and 804 of the
Dodd-Frank Act (as amended in 2013 and 2018, the ``Hearing
Procedures'').\4\ On February 4, 2015, the Council adopted supplemental
procedures (the ``2015 Supplemental Procedures'') to the 2012 Final
Rule and Interpretive Guidance.\5\ In June 2015, the Council published
staff guidance with details regarding the methodologies used in Stage 1
thresholds in connection with the determination process under section
113.\6\ On November 17, 2017, the Department of the Treasury issued a
report to the President in response to a Presidential Memorandum
directing the Secretary of the Treasury to conduct a thorough review of
the determination and designation processes of the Council.\7\
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    \2\ Section 113 of the Dodd-Frank Act, 12 U.S.C. 5323, refers to
a Council ``determination'' regarding a nonbank financial company.
This release refers to ``determination'' and ``designation''
interchangeably for ease of reading.
    \3\ The 2012 Final Rule and Interpretive Guidance added a new
part 1310 to title 12 of the Code of Federal Regulations, consisting
of final rules (12 CFR 1310.1-1310.23) and interpretive guidance
(Appendix A to Part 1310-Financial Stability Oversight Council
Guidance for Nonbank Financial Company Designations). See 12 CFR
part 1310, app. A (2012).
    \4\ 77 FR 31855 (May 30, 2012); 78 FR 22546 (April 16, 2013); 83
FR 12010 (March 19, 2018).
    \5\ Financial Stability Oversight Council Supplemental
Procedures Relating to Nonbank Financial Company Determinations
(February 4, 2015), available at https://www.treasury.gov/initiatives/fsoc/designations/Documents/Supplemental%20Procedures%20Related%20to%20Nonbank%20Financial%20Company%20Determinations%20-%20February%202015.pdf.
    \6\ See Council, Staff Guidance Methodologies Relating to Stage
1 Thresholds (June 8, 2015), available at https://www.treasury.gov/initiatives/fsoc/designations/Documents/FSOC%20Staff%20Guidance%20-%20Stage%201%20Thresholds.pdf.
    \7\ Treasury, Report to the President of the United States in
Response to the Presidential Memorandum Issued April 21, 2017:
Financial Stability Oversight Council Designations (November 17,
2017), available at https://www.treasury.gov/press-center/press-releases/documents/pm-fsoc-designations-memo-11-17.pdf.
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    On March 6, 2019, the Council approved proposed interpretive
guidance (the ``Proposed Guidance''), which incorporated certain
provisions of the 2015 Supplemental Procedures, to revise and update
the 2012 Interpretive Guidance.\8\ The Proposed Guidance, which
included a request for public comment and over 40 specific questions,
was intended to enhance the Council's transparency, analytical rigor,
and public engagement. The comment period for the Proposed Guidance
closed on May 13, 2019.
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    \8\ 84 FR 9028 (March 13, 2019). On the same date, the Council
adopted a final rule stating that the Council shall not amend or
rescind its interpretive guidance on nonbank financial company
determinations without providing the public with notice and an
opportunity to comment in accordance with the procedures applicable
to legislative rules under the Administrative Procedure Act. See 84
FR 8958 (March 13, 2019).
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    The Council received 26 comment letters in response to the Proposed
Guidance, of which nine were from companies or trade associations in
the asset management industry, four were from trade associations in the
insurance industry, three were from other trade associations, seven
were from various advocacy groups, one was from two previous
Chairpersons of the Council and two previous Chairmen of the Federal
Reserve, one was from an association of state insurance regulators, and
one was from a group of academics.
[[Page 71742]]
(Comment letters are available online at http://www.regulations.gov/docket?D=FSOC-2019-0001.) Twenty of the commenters were generally
supportive of the proposal, including the primary focus on the
activities-based approach and analytical enhancements to the Council's
designation process. Six commenters were generally opposed to the
proposal, arguing it unnecessarily limited the Council's tools for
addressing systemic risk. Some of the commenters generally opposed to
the proposal nonetheless stated that an activities-based approach may
be appropriate in certain circumstances.
    This final interpretive guidance (the ``Final Guidance'') replaces
in its entirety the 2012 Interpretive Guidance. In addition, in
connection with the adoption of the Final Guidance, the Council has
rescinded the 2015 Supplemental Procedures and the 2015 staff guidance
regarding the Stage 1 thresholds. The Council's rules codified at 12
CFR 1310.1 to 1310.23 and the Council's Hearing Procedures remain in
effect.
    The Council expects that the Final Guidance will better enable the
Council to:
    [cir] Leverage the expertise of financial regulatory agencies;
    [cir] Promote market discipline;
    [cir] Maintain competitive dynamics in affected markets;
    [cir] Appropriately tailor regulations to cost-effectively minimize
burdens; and
    [cir] Ensure the Council's designation analyses are rigorous and
transparent.
II. Overview of Final Guidance
    The Final Guidance revises the 2012 Interpretive Guidance to ensure
that the Council's work is clear, transparent, and analytically
rigorous, and to enhance the Council's engagement with companies,
regulators, and other stakeholders. By issuing clear and transparent
guidance, the Council seeks to provide the public with sufficient
information to understand the Council's concerns regarding risks to
financial stability, while appropriately protecting information
submitted by companies and regulators to the Council.
A. Key Changes From 2012 Interpretive Guidance and Proposed Guidance
1. Key Changes From 2012 Interpretive Guidance
    The Final Guidance substantially transforms the Council's previous
procedures. Following are high-level descriptions of several of the
most important changes, which are explained in greater detail below.
    First, under the Final Guidance, the Council will prioritize its
efforts to identify, assess, and address potential risks and threats to
U.S. financial stability through a process that begins with an
activities-based approach. This approach is consistent with the
Council's priorities of identifying and addressing potential risks and
emerging threats on a system-wide basis, in order to reduce the
potential for competitive market distortions that could arise from
entity-specific determinations, and allow relevant financial regulatory
agencies to address identified potential risks. The Council will pursue
entity-specific determinations under section 113 of the Dodd-Frank Act
only if a potential risk or threat cannot be adequately addressed
through an activities-based approach. This approach will enable the
Council to effectively identify and address the underlying sources of
risks to financial stability on a system-wide basis, rather than
addressing risks only at a particular nonbank financial company that
may be designated.
    Second, before issuing nonbinding recommendations to a primary
financial regulatory agency under section 120 of the Dodd-Frank Act,
the Council will ascertain whether the primary financial regulatory
agency would be expected to perform a cost-benefit analysis of the
actions it would take in response to the Council's contemplated
recommendation. In cases where the primary financial regulatory agency
would not be expected to conduct such an analysis, the Council itself
will--prior to making a final recommendation--conduct an analysis,
using empirical data, to the extent available, of the benefits and
costs of the actions that the primary financial regulatory agency would
be expected to take in response to the contemplated recommendation.
When the Council conducts its own analysis, the Council will make a
recommendation under section 120 only if it believes that the results
of its assessment of benefits and costs support the recommendation.
    Third, in the event the Council considers a nonbank financial
company for a potential determination under section 113, the Council
will perform a cost-benefit analysis prior to making a determination.
The Council will make a determination under section 113 only if the
expected benefits to financial stability from the determination justify
the expected costs that the determination would impose.
    Fourth, under the Final Guidance, the Council will assess the
likelihood of a nonbank financial company's material financial distress
when evaluating the firm for a potential determination, in order to
evaluate the extent to which a determination may promote U.S. financial
stability.
    Fifth, the Final Guidance condenses the prior three-stage process
for a determination under section 113 into two stages, by eliminating
prior stage 1 (as established by the 2012 Interpretive Guidance). Under
prior stage 1, a set of uniform quantitative metrics was applied to a
broad group of nonbank financial companies in order to identify nonbank
financial companies for further evaluation and to provide clarity for
other nonbank financial companies that likely would not be subject to
evaluation for a potential determination. The Final Guidance eliminates
prior stage 1, because it generated confusion among firms and members
of the public and is not compatible with the prioritization of an
activities-based approach.
    Sixth, the Final Guidance further enhances the new, two-stage
determination process by making numerous procedural improvements and
incorporating several provisions of the 2015 Supplemental Procedures,
which were intended to facilitate the Council's engagement and
transparency. The Final Guidance will increase the Council's engagement
with companies and their existing regulators during the determination
process. One of the goals of this enhanced engagement is to provide a
company under review with greater visibility into the aspects of its
business that may pose risks to U.S. financial stability. Enhanced
engagement will also allow the company to provide the Council with
relevant information, which will help to ensure that the Council is
making decisions based on a broad set of data and a rigorous analysis.
By making a company aware early in the review process of the potential
risks the Council has identified, the Council seeks to give the company
more information and tools to mitigate those risks prior to any Council
designation, thereby providing a potential pre-designation ``off-
ramp.''
    The Final Guidance also includes procedures intended to clarify the
post-designation ``off-ramp.'' The Final Guidance provides that in the
event the Council makes a final determination regarding a company, the
Council intends to encourage the company or its regulators to take
steps to mitigate the potential risks identified in the Council's
written explanation of the basis for its final determination. Except in
cases where new material risks arise over time, if a company adequately
addresses the potential risks identified in writing by the Council at
the time of the final determination and in
[[Page 71743]]
subsequent reevaluations, the Council should generally be expected to
rescind its determination regarding the company. By clarifying the
``off-ramp'' to rescission, and taking other steps to promote
designated nonbank financial companies' ability to reduce the threat
they could pose to financial stability, the Council seeks to both
protect the U.S. financial system and reduce the regulatory burden on
the companies.
    Seventh, the Final Guidance eliminates the six-category framework
described in the 2012 Interpretive Guidance. As noted in the 2012
Interpretive Guidance, the Dodd-Frank Act requires the Council to take
into account 10 considerations when evaluating a company for a
potential determination, and authorizes the Council to consider ``any
other risk-related factors that the Council deems appropriate.'' \9\
The 2012 Interpretive Guidance established an analytic framework that
grouped all relevant factors, including the 10 statutory considerations
\10\ and any additional risk-related factors, into six categories
(size, interconnectedness, substitutability, leverage, liquidity risk
and maturity mismatch, and existing regulatory scrutiny). The six-
category framework did not prove useful in guiding the Council's
evaluations, and unnecessarily complicated the framework for the
Council's analysis. As a result, the Final Guidance eliminates this
six-category framework.
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    \9\ See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2).
    \10\ See section C(1) below for a list of the 10 statutory
considerations.
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2. Key Changes From Proposed Guidance
    Following are high-level descriptions of several changes in this
Final Guidance from the Proposed Guidance. These changes are explained
in greater detail below.
    First, in response to comments that the Council should provide more
detail on how it will conduct its analysis under the activities-based
approach, the Final Guidance clarifies that the Council will consult
with relevant financial regulatory agencies and will take into account
existing laws and regulations that may mitigate a potential risk to
U.S. financial stability. Among other factors, the Final Guidance
provides that the Council will also take into account the risk profiles
and business models of market participants engaging in the products,
activities, or practices under evaluation.
    Second, the Final Guidance provides additional clarity on the
process by which the Council may issue recommendations under section
120, including the Council's analysis of the costs and benefits
associated with such recommendations.
    Third, the Final Guidance has been revised in response to comments
regarding the proposed interpretation of ``nonbank financial company''
as including any successor of a company that is subject to a final
determination of the Council. In response to comments that the proposed
interpretation was overly broad, the Final Guidance has been revised to
state, more narrowly, that the Council intends to interpret the
statutory term ``nonbank financial company supervised by the Board of
Governors'' as including any nonbank financial company that acquires,
directly or indirectly, a majority of the assets or liabilities of a
company that is subject to a final determination of the Council. As a
result, if a nonbank financial company subject to a final determination
of the Council sells or otherwise transfers a majority of its assets or
liabilities, the acquirer will succeed to, and become subject to, the
Council's determination. As noted below and in section V of the Final
Guidance, the Council may grant a designated nonbank financial
company's request for a reevaluation of the determination before the
next annual reevaluation, in appropriate cases.
    Fourth, the Final Guidance has been revised to add greater
specificity regarding the Council's assessment of costs and benefits in
connection with a determination under section 113 of the Dodd-Frank
Act. For example, the Final Guidance states that when possible, the
Council will quantify reasonably estimable benefits and costs, using
ranges, as appropriate, and based on empirical data when available.
    Fifth, the description of the Council's analytic process for
assessing the likelihood of a company's material financial distress has
been revised. The Final Guidance provides that to conduct this
assessment, the Council may consider factors such as leverage (both on
and off balance sheet), potential risks associated with asset
reevaluations (whether such reevaluations arise from market disruptions
or severe macroeconomic conditions), reliance on short-term funding or
other fragile funding markets, maturity transformation, and risks from
exposures to counterparties or other market participants.
    Sixth, the Proposed Guidance stated that the Council or its
Deputies Committee \11\ would vote to commence review of a nonbank
financial company in Stage 1 of the determination process. In response
to public comments, the Final Guidance provides that the Council will
vote to commence any review of a nonbank financial company in Stage 1.
The table below provides a summary of several key transition points
under the Final Guidance:
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    \11\ The Council's Deputies Committee is composed of senior
officials from each Council member and member agency. It coordinates
and oversees the work of the Council's other interagency staff
committees.
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        Transition point            Persons voting     Voting threshold
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Begin step one of ABA...........  No required vote..  N/A.
Begin step two of ABA...........  No required vote..  N/A.
Begin Stage 1 of Determination    Council member      Majority.
 Process.                          vote.
Begin Stage 2 of Determination    Council member      Majority.
 Process.                          vote.
Make Proposed Determination.....  Council member      Two-thirds.\12\
                                   vote.
Make Final Determination........  Council member      Two-thirds.
                                   vote.
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    The following sections provide detailed descriptions of (1) the
activities-based approach (section B); (2) the analytic framework for
the Council's evaluation of nonbank financial companies for a potential
determination under section 113 of the Dodd-Frank Act (section C); and
(3) the process that the Council will generally follow when determining
whether to designate, or rescind the designation of, a nonbank
financial company (section D).
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    \12\ Under 12 CFR 1310.10(b)(2), any proposed or final
determination requires the vote of not fewer than two-thirds of the
voting members of the Council then serving, including the
affirmative vote of the Chairperson of the Council.
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[[Page 71744]]
B. Activities-Based Approach
1. Overview
    Under the Final Guidance, the Council will prioritize its efforts
to identify, assess, and address potential risks and threats to U.S.
financial stability through a process that begins with an activities-
based approach. The Council will pursue entity-specific determinations
under section 113 of the Dodd-Frank Act only if a potential risk or
threat cannot be adequately addressed through an activities-based
approach. This approach reflects two priorities: (1) Identifying and
addressing, in consultation with relevant financial regulatory
agencies,\13\ potential risks and emerging threats on a system-wide
basis, thereby reducing the potential for competitive distortions among
financial companies and in markets that could arise from entity-
specific determinations, and (2) allowing relevant financial regulatory
agencies, which generally possess greater information and expertise
with respect to company, product, and market risks, to address
potential risks, rather than subjecting the companies to new regulatory
authorities. The 2012 Final Rule and Interpretive Guidance did not
address the concept of an activities-based approach.
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    \13\ References in this preamble and guidance to ``relevant
financial regulatory agencies'' may encompass a broader range of
regulators than those included in the statutory definition of
``primary financial regulatory agency.'' See Dodd-Frank Act section
2(12), 12 U.S.C. 5301(12).
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    As part of its activities-based approach, the Council will examine
a diverse range of financial products, activities, and practices that
could pose risks to U.S. financial stability. The Council's annual
reports highlight the types of activities the Council will evaluate,
including activities related to the extension of credit, maturity and
liquidity transformation, market making and trading, and other key
functions critical to support the functioning of financial markets.\14\
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    \14\ For example, the Council's 2018 annual report noted risks
such as cybersecurity events associated with the increased use of
information technology, the concentrations of activities and
exposures in central counterparties, and transition issues related
to the move away from LIBOR to an alternative, sustainable reference
rate.
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    Most commenters supported the activities-based approach, stating
that it is the most effective means to address potential risks that may
arise in particular industries and would avoid competitive distortions
from the entity-specific approach. Some commenters supportive of
alternatives to the entity-specific approach stated that designating
individual nonbank financial companies could create inefficiencies and
competitive disadvantages in capital markets. One commenter stated that
primary regulators should tailor their regulations based on the unique
attributes of each company and consider the cumulative effects of
regulations on companies. By relying on the experience and expertise of
relevant financial regulatory agencies during the activities-based
approach, the Council expects that any response to an identified risk
to financial stability will be tailored in a manner that reflects the
unique attributes of affected companies and their existing regulatory
framework. One commenter stated that the activities-based approach
should cover activities, but not products and practices. The Council
believes that the activities-based approach would be rendered less
effective if it excluded products and practices, because activities
that may pose risks to financial stability often involve the issuance
of products or the conduct of practices.
    Other commenters stated that there should be a high bar to Council
actions. These commenters stated that the Council and primary
regulators should bear the burden of proof in establishing the
existence of a risk to financial stability and of demonstrating that
the Council's proposed response to the risk is optimal from an
effectiveness and efficiency standpoint. The Council expects that its
analyses will sufficiently establish the existence of any potential
risk or emerging threat to financial stability to which the Council
seeks to respond. Further, any regulation adopted by relevant financial
regulatory agencies in response to the Council's activities-based
approach would generally be subject to existing federal or state
administrative law requirements.
    Several commenters opposed the prioritization of the activities-
based approach, based on various legal, procedural, analytical, and
other objections. Some commenters noted that the Council does not have
authority to regulate financial activities, or stated that the proposal
to rely on primary regulators to address potential risks has no basis
in the Dodd-Frank Act. One commenter stated that Congress did not
intend the Council's designation authority to be subordinate to or
contingent upon an activities-based approach, and two other commenters
stated that the Council's authority to make recommendations under
section 120 of the Dodd-Frank Act cannot serve as a substitute for
designations under section 113. One commenter stated that the Council's
analysis should begin with an activities-based approach, but that the
activities-based approach should not be undertaken at the expense of
designation, which the commenter stated is an important tool that
should be used when warranted.
    The Dodd-Frank Act gives the Council broad discretion to determine
how to respond to potential threats to U.S. financial stability. The
activities-based approach is consistent with the Council's priorities
of identifying and addressing potential risks and emerging threats on a
system-wide basis, allowing relevant financial regulatory agencies to
address identified potential risks. The Council retains the authority
to designate nonbank companies under the Final Guidance. The Council
recognizes that its authority under section 120 of the Dodd-Frank Act
is not a substitute for designations in all circumstances. However,
consistent with the Council's prioritization of an activities-based
approach, the Council's authority under section 120 may be a more
effective means of addressing certain types of potential risks than
designating one or more individual companies.
    Two commenters stated that the activities-based approach cannot
address risks that are tied to the funding and leverage or combination
of activities within a specific firm. Another commenter stated that the
Federal Reserve's regulatory authorities with respect to designated
nonbank financial companies, such as capital and liquidity
requirements, risk management requirements, and stress testing, are not
available through an activities-based approach. In the activities-based
approach, the Council anticipates identifying risks from activities
such as the use of leverage, and working with relevant financial
regulatory agencies to respond to identified risks. The Council expects
that in many cases, relevant financial regulatory agencies will have
authority to address risks identified by the Council in the activities-
based approach. However, if a potential threat to U.S. financial
stability cannot be adequately addressed through an activities-based
approach, the Council may consider a nonbank financial company for a
potential determination under section 113 of the Dodd-Frank Act.
    One commenter stated that although the Proposed Guidance suggests
that the activities-based approach will minimize competitive
distortions that arise from firm-specific decisions, large,
systemically important firms actually create competitive distortions,
because of the perception that they will receive a bailout in a
situation where their failure could create systemic risk.
[[Page 71745]]
Another commenter stated that competitive market distortions are not
among the statutory factors that the Council is required to consider
when evaluating specific companies for a determination. One of the
Council's priorities is to identify and address potential risks and
emerging threats to financial stability on a system-wide basis, which,
in turn, reduces the potential for competitive market distortions that
could arise from entity-specific determinations. The activities-based
approach is consistent with this system-wide perspective.
    One commenter objected to the activities-based approach on the
basis that it is easier for regulators to identify systemic firms ex
ante than to predict which activities will threaten financial
stability. Another commenter stated that jurisdictional gaps will
impede the activities-based approach, including with respect to
insurance companies, hedge funds, and nonbank financial technology
companies. By leveraging the expertise and regulatory authorities of
relevant financial regulatory agencies as part of its collaborative
engagement in the activities-based approach, the Council expects to
identify products, activities, and practices that may raise concerns
and effectively address any jurisdictional gaps. Council members can,
at their discretion, raise potential risks for consideration by the
Council, including with respect to risks that are, or are migrating,
outside a particular regulator's jurisdiction. Another commenter stated
that the activities-based approach will incentivize firms to engage in
regulatory arbitrage by seeking out activities that have not been
identified or appropriately regulated. However, actions taken to
address potential risks across an entire industry or market under the
activities-based approach may be more effective in discouraging
regulatory arbitrage than company-specific determinations under section
113. Two commenters stated that it would not be possible for the
Council to undertake an activities-based approach effectively, given
the reduction in funding and staff for the Office of Financial Research
(OFR). The Council has confidence that Council members and member
agencies, including the OFR, will be able to conduct the market
monitoring, risk identification, information sharing, and analysis
contemplated by the activities-based approach.
2. First Step of Activities-Based Approach
    The Final Guidance establishes a two-step process for the Council's
activities-based approach. In the first step, in an effort to identify
potential risks to U.S. financial stability, the Council intends to
monitor diverse financial markets and market developments, in
consultation with relevant financial regulatory agencies, to identify
products, activities, or practices that could pose risks to financial
stability.\15\ The Council intends to continue to monitor a broad scope
of financial markets and market developments, which may include
corporate and sovereign debt and loan markets, equity markets, new or
evolving financial products, activities, and practices, and
developments affecting the resiliency of financial market participants.
If the Council's monitoring of markets and market developments
identifies a product, activity, or practice that could pose a potential
risk to U.S. financial stability, the Council, in consultation with the
relevant financial regulatory agencies, will evaluate the potential
risk to determine whether it merits further review or action. The Final
Guidance defines a ``risk to financial stability'' as a risk of an
event or development that could impair financial intermediation or
financial market functioning to a degree that would be sufficient to
inflict significant damage on the broader economy.\16\ One commenter
stated that the Council should amend the proposed definition of ``risk
to financial stability'' by evaluating the impact and likelihood of a
potential risk, among other attributes. The definition in the Final
Guidance is unchanged from the proposal, because the definition already
addresses the scale of the risk by reference to the impact on the
broader economy. The likelihood of the risk arising is more relevant to
the consideration of any appropriate regulatory response than to this
definition.
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    \15\ The Council has a statutory duty to monitor the financial
services marketplace in order to identify potential threats to U.S.
financial stability. See Dodd-Frank Act section 112(a)(2)(C), 12
U.S.C. 5322(a)(2)(C).
    \16\ The 2012 Final Rule and Interpretive Guidance did not
define ``risk to financial stability.''
---------------------------------------------------------------------------
    In its analysis in the first step of the activities-based approach,
the Council will evaluate the extent to which certain characteristics
could amplify potential risks to U.S. financial stability arising from
products, activities, or practices. While these characteristics may not
themselves present risks to U.S. financial stability, the Council will
consider whether the combination or prominence of such characteristics
in the products, activities, or practices under evaluation warrants
further scrutiny. Such characteristics include asset valuation risk or
credit risk; leverage, including leverage arising from debt,
derivatives, off-balance sheet obligations, and other arrangements; and
the transparency of financial markets, such as growth in financial
transactions occurring outside of regulated sectors, among others. When
evaluating the potential risks associated with a product, activity, or
practice, the Council will take into account these characteristics and
various other factors that may exacerbate or mitigate the risks. For
example, activities may pose greater risks if they are complex or
opaque, are conducted without effective risk-management practices, are
significantly correlated with other financial products, or are either
highly concentrated or significant and widespread. A trading activity
in a market subject to a significant amount of asset valuation risk,
for instance, may pose a greater threat to financial stability if the
activity is also opaque. In contrast, regulatory requirements or market
practices may mitigate risks by, for example, limiting exposures or
leverage, enhancing risk-management practices, or restricting excessive
risk-taking. Regulatory requirements associated with a lending
activity, such as an asset concentration limit or repayment test, may
reduce the potential risk to financial stability stemming from the
activity. Council members can, at their discretion, raise potential
risks for consideration by the Council, including with respect to risks
that are, or are migrating, outside a particular regulator's
jurisdiction.
    Commenters offered numerous views regarding the proposed analytical
components of the first step of the activities-based approach. Several
commenters stated that the Final Guidance should take into account
existing regulations implemented since the financial crisis, or
consider the existing regulatory framework and work with the primary
regulator to harmonize an approach to evaluating risk. As discussed
below, the Final Guidance has been revised to make clear that the
Council will consult with relevant financial regulatory agencies and
will take into account existing laws and regulations that may mitigate
a potential risk to U.S. financial stability. One commenter stated that
the Council should tailor regulation to firms' risk profiles. The
Council itself does not adopt financial services regulations, but it
expects that actions that relevant financial regulatory agencies take
to address potential risks to financial stability will be tailored to
respond effectively and efficiently to the relevant risk. Further, the
Final Guidance has
[[Page 71746]]
been revised to state that the Council will take into account the risk
profiles and business models of market participants engaging in the
products, activities, or practices under evaluation.
    Other commenters recommended that the Council further specify how
it will analyze potential risks in the activities-based approach, such
as by clarifying the criteria or standards the Council will apply, or
establishing an empirical connection between an identified risk and
measures to address the risk. As discussed below, the Final Guidance
has been revised to make clear that the Council will consider available
evidence regarding the potential risk and the behavior of financial
market participants. At the same time, empirical data may not be
available regarding all potential risks, and the type and scope of the
Council's analysis will be tailored to the potential risk under
consideration.
    Several commenters provided recommendations on the types of risks
that the Council should focus on. Commenters stated that the Council
should focus on new or emerging risks, or on substantially changed
activities. Other commenters stated that the Council should focus on
risks such as: Key service providers or market participants that could
introduce new threats; cross-jurisdictional risks; or historical
sources of financial disruptions. The Council expects that such risks
and activities will be reviewed as part of the activities-based
approach. One commenter stated that the activities-based approach
should consider risks from sovereign entities, central banks,
government agencies, and cyber threats. The activities-based approach
will be sufficiently flexible to enable the Council to consider any
relevant risks that may arise from these sources. One commenter stated
that the Council should consider how to address risks that arise
rapidly and require an expedited response from the Council and
regulators. The Council will act expeditiously, as appropriate, to
address emerging risks to financial stability.
    One commenter stated that the Council should solicit public comment
when identifying potential risks during the activities-based approach.
During the activities-based approach, the Council will engage
extensively with relevant financial regulatory agencies, which are
generally in close contact with market participants and other
stakeholders. In addition, the Final Guidance notes that the Council
may engage with industry participants and other members of the public
as it assesses potential risks. Further, as described below, if the
Council proposes to issue recommendations under section 120 of the
Dodd-Frank Act, the Council will provide public notice and an
opportunity to comment on proposed recommendations in accordance with
its statutory obligations.
    Several commenters raised considerations specific to certain
industries. One commenter stated that insurance is not inherently a
source of systemic risk and can be an effective tool of risk
mitigation. Another commenter stated that property and casualty
insurers do not create systemic risk due to their low levels of
leverage and liquidity risk.
    Several commenters discussed the application of the activities-
based approach to the asset management industry. Commenters stated that
private equity and private credit do not pose risks to financial
stability, and highlighted the existing federal regulation of such
firms. Another commenter stated that the Final Guidance should state
that there is no historical evidence demonstrating that traditional
asset management activities have threatened U.S. financial stability.
One commenter stated that when the Council evaluates leverage in the
investment funds sector, it should defer to existing regulation
regarding funds' asset segregation and derivatives use.
    One of the priorities of the activities-based approach is to allow
relevant financial regulatory agencies, which generally possess greater
information and expertise with respect to company, product, and market
risks, to address potential risks, rather than subjecting companies to
new regulatory authorities. The Council believes that this approach
will enable the Council, working together with financial regulatory
agencies, to appropriately consider specific attributes of particular
industries, business models, and existing regulatory frameworks,
including the factors highlighted in the public comments regarding
insurance and asset management.
    Several commenters provided additional views regarding the
Council's analysis of specific risk factors. One commenter stated that
the activities-based approach should consider risks and mitigants for
each relevant industry, since each industry has distinct risk-
mitigation techniques. Another commenter stated that leverage alone
does not equal risk, and that some leverage can decrease risk. One
commenter stated that the Final Guidance should distinguish between
investor protection concerns and financial stability concerns. The
Council expects to collaborate with relevant financial regulatory
agencies when evaluating the extent to which certain characteristics
could amplify potential risks to U.S. financial stability arising from
products, activities, or practices. Such characteristics include
leverage, such as leverage arising from debt, derivatives, off-balance
sheet obligations, and other arrangements. The Council will give due
consideration to the attributes of particular risks during this
collaboration.
    One commenter stated that the Council should regularly survey
financial firms on their sources of short-term funding. While the
Council does not believe it is appropriate at this time to impose this
additional reporting requirement on market participants, the Council
will regularly rely on a wide range of data, research, and analysis
from Council member agencies, the OFR, and public sources to inform its
actions.
3. Four Framing Questions in First Step of Activities-Based Approach
    The Council's analysis in the first step of the activities-based
approach will generally focus on four framing questions, which analyze
(1) triggers of potential risks (for example, sharp reductions in the
valuation of particular classes of financial assets or significant
credit losses); (2) how adverse effects of the potential risk may be
transmitted to financial markets or market participants (for example,
through direct or indirect exposures in financial markets to the
potential risk or funding or trading pressures that may result from
associated declines in asset prices); (3) the effects the potential
risk could have on the U.S. financial system (for example, the scale
and magnitude of adverse effects on other companies and markets, and
whether such effects could be concentrated or diffused among market
participants); and (4) whether the adverse effects of the potential
risk could impair the U.S. financial system in a manner that could harm
the non-financial sector of the U.S. economy (for example, through
curtailed or interrupted provision of credit to non-financial
companies).
    Commenters that expressed a view on the four framing questions
generally supported the proposed framework, in some cases with
suggestions for additional factors or steps the Council should
consider. Two commenters stated that the Council should consult with
primary regulators regarding new dynamics that could fuel a financial
crisis, such as risks that start in the broader economy and propagate
to the financial system. Another commenter stated that the Council
should provide
[[Page 71747]]
more detail on how it will analyze data under the four framing
questions. In addition, three commenters stated that the Council's
analysis under the four framing questions should be based on empirical
and historical evidence. The Final Guidance has been revised to clarify
that in its evaluation of the four framing questions, the Council will
consult with relevant financial regulatory agencies and will take into
account existing laws and regulations that may mitigate a potential
risk to U.S. financial stability. The Council will also take into
account the risk profiles and business models of market participants
engaging in the products, activities, or practices under evaluation.
The Council will consider available evidence regarding potential risks.
However, the Final Guidance notes that empirical data may not be
available regarding all potential risks, and the type and scope of the
Council's analysis will be tailored to the potential risk under
consideration.
    Several other commenters stated that the analysis under the four
framing questions should include an assessment of the likelihood,
significance, dollar value, or magnitude of a potential risk to
financial stability. The Council expects that the scale of the adverse
effects a potential risk could have on companies and markets will be
part of its evaluation under the four framing questions--particularly
the third question, regarding the effects the potential risk could have
on the U.S. financial system. However, the Council does not intend to
introduce a separate assessment of the likelihood of a particular risk,
which could unnecessarily restrict its ability to evaluate the framing
questions.
4. Second Step of Activities-Based Approach
    If the Council identifies a potential risk to U.S. financial
stability in step one of the activities-based approach, then in the
second step, the Council will work with the relevant financial
regulatory agencies at the federal and state levels to seek the
implementation of appropriate actions to address the identified
potential risk.\17\ The goal of this step is for these regulators to
take appropriate actions such as modifying their regulation or
supervision of companies or markets under their jurisdiction in order
to mitigate potential risks to U.S. financial stability identified by
the Council. Measures that regulators can take to address a particular
risk may vary widely, based on their authorities and the urgency of the
risk. The Council will seek to take advantage of these regulators'
expertise and their regulatory and supervisory authorities to address
the potential risk identified by the Council. Two commenters stated
that the Council should vote on advancing from step one to step two of
the activities-based approach. Because of the continued preliminary
nature of any analysis and interagency collaboration at the outset of
step two, the Council is not adopting a requirement to hold a vote at
that time.
---------------------------------------------------------------------------
    \17\ The Council has a statutory duty to ``recommend to the
member agencies general supervisory priorities and principles
reflecting the outcome of discussions among the member agencies.''
See Dodd-Frank Act section 112(a)(2)(F), 12 U.S.C. 5322(a)(2)(F).
---------------------------------------------------------------------------
    The Council expects that much of its initial identification and
assessment of risks, and engagement with regulators, will be informal
and nonpublic in nature. The staffs of Council members and member
agencies will be responsible for much of the market monitoring, risk
identification, information sharing, and analysis in the activities-
based approach. This engagement may yield a range of diverse outcomes,
including the sharing of data, research, and analysis among the Council
and regulators, or the public issuance of recommendations by the
Council in its annual reports. Potential risks that merit further
attention may be raised at meetings of the Council members or with
other stakeholders, and, as appropriate, may result in public
statements or recommendations by the Council, as described above.
    The Council anticipates that appropriate measures it may take to
address an identified potential risk will also typically take the form
of relatively informal actions, such as information sharing among
regulators, but as deemed appropriate could also include more formal
measures, such as the Council's public issuance of recommendations to
regulators or the public. Such recommendations could be made in the
Council's annual report. Alternatively, if after engaging with relevant
financial regulatory agencies, the Council finds that those regulators'
actions are inadequate to address the identified potential risk to U.S.
financial stability, the Council has authority under section 120 of the
Dodd-Frank Act to ``provide for more stringent regulation of a
financial activity'' by publicly issuing nonbinding recommendations to
primary financial regulatory agencies to apply new or heightened
standards and safeguards for a financial activity or practice conducted
by bank holding companies or nonbank financial companies under their
jurisdictions.\18\ The Council's authority under section 120 of the
Dodd-Frank Act is discussed below.
---------------------------------------------------------------------------
    \18\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
---------------------------------------------------------------------------
    Several commenters provided views regarding the Council's process
and engagement with primary regulators in the activities-based
approach. One commenter stated that the Council should separate
responsibility among the Council staff for investigating an activity
from responsibility for determining that the activity poses a systemic
risk. The Council has limited staff and also relies on the resources of
its members and member agencies, and therefore does not propose to
restructure its staff in this manner. Two commenters stated that the
Council should rely as much as possible on public or existing
regulatory data. The Council will regularly rely on data, research, and
analysis from Council member agencies, the OFR, industry participants,
and other public sources to inform its actions. Consistent with its
statutory obligations, the Council will, whenever possible, rely on
information available from the OFR or primary financial regulatory
agencies before requiring the submission of reports from any nonbank
financial company or bank holding company that is regulated by a member
agency or primary financial regulatory agency.\19\ One commenter stated
that the Council should report publicly on its activities-based
approach evaluations and other Council activities, and include this
reporting in the Council annual report. The issues the Council is
likely to consider in the activities-based approach are often discussed
in the Council's annual reports. In the event the Council issues
recommendations in connection with the activities-based approach, such
recommendations could also be made in the Council's annual report,
which includes the Council's recommendations to enhance the integrity,
efficiency, competitiveness, and stability of U.S. financial markets,
to promote market discipline, and to maintain investor confidence.
---------------------------------------------------------------------------
    \19\ See Dodd-Frank Act section 112(d)(3)(B), 12 U.S.C.
5322(d)(3)(B).
---------------------------------------------------------------------------
    One commenter stated that the Council should consider whether new
regulatory requirements could have an unintended adverse impact on
financial stability. The Council will coordinate among its members and
member agencies and will follow up on supervisory or regulatory actions
to ensure the potential risk is adequately addressed, with due
consideration for
[[Page 71748]]
any identified, unintended adverse impact.
    One commenter stated that the Council should further clarify the
process it will follow during the activities-based approach. The
Council believes the process set forth in the Final Guidance provides
an appropriate level of specificity while also permitting sufficient
flexibility for informal collaboration among financial regulators to
identify, assess, and address potential risks. One commenter stated
that the Council should publicly issue a written provisional
determination regarding any identified potential risk to financial
stability. The Council's collaboration with relevant financial
regulatory agencies in the activities-based approach may yield a range
of diverse outcomes, including the sharing of data, research, and
analysis among the Council and these regulators, or the public issuance
of recommendations by the Council in its annual reports. The approach
described in the Final Guidance will enable robust analysis and
collaboration, without unduly restricting the Council's ability to
respond to potential risks to U.S. financial stability.
    A number of commenters provided recommendations about the Council's
engagement with regulators or industry stakeholders in the activities-
based approach. Several commenters stated that engagement with primary
regulators and companies should be a key component of the activities-
based approach, and another stated that the Council should strengthen
the role of the primary regulator in activities-based approach step
one, with a presumption supporting the primary regulator's findings.
The Final Guidance makes clear that the Council will seek to take
advantage of existing regulators' expertise and regulatory authorities
to address any potential risk identified by the Council during the
activities-based approach. One commenter stated that the Council should
communicate with the primary regulator about existing regulations
applicable to companies engaged in financial activities that may be
evaluated in connection with the activities-based approach, any
possible changes to such regulations, and whether it can address the
identified risk on an industry-wide basis. As discussed above, the
Final Guidance has been revised to clarify that in its evaluation, the
Council will consult with relevant financial regulatory agencies and
will take into account existing laws and regulations that may mitigate
a potential risk to U.S. financial stability. Several commenters stated
that the Council should coordinate with various other parties during
the activities-based approach, including state insurance regulators,
the National Association of Insurance Commissioners (NAIC), and other
industry stakeholders. If the Council identifies a potential risk to
U.S. financial stability in step one of the activities-based approach,
then in the second step, the Council will work with the relevant
financial regulatory agencies, including state regulators, to seek the
implementation of appropriate actions to address the identified
potential risk.
    Several commenters stated that the Council or the relevant primary
regulator should undertake a cost-benefit analysis in connection with
the activities-based approach. Because the Council will not itself be
adopting regulations or taking supervisory actions to address potential
risks to U.S. financial stability identified in the activities-based
approach, a cost-benefit analysis by the Council during the activities-
based approach would not generally be appropriate. In addition, several
commenters recommended that the Council undertake a cost-benefit
analysis in connection with any recommendation the Council may issue
under section 120 of the Dodd-Frank Act. As described below, the
Council made changes to the Final Guidance in response to these
comments, because it has determined that such an analysis would
increase the rigor of the Council's recommendations under section 120.
5. Recommendations Under Section 120 of the Dodd-Frank Act
    Under section 120 of the Dodd-Frank Act, the Council has authority
to ``provide for more stringent regulation of a financial activity'' by
publicly issuing nonbinding recommendations to primary financial
regulatory agencies to apply new or heightened standards and safeguards
for a financial activity or practice conducted by certain financial
companies.\20\
---------------------------------------------------------------------------
    \20\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
---------------------------------------------------------------------------
    The authority to issue recommendations to primary financial
regulatory agencies under section 120 is one of the Council's most
formal tools for responding to potential risks to U.S. financial
stability. Given the importance of this tool, and consistent with the
public comments on the Proposed Guidance, the Council believes that a
cost-benefit analysis should be performed and made public in connection
with any recommendations issued under section 120. The Final Guidance
has been revised to provide additional clarity on the process by which
the Council may issue recommendations under section 120, and how the
costs and benefits associated with such recommendations will be
analyzed. Consistent with section 120, the Council will make these
recommendations only if it determines that the conduct, scope, nature,
size, scale, concentration, or interconnectedness of the activity or
practice could create or increase the risk of significant liquidity,
credit, or other problems spreading among bank holding companies and
nonbank financial companies, U.S. financial markets, or low-income,
minority, or underserved communities.
    In its recommendations under section 120, the Council may suggest
broad approaches to address the risks it has identified. When
appropriate, the Council may make a more specific recommendation. To
promote analytical rigor and avoid duplication, before making any
recommendation under section 120, the Council will ascertain whether
the relevant primary financial regulatory agency would be expected to
perform a cost-benefit analysis of the actions it would take in
response to the Council's contemplated recommendation. In cases where
the primary financial regulatory agency would not be expected to
conduct such an analysis, the Council itself will--prior to making a
final recommendation--conduct an analysis, using empirical data, to the
extent available, of the benefits and costs of the actions that the
primary financial regulatory agency would be expected to take in
response to the contemplated recommendation. Where the Council conducts
its own such analysis, the specificity of its assessment of benefits
and costs would be commensurate with the specificity of the
contemplated recommendation. In general, such an assessment by the
Council will include a consideration of the benefits and costs to
market participants and to the U.S. financial system and long-term
economic growth. Where the Council conducts its own analysis, the
Council will make a recommendation under section 120 only if it
believes that the results of its assessment of benefits and costs
support the recommendation.
    Primary financial regulatory agencies have significant experience,
knowledge, and expertise that can be useful in determining the most
efficient way to address a particular risk within their regulatory
jurisdiction. In every case, prior to issuing a recommendation under
section 120, the Council will consult with the relevant primary
financial regulatory agency and provide
[[Page 71749]]
notice to the public and opportunity for comment as required by section
120.
    In any case in which no primary financial regulatory agency exists
for one or more nonbank financial companies conducting financial
activities or practices identified by the Council as posing risks, the
Council can consider reporting to Congress on recommendations for
legislation that would prevent such activities or practices from
threatening U.S. financial stability.\21\ The Council intends to make
recommendations under section 120 of the Dodd-Frank Act only to the
extent that its recommendations are consistent with the statutory
mandate of the relevant primary financial regulatory agency.
---------------------------------------------------------------------------
    \21\ See Dodd-Frank Act section 120(d)(3), 12 U.S.C. 5330(d)(3).
---------------------------------------------------------------------------
    One commenter stated that the Council should use its authority
under section 120 of the Dodd-Frank Act after informal and nonpublic
actions have been tried and deemed insufficient. As noted above, if the
Council, after engaging with relevant financial regulatory agencies,
believes those regulators' actions are inadequate to address an
identified potential risk to U.S. financial stability, the Council may
make formal public recommendations to primary financial regulatory
agencies under section 120. Another commenter stated that the consent
of the primary financial regulatory agency should be required before
the Council issues a recommendation under section 120. The Council
expects to issue recommendations under section 120 only after engaging
with relevant financial regulatory agencies, but the primary financial
regulatory agency's consent is not required under section 120, and the
Council believes that its consultation with regulators will be more
effective than the commenter's proposed restriction on the Council's
discretion.
6. Transition From Activities-Based Approach to Determination Process
    The Proposed Guidance stated that if the activities-based approach
did not adequately address a potential risk identified by the Council,
the Council may evaluate one or more individual nonbank financial
companies for an entity-specific determination under section 113 of the
Dodd-Frank Act.
    Commenters provided various recommendations on the procedural steps
that should be required for the Council to advance beyond the
activities-based approach and commence an evaluation of a nonbank
financial company for a potential determination under section 113 of
the Dodd-Frank Act. One commenter requested that the Council clarify
that the activities-based approach is distinct from the determination
process. The Final Guidance reflects the fact that the process for
evaluating a nonbank financial company for a potential determination
under section 113 of the Dodd-Frank Act is distinct from the process
for an activities-based approach under section 112 of the Dodd-Frank
Act. Commenters made a number of comments intended to ensure that
sufficient analysis is conducted in the activities-based approach
before the Council initiates a designation analysis. One commenter
stated that before considering a nonbank financial company for a
potential determination, the Council should explain in writing the
empirical basis why the activities-based approach is insufficient.
Several other commenters stated that the Council should only move from
the activities-based approach to a designation analysis if the primary
regulator of the relevant nonbank financial company states in writing
that it cannot address the risk through an activities-based approach.
Other commenters recommended that the Council and relevant primary
regulator prepare a list of the regulator's findings in connection with
the transition from the activities-based approach to a designation
analysis and that the Council should make a ``written finding'' that it
is moving to a designation analysis.
    The Proposed Guidance stated that the Council or its Deputies
Committee would vote to commence review of a nonbank financial company
in Stage 1. Several commenters stated that the Council should vote on
any decision to commence the review of a nonbank financial company for
a potential determination, and that such a vote should not be delegable
to the Deputies Committee. In light of the significance of a Council
determination, the Council agrees with these comments. Accordingly, the
Final Guidance has been revised to provide that the Council will vote
to commence review of a nonbank financial company in Stage 1. The
Council's vote before considering a nonbank financial company for a
potential determination will help ensure that sufficient analysis has
been conducted in the activities-based approach.\22\
---------------------------------------------------------------------------
    \22\ See also the chart of Council votes that would occur at
significant transition points in the Council's analysis, in section
II(A)(2) above.
---------------------------------------------------------------------------
C. Analytic Framework for Nonbank Financial Company Determinations
    The Proposed Guidance stated that the Council expects to advance
beyond the activities-based approach, and evaluate a nonbank financial
company for a potential determination under section 113 of the Dodd-
Frank Act, only in a limited set of circumstances--namely, if (1) the
Council's collaboration and engagement with the relevant financial
regulatory agencies using an activities-based approach does not
adequately address the potential risk identified by the Council, or if
the potential threat to U.S. financial stability is outside the
jurisdiction or authority of financial regulatory agencies, and (2) the
potential threat identified by the Council is one that could be
addressed by a Council determination regarding one or more nonbank
financial companies. Two commenters stated that the Final Guidance
should be modified to state that the Council may consider a nonbank
financial company for a potential determination only if a potential
threat ``can only be adequately addressed'' through designation. While
the Council believes that the commenters' proposed language would
unduly restrict the Council's ability to respond to potential threats
to financial stability, the Final Guidance has been revised, with
respect to clause (2) above, to add that the Council will only evaluate
a company for a designation if the potential threat identified is one
that could be effectively addressed by a Council determination.
    Following is a description of the substantive analysis the Council
would undertake regarding any nonbank financial company under review
for a potential determination.
1. Statutory Standards and Considerations
    Title I of the Dodd-Frank Act defines a ``nonbank financial
company'' as a domestic or foreign company that is ``predominantly
engaged'' in ``financial activities,'' other than bank holding
companies and certain other types of firms.\23\ The Dodd-Frank Act
provides that a company is ``predominantly engaged'' in financial
activities if either (1) the annual gross revenues derived by the
company and all of its subsidiaries from financial activities, as well
as from the ownership or control of insured depository institutions,
represent 85 percent or more of the consolidated annual gross revenues
of the company; or (2) the consolidated assets of the
[[Page 71750]]
company and all of its subsidiaries related to financial activities, as
well as related to the ownership or control of insured depository
institutions, represent 85 percent or more of the consolidated assets
of the company.\24\ The Dodd-Frank Act requires the Federal Reserve to
establish the requirements for determining whether a company is
``predominantly engaged in financial activities'' for this purpose.\25\
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    \23\ See Dodd-Frank Act section 102(a)(4), 12 U.S.C. 5311(a)(4).
    \24\ See Dodd-Frank Act section 102(a)(6), 12 U.S.C. 5311(a)(6).
    \25\ See Dodd-Frank Act section 102(b), 12 U.S.C. 5311(b). The
Federal Reserve published a final rule in April 2013 establishing
the requirements for determining if a company is ``predominantly
engaged in financial activities.'' See 12 CFR 242.3.
---------------------------------------------------------------------------
    Section 113 of the Dodd-Frank Act authorizes the Council to subject
a nonbank financial company to supervision by the Federal Reserve and
prudential standards if the Council determines that (1) material
financial distress at the nonbank financial company could pose a threat
to U.S. financial stability (the ``First Determination Standard''), or
(2) the nature, scope, size, scale, concentration, interconnectedness,
or mix of the activities of the nonbank financial company could pose a
threat to U.S. financial stability (the ``Second Determination
Standard''). The analytic framework in the Final Guidance focuses
primarily on the First Determination Standard, because risks to
financial stability (such as asset fire sales or financial market
disruptions) are most commonly propagated through a nonbank financial
company when it is in distress.
    The Council is statutorily required to take into account the
following considerations in making a determination under section 113 of
the Dodd-Frank Act: \26\
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    \26\ See Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2).
This list reflects the statutory considerations applicable to a
determination with respect to a U.S. nonbank financial company. The
Council is required to consider corresponding factors in making a
determination with respect to a foreign nonbank financial company.
     The extent of the leverage of the company;
     The extent and nature of the off-balance-sheet
exposures of the company;
     The extent and nature of the transactions and
relationships of the company with other significant nonbank
financial companies and significant bank holding companies;
     The importance of the company as a source of credit for
households, businesses, and State and local governments and as a
source of liquidity for the U.S. financial system;
     The importance of the company as a source of credit for
low-income, minority, or underserved communities, and the impact
that the failure of such company would have on the availability of
credit in such communities;
     The extent to which assets are managed rather than
owned by the company, and the extent to which ownership of assets
under management is diffuse;
     The nature, scope, size, scale, concentration,
interconnectedness, and mix of the activities of the company;
     The degree to which the company is already regulated by
one or more primary financial regulatory agencies;
     The amount and nature of the financial assets of the
company;
     The amount and types of the liabilities of the company,
including the degree of reliance on short-term funding; and
     Any other risk-related factors that the Council deems
appropriate.
    One commenter stated that the Council should make clear that
designation of certain entities, like mutual funds and their managers,
is inappropriate. Another commenter stated that designation is the
wrong approach for capital markets firms, because it applies rules
designed for banks to non-banks. Several commenters stated that the
Federal Reserve should exempt from designation certain types of nonbank
financial companies that do not exhibit certain risk factors, pursuant
to section 170 of the Dodd-Frank Act. The Council does not intend to
provide industry-based exemptions from potential determinations under
section 113 of the Dodd-Frank Act. The Council would evaluate industry-
or firm-specific factors as part of the assessment of any nonbank
financial company for potential designation. Therefore, based on these
comments, the Final Guidance has been revised to make clear that the
information relevant to an in-depth analysis of a nonbank financial
company may vary based on the nonbank financial company's
characteristics. One commenter stated that the Council should consider
how the enhanced prudential standards that apply to designated nonbank
financial companies should be tailored to specific types of nonbank
financial companies. The Council has statutory authority to make
recommendations to the Federal Reserve concerning the establishment and
refinement of prudential standards and other requirements applicable to
designated nonbank financial companies; \27\ the Council may consider,
at a future date, whether to issue such recommendations.
---------------------------------------------------------------------------
    \27\ See Dodd-Frank Act section 115, 12 U.S.C. 5325.
---------------------------------------------------------------------------
    Several other commenters generally opposed to the proposal stated
that the Council's designation authority is a vital tool that should
not be de-emphasized in favor of the activities-based approach. One
commenter stated that Congress intended that designation be the
mandatory and primary mechanism for addressing risks to financial
stability. Another stated that the Proposed Guidance imposed conditions
that conflicted with section 113 of the Dodd-Frank Act. Several
commenters stated that the proposed changes would make designation
unworkably lengthy, or would preclude its use to address potential
risks in advance of an emergency. Other commenters made similar
arguments regarding the benefits of nonbank financial company
designations. The Final Guidance is intended to ensure that the
Council's work is clear, transparent and analytically rigorous, and to
enhance the Council's engagement with companies, regulators, and other
stakeholders. By issuing clear and transparent guidance, the Council
seeks to provide the public with sufficient information to understand
the Council's concerns regarding risks to U.S. financial stability,
while appropriately protecting information submitted by companies and
regulators to the Council. The Final Guidance does not prohibit the
Council from considering a nonbank financial company for potential
designation, in appropriate circumstances. The Final Guidance makes
clear that the Council may pursue entity-specific determinations under
section 113 of the Dodd-Frank Act if a potential risk or threat cannot
be adequately addressed through an activities-based approach. The
Council anticipates it would consider a nonbank financial company for a
potential determination under section 113 only in rare instances, such
as if the products, activities, or practices of a company that pose a
potential threat to U.S. financial stability are outside the
jurisdiction or authority of financial regulatory agencies. Further,
the Final Guidance does not limit the ability of the Council to waive
or modify the procedural requirements related to nonbank financial
company designations if the Council determines that such action is
necessary or appropriate to prevent or mitigate threats posed by a
nonbank financial company to U.S. financial stability.\28\
---------------------------------------------------------------------------
    \28\ See Dodd-Frank Act section 113(f), 12 U.S.C. 5323(f), 12
CFR 1310.22.
---------------------------------------------------------------------------
    The Final Guidance clarifies several terms used in the Dodd-Frank
Act that are not defined in the Act, including ``company,'' ``material
financial distress,'' and ``threat to the financial stability of the
United States.'' The Final Guidance defines ``threat to the
[[Page 71751]]
financial stability of the United States'' by reference to the
potential for ``severe damage on the broader economy,'' in contrast to
the definition in the 2012 Interpretive Guidance, which refers to
``significant'' damage. The Council intends to interpret the term
``company'' to include any corporation, limited liability company,
partnership, business trust, association, or similar organization.\29\
The Proposed Guidance stated that the Council intends to interpret
``nonbank financial company'' as including any successor of a company
that is subject to a final determination of the Council. Several
commenters stated that the Council should either eliminate the
``successor'' language, or limit successors to those entities that
succeed to substantially all the designated company's assets and
liabilities.
---------------------------------------------------------------------------
    \29\ The statutory definition of ``nonbank financial company''
excludes bank holding companies and certain other types of
companies. Dodd-Frank Act section 102(a)(4), 12 U.S.C. 5311(a)(4).
---------------------------------------------------------------------------
    The Council agrees with commenters that the proposed interpretation
of ``nonbank financial company'' was overly broad. The Final Guidance
has therefore been revised to narrow the proposed interpretation and
further clarify which entity would be subject to a Council
determination in the event of a sale that involves the transfer of a
majority, but not all, of a designated nonbank financial company's
assets or liabilities. The Final Guidance states that the Council
intends to interpret the statutory term ``nonbank financial company
supervised by the Board of Governors'' as including any nonbank
financial company that acquires, directly or indirectly, a majority of
the assets or liabilities of a company that is subject to a final
determination of the Council. As a result, if a nonbank financial
company subject to a final determination of the Council sells or
otherwise transfers a majority of its assets or liabilities, the
acquirer, rather than the remaining small entity, will succeed to and
become subject to the Council's determination.\30\ This new definition
has the benefit of clarity, because it relies on a simple balance
sheet-related test to determine whether an entity succeeds to, and
becomes subject to, a Council determination. This definition also makes
clear that the acquirer of a minority of a designated nonbank financial
company's assets or liabilities will not be deemed to become subject to
the Council determination. At the request of the designated nonbank
financial company, the Council may engage in discussions with the
company to evaluate the structure of any transaction involving a
potential successor. Further, as discussed in section V of the Final
Guidance, a nonbank financial company that is subject to a final
determination of the Council may request a reevaluation of the
determination before the next required annual reevaluation, in
appropriate cases. The Final Guidance has been revised to make clear
that if a nonbank financial company subject to a final determination of
the Council sells or otherwise transfers a majority of its assets or
liabilities, the acquirer can use this reevaluation process to seek a
rescission of the determination upon consummation of its transaction.
---------------------------------------------------------------------------
    \30\ In narrowing and clarifying its interpretation of ``nonbank
financial company supervised by the Board of Governors,'' the
Council is guided by general principles of corporate law under which
an acquirer of another company's assets may be liable for
obligations of the seller in certain situations, including if the
purchaser is merely a continuation of the seller.
---------------------------------------------------------------------------
    Several commenters stated that the Council should add specificity
regarding certain definitions in the Proposed Guidance, such as
``impairment of financial intermediation or of financial market
functioning,'' ``severe damage on the broader economy,'' ``overall
stress in the financial services industry,'' and ``weak macroeconomic
environment.'' The Council believes that these definitions accurately
reflect the statutory requirements and the nature of the threat that
the Council's authority under the Dodd-Frank Act seeks to mitigate.
Attempting to define them with greater specificity could unacceptably
limit the Council's discretion in a situation that is not precisely
foreseeable.
    The Council received a number of comments regarding its analysis in
the designation context. One commenter stated that the Council should
defer to the nonbank financial company's primary regulator during the
analysis, and another stated that the Council should provide a key role
on the Council analytic team to staff of the primary regulator, and
solicit input from industry and academic economists. The Council will
consult with a company's primary financial regulatory agency (if any)
when assessing a company for potential designation. A company under
review in Stage 1 or Stage 2 may voluntarily submit to the Council any
information it deems relevant to the Council's evaluation. In
consideration of the benefits that the Council will derive from
extensive engagement with a company's primary financial regulatory
agency, the Council will actively solicit the regulator's views
regarding risks at the company and potential means to mitigate those
risks, and will share its preliminary views regarding potential risks
at the company with the regulator. During the determination process,
the Council will continue to encourage the regulator to address
relevant risks using the regulator's existing authorities.
    Other commenters provided specific analytical recommendations to
the Council, including that the Council should consider market risks in
conjunction with the analysis of a nonbank financial company's
liquidity risk; the Council should assess the ability of financial
markets to absorb asset fire sales; and, when analyzing leverage, the
Council should distinguish between long and short exposures. The
Council has not revised the Final Guidance to address these comments
but intends to consider such factors in its analyses as appropriate.
2. Transmission Channels
    The Final Guidance explains that the Council's evaluation of a
nonbank financial company for a potential determination will focus
primarily on how the negative effects of the company's material
financial distress, or of the nature, scope, size, scale,
concentration, interconnectedness, or mix of the company's activities,
could be transmitted to or affect other firms or markets, thereby
causing a broader impairment of financial intermediation or of
financial market functioning. The Council has identified three
transmission channels as most likely to facilitate the transmission of
these negative effects. These transmission channels are: (1) The
exposure transmission channel; (2) the asset liquidation transmission
channel; and (3) the critical function or service transmission channel.
While these transmission channels were also described in the 2012
Interpretive Guidance, the Final Guidance substantially enhances and
clarifies the Council's analyses under these three channels. The
Council may also consider other relevant channels through which risks
could be transmitted from a particular nonbank financial company and
thereby pose a threat to U.S. financial stability.
a. Exposure Transmission Channel
    Under the exposure transmission channel, the Council will evaluate
whether a nonbank financial company's creditors, counterparties,
investors, or other market participants have direct or indirect
exposure to the nonbank financial company that is significant enough to
materially and adversely affect those or other creditors,
counterparties, investors, or other market participants and thereby
pose a threat to U.S. financial stability. Among
[[Page 71752]]
other factors, the Council expects to evaluate the amounts of
exposures, the degree of protection for the counterparty under the
terms of transactions, whether the largest counterparties include large
financial institutions, and the company's leverage and size. The
Council will also consider the exposures that counterparties and other
market participants have to a nonbank financial company arising from
the company's capital markets activities. The Council expects to
consider a variety of factors in connection with this analysis, such as
the amount and nature of, and counterparties to, the company's
outstanding debt (regardless of term) and other liabilities,
derivatives transactions (which may be measured on the basis of gross
notional amount, net fair value, or potential future exposures), and
securities financing transactions, among others. The Council will also
consider applicable factors, including existing regulatory
requirements, that may mitigate potential risks under the exposure
transmission channel. The Final Guidance notes that the Council will
consider the extent to which assets are managed rather than owned by
the company, in recognition of the distinct nature of exposure risks
when the company is acting as an agent rather than as principal. In
particular, in the case of a nonbank financial company that manages
assets on behalf of customers or other third parties, the third
parties' direct financial exposures are often to the issuers of the
managed assets, rather than to the nonbank financial company managing
those assets. Finally, the Council will evaluate the potential for
contagion in conjunction with other factors summarized above when
evaluating risk under this channel. As part of this assessment, the
Council will consider relevant industry-specific historical examples,
the scope of the company's interconnectedness with large financial
institutions, and market-based or regulatory factors that may mitigate
the risk of contagion, among other factors.
b. Asset Liquidation Transmission Channel
    Under the asset liquidation transmission channel, the Council will
consider whether a nonbank financial company holds assets that, if
liquidated quickly, could pose a threat to U.S. financial stability by,
for example, causing a fall in asset prices that significantly disrupts
trading or funding in key markets or causes significant losses or
funding problems for other firms with similar holdings. The Council may
also consider whether a deterioration in asset pricing or market
functioning could pressure other financial firms to sell their holdings
of affected assets in order to maintain adequate capital and liquidity,
which, in turn, could produce a cycle of asset sales that could lead to
further market disruptions. The Council will also consider the extent
to which assets are managed rather than owned by the company. The
Council's analysis of the asset liquidation transmission channel will
focus on three central factors: (1) Liquidity of the company's
liabilities; (2) liquidity of the company's assets; and (3) potential
fire sale impacts.
    When analyzing the liquidity of the company's liabilities, the
Council will assess the company's liquidity risk by reviewing factors
such as the company's short-term financial obligations, financial
arrangements that can be terminated by counterparties and therefore
become short-term, and long-term liabilities that may come due in a
short-term period, among other factors. The Council will also evaluate
the company's leverage (for example, by assessing total assets and
total debt measured relative to total equity, and derivatives
liabilities and off-balance sheet obligations relative to total
equity), as well as the company's short-term debt ratio. When analyzing
the liquidity of the company's assets, the Council will consider which
assets the company could rapidly liquidate, if necessary, to satisfy
its obligations. Finally, when analyzing potential fire sale impacts,
the Council will consider the potential effects of the company's asset
liquidation on markets and market participants.
c. Critical Function or Service Transmission Channel
    Finally, under the critical function or service transmission
channel, the Council will consider the potential for a nonbank
financial company to become unable or unwilling to provide a critical
function or service that is relied upon by market participants and for
which there are no ready substitutes and thereby pose a threat to U.S.
financial stability. This analysis considers the extent to which other
firms could provide similar financial services in a timely manner at a
similar price and quantity if a nonbank financial company withdraws
from a particular market, a factor commonly known as
``substitutability.'' Substitutability also captures situations in
which a nonbank financial company is the primary or dominant provider
of services in a market that the Council determines to be essential to
U.S. financial stability. When evaluating this transmission channel,
the Council may consider the nonbank financial company's activities and
critical functions and the importance of those activities and functions
to the U.S. financial system, including how those activities and
functions would be performed by the company or other market
participants in the event of the company's material financial distress;
the competitive landscape for markets in which a nonbank financial
company participates and for the services it provides; the company's
market share in specific product lines; and the ability of substitutes
to replace a service or function provided by the company, among other
factors.
    The Council received a number of comments regarding the
transmission channels. One commenter stated that the transmission
channels should refer to existing regulations or policies that relate
to financial stability. The Council is statutorily required to take
into account the degree to which the nonbank financial company is
already regulated by one or more primary financial regulatory agencies,
and this analysis will focus on the extent to which existing regulation
of the company mitigates the potential risks to financial stability
identified by the Council.
    One commenter stated that in the asset liquidation transmission
channel, the Council should establish a basis for concluding that a
decline in asset prices, and resulting disruptions or losses, poses a
threat to financial stability. The Final Guidance has been revised to
clarify that, under the asset liquidation channel, the Council will
consider whether a nonbank financial company holds assets that, if
liquidated quickly, could pose a threat to U.S. financial stability by,
for example, causing a fall in asset prices that significantly disrupts
trading or funding in key markets or causes significant losses or
funding problems for other firms with similar holdings. Commenters also
stated that the Council should establish a basis for concluding that
the risks identified under each transmission channel could pose a
threat to financial stability, and should take into account mitigating
factors. The Final Guidance has been revised to provide that the
analysis under each transmission channel relates to the potential
threat to U.S. financial stability, and that the Council will consider
applicable factors that may mitigate potential threats under each
transmission channel.
    Several commenters provided industry-specific comments with respect
to the transmission channels.
[[Page 71753]]
One commenter stated that the Council should include examples of risk-
mitigating features of the insurance sector, such as recognizing
insurance separate accounts, and mechanisms that mitigate potential
fire sales of assets resulting from policyholder withdrawals or
surrenders. The Final Guidance has been revised to make clear that the
Council will consider applicable factors that may mitigate potential
risks under the exposure transmission channel, such as the use of
insurance funds to limit counterparty exposures or other transactions
that reallocate risk to well-capitalized entities. Several commenters
supported the statement in the Proposed Guidance that the Council will
consider the extent to which assets are managed rather than owned by
the company. Other comments highlighted factors that may limit
potential risks to financial stability arising from asset managers. The
Final Guidance has been revised to make clear that in its analyses
under the transmission channels, the Council will consider applicable
factors that may limit the transmission of risk, such as existing
regulatory requirements, collateralization, bankruptcy-remote
structures, or guarantee funds that reduce counterparties' exposures to
the nonbank financial company or mitigate incentives for customers or
counterparties to withdraw funding or assets. The Council's
determination with respect to a nonbank financial company will be based
on an evaluation of whether the nonbank financial company meets the
statutory standards, taking into account the statutory considerations
set forth in section 113 of the Dodd-Frank Act, and any other risk-
related factors that the Council deems appropriate. While the Council
does not intend to provide industry-based exemptions from potential
determinations under section 113 of the Dodd-Frank Act, the Council
intends to give these types of mitigating factors due consideration in
its analysis of any nonbank financial company for a potential
determination.
3. Complexity, Opacity, and Resolvability
    In addition to the three transmission channels, the Final Guidance
explains that the Council also intends to consider a nonbank financial
company's complexity, opacity, and resolvability when evaluating
whether the company poses a risk to U.S. financial stability. As part
of this analysis, the Council may assess the complexity of the nonbank
financial company's legal, funding, and operational structure, and any
obstacles to the rapid and orderly resolution of the company. One
commenter requested that the Final Guidance state that the Council
expects to discuss these matters with the regulatory agency. The Final
Guidance notes that the Council will consult with the relevant primary
financial regulatory agency during both Stage 1 and Stage 2. When
consulting with a company's primary financial regulatory agency (if
any), the Council expects to discuss the company's complexity, opacity,
and resolvability, as well as the likelihood of its material financial
distress, taking into account a period of overall stress in the
financial services industry and a weak macroeconomic environment
(discussed in detail below).
4. Existing Regulatory Scrutiny
    Consistent with section 113 of the Dodd-Frank Act, the Final
Guidance explains that the Council will consider the degree to which a
nonbank financial company is already regulated by one or more primary
financial regulatory agencies. When considering existing regulatory
scrutiny, the Council may weigh factors such as the comprehensiveness
of the regulatory regime, the extent to which the company's primary
financial regulatory agency has imposed risk-management standards as
relevant to the type of company, regulators' processes for inter-
regulator coordination, and the extent to which existing regulation of
the company has mitigated the potential risks to financial stability
identified by the Council.
5. Cost-Benefit Analysis and Likelihood of Material Financial Distress
a. Cost-Benefit Analysis
    Under the Final Guidance, the Council will perform a cost-benefit
analysis before making any determination under section 113. The Council
proposes to make a determination under section 113 only if the expected
benefits justify the expected costs that the determination would
impose.\31\ The key elements of regulatory analysis include (1) a
statement of the need for the proposed action, (2) an examination of
alternative approaches, and (3) an evaluation of the benefits and costs
of the proposed action and the main alternatives.\32\ The Council will
conduct this analysis only in cases where the Council is concluding
that the company meets one of the standards for a determination by the
Council under section 113 of the Dodd-Frank Act, because in other cases
doing so would not affect the outcome of the Council's analysis.
---------------------------------------------------------------------------
    \31\ See MetLife, Inc. v. Financial Stability Oversight Council,
177 F. Supp.3d 219, 242 (D.D.C. 2016) (quoting 12 U.S.C.
5323(a)(2)(K) and Michigan v. Environmental Protection Agency, 135
S. Ct. 2699, 2707 (2015)).
    \32\ See Office of Management and Budget Circular A-4 (Sept. 17,
2003).
---------------------------------------------------------------------------
    The Council will consider the benefits of a determination to the
U.S. financial system, long-term economic growth, and the nonbank
financial company due to additional regulatory and supervisory
requirements resulting from the determination, including the benefits
of the prudential standards adopted by the Federal Reserve under
section 165 of the Dodd-Frank Act. When evaluating potential benefits
to the U.S. financial system and long-term economic growth arising from
a determination, the Council may consider whether the determination
enhances U.S. financial stability and mitigates the severity of
economic downturns by reducing the likelihood or severity of a
potential financial crisis, among other factors. With respect to
company-specific benefits, a company subject to a determination may
derive benefits from anticipated new or increased requirements,
including, for example, a lower cost of capital or higher credit
ratings upon meeting its post-designation regulatory and supervisory
requirements.
    When evaluating the costs of a determination, the Council will
consider not only the cost to the nonbank financial company from
anticipated new or increased regulatory and supervisory requirements in
connection with a determination, but also costs to the U.S. economy.
Relevant costs to the company will likely include costs related to
risk-management requirements, supervision and examination, and
liquidity requirements. When evaluating the costs of a determination to
the U.S. economy, the Council will assess the impact of the
determination on the availability and cost of credit or financial
products in relevant U.S. markets, among other factors.
    The majority of the commenters supported the proposal to perform a
cost-benefit analysis before making any determination under section
113. Several commenters provided recommendations regarding the
Council's analysis, including that the Council's analysis should be
empirically based or use historical data (not assumptions), with
estimates of indirect costs. The Final Guidance has been revised to add
greater specificity regarding the Council's cost-benefit analysis. The
Final Guidance makes clear that when possible, the Council will
quantify reasonably estimable benefits and costs, using ranges, as
appropriate, and based on empirical
[[Page 71754]]
data when available. If such benefits or costs cannot be quantified in
this manner, the Council will explain why such benefits or costs could
not be quantified or estimated. The Council also expects to consider
benefits and costs qualitatively. To the extent feasible, the Council
will attempt to assess the relative importance of any such qualitative
elements. At the same time, the Final Guidance recognizes that it may
not be possible to assess with any degree of certainty certain
potential benefits or costs, including indirect benefits or costs.
    One commenter stated that the Council should not designate a
nonbank financial company unless the Council can demonstrate that
designation would effectively mitigate the risk posed by the firm.
Another stated that the Council should make clear that the Council will
not designate a nonbank financial company unless designation mitigates
the risk to financial stability better than available alternatives. The
Council believes these concerns are adequately addressed by the
activities-based approach, as well as the Council's approach to making
a determination under section 113 only if the expected benefits justify
the expected costs that the determination would impose.
    Several commenters stated that the Council should conduct its cost-
benefit analysis based on the specific regulations that would apply to
a nonbank financial company if it were designated. The Council declines
to incorporate this requirement into its cost-benefit analysis, because
it is not logistically practicable for the Federal Reserve, which must
establish such prudential standards by rule or order, to provide this
information to the Council before the relevant company has been
designated. Another commenter stated that the Council should apply a
cost-benefit analysis to any additional regulation the Council
considers. However, the Council itself does not adopt regulations
applicable to designated nonbank financial companies.
    Several commenters opposed the proposal to perform a cost-benefit
analysis before making determinations under section 113. Several
commenters noted that the Dodd-Frank Act does not discuss a cost-
benefit analysis in connection with section 113. Two commenters stated
that the costs that will apply to a particular firm will depend on the
supervisory and regulatory regime the Federal Reserve establishes after
the designation. One commenter stated that cost-benefit analysis is a
burdensome, time-consuming, and imprecise methodology. One commenter
stated that the costs and benefits of designation are difficult to
predict in advance, in part because it is impossible to estimate the
likelihood, magnitude, or timing of a future financial crisis. The
Council believes that rigorous cost-benefit analysis is consistent with
thoughtful decision-making, and that it is an important step to ensure
that the Council makes a determination under section 113 only if the
expected benefits justify the expected costs of the determination.
Finally, two commenters stated that requiring cost-benefit analysis
will make it easier for a designated company to litigate its
designation. The Council will strive to perform analytically robust
cost-benefit analysis in a timely manner.
b. Likelihood of Material Financial Distress
    Consistent with sound risk regulation, the Council will consider
not only the impact of an identifiable risk, but also the likelihood
that the risk will be realized. The Council will therefore assess the
likelihood of a company's material financial distress, based on its
vulnerability to a range of factors, when evaluating the overall impact
of a Council determination for any company under review under the First
Determination Standard. The description of the Council's analytical
process for assessing the likelihood of a company's material financial
distress has been revised based on public comments. The Final Guidance
provides that factors the Council may consider include leverage (both
on and off balance sheet), potential risks associated with asset
reevaluations (whether such reevaluations arise from market disruptions
or severe macroeconomic conditions), reliance on short-term funding or
other fragile funding markets, maturity transformation, and risks from
exposures to counterparties or other market participants. The Council's
assessment may rely upon historical examples regarding the
characteristics of financial companies that have experienced financial
distress, but may also consider other risks that do not have historical
precedent. The Council's analysis of the vulnerability of a nonbank
financial company to material financial distress will be conducted
taking into account a period of overall stress in the financial
services industry and a weak macroeconomic environment.
    Several commenters supported the proposal that the Council will
assess the likelihood of a company's material financial distress. One
commenter stated that for any determination, the Council should be
required to determine that distress is reasonably likely to occur and
that the distress is reasonably likely to inflict severe damage on the
economy as a whole, using empirical and historical data. The criterion
is not included in the Final Guidance, because it would impose an
unduly high burden on the Council's ability to designate a nonbank
financial company.
    Several other commenters opposed the proposal that the Council will
assess the likelihood of a company's material financial distress. Three
commenters stated that the Dodd-Frank Act does not require that the
Council assess the likelihood of a company's material financial
distress. However, the Council believes that performing such a
likelihood assessment is an important part of the Council's assessment
of the extent to which a determination may promote U.S. financial
stability. Several commenters stated that the Dodd-Frank Act requires
the Council to assume the material financial distress of a nonbank
financial company. One commenter stated that the Council has a duty to
designate a nonbank financial company when the Council determines that
the company could pose a risk to financial stability if it fails, and
that the Council does not need to predict the probability of failure or
the mechanism for that failure. The Council has authority under section
113 of the Dodd-Frank Act, including under section 113(a)(2)(K), which
authorizes the Council to consider ``any other risk-related factors
that the Council deems appropriate,'' to consider the vulnerability of
a nonbank financial company to material financial distress as part of
the Council's analysis.
    Commenters opposed to the Council's assessment of the likelihood of
material financial distress raised a number of other objections,
including that this assessment will be a significant barrier to
designation; no accurate metrics exist that would enable the Council to
measure the likelihood of a company's material financial distress; and
it is difficult to anticipate the catalyst, dynamics, or timing of a
financial crisis. The Council believes that its analysis, including its
consultations with a company's primary financial regulatory agency and
its assessment of the statutory considerations, will enable the Council
to evaluate the likelihood of the company's material financial
distress. Several commenters also stated that the Council's
determination regarding the likelihood of a company's material
financial distress could publicly signal concern regarding a firm's
health, which could harm the company. The Council believes that the
marketplace will, in most cases, consider the same fundamental factors
that the Council
[[Page 71755]]
evaluates for purposes of independently assessing the likelihood of
material financial distress at a company that is being evaluated for a
potential determination. Finally, several commenters argued that the
Council should interpret section 113 of the Dodd-Frank Act in a manner
that is consistent with MetLife v. FSOC,\33\ while several others
argued it should not. Where appropriate, the Final Guidance reflects
the Council's view regarding the extent to which it should adopt the
analysis from that judicial decision.\34\
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    \33\ 177 F. Supp.3d 219 (D.D.C. 2016).
    \34\ The U.S. District Court for the District of Columbia in
MetLife v. FSOC held that the Council had acted in an arbitrary and
capricious manner. Specifically, the court stated that ``FSOC
purposefully omitted any consideration of the cost of designation to
MetLife. Thus, FSOC assumed the upside benefits of designation (even
without specific standards from the Federal Reserve) but not the
downside costs of its decision.'' 177 F.Supp.3d 219, 230. The Final
Guidance seeks to ensure that future Council determinations comport
with the court's decision and consider costs.
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D. Determination and Annual Reevaluation Process
    As noted above, the Council will prioritize an activities-based
approach for identifying, assessing, and addressing potential risks to
financial stability. The Council may, however, subject a nonbank
financial company to review for an entity-specific determination under
section 113 of the Dodd-Frank Act if the activities-based approach
would not adequately address potential risks to U.S. financial
stability.\35\ As noted above, the Final Guidance provides that the
Council will vote to commence review of a nonbank financial company in
Stage 1.
---------------------------------------------------------------------------
    \35\ As noted above, the Council anticipates it would consider a
determination under section 113 only in rare instances, such as if
the products, activities, or practices of a company that pose a
potential threat to U.S. financial stability are outside the
jurisdiction or authority of financial regulatory agencies.
---------------------------------------------------------------------------
    As proposed, the Final Guidance condenses the prior three-stage
determination process into two stages by eliminating prior stage 1,
makes other procedural improvements, and incorporates certain
provisions of the 2015 Supplemental Procedures.\36\ Following is a
description of the processes set forth in the Final Guidance for the
Council's evaluation of a nonbank financial company for a potential
determination under section 113 and the Council's annual reevaluations
of any such determinations.
---------------------------------------------------------------------------
    \36\ As discussed in section II(A)(1) above, the Proposed
Guidance eliminates the six-category framework described in the 2012
Interpretive Guidance.
---------------------------------------------------------------------------
1. Stage 1: Preliminary Evaluation of Nonbank Financial Companies
    In the first stage of the determination process, the Council will
notify nonbank financial companies identified as potentially posing
risks to U.S. financial stability. Under the Final Guidance, the
Council will engage extensively with the relevant company and its
financial regulators during Stage 1. The Council's preliminary analysis
will be based on quantitative and qualitative information available to
the Council primarily through public and regulatory sources. In
addition, a company under review in Stage 1 may voluntarily submit to
the Council any information it deems relevant to the Council's
evaluation and may, upon request, meet with staff of Council members
and member agencies who are leading the Council's analysis. In order to
reduce the burdens of review on the company, the Council will not
require the company to submit information during Stage 1.
    In consideration of the benefits that the Council will derive from
extensive engagement with a company's primary financial regulatory
agency, the Council will actively solicit the regulator's views
regarding risks at the company and potential means to mitigate those
risks, and will share its preliminary views regarding potential risks
at the company with the regulator. The Final Guidance notes that the
Council will consult with the primary financial regulatory agency
during both Stage 1 and Stage 2. Several commenters expressed support
for this approach, and stated that engagement with primary regulators
should be a key component of the determination process.
    Enhanced engagement in Stage 1 is intended to allow a company under
review to provide the Council with relevant information, which will
help to ensure that the Council is making decisions based on a diverse
array of data and rigorous analysis, and to provide the company with
greater visibility into the aspects of its business that may pose risks
to U.S. financial stability. Another goal of the enhanced engagement in
Stage 1 is to enable the company to take actions in response to the
Council's concerns, thereby providing a pre-designation ``off-ramp,''
while not burdening a company with the relatively higher costs that may
be incurred during a Stage 2 evaluation. By making a company aware of
the potential risks the Council has identified during its preliminary
review, the Council seeks to give the company more information and
tools to mitigate those risks prior to any Council determination. One
commenter recommended that the Final Guidance provide greater detail
regarding the pre-designation ``off-ramp.'' The Final Guidance has been
revised to clarify that the Council will seek to enable a company under
review to understand the focus of the Council's analysis, which may
enable the company to act to mitigate any threats to U.S. financial
stability and thereby potentially avoid becoming subject to a Council
determination. One commenter stated that the Council should undertake
early engagement with firms during the designation process. The Council
believes that its approach in Stage 1, as described above, addresses
this comment.
    Following the preliminary evaluation in Stage 1, the Council may
decide not to evaluate the company further, or it may vote to commence
a more detailed analysis of the company by advancing it to Stage 2. One
commenter recommended that if a Stage 1 review is terminated, there
should be a waiting period before Stage 1 can be restarted. Because
such a waiting period could prevent the Council from acting to address
a potential threat to financial stability even if new developments or
new information arose, this requested change has not been made.
    As noted above, the Final Guidance condenses the prior three-stage
process for a determination under section 113 into two stages, by
eliminating prior stage 1, which had been established by the 2012
Interpretive Guidance. Under prior stage 1, a set of uniform
quantitative metrics was applied to a broad group of nonbank financial
companies in order to identify nonbank financial companies for further
evaluation and to provide clarity for other nonbank financial companies
that likely would not be subject to evaluation for a potential
determination. Several commenters expressed views on the elimination of
the stage 1 thresholds. Prior stage 1 had generated confusion among
firms and members of the public and was not compatible with the
prioritization of an activities-based approach, so it has been
eliminated.
2. Transition From Stage 1 to Stage 2
    The Proposed Guidance did not specify whether a Council vote would
be required to advance a nonbank financial company from Stage 1 to
Stage 2. Based on public comments, the Final Guidance has been revised
to specify that a Council vote is required to
[[Page 71756]]
advance a company to Stage 2.\37\ For any company under review in Stage
1 that is regulated by a primary financial regulatory agency or home
country supervisor, the Council will consult with the regulator, as
appropriate, before the Council votes on whether to advance the company
to Stage 2. One commenter stated that the primary regulator should have
the primary role in advancing a firm from Stage 1 to Stage 2. As
described above, the Final Guidance provides for extensive engagement
between the Council and the primary financial regulatory agency during
the determination process. The Council does not, however, believe it is
appropriate to give the primary financial regulatory agency a specific
additional role in advancing a firm from Stage 1 to Stage 2.
---------------------------------------------------------------------------
    \37\ Under the Dodd-Frank Act, unless otherwise specified in the
statute, the Council must make all decisions that it is authorized
or required to make by a majority vote of the voting members then
serving. Dodd-Frank Act section 111(f), 12 U.S.C. 5321(f).
---------------------------------------------------------------------------
    One commenter requested that the Council clarify that there is no
obligation to advance a nonbank financial company from Stage 1 to Stage
2. The Council confirms that it will advance a nonbank financial
company to Stage 2 only if the Council determines that the company
merits further review after the analysis in Stage 1.\38\
---------------------------------------------------------------------------
    \38\ See also the chart of Council votes that would occur at
significant transition points in the Council's analysis, in section
II(A)(2) above.
---------------------------------------------------------------------------
3. Stage 2: In-Depth Evaluation
    In Stage 2, the Council will conduct an in-depth evaluation of any
company that the Council has determined in Stage 1 merits additional
review. Under the Final Guidance, the Council would continue in Stage 2
to engage extensively with the relevant company and its existing
regulators.
    In Stage 2, the Council will request that the company provide
information that the Council deems relevant to its evaluation, which
will involve both qualitative and quantitative data. The Council will
take certain preliminary steps before requiring the submission of
reports from any nonbank financial company that is regulated by a
Council member agency or any primary financial regulatory agency;
acting through the OFR, the Council will coordinate with these agencies
and, whenever possible, rely on information available from the OFR or
these agencies.
    The Council will take steps to facilitate a transparent review
process with the company during Stage 2. During Stage 2, the company
may submit any other information that it deems relevant to the
Council's evaluation, and the Council will make staff representing
Council members available to meet with the representatives of the
company, to explain the evaluation process and the framework for the
Council's analysis. If the analysis in Stage 1 has identified specific
aspects of the company's operations or activities as the primary focus
for the evaluation, staff will notify the company of those issues.
Several commenters stated that the Final Guidance should provide that
Council members and their deputies are available to meet with nonbank
financial companies in Stage 1 and Stage 2. The Final Guidance provides
for the Council's Deputies Committee to meet with a company in Stage 2,
to allow the company to present any information or arguments it deems
relevant to the Council's evaluation. In addition, individual Council
members may determine that it is appropriate to meet with a nonbank
financial company under review, subject to the need to maintain a
single administrative record and consistency in the information
available to each of the Council members. In addition, the Council will
seek to continue its consultation with the company's primary financial
regulatory agency or home country supervisor in a timely manner before
the Council makes any proposed or final determination, encouraging the
relevant financial regulator to address relevant risks using the
regulator's existing authorities. The Council will notify the company
when the Council believes that the evidentiary record regarding the
company is complete, before the Council either makes any proposed
determination regarding the company, or alternatively, notifies the
company that it is no longer being considered for a determination at
that time.
    Several commenters provided recommendations regarding the
transparency of the determination process and the Council's procedures
for providing information to nonbank financial companies under review.
Two commenters stated that the Council should not consider information
from primary regulators that cannot, due to confidentiality
requirements, also be provided to the nonbank financial company under
review. The Council expects to rely on data, research, and analysis
from Council member agencies and the OFR, among other sources, in the
determination process. Certain of these materials may include internal
work product and analysis that are not intended for external
distribution. However, the Council expects that any information that
the Council relies on to support a determination regarding a nonbank
financial company under section 113 of the Dodd-Frank Act will be
included in the Council's written explanation of the final
determination, which will be provided to the company. Several other
commenters stated that the Council should provide a nonbank financial
company under evaluation with a written description of its potential
threat to financial stability in Stage 1, or an explanation why an
activities-based approach would not mitigate the potential threat. The
Final Guidance provides that during Stage 1, the Council intends for
staff of Council members and member agencies to explain to the company
the key risks that have been identified in the analysis. However,
because the review of the company is preliminary and continues to
change until the Council makes a final determination, these identified
risks may shift over time, so it is not practicable to provide a
company with a written explanation of the potential threat to financial
stability during Stage 1.
    Several commenters stated that the Council should share all Council
information with a nonbank financial company under review during Stages
1 and 2, including any cost-benefit analysis, expert, or regulatory
analysis. Due to the preliminary nature of the Council's internal work
product during Stages 1 and 2, sharing all of this information with the
company under review would impose considerable burdens on the Council,
while not necessarily providing the company with a clear understanding
of the issues the Council is focusing on. Instead, the Final Guidance
reflects numerous procedural improvements to the determination process
compared to the 2012 Interpretive Guidance, which are intended to
facilitate the Council's engagement and transparency. The Final
Guidance increases the Council's engagement with nonbank financial
companies and their regulators during the determination process,
balanced with the Council's resources and need to perform the analysis
in a timely manner.
    Several commenters stated that the Council should provide a nonbank
financial company with a written explanation of the reasons for
advancing it from Stage 1 to Stage 2, and an opportunity to respond,
before advancing it to Stage 2. The process under the Final Guidance
for Stage 1 and Stage 2 provides extensive opportunities for a company
to submit information to the Council and to
[[Page 71757]]
discuss that information with staff of Council members and member
agencies. In particular, the Final Guidance provides that if the
Council's analysis in Stage 1 has identified specific aspects of the
company's operations or activities as the primary focus for the
evaluation, staff will notify the company of those issues, although the
issues will be subject to change based on the ongoing analysis.
Further, during Stage 2, a company may submit any information that it
deems relevant to the Council's evaluation, and the Council will make
staff representing Council members available to meet with the
representatives of the company, to explain the evaluation process and
the framework for the Council's analysis. The Final Guidance also
provides for the Council's Deputies Committee to meet with a company in
Stage 2, to allow the company to present any information or arguments
it deems relevant to the Council's evaluation.
4. Proposed Determination; Hearing
    The procedural steps related to the Council's proposed
determinations, hearings, and final determinations are largely
specified in section 113 of the Dodd-Frank Act.
    A nonbank financial company may be considered for a proposed
determination based on the analysis performed in Stage 2. In the event
the Council votes to make a proposed determination, the Council will
issue a written notice and explanation of the proposed determination to
the company, and will also provide the company's primary financial
regulatory agency or home country supervisor (subject to appropriate
protections for confidential information) with the nonpublic written
explanation of the basis for the proposed determination. In accordance
with section 113(e) of the Dodd-Frank Act, a nonbank financial company
that is subject to a proposed determination may request a nonpublic
hearing before the Council to contest the proposed determination.
    Several commenters stated that the Council should provide the full
evidentiary record to a nonbank financial company in Stage 2 at least
30 days before a proposed determination, and give the company the
opportunity to review and comment on the materials. The procedures
under the Final Guidance provide extensive opportunities for engagement
with companies under review, including during Stages 1 and 2 and after
a proposed determination, so the Council is not adopting these
recommended changes.
    Several commenters requested additional changes to the procedures
for the Council's hearings for nonbank financial companies subject to
proposed determinations. The Council's Hearing Procedures, which are
not being amended at this time, provide for transparent engagement
between the Council and nonbank financial companies. Further, under the
Final Guidance, a company has extensive opportunities to submit
information to the Council and meet with representatives of Council
members and member agencies during the Council's review in Stage 2,
which will precede any proposed determination or hearing. The Council
is therefore not adopting further changes related to its hearings.
5. Final Determination
    After making a proposed determination and holding any requested
written or oral hearing, the Council may make a final determination in
accordance with the Dodd-Frank Act that the company will be subject to
supervision by the Federal Reserve and prudential standards. If the
Council makes a final determination regarding the company, the Council
will provide the company with a written notice of the Council's final
determination, including an explanation of the basis for the Council's
decision, and will also provide the company's primary financial
regulatory agency or home country supervisor with the nonpublic written
explanation of the basis of the Council's final determination, subject
to appropriate protections for confidential information. Under the
Final Guidance, the Council expects that its explanation of the final
basis for any determination will highlight the key risks that led to
the determination and include clear guidance regarding the factors that
were most important in the Council's determination.
    One commenter recommended that the Final Guidance state that the
Council will assess all available alternatives before considering any
nonbank financial company for potential determination. Two commenters
stated that the Council should only designate a nonbank financial
company with the consent of its primary regulator. Under the Final
Guidance, Stage 2 will include numerous procedures to facilitate a
robust and transparent review process with the company and its primary
financial regulatory agency. For example, during Stage 2, the company
may submit any information that it deems relevant to the Council's
evaluation, and the Council will make staff representing Council
members available to meet with the representatives of the company. In
addition, the Council will seek to continue its consultation with the
company's primary financial regulatory agency or home country
supervisor in a timely manner before the Council makes any proposed or
final determination, encouraging the relevant financial regulator to
address relevant risks using the regulator's existing authorities.
These procedures should ensure adequate engagement between the Council,
the company under review, and its primary financial regulatory agency.
    Unchanged from the 2012 Interpretive Guidance, when practicable and
consistent with the purposes of the determination process, the Council
will provide a nonbank financial company with a notice of a final
determination at least one business day before publicly announcing the
determination. As a result, the Council generally will not issue any
public notice regarding its determination vote on the day of the vote;
instead, to enable the company adequately to prepare its public
disclosures regarding the Council's determination, the first public
announcement by the Council will generally be the day after the
Council's vote. Although this approach will result in a short delay in
the public announcement of a Council vote on a final determination, the
benefit of enabling the company to prepare for the public announcement,
and to review the Council's materials for confidential, sensitive
business information before their public release, warrants the delay.
    Other commenters provided recommendations related to the procedural
steps for a final determination. Several commenters stated that the
Council should separate Council staff responsible for reviewing a
nonbank financial company from those responsible for determining
whether designation is warranted, and one commenter stated that the
Council should allow companies to examine the Council staff who
conducted the analysis. While staff of the Council members and member
agencies analyze nonbank financial companies, the decision makers are
the voting members of the Council, and the Council is not adopting
these recommendations regarding its staffing structure. One commenter
stated that the Council should allow firms to appeal their designation
to an ``independent authority.'' The Dodd-Frank Act provides that any
nonbank financial company subject to a final determination may
challenge the Council's action in court, which
[[Page 71758]]
provides ample opportunity for an independent authority to review the
determination.\39\ Two commenters stated that before making a final
determination regarding a nonbank financial company, the Council should
receive from the Federal Reserve a detailed, company-specific
supervisory plan. One of these commenters stated that the Council
should share the plan with the relevant nonbank financial company. This
recommendation has not been incorporated into the Final Guidance
because it is not logistically practicable for the Federal Reserve,
which must establish such prudential standards by rule or order, to
provide this information to the Council before the relevant company has
been designated.
---------------------------------------------------------------------------
    \39\ Dodd-Frank Act section 113(h), 12 U.S.C. 5323(h).
---------------------------------------------------------------------------
    Several commenters expressed support for the greater analytical
rigor and process improvements reflected in the Proposed Guidance. For
example, the Council will provide each designated nonbank financial
company with an opportunity for an oral hearing before the Council once
every five years at which the company can contest the determination.
6. Annual Reevaluations of Nonbank Financial Company Determinations
    For any nonbank financial company that is subject to a final
determination, the Council is required by statute to reevaluate the
determination at least annually, and to rescind the determination if
the Council determines that the company no longer meets the statutory
standards for a determination. The Final Guidance incorporates a number
of additional procedural steps, not mandated by the Dodd-Frank Act, for
annual reevaluations, in order to enhance engagement with companies and
their regulators, and to increase transparency. One of the goals of
these changes is to clarify the post-designation ``off-ramp'' process
for a company, which would enable the company to identify changes it
could consider making to address the potential threat to financial
stability identified by the Council, and receive feedback regarding
whether those changes may address the Council's concerns. One commenter
opposed to the off-ramp procedures stated that they would involve the
Council in firms' business decisions, thereby increasing litigation
risk. The Council intends that this process should be flexible and
tailored to the risks posed by designated companies, rather than hard-
wired or overly prescriptive. The process is intended to incentivize
designated companies to address the key factors that led to
designation, which would promote the Council's goal of reducing risks
to U.S. financial stability. The Council believes that this flexible
approach will limit its involvement in a designated company's business
decisions and allow the company, rather than the Council, to identify
the most appropriate means to mitigate risks.
    The Final Guidance provides that in the event the Council makes a
final determination regarding a company, the Council intends to
encourage the company and, if appropriate, its regulators to take steps
to mitigate the potential risks identified in the Council's written
explanation of the basis for its final determination. Except in cases
where new material risks arise over time, if a company adequately
addresses the potential risks identified in writing by the Council at
the time of the final determination and in subsequent reevaluations,
the Council should generally be expected to rescind its determination
regarding the company. To facilitate this process, companies are
encouraged during annual reevaluations to submit information regarding
any changes related to the company's risk profile that mitigate the
potential risks identified in the Council's final determination of the
company and in reevaluations of the determination. If the company
explains in detail potential changes it could make to its business to
address the potential risks previously identified by the Council, staff
of Council members and Council member agencies will endeavor to provide
their feedback on the extent to which those changes may address the
potential risks. Consistent with public comments, the Final Guidance
provides that if a company contests the Council's determination during
the Council's annual reevaluation, the Council will provide the
company, its primary financial regulatory agency, and the primary
financial regulatory agency of its significant subsidiaries with a
notice explaining the primary basis for any decision not to rescind the
determination. The notice will address each of the material factors
raised by the company in its submissions to the Council contesting the
determination during the annual reevaluation.
    Several commenters expressed support for both the pre-designation
and post-designation ``off-ramps''. One commenter also stated that the
Council should de-designate firms if the benefits of designation are
not outweighing costs, and another stated that the Council should have
a streamlined process for doing so. The Council believes that the post-
designation off-ramp described above provides for a robust and
streamlined review process. As part of its review of a designated
company, the Council does not believe it is appropriate to perform
another cost-benefit analysis, in addition to the cost-benefit analysis
performed prior to the designation, in light of timing and resource
constraints in the context of annual reevaluations of previous
determinations.
    The Final Guidance also underscores that the Council applies the
same standards of review in its annual reevaluations as the standard
for an initial determination regarding a nonbank financial company:
Either the company's material financial distress, or the nature, scope,
size, scale, concentration, interconnectedness, or mix of the company's
activities, could pose a threat to U.S. financial stability. If the
Council determines that the company no longer meets those standards,
the Council will rescind its determination. The Final Guidance also
stresses that, while the Council's annual reevaluation of a company
subject to a final determination will generally focus on changes since
the Council's previous review, the ultimate question the Council will
seek to assess is whether changes in the aggregate since the company's
designation have caused the company to cease meeting the Determination
Standards.\40\
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    \40\ In a reevaluation of a determination, the Council may
choose to consider only one Determination Standard, for example
because changes that address the potential threats previously
identified by the Council under one Determination Standard may also
address potential threats relevant to the other Determination
Standard.
---------------------------------------------------------------------------
    Several commenters stated that the Council should adopt a framework
for evaluating the impact of its designations, and assess the
effectiveness of designation regularly. For any nonbank financial
company that is subject to a final determination, the Council is
required by statute to reevaluate the determination at least annually,
and to rescind the determination if the Council determines that the
company no longer meets the statutory standards for a designation. The
Final Guidance incorporates a number of additional procedural steps for
annual reevaluations to enhance engagement with companies and their
regulators, and to increase transparency. The measures should ensure
that a nonbank financial company is designated, or remains designated,
only if it meets the statutory standard for designation.
[[Page 71759]]
E. Other Comments Received
    Several commenters provided recommendations about international
issues regarding the Proposed Guidance, including international
regulatory coordination and the relationship between Council
designations and the Financial Stability Board's (FSB's) identification
of U.S. nonbank financial companies as global systemically important
institutions. The Council supports the promotion of regulatory
coordination at the international level, but is not expressing a view
on its member agencies' roles in international discussions.
    Several commenters stated that the Council should commit in the
Final Guidance to ensuring the confidentiality of all collected
information. The Final Guidance notes that the Council is subject to
statutory and regulatory requirements to maintain the confidentiality
of certain information submitted to it by a nonbank financial company
or its regulators.\41\ Under applicable law and the Council's rules,
the Freedom of Information Act (FOIA) and the applicable exemptions
thereunder apply to any data or information submitted under the rule.
In addition, the Council's FOIA rule applies to data and information
received by the Council.\42\ The Council expects that nonbank financial
companies' submissions will likely contain or consist of ``trade
secrets and commercial or financial information obtained from a person
and privileged or confidential'' and information that is ``contained in
or related to examination, operating, or condition reports prepared by,
on behalf of, or for the use of an agency responsible for the
regulation or supervision of financial institutions.'' These types of
information are subject to withholding under exemptions 4 and 8 of the
FOIA (5 U.S.C. 552(b)(4) and (8)). To the extent that nonbank financial
companies' submissions contain or consist of data or information not
subject to an applicable FOIA exemption, that data or information would
be releasable under the FOIA.
---------------------------------------------------------------------------
    \41\ See Dodd-Frank Act section 112(d)(5), 12 U.S.C. 5322(d)(5);
see also 2012 Final Rule and Interpretive Guidance at 21648-21649
and 12 CFR 1310.20(e).
    \42\ See 12 CFR 1310.20(e)(3).
---------------------------------------------------------------------------
    In addition, it should be noted that all members of the Council,
including both its voting and non-voting members, will treat records of
the Council in accordance with the Council's FOIA rule. When the
Council and its members provide non-public information to each other in
connection with Council functions and activities, the recipients
generally intend to treat such information as confidential and not
publicly disclose such information without the consent of the providing
party. However, such information may be used by the recipients for
enforcement, examination, resolution planning, or other purposes,
subject to any appropriate limitations on the disclosure of such
information to third parties, taking into account factors including the
need to preserve the integrity of the supervision and examination
process. The Council believes that the additional confidentiality
restrictions suggested by commenters generally would not materially
increase the confidentiality of information collected by the Council,
due to requirements under the FOIA, or would harmfully constrain the
Council's ability to perform its evaluations of nonbank financial
companies.
    Finally, other commenters raised various comments related to the
operations of the Council. One commenter recommended that the Final
Guidance should state that any departure from the Final Guidance should
be treated as a modification that requires public comment (other than
in emergency situations affecting a single company that require
immediate action). The Council previously adopted a rule stating that
it will not amend or rescind its interpretive guidance on nonbank
financial company determinations without soliciting public notice and
comment,\43\ which the Council believes addresses this concern.
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    \43\ 84 FR 8958 (March 13, 2019).
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III. Legal Authority of Council and Status of the Final Guidance
    The Council has numerous authorities and tools under the Dodd-Frank
Act to carry out its statutory purposes.\44\ The Council expects that
its response to any potential risk or threat to U.S. financial
stability will be based on an assessment of the circumstances. As the
agency charged by Congress with broad-ranging responsibilities under
sections 112 and 113 of the Dodd-Frank Act, the Council has the
inherent authority to promulgate interpretive guidance under those
provisions that explains and interprets the statutory factors that the
Council will consider when employing the activities-based approach and
undertaking the determination process.\45\ The Council also has
authority to issue procedural rules \46\ and policy statements.\47\ The
Final Guidance describes the Council's interpretation of the statutory
factors and provides transparency to the public as to how the Council
intends to exercise its statutory grant of discretionary authority.
Except to the extent that the Final Guidance sets forth rules of agency
organization, procedure, or practice, the Council has concluded that
the Final Guidance does not have binding effect; does not impose duties
on, or alter the rights or interests of, any person; does not change
the statutory standards for the Council's decision making; and does not
relieve the Council of the need to make entity-specific determinations
in accordance with section 113 of the Dodd-Frank Act.
---------------------------------------------------------------------------
    \44\ See, for example, Dodd-Frank Act sections 112(a)(2), 113,
115, 120, 804, 12 U.S.C. 5322(a)(2), 5323, 5325, 5330, 5463.
    \45\ Courts have recognized that ``an agency charged with a duty
to enforce or administer a statute has inherent authority to issue
interpretive rules informing the public of the procedures and
standards it intends to apply in exercising its discretion.'' See,
for example, Production Tool v. Employment & Training
Administration, 688 F.2d 1161, 1166 (7th Cir. 1982). The Supreme
Court has acknowledged that ``whether or not they enjoy any express
delegation of authority on a particular question, agencies charged
with applying a statute necessarily make all sorts of interpretive
choices.'' See U.S. v. Mead, 533 U.S. 218, 227 (2001).
    \46\ See Dodd-Frank Act section 111(e)(2), 12 U.S.C. 5321(e)(2).
    \47\ See Association of Flight Attendants-CWA, AFL-CIO v.
Huerta, 785 F.3d 710 (D.C. Cir. 2015).
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IV. Paperwork Reduction Act
    The collection of information contained in the Final Guidance has
been reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))
under control 1505-0244. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a valid control number assigned by the Office of
Management and Budget.
    The collection of information under the Final Guidance is found in
12 CFR 1310.20-1310.23, which were added pursuant to the 2012 Final
Rule and Interpretive Guidance.\48\
---------------------------------------------------------------------------
    \48\ See note 3 above.
---------------------------------------------------------------------------
    The hours and costs associated with preparing data, information,
and reports for submission to the Council constitute reporting and cost
burdens imposed by the collection of information. The estimated total
annual reporting burden associated with the collection of information
in the Final Guidance is 20 hours, based on an estimate of one
respondent. We estimate the cost associated with this information
collection to be $9,000. These estimates are significantly lower than
those in the Paperwork Reduction Act discussion in the 2012 Final Rule
and Interpretive Guidance, because the Council expects
[[Page 71760]]
that, notwithstanding any additional reporting burden that financial
companies participating in the activities-based approach may incur, the
aggregate reporting burden on companies will be significantly reduced
as a result of the Council's proposal to pursue entity-specific
determinations under section 113 of the Dodd-Frank Act only if a
potential risk or threat cannot be adequately addressed through an
activities-based approach.
    In making this estimate, the Council estimates that due to the
nature of the information likely to be requested, approximately 75
percent of the burden in hours will be carried by financial companies
internally at an average cost of $400 per hour, and the remainder will
be carried by outside professionals retained by financial companies at
an average cost of $600 per hour. In addition, in determining these
estimates, the Council considered its obligation under 12 CFR
1310.20(b) to, whenever possible, rely on information available from
the OFR or any Council member agency or primary financial regulatory
agency that regulates a nonbank financial company before requiring the
submission of reports from such nonbank financial company. The Council
expects that its collection of information under the Final Guidance
will be performed in a manner that attempts to minimize burdens for
affected financial companies. The aggregate burden will be subject to
the number of financial companies that participate in the activities-
based approach or are evaluated in the determination process, the
extent of information regarding such companies that is available to the
Council through existing public and regulatory sources, and the amount
and types of information that financial companies provide to the
Council. The Proposed Guidance requested comment on the estimates and
other assumptions in the proposed collection of information, but no
comments were received in response to the questions presented.
V. Executive Orders 12866 and 13563
    Executive Orders 12866 and 13563 direct certain agencies to assess
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. The Office of Information and Regulatory Affairs within
the Office of Management and Budget has designated this interpretive
guidance as a ``significant regulatory action'' under section 3(f) of
Executive Order 12866.
List of Subjects in 12 CFR Part 1310
    Brokers, Investments, Securities.
    The Financial Stability Oversight Council is amending 12 CFR part
1310 as follows:
PART 1310--AUTHORITY TO REQUIRE SUPERVISION AND REGULATION OF
CERTAIN NONBANK FINANCIAL COMPANIES
0
1. The authority citation for part 1310 continues to read as follows:
    Authority: 12 U.S.C. 5321; 12 U.S.C. 5322; 12 U.S.C. 5323.
0
2. Appendix A is revised to read as follows:
Appendix A to Part 1310--Financial Stability Oversight Council Guidance
for Nonbank Financial Company Determinations
I. Introduction
    Section 113 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'') \1\ authorizes the Financial
Stability Oversight Council (the ``Council'') to determine that a
nonbank financial company will be supervised by the Board of
Governors of the Federal Reserve System (the ``Federal Reserve'')
and be subject to prudential standards in accordance with Title I of
the Dodd-Frank Act if either of two standards is met. Under the
first standard, the Council may subject a nonbank financial company
to supervision by the Federal Reserve and prudential standards if
the Council determines that material financial distress at the
nonbank financial company could pose a threat to the financial
stability of the United States. Under the second standard, the
Council may determine that a nonbank financial company will be
supervised by the Federal Reserve and subject to prudential
standards if the nature, scope, size, scale, concentration,
interconnectedness, or mix of the activities of the nonbank
financial company could pose a threat to U.S. financial stability.
Section 113 of the Dodd-Frank Act also lists considerations that the
Council must take into account in making a determination.
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    \1\ See Dodd-Frank Act section 113, 12 U.S.C. 5323.
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    Section II of this document describes the approach the Council
intends to take in prioritizing its work to identify and address
potential risks to U.S. financial stability using an activities-
based approach. This approach reflects the Council's priorities of
identifying potential risks on a system-wide basis, reducing the
potential for competitive distortions that could arise from entity-
specific determinations, and allowing relevant financial regulatory
agencies \2\ to address identified potential risks. First, the
Council will monitor markets to identify potential risks to U.S.
financial stability and to assess those risks on a system-wide
basis. Second, the Council will then work with relevant financial
regulatory agencies to seek the implementation of actions intended
to address identified potential risks to financial stability.
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    \2\ References in this appendix to ``relevant financial
regulatory agencies'' may encompass a broader range of regulators
than those included in the statutory definition of ``primary
financial regulatory agency,'' which is defined in Dodd-Frank Act
section 2(12), 12 U.S.C. 5301(12).
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    Section III of this appendix describes the manner in which the
Council intends to apply the statutory standards and considerations
in making determinations under section 113 of the Dodd-Frank Act, if
the Council determines that potential risks to U.S. financial
stability are not adequately addressed through the activities-based
approach. Section III defines key terms used in the statute,
including ``threat to the financial stability of the United
States.'' Section III also includes a detailed description of the
analysis that the Council intends to conduct during its reviews,
including a discussion of channels through which risks from a
company may be transmitted to other companies or markets, and the
Council's assessment of the likelihood of the company's material
financial distress and the benefits and costs of a determination.
    Section IV of this appendix outlines a two-stage process that
the Council will follow in non-emergency situations when determining
whether to subject a nonbank financial company to Federal Reserve
supervision and prudential standards. In the first stage of the
process, the Council will notify the company and its primary
financial regulatory agency and conduct a preliminary analysis to
determine whether the company should be subject to further
evaluation by the Council. During the second stage of the evaluation
process, the Council will conduct an in-depth evaluation if it
determines in the first stage that the nonbank financial company
merits additional review.
    The Council's practices set forth in this guidance to address
potential risks to U.S. financial stability are intended to comply
with its statutory purposes: (1) To identify risks to U.S. financial
stability that could arise from the material financial distress or
failure, or ongoing activities, of large, interconnected bank
holding companies or nonbank financial companies, or that could
arise outside the financial services marketplace; (2) to promote
market discipline, by eliminating expectations on the part of
shareholders, creditors, and counterparties of such companies that
the government will shield them from losses in the event of failure;
and (3) to respond to emerging threats to the stability of the U.S.
financial system.\3\ Council actions seek to foster transparency and
to avoid competitive distortions in markets for financial services
and products. Further, nonbank financial
[[Page 71761]]
companies should not benefit from an implicit federal financial
safety net. Therefore, the Council emphasizes the importance of
market discipline as a mechanism for addressing potential risks to
U.S. financial stability posed by financial companies.
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    \3\ Dodd-Frank Act section 112(a)(1), 12 U.S.C. 5322(a)(1).
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    This interpretive guidance is not a binding rule, except to the
extent that it sets forth rules of agency organization, procedure,
or practice. This guidance is intended to assist financial companies
and other market participants in understanding how the Council
expects to exercise certain of its authorities under Title I of the
Dodd-Frank Act. The Council retains discretion, subject to
applicable statutory requirements, to consider factors relevant to
the assessment of a potential risk or threat to U.S. financial
stability on a case-by-case basis. If the Council were to depart
from the interpretative guidance, it would need to provide a
reasoned explanation for its action, which would ordinarily require
acknowledging the change in position.\4\
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    \4\ See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515
(2009).
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II. Activities-Based Approach
    The Dodd-Frank Act gives the Council broad discretion in
determining how to respond to potential threats to U.S. financial
stability. A determination to subject a nonbank financial company to
Federal Reserve supervision and prudential standards under section
113 of the Dodd-Frank Act is only one of several Council authorities
for responding to potential risks to U.S. financial stability.\5\
The Council will prioritize its efforts to identify, assess, and
address potential risks and threats to U.S. financial stability
through a process that begins with an activities-based approach, and
will pursue entity-specific determinations under section 113 of the
Dodd-Frank Act only if a potential risk or threat cannot be
adequately addressed through an activities-based approach. The
Council anticipates it would consider a nonbank financial company
for a potential determination under section 113 only in rare
instances, such as if the products, activities, or practices of a
company that pose a potential threat to U.S. financial stability are
outside the jurisdiction or authority of financial regulatory
agencies. This approach reflects two priorities: (1) Identifying and
addressing, in consultation with relevant financial regulatory
agencies, potential risks and emerging threats on a system-wide
basis and to reduce the potential for competitive distortions among
financial companies and in markets that could arise from entity-
specific determinations, and (2) allowing relevant financial
regulatory agencies, which generally possess greater information and
expertise with respect to company, product, and market risks, to
address potential risks, rather than subjecting the companies to new
regulatory authorities.
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    \5\ For example, the Council has authority to make
recommendations to the Federal Reserve concerning the establishment
and refinement of prudential standards and reporting and disclosure
requirements applicable to nonbank financial companies supervised by
the Federal Reserve; make recommendations to primary financial
regulatory agencies to apply new or heightened standards and
safeguards for a financial activity or practice conducted by certain
financial companies if the Council determines that such activity or
practice could create or increase certain risks; and designate
financial market utilities and payment, clearing, and settlement
activities that the Council determines are, or are likely to become,
systemically important. Dodd-Frank Act sections 115, 120, 804, 12
U.S.C. 5325, 5330, 5463.
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    As part of its activities-based approach, the Council will
examine a range of financial products, activities, or practices that
could pose risks to U.S. financial stability. These types of
activities are often identified in the Council's annual reports,
such as activities related to (1) the extension of credit, (2) the
use of leverage or short-term funding, (3) the provision of
guarantees of financial performance, and (4) other key functions
critical to support the functioning of financial markets. The
Council considers a risk to financial stability to mean a risk of an
event or development that could impair financial intermediation or
financial market functioning to a degree that would be sufficient to
inflict significant damage on the broader economy. The Council's
activities-based approach is intended to identify and address risks
to financial stability using a two-step approach, described below.
a. Step One of Activities-Based Approach: Identifying Potential
Risks From Products, Activities, or Practices
Monitoring Markets
    The Council has a statutory duty to monitor the financial
services marketplace in order to identify potential threats to U.S.
financial stability.\6\ In the first step of the activities-based
approach, to enable the Council to identify potential risks to U.S.
financial stability, the Council, in consultation with relevant
financial regulatory agencies, intends to monitor diverse financial
markets and market developments to identify products, activities, or
practices that could pose risks to U.S. financial stability. When
monitoring potential risks to financial stability, the Council
intends to consider the linkages across products, activities, and
practices, and their interconnectedness across firms and markets.
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    \6\ Dodd-Frank Act section 112(a)(2), 12 U.S.C. 5322(a)(2).
---------------------------------------------------------------------------
    For example, the Council's monitoring may include:
     Corporate and sovereign debt and loan markets;
     equity markets;
     markets for other financial products, including
structured products and derivatives;
     short-term funding markets;
     payment, clearing, and settlement functions;
     new or evolving financial products, activities, and
practices; and
     developments affecting the resiliency of financial
market participants.
    To monitor markets and market developments, the Council will
review information such as historical data, research regarding the
behavior of financial market participants, and new developments that
arise in evolving marketplaces. The Council will regularly rely on
data, research, and analysis from Council member agencies, the
Office of Financial Research, industry participants, and other
public sources. Consistent with its statutory obligations, the
Council will, whenever possible, rely on information available from
primary financial regulatory agencies.\7\
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    \7\ Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
---------------------------------------------------------------------------
Evaluating Potential Risks
    If the Council's monitoring of markets and market developments
identifies a product, activity, or practice that could pose a
potential risk to U.S. financial stability, the Council, in
consultation with relevant financial regulatory agencies, will
evaluate the potential risk to determine whether it merits further
review or action. The Council's work in this step may include
efforts such as sharing data, research, and analysis among Council
members and member agencies and their staffs; consultations with
regulators and other experts regarding the scope of potential risks
and factors that may mitigate those risks; and the collaborative
development of analyses for consideration by the Council. As part of
this work, the Council may also engage with industry participants
and other members of the public as it assesses potential risks.
    The Council will assess the extent to which characteristics such
as the following could amplify potential risks to U.S. financial
stability arising from products, activities, or practices:
     Asset valuation risk or credit risk;
     leverage, including leverage arising from debt,
derivatives, off-balance sheet obligations, and other arrangements;
     liquidity risk or maturity mismatch, such as reliance
on funding sources that could be susceptible to dislocations;
     counterparty risk and interconnectedness among
financial market participants;
     the transparency of financial markets, such as growth
in financial transactions occurring outside of regulated sectors;
     operational risks, such as cybersecurity and
operational resilience; or
     the risk of destabilizing markets for particular types
of financial instruments, such as trading practices that
substantially increase volatility in key markets.
    Various factors may exacerbate or mitigate each of these types
of risks. For example, activities may pose greater risks if they are
complex or opaque, are conducted without effective risk-management
practices, are significantly correlated with other financial
products, and are either highly concentrated or significant and
widespread. In contrast, regulatory requirements or market practices
may mitigate risks by, for example, limiting exposures or leverage,
enhancing risk-management practices, or restricting excessive risk-
taking.
    While the contours of the Council's initial evaluation of any
potential risk will depend on the type and scope of analysis
relevant to the particular risk, the Council's analyses will
generally focus on four framing questions:
[[Page 71762]]
    1. How could the potential risk be triggered? For example, could
it be triggered by sharp reductions in the valuation of particular
classes of financial assets?
    2. How could the adverse effects of the potential risk be
transmitted to financial markets or market participants? For
example, what are the direct or indirect exposures in financial
markets to the potential risk?
    3. What impact could the potential risk have on the financial
system? For example, what could be the scale of its adverse effects
on other companies and markets, and would its effects be
concentrated or distributed broadly among market participants? This
analysis should take into account factors such as existing
regulatory requirements or market practices that mitigate potential
risks.
    4. Could the adverse effects of the potential risk impair the
financial system in a manner that could harm the non-financial
sector of the U.S. economy?
    In this evaluation, the Council will consult with relevant
financial regulatory agencies and will take into account existing
laws and regulations that may mitigate a potential risk to U.S.
financial stability. The Council will also take into account the
risk profiles and business models of market participants engaging in
the products, activities, or practices under evaluation, and
consider available evidence regarding the potential risk. Empirical
data may not be available regarding all potential risks, and the
type and scope of the Council's analysis will be tailored to the
potential risk under consideration.
    If a product, activity, or practice creating a potential risk to
financial stability is identified, the Council will work with
relevant financial regulatory agencies to address the identified
risk, as described in section II.b of this appendix.
b. Step Two of Activities-Based Approach: Working With Regulators
To Address Identified Risks
    If the Council identifies a potential risk to U.S. financial
stability in step one of the activities-based approach, the Council
will work with the relevant financial regulatory agencies at the
federal and state levels to seek the implementation of appropriate
actions to address the identified potential risk. The Council will
coordinate among its members and member agencies and will follow up
on supervisory or regulatory actions to ensure the potential risk is
adequately addressed. The goal of this step would be for existing
regulators to take appropriate action, such as modifying their
regulation or supervision of companies or markets under their
jurisdiction in order to mitigate potential risks to U.S. financial
stability identified by the Council.\8\ If a potential risk
identified by the Council relates to a product, activity, or
practice arising at a limited number of individual financial
companies, the Council nonetheless will prioritize a remedy that
addresses the underlying risk across all companies that engage in
the relevant activity. If the Council finds that a particular type
of financial product could present risks to U.S. financial
stability, there may be different approaches existing regulators
could take, based on their authorities and the urgency of the risk,
such as restricting or prohibiting the offering of that product, or
requiring market participants to take additional risk-management
steps that address the risks.
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    \8\ The Dodd-Frank Act provides that the Council's duties
include to recommend to the member agencies general supervisory
priorities and principles reflecting the outcome of discussions
among the member agencies and to make recommendations to primary
financial regulatory agencies to apply new or heightened standards
and safeguards for financial activities or practices that could
create or increase risks of significant liquidity, credit, or other
problems spreading among bank holding companies, nonbank financial
companies, and United States financial markets. Dodd-Frank Act
sections 112(a)(2)(F), (K), 12 U.S.C. 5322(a)(2)(F), (K).
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    If, after engaging with relevant financial regulatory agencies,
the Council believes those regulators' actions are inadequate to
address the identified potential risk to U.S. financial stability,
the Council has authority to make formal public recommendations to
primary financial regulatory agencies under section 120 of the Dodd-
Frank Act. Under section 120, the Council may provide for more
stringent regulation of a financial activity by issuing nonbinding
recommendations, following consultation with the primary financial
regulatory agency and public notice inviting comments on proposed
recommendations, to the primary financial regulatory agency to apply
new or heightened standards or safeguards for a financial activity
or practice conducted by bank holding companies or nonbank financial
companies under their jurisdiction.\9\ In addition, in any case in
which no primary financial regulatory agency exists for the markets
or companies conducting financial activities or practices identified
by the Council as posing risks, the Council can consider reporting
to Congress on recommendations for legislation that would prevent
such activities or practices from threatening U.S. financial
stability. The Council intends to make recommendations under section
120 only to the extent that its recommendations are consistent with
the statutory mandate of the primary financial regulatory agency to
which the Council is making the recommendation.
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    \9\ Dodd-Frank Act section 120(a), 12 U.S.C. 5330(a).
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    The authority to issue recommendations to primary financial
regulatory agencies under section 120 is one of the Council's most
formal tools for responding to potential risks to U.S. financial
stability. The Council will make these recommendations only if it
determines that the conduct, scope, nature, size, scale,
concentration, or interconnectedness of the activity or practice
could create or increase the risk of significant liquidity, credit,
or other problems spreading among bank holding companies and nonbank
financial companies, U.S. financial markets, or low-income,
minority, or underserved communities.
    In its recommendations under section 120, the Council may
suggest broad approaches to address the risks it has identified.
When appropriate, the Council may make a more specific
recommendation. To promote analytical rigor and avoid duplication,
before making any recommendation under section 120, the Council will
ascertain whether the relevant primary financial regulatory agency
would be expected to perform a cost-benefit analysis of the actions
it would take in response to the Council's contemplated
recommendation. In cases where the primary financial regulatory
agency would not be expected to conduct such an analysis, the
Council itself will--prior to making a final recommendation--conduct
an analysis, using empirical data, to the extent available, of the
benefits and costs of the actions that the primary financial
regulatory agency would be expected to take in response to the
contemplated recommendation. Where the Council conducts its own such
analysis, the specificity of its assessment of benefits and costs
would be commensurate with the specificity of the contemplated
recommendation. Furthermore, where the Council conducts its own
analysis, the Council will make a recommendation under section 120
only if it believes that the results of its assessment of benefits
and costs support the recommendation.
    Primary financial regulatory agencies have significant
experience, knowledge, and expertise that can be useful in
determining the most efficient way to address a particular risk
within their regulatory jurisdiction. In every case, prior to
issuing a recommendation under section 120, the Council will consult
with the relevant primary financial regulatory agency and provide
notice to the public and opportunity for comment as required by
section 120.
III. Analytic Framework for Nonbank Financial Company Determinations
    If the Council's collaboration and engagement with the relevant
financial regulatory agencies during the activities-based approach
does not adequately address a potential threat identified by the
Council--or if a potential threat to U.S. financial stability is
outside the jurisdiction or authority of financial regulatory
agencies--and if the potential threat identified by the Council is
one that could be effectively addressed by a Council determination
regarding one or more nonbank financial companies, the Council may
evaluate one or more nonbank financial companies for an entity-
specific determination under section 113 of the Dodd-Frank Act,
applying the analytic framework described below. This section
describes the analysis the Council will conduct in general regarding
individual nonbank financial companies that are considered for a
potential determination, and section IV of this appendix describes
the Council's process for those reviews.
a. Statutory Standards and Considerations
    The Council may determine, by a vote of not fewer than two-
thirds of the voting members of the Council then serving, including
an affirmative vote by the Chairperson of the Council, that a
nonbank financial company will be supervised by the Federal Reserve
and be subject to prudential standards if the Council determines
that (1) material financial distress at the nonbank
[[Page 71763]]
financial company could pose a threat to the financial stability of
the United States (the ``First Determination Standard'') or (2) the
nature, scope, size, scale, concentration, interconnectedness, or
mix of the activities of the nonbank financial company could pose a
threat to the financial stability of the United States (the ``Second
Determination Standard,'' and, together with the First Determination
Standard, the ``Determination Standards'').\10\ The analytic
framework described below focuses primarily on the First
Determination Standard because threats to financial stability (such
as asset fire sales or financial market disruptions) are most
commonly propagated through a nonbank financial company when it is
in distress.
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    \10\ If the Council is unable to determine whether the financial
activities of a U.S. nonbank financial company pose a threat to the
financial stability of the United States based on certain
information, the Council may request the Federal Reserve to conduct
an examination of the U.S. nonbank financial company for the sole
purpose of determining whether the company should be supervised by
the Federal Reserve for purposes of Title I of the Dodd-Frank Act.
Dodd-Frank Act section 112(d)(4), 12 U.S.C. 5322(d)(4).
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    Several relevant terms used in the Dodd-Frank Act are not
defined in the statute. The Council intends to interpret the term
``company'' to include any corporation, limited liability company,
partnership, business trust, association, or similar
organization.\11\ In addition, the Council intends to interpret
``nonbank financial company supervised by the Board of Governors''
as including any nonbank financial company that acquires, directly
or indirectly, a majority of the assets or liabilities of a company
that is subject to a final determination of the Council.\12\ The
Council intends to interpret the term ``material financial
distress'' as a nonbank financial company being in imminent danger
of insolvency or defaulting on its financial obligations. The
Council intends to interpret the term ``threat to the financial
stability of the United States'' as meaning the threat of an
impairment of financial intermediation or of financial market
functioning that would be sufficient to inflict severe damage on the
broader economy. For purposes of considering whether a nonbank
financial company could pose a threat to U.S. financial stability
under either Determination Standard, the Council intends to assess
the company in the context of a period of overall stress in the
financial services industry and in a weak macroeconomic environment,
with market developments such as increased counterparty defaults,
decreased funding availability, and decreased asset prices. The
Council believes this is appropriate because in such a context, the
risks posed by a nonbank financial company may have a greater effect
on U.S. financial stability.
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    \11\ The statutory definition of ``nonbank financial company''
excludes bank holding companies and certain other types of
companies. Dodd-Frank Act section 102(a)(4), 12 U.S.C. 5311(a)(4).
    \12\ As a result, if a nonbank financial company subject to a
final determination of the Council sells or otherwise transfers a
majority of its assets or liabilities, the acquirer will succeed to,
and become subject to, the Council's determination. As discussed in
section V below, a nonbank financial company that is subject to a
final determination of the Council may request a reevaluation of the
determination before the next required annual reevaluation, in
appropriate cases. Such an acquirer can use this reevaluation
process to seek a rescission of the determination upon consummation
of its transaction.
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    The Dodd-Frank Act requires the Council to consider 10 specific
considerations when determining whether a nonbank financial company
satisfies either of the Determination Standards. These statutory
considerations help the Council to evaluate whether one of the
Determination Standards has been met: \13\
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    \13\ Dodd-Frank Act section 113(a)(2), 12 U.S.C. 5323(a)(2).
This list of considerations is applicable to U.S. nonbank financial
companies. With respect to foreign nonbank financial companies, the
Council is required to take into account a similar list of
considerations, in some cases limited to the companies' U.S.
business or activities. See Dodd-Frank Act section 113(b)(2), 12
U.S.C. 5323(b)(2).
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     The extent of the leverage of the company;
     the extent and nature of the off-balance-sheet
exposures of the company;
     the extent and nature of the transactions and
relationships of the company with other significant nonbank
financial companies and significant bank holding companies;
     the importance of the company as a source of credit for
households, businesses, and state and local governments and as a
source of liquidity for the U.S. financial system;
     the importance of the company as a source of credit for
low-income, minority, or underserved communities, and the impact
that the failure of such company would have on the availability of
credit in such communities;
     the extent to which assets are managed rather than
owned by the company, and the extent to which ownership of assets
under management is diffuse;
     the nature, scope, size, scale, concentration,
interconnectedness, and mix of the activities of the company;
     the degree to which the company is already regulated by
one or more primary financial regulatory agencies;
     the amount and nature of the financial assets of the
company; and
     the amount and types of the liabilities of the company,
including the degree of reliance on short-term funding.
    The statute also requires the Council to take into account any
other risk-related factors that the Council deems appropriate. Any
determination by the Council will be made based on a company-
specific evaluation and an application of the standards and
considerations set forth in section 113 of the Dodd-Frank Act, and
taking into account qualitative and quantitative information the
Council deems relevant to a particular nonbank financial company.
The Council anticipates that the information relevant to an in-depth
analysis of a nonbank financial company may vary based on the
nonbank financial company's characteristics.
    The discussion below describes how the Council will apply the
Determination Standards in its evaluation of a nonbank financial
company, including how the Council will take into account the
statutory considerations, and other risk-related factors that the
Council will take into account. Due to the unique threat that each
nonbank financial company could pose to U.S. financial stability and
the nature of the inquiry required by the statutory considerations,
the Council expects that its evaluations of nonbank financial
companies will be firm-specific and may include quantitative and
qualitative information that the Council deems relevant to a
particular nonbank financial company. The transmission channels,
sample metrics, and other factors set forth below are not exhaustive
and may not apply to all nonbank financial companies under
evaluation.
b. Transmission Channels
    The Council's evaluation of any nonbank financial company under
section 113 of the Dodd-Frank Act will seek to determine whether a
nonbank financial company meets one of the Determination Standards
described above. In its analysis of a nonbank financial company, the
Council will assess how the negative effects of the company's
material financial distress, or of the nature, scope, size, scale,
concentration, interconnectedness, or mix of the company's
activities, could be transmitted to or affect other firms or
markets, thereby causing a broader impairment of financial
intermediation or of financial market functioning. Such a
transmission of risk can occur through various mechanisms, or
channels. The Council has identified three transmission channels as
most likely to facilitate the transmission of the negative effects
of a nonbank financial company's material financial distress, or of
the nature, scope, size, scale, concentration, interconnectedness,
or mix of the company's activities, to other financial firms and
markets: Exposure; asset liquidation; and critical function or
service. These three transmission channels are described below. The
Council may also consider other relevant channels through which
risks could be transmitted from a particular nonbank financial
company and thereby pose a threat to U.S. financial stability. The
Council will take into account the 10 statutory considerations and
any other risk-related factors the Council deems appropriate as part
of its evaluation of a nonbank financial company under the three
transmission channels and the other factors described below.
Further, in its analyses under the transmission channels, the
Council will consider applicable factors that may limit the
transmission of risk, such as existing regulatory requirements,
collateralization, bankruptcy-remote structures, or guarantee funds
that reduce counterparties' exposures to the nonbank financial
company or mitigate incentives for customers or counterparties to
withdraw funding or assets.
Exposure Transmission Channel
    Under this transmission channel, the Council will evaluate
whether a nonbank financial company's creditors, counterparties,
investors, or other market participants have direct or indirect
exposure to the nonbank financial company that is significant enough
to materially and adversely affect those or other creditors,
[[Page 71764]]
counterparties, investors, or other market participants and thereby
pose a threat to U.S. financial stability.
    The Council expects that its analyses under the exposure
transmission channel will generally include the factors described
below. The potential threat to U.S. financial stability will
generally be greater if the amounts of the exposures are larger; if
the terms of the transactions provide less protection for the
counterparty; and if the largest counterparties include large
financial institutions.
    The Council also will consider a company's leverage and size. A
company's leverage can amplify the risks posed by exposures,
including off-balance sheet exposures, by reducing the company's
ability to satisfy its obligations to creditors in the event of its
material financial distress. Size is relevant to this analysis, as
material financial distress at a larger nonbank financial company
would generally transmit risk on a larger scale than distress at a
smaller company. Size may be measured by the assets, liabilities,
and capital of the firm.
    As required by statute, the Council will consider the extent to
which assets are managed rather than owned by the company and the
extent to which ownership of assets under management is diffuse. The
Council's analysis will recognize the distinct nature of exposure
risks when the company is acting as an agent rather than as
principal.\14\ In particular, in the case of a nonbank financial
company that manages assets on behalf of customers or other third
parties, the third parties' direct financial exposures are often to
the issuers of the managed assets, rather than to the nonbank
financial company managing those assets.
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    \14\ Dodd-Frank Act section 113(a)(2)(F), 12 U.S.C.
5323(a)(2)(F).
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    The Council will consider the exposures that counterparties and
other market participants have to a nonbank financial company
arising from the company's capital markets activities. This
assessment includes an evaluation of the company's relationships
with other significant nonbank financial companies and significant
bank holding companies. In most cases, the Council will consider
factors such as the amount and nature of, and counterparties to, the
company's:
     Outstanding debt (regardless of term) and other
liabilities (such as guaranteed investment contracts issued by an
insurance company or Federal Home Loan Bank loans).
     Derivatives transactions (which may be measured on the
basis of gross notional amount, net fair value, or potential future
exposures).
     Securities financing transactions (i.e., repurchase
agreements and securities lending transactions).
     Lines of credit.
     Credit-default swaps outstanding for which the company
or an affiliate is the reference entity (generally focusing on
single-name credit-default swaps).
    Relevant metrics may include the number, size, and financial
strength of a nonbank financial company's counterparties, including
the proportion of its counterparties' exposure to the nonbank
financial company relative to the counterparties' capital. The
potential risk arising under this transmission channel depends not
only on the number of counterparties that a nonbank financial
company has, but also on the importance of that nonbank financial
company to its counterparties and the extent to which the
counterparties are interconnected with other financial firms, the
financial system, and the broader economy. Therefore, the Council
will focus on exposures of large financial institutions to the
nonbank financial company under review. This analysis will take into
account both individual counterparty exposures as well as aggregate
exposures of other financial institutions to the company under
review. The amount and types of other exposures that counterparties
and other market participants have to a nonbank financial company is
highly dependent on the nature of the company's business. The
Council's analysis will take these other fact-specific
considerations into account.
    The Council also will consider applicable factors, including
existing regulatory requirements, that may mitigate potential risks
under the exposure transmission channel. For example,
collateralization by high-quality, highly liquid securities, such as
U.S. Treasury securities, the use of insurance funds to limit
counterparty exposures, or other transactions that reallocate risk
to well-capitalized entities, may reduce the potential for certain
exposures to serve as a channel for the transmission of risk.
    Contagion. The negative effects of the material financial
distress of a large, interconnected nonbank financial company are
not necessarily limited to the amount of direct losses suffered by
the firm's creditors, counterparties, investors, or other market
participants. In general, the wider and more interconnected a
company's network of financial counterparties, the greater the
potential negative effect of the material financial distress of the
company. Aggregate exposures to a nonbank financial company can
create a potential threat to U.S. financial stability if they lead
to contagion among financial institutions and financial markets more
broadly. Contagion has the potential to spread distress quickly and
seemingly unexpectedly. Such transmission is associated with opaque
balance sheets, closely correlated markets, and coordination
failures among investors. In such circumstances, fire sales by a
highly leveraged and interconnected nonbank financial company may
result in a loss of confidence in other financial companies that are
perceived to have similar characteristics. The Council will seek
evidence regarding the potential for contagion, including relevant
industry-specific historical examples and the scope of the company's
interconnectedness with large financial institutions, among other
factors. Various market-based or regulatory factors can strongly
mitigate the risk of contagion. Contagion should be viewed in
conjunction with other factors described above when evaluating risk
under the exposure transmission channel.
Asset Liquidation Transmission Channel
    Under this transmission channel, the Council will consider
whether a nonbank financial company holds assets that, if liquidated
quickly, could pose a threat to U.S. financial stability by, for
example, causing a fall in asset prices that significantly disrupts
trading or funding in key markets or causes significant losses or
funding problems for other firms with similar holdings. This channel
would likely be most relevant for a nonbank financial company that
could be forced to liquidate assets quickly due to its funding and
liquid asset profile. For example, this could be the case if a
nonbank financial company relies heavily on short-term funding. The
Council may also consider whether a deterioration in asset pricing
or market functioning could pressure other financial firms to sell
their holdings of affected assets in order to maintain adequate
capital and liquidity, which, in turn, could produce a cycle of
asset sales that could lead to further market disruptions. This
analysis includes an assessment of any maturity mismatch at the
company--the difference between the maturities of the company's
assets and liabilities. A company's reliance on short-term funding
to finance longer-term positions can subject the company to rollover
or refinancing risk that may force it to sell assets rapidly at low
market prices. The Council will also consider applicable factors
that may mitigate potential risks under the asset liquidation
transmission channel. As part of its analysis, the Council will
consider the extent to which assets are managed rather than owned by
the company.
    The Council's analyses of the asset liquidation transmission
channel will focus on three central factors, described below.
    Liquidity of the company's liabilities. The first factor in the
Council's assessment under this transmission channel is the amount
and nature of the company's liabilities that are, or could become,
short-term in nature. This analysis involves an assessment of the
company's liquidity risk. Liquidity risk generally refers to the
risk that a company may not have sufficient funding to satisfy its
short-term needs. For example, relevant factors may include:
     The company's short-term financial obligations
(including outstanding commercial paper).
     Financial arrangements that can be terminated by
counterparties and therefore become short-term (including callable
debt, derivatives, securities lending, repurchase agreements, and
off-balance-sheet exposures).
     Long-term liabilities that may come due in a short-term
period.
     Financial transactions that may require the company to
provide additional margin or collateral to the counterparty.
     Products that allow customers rapidly to withdraw funds
from the company.
     Liabilities related to other collateralized borrowings
and deposits.
    The Council will quantitatively identify the scale of potential
liquidity needs that could plausibly arise at the company. As part
of this analysis, the Council will apply counterparty and customer
withdrawal rates based on historical examples and other relevant
models to assess the scope of
[[Page 71765]]
plausible withdrawals. In addition, any ability of the company or
its financial regulators to impose stays on counterparty
terminations or withdrawals is relevant, because it may reduce the
company's liquidity needs in an event of material financial
distress. The Council also will consider the company's internal
estimates of potential liquidity needs in a context of material
financial distress.
    The company's leverage and short-term debt ratios are relevant
to this analysis, as high leverage and reliance on short-term
funding can increase the potential for a company to be subject to
sudden liquidity strains that force it rapidly to sell assets.
Leverage can be measured by the ratio of assets to capital or as a
measure of economic risk relative to capital. The latter measurement
can better capture the effect of derivatives and other products with
embedded leverage on the risk undertaken by a nonbank financial
company. Comparisons of leverage to peer financial institutions can
help indicate the level of risk at the company. Metrics that may be
used to assess leverage include:
     Total assets and total debt measured relative to total
equity, which measures financial leverage.
     Derivatives liabilities and off-balance sheet
obligations relative to total equity, which may show how much off-
balance sheet leverage a nonbank financial company may have.
     Securities financing transactions and funding
agreements that provide alternative sources of liquidity or
operating income, which indicate the use of operating leverage.
     Changes in leverage ratios, which may indicate that a
nonbank financial company is increasing or decreasing its risk
profile.
    Liquidity of the company's assets. The second factor under the
asset liquidation transmission channel is an analysis of the
company's assets that the company could rapidly liquidate, if
necessary, to satisfy its obligations. In particular, the Council
expects that this assessment will focus on the size and liquidity
characteristics of the company's investment portfolio. The Council
will assess the company's assets, grouped into categories such as
highly liquid (for example, cash, U.S. Treasury securities, and U.S.
agency mortgage-backed securities) and less-liquid (for example,
corporate bonds, non-agency mortgage-backed securities, and
mortgages and other loans) to determine if it holds cash instruments
or readily marketable securities that could reasonably be expected
to have a liquid market in times of broader market stress. To the
extent that the company's assets are encumbered, those assets would
generally not be considered to be available to satisfy short-term
obligations.
    Potential fire sale impacts. The third factor in the asset
liquidation transmission channel analysis is the potential effects
of the company's asset liquidation on markets and market
participants. As described above, the Council will assess the scale
of potential liquidity needs that could plausibly arise at the
company and the amount and nature of financial assets the company
could sell to satisfy its obligations. In this step of the asset
liquidation transmission channel analysis, the Council will apply
quantitative models to assess how the company could satisfy the
identified range of potential liquidity needs by rapidly selling its
identified liquid assets. To assess this factor, the Council will
compare the volume of the company's potential liquidation of
particular categories of financial instruments with the average
daily trading volume in the United States of those types of
instruments. In general, a rapid liquidation of a significant amount
of relatively illiquid financial instruments, or instruments that
are widely held by other market participants, will have a greater
effect on the market than a liquidation of the same amount of highly
liquid instruments or instruments that are not widely held. The
Council may also conduct an analysis to assess the relative impact
of negative shocks to the equity or assets of certain financial
institutions on other financial institutions. The Council expects
that its analysis will generally focus on potential asset
liquidation periods of 30 to 90 days.
    The order in which a nonbank financial company may liquidate
assets is a factor in the extent of any fire sale risk, but is
subject to considerable uncertainties. A company could liquidate a
significant portion of its highly liquid assets first, in order to
reduce the likelihood that the company would be forced to liquidate
illiquid assets in the event of its material financial distress.
However, in the event of the company's material financial distress,
a company may also be expected to seek to maintain compliance with
any applicable risk-based capital ratios and other requirements.
Doing so might require a company to sell a mix of assets across a
number of asset classes, rather than proceed with the sale of assets
in order from most liquid to least liquid. Further, in the event of
a significant market disruption, there could be a meaningful first-
mover advantage to selling less-liquid assets first. For example,
markets for less-liquid assets, such as private and public corporate
bonds and asset-backed securities, could be prone to disruption in
the event that a seller liquidated a large portion of its portfolio
of those assets. Given these potential discounts, in some
circumstances a company may be incentivized to sell a portion of its
less-liquid assets first and to hold U.S. government securities and
agency mortgage-backed securities, which tend to increase in value
during a period of market turmoil. To the extent that a company's
highly liquid assets are encumbered (for example, under securities
financing transactions or as collateral for loans), the company
would also need to sell less-liquid assets to satisfy its liquidity
needs. Further, a company's holdings of liquid assets could be
reduced before the company enters material financial distress. As a
result, the Council may take into account company-specific factors
in assessing the order in which the company might liquidate assets.
One approach the Council may take is to assess the potential effects
if the company sells pro rata portions of the more-liquid segments
of its investment portfolio (such as cash and highly liquid
instruments, U.S. agency securities, investment-grade public
corporate debt securities, publicly traded equity securities, and
asset backed-securities).
Critical Function or Service Transmission Channel
    Under this transmission channel, the Council will consider the
potential for a nonbank financial company to become unable or
unwilling to provide a critical function or service that is relied
upon by market participants and for which there are no ready
substitutes and thereby pose a threat to U.S. financial stability.
This factor is commonly referred to as ``substitutability.''
Substitutability captures the extent to which other firms could
provide similar financial services in a timely manner at a similar
price and quantity if a nonbank financial company withdraws from a
particular market. Substitutability also captures situations in
which a nonbank financial company is the primary or dominant
provider of services in a market that the Council determines to be
essential to U.S. financial stability. A risk under this
transmission channel may be identified if a company provides a
critical function or service that may not easily be substitutable.
The Council's analysis will also consider applicable factors that
may mitigate potential risks under the critical function or service
transmission channel.
    Concern about a potential lack of substitutability could be
greater if a nonbank financial company and its competitors are
likely to experience stress at the same time because they are
exposed to the same risks. The Council may also analyze the nonbank
financial company's activities and critical functions and the
importance of those activities and functions to the U.S. financial
system and assess how those activities and functions would be
performed by the nonbank financial company or other market
participants in the event of the nonbank financial company's
material financial distress. The Council also will consider the
substitutability of critical market functions that the company
provides in the United States in the event of material financial
distress of a foreign parent company.
    The analysis of this channel incorporates a review of the
competitive landscape for markets in which a nonbank financial
company participates and for the services it provides (including the
provision of liquidity to the U.S. financial system, the provision
of credit to low-income, minority, or underserved communities, or
the provision of credit to households, businesses and state and
local governments), the ability of other firms to replace those
services, and the nonbank financial company's market share. This
analysis may focus on the company's market share in specific product
lines and the ability of substitutes to replace a service or
function provided by the company. The Council's evaluation of a
nonbank financial company's market share regarding a particular
product or service may include assessments of the ability of the
nonbank financial company's competitors to expand to meet market
needs during a period of overall stress in the financial services
industry or in a weak macroeconomic environment; the costs that
market participants would incur if forced to switch providers; the
timeframe within which a disruption in the provision of the product
or service would materially affect market participants or market
[[Page 71766]]
functioning; and the economic implications of such a disruption.
c. Complexity and Resolvability
    The potential threat a nonbank financial company could pose to
U.S. financial stability may be mitigated or aggravated by the
company's complexity, opacity, or resolvability. In particular, a
risk may be aggravated if a nonbank financial company's resolution
under ordinary insolvency regimes could disrupt key markets or have
a material adverse impact on other financial firms or markets. An
evaluation of a nonbank financial company's complexity and
resolvability entails an assessment of (1) the complexity of the
nonbank financial company's legal, funding, and operational
structure, and (2) any obstacles to the rapid and orderly resolution
of the nonbank financial company:
     Legal structure factors may include the number of
jurisdictions the company operates in, the number of subsidiaries,
and the organizational structure.
     Funding structure factors may include the degree of
interaffiliate dependency for liquidity and funding (such as
intercompany loans or other affiliate support arrangements), payment
operation (such as treasury operations), and risk-management.
     Operational structure factors may include the number of
employees, the number of U.S. and non-U.S. locations, and the degree
of inter-company dependency in regard to financial guarantees and
support arrangements, the ability to separate functions and spin off
services or business lines, the complexity and resiliency of
intercompany and outsourced services and arrangements in resolution,
and the likelihood of preserving franchise value in a recovery or
resolution scenario.
     Cross-border operational factors may include size and
complexity of the company's cross-border operations and impact of
potential ring-fencing on an orderly resolution.
    Factors that would tend to increase the risk associated with a
company's complexity and resolvability include large size or scope
of activities; a complex legal or operational structure; multi-
jurisdictional operations and regulatory regimes; complex funding
structures; the potential impact of a loss of key personnel; and
shared services among affiliates. The opacity of a firm's
structure--if the firm's structure and operations cannot readily or
easily be determined--may present an obstacle to resolution.
d. Existing Regulatory Scrutiny
    As noted above, one of the considerations the Council is
statutorily required to take into account in making a determination
under section 113 of the Dodd-Frank Act is the degree to which the
nonbank financial company is already regulated by one or more
primary financial regulatory agencies.\15\ In its analysis of this
statutory consideration, the Council will focus on the extent to
which existing regulation of the company has mitigated the potential
risks to financial stability identified by the Council. For example,
factors that may be used to assess existing regulatory scrutiny
include:
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    \15\ Dodd-Frank Act section 113(a)(2)(H), 12 U.S.C.
5323(a)(2)(H).
---------------------------------------------------------------------------
     The extent to which the company's primary financial
regulator has imposed risk-management standards such as capital,
liquidity, and reporting requirements, as relevant to the type of
company, and has authority to supervise, examine, and bring
enforcement actions, with respect to the company and its affiliates.
     Regulators' processes for inter-regulator coordination.
     For non-U.S. entities, the extent to which the company
is supervised and subject to prudential standards on a consolidated
basis in its home country that are administered and enforced by a
comparable foreign supervisory authority.
e. Benefits and Costs of Determination; Likelihood of Material
Financial Distress
    Determining whether the expected benefits of a potential Council
determination justify the expected costs is necessary to ensure that
the Council's actions are expected to provide a net benefit to U.S.
financial stability and are consistent with thoughtful
decisionmaking.\16\ Financial stability benefits may be difficult to
quantify, and some of the costs may be difficult to forecast with
precision. When possible, the Council will quantify reasonably
estimable benefits and costs, using ranges, as appropriate, and
based on empirical data when available. If such benefits or costs
cannot be quantified in this manner, the Council will explain why
such benefits or costs could not be quantified. The Council also
expects to consider benefits and costs qualitatively.\17\ To the
extent feasible, the Council will attempt to assess the relative
importance of any such qualitative elements. The Council will make a
determination under section 113 only if the expected benefits to
financial stability from Federal Reserve supervision and prudential
standards justify the expected costs that the determination would
impose. As part of this analysis, the Council will assess the
likelihood of a firm's material financial distress, in order to
assess the extent to which a determination may promote U.S.
financial stability.
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    \16\ See MetLife, Inc. v. Financial Stability Oversight Council,
177 F. Supp.3d 219, 242 (D.D.C. 2016) (quoting 12 U.S.C.
5323(a)(2)(K) and Michigan v. Environmental Protection Agency, 135
S. Ct. 2699, 2707 (2015)).
    \17\ The Council will also consider non-quantified benefits and
costs. See Office of Management and Budget Circular A-4 (Sept. 17,
2003), section (E) (Developing Benefit and Cost Estimates) (7).
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    The key elements of regulatory analysis include (1) a statement
of the need for the proposed action, (2) an examination of
alternative approaches, and (3) an evaluation of the benefits and
costs (quantitative and qualitative) of the proposed action and the
main alternatives.\18\ The Council will conduct this analysis only
in cases where the Council is concluding that the company meets one
of the standards for a determination by the Council under section
113 of the Dodd-Frank Act, because in other cases doing so would not
affect the outcome of the Council's analysis.
---------------------------------------------------------------------------
    \18\ See Office of Management and Budget Circular A-4 (Sept. 17,
2003).
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    Benefits. With respect to the benefits of a Council
determination, the Council will consider the benefits of the
determination itself, both to (1) the U.S. financial system and
long-term economic growth and (2) the nonbank financial company due
to additional regulatory requirements resulting from the
determination, particularly the prudential standards adopted by the
Federal Reserve under section 165 of the Dodd-Frank Act.
    One of the Council's statutory purposes is to respond to
emerging threats to the stability of the U.S. financial system.\19\
The primary intended benefit of a determination under section 113 of
the Dodd-Frank Act is a reduction in the likelihood or severity of a
financial crisis. Therefore, the Council will consider potential
benefits to the U.S. financial system and the U.S. economy arising
from a Council determination. To the extent that a Council
determination reduces the likelihood or severity of a potential
financial crisis, the determination could enhance financial
stability and mitigate the severity of economic downturns. The
Council may use various measures of systemic risk to assess any
improvement in financial stability. Such measures include S-Risk
(which attempts to quantify the amount of capital a financial firm
would need to raise in order to function normally in the event of a
severe financial crisis), conditional value at risk, and certain
estimates of fire sale risk, among others. To assess the benefit to
the U.S. financial system and the U.S. economy from a determination,
the Council may also consider historical analogues to the nonbank
under review. In addition, the Council may compare the risks to
financial stability posed by a particular nonbank to the risks posed
by large bank holding companies, in order to produce an assessment
of the relative risks the company may pose. Further, the loss of any
implicit ``too big to fail'' or similar subsidy would be considered
a benefit to the economy, even if it increases the nonbank financial
company's cost of capital.
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    \19\ Dodd-Frank Act section 112(a)(1)(C), 12 U.S.C.
5322(a)(1)(C).
---------------------------------------------------------------------------
    Analysis of the benefits of a determination for the relevant
nonbank financial company may include those arising directly from
the Council's determination as well as any benefits arising from
anticipated new or increased requirements resulting from the
determination, such as additional supervision and enhanced capital,
liquidity, or risk-management requirements. For example, a nonbank
financial company subject to a Council determination may benefit
from a lower cost of capital or higher credit ratings upon meeting
its post-determination regulatory requirements.
    Costs. With respect to the costs of a Council determination, the
Council will consider the costs of the determination itself, both to
(1) the nonbank financial company due to additional regulatory
requirements resulting from the determination, including the costs
of the prudential standards adopted by the Federal Reserve under
section 165 of the Dodd Frank Act; and (2) the U.S. economy.
[[Page 71767]]
    The Council will consider costs to the company arising from
anticipated new or increased regulatory requirements resulting from
the determination related to:
     Risk-management requirements, such as the costs of
capital planning and stress testing.
     Supervision and examination, such as compliance costs
to the firm of additional examination and supervision.
     Increased capital requirements, after accounting for
offsetting benefits to taxpayers and to the holders of the firm's
other liabilities.
     Liquidity requirements, such as the opportunity cost
from any requirement to hold additional high-quality liquid assets,
relative to the company's current investment portfolio.
    Because the Federal Reserve is required to tailor prudential
standards to a nonbank financial company subject to a Council
determination after the Council has made a determination regarding
the company, the new regulatory requirements that result from the
Council's determination will not be known to the Council during its
analysis of the company. In cases where the nonbank financial
company under review primarily engages in bank-like activities, the
Council may consider, as a proxy, the costs that would be imposed on
the nonbank if the Federal Reserve imposed prudential standards
similar to those imposed on bank holding companies with at least
$250 billion in total consolidated assets under section 165 of the
Dodd-Frank Act.\20\
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    \20\ Dodd-Frank Act section 165, 12 U.S.C. 5365.
---------------------------------------------------------------------------
    The Council also will consider the cost of a determination under
section 113 of the Dodd-Frank Act to the U.S. economy by assessing
the impact of the determination on the availability and cost of
credit or financial products in relevant U.S. markets. To the extent
that the markets in which the relevant nonbank participates have low
concentration, the impact that the determination regarding one firm
would have on credit conditions would generally be immaterial.
However, if the relevant markets are concentrated, a Council
determination regarding a significant market participant could have
a material impact on credit conditions in that market. As part of
this analysis, the Council may also consider the extent to which any
reduction in financial services provided by the nonbank financial
company under review would be offset by other market participants.
    Likelihood of Material Financial Distress. As part of the
assessment of the overall impact of a Council determination for any
company under review under the First Determination Standard, the
Council will assess the likelihood of the company's material
financial distress based on its vulnerability to a range of factors.
For example, these factors may include leverage (both on- and off-
balance sheet), potential risks associated with asset reevaluations
(whether such reevaluations arise from market disruptions or severe
macroeconomic conditions), reliance on short-term funding or other
fragile funding markets, maturity transformation, and risks from
exposures to counterparties or other market participants. This
assessment may rely upon historical examples regarding the
characteristics of financial companies that have experienced
financial distress, but may also consider other risks that do not
have historical precedent. The Council's analysis of the
vulnerability of a nonbank financial company to material financial
distress will be conducted taking into account a period of overall
stress in the financial services industry and a weak macroeconomic
environment. The Council may also consider the results of any stress
tests that have previously been conducted by the company or by its
primary financial regulatory agency.
IV. The Determination Process
    As described in section II above, the Council will prioritize an
activities-based approach for identifying, assessing, and addressing
potential risks to financial stability. However, if a potential risk
or threat to U.S. financial stability cannot be adequately addressed
through an activities-based approach, the Council may consider a
nonbank financial company for a potential determination under
section 113 of the Dodd-Frank Act. The Council anticipates it would
consider a nonbank financial company for a potential determination
under section 113 only in rare instances, such as if the products,
activities, or practices of a company that pose a potential threat
to U.S. financial stability are outside the jurisdiction or
authority of financial regulatory agencies. The Council expects
generally to follow a two-stage process of evaluation and analysis,
as described below.
    In the first stage of the process (``Stage 1''), nonbank
financial companies identified as potentially posing risks to U.S.
financial stability will be notified and subject to a preliminary
analysis, based on quantitative and qualitative information
available to the Council primarily through public and regulatory
sources. During Stage 1, the Council will permit, but not require,
the company to submit relevant information. The Council will also
consult with the primary financial regulatory agency or home country
supervisor, as appropriate. This approach will enable the Council to
fulfill its statutory obligation to rely whenever possible on
information available through the Office of Financial Research (the
``OFR''), Council member agencies, or the nonbank financial
company's primary financial regulatory agencies before requiring the
submission of reports from any nonbank financial company.\21\
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    \21\ See Dodd-Frank Act section 112(d)(3), 12 U.S.C. 5322(d)(3).
---------------------------------------------------------------------------
    Following Stage 1, nonbank financial companies that are selected
for additional review will receive notice that they are being
considered for a proposed determination that the company could pose
a threat to U.S. financial stability (a ``Proposed Determination'')
and will be subject to in-depth evaluation during the second stage
of review (``Stage 2''). Stage 2 will involve the evaluation of
additional information collected directly from the nonbank financial
company. At the end of Stage 2, the Council may consider whether to
make a Proposed Determination with respect to the nonbank financial
company. If a Proposed Determination is made by the Council, the
nonbank financial company may request a hearing in accordance with
section 113(e) of the Dodd-Frank Act and Sec.  1310.21(c) of the
Council's rule.\22\ After making a Proposed Determination and
holding any written or oral hearing if requested, the Council may
vote to make a final determination.
---------------------------------------------------------------------------
    \22\ See 12 CFR 1310.21(c).
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a. Stage 1: Preliminary Evaluation of Nonbank Financial Companies
    Stage 1 involves a preliminary analysis of nonbank financial
companies to assess the risks they could pose to U.S. financial
stability.
Identification of Company for Review in Stage 1
    If, as described in section II, the Council's consultation with
and any recommendations to a nonbank financial company's primary
financial regulatory agency do not adequately address a potential
risk identified by the Council, the Council may evaluate one or more
individual nonbank financial companies for an entity-specific
determination under section 113 of the Dodd-Frank Act. The Council
will vote to commence review of a nonbank financial company in Stage
1. When evaluating the potential risks associated with a nonbank
financial company, the Council may consider the company and its
subsidiaries together. This approach enables the Council to consider
potential risks arising across the consolidated organization, while
retaining the ability to make a determination regarding either the
parent or any individual nonbank financial company subsidiary (or
neither), depending on which entity the Council determines could
pose a threat to financial stability.
Engagement With Company and Regulators in Stage 1
    The Council will provide a notice to any nonbank financial
company under review in Stage 1. In Stage 1, the Council will
consider available public and regulatory information; in addition, a
company under review in Stage 1 may submit to the Council any
information it deems relevant to the Council's evaluation and may,
upon request, meet with staff of Council members and member agencies
who are leading the Council's analysis. In order to reduce the
burdens of review on the company, the Council will not require the
company to submit information during Stage 1. In addition, staff
representing Council members will, upon request, provide the company
with a list of the primary public sources of information being
considered during the Stage 1 analysis, so that the company has an
opportunity to understand the information the Council may rely upon
during Stage 1. Through this engagement, the Council will seek to
enable the company under review to understand the focus of the
Council's analysis, which may enable the company to act to mitigate
any risks to financial stability and thereby potentially avoid
becoming subject to a Council determination.
[[Page 71768]]
    During the discussions in Stage 1 with the company, the Council
intends for staff of Council members and member agencies to explain
to the company the key risks that have been identified in the
analysis. Because the review of the company is preliminary and
continues to change until the Council makes a final determination,
these identified risks may shift over time.
    The Council will also consider in Stage 1 information available
from relevant existing regulators of the company. Under the Dodd-
Frank Act, the Council is required to consult with the primary
financial regulatory agency, if any, for each nonbank financial
company or subsidiary of a nonbank financial company that is being
considered for a determination before the Council makes any final
determination with respect to such company.\23\ For any company
under review in Stage 1 that is regulated by a primary financial
regulatory agency or home country supervisor, the Council will
notify the regulator or supervisor that the company is under review
no later than such time as the company is notified. As part of that
consultation process, the Council will consult with the primary
financial regulatory agency, if any, of each significant subsidiary
of the nonbank financial company, to the extent the Council deems
appropriate in Stage 1. The Council will actively solicit the
regulator's views regarding risks at the company and potential
mitigants. In order to enable the regulator to provide relevant
information, the Council will share its preliminary views regarding
potential risks at the company, and request that the regulator
provide information regarding those specific risks, including
whether the risks are adequately mitigated by factors such as
existing regulation or the company's business practices. During the
determination process, the Council will continue to encourage the
regulator to address any risks to U.S. financial stability using the
regulator's existing authorities; if the Council believes the
regulator's actions adequately address the potential risks to U.S.
financial stability the Council has identified, the Council may
discontinue its consideration of the firm for a potential
determination under section 113 of the Dodd-Frank Act.
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    \23\ Dodd-Frank Act section 113(g), 12 U.S.C. 5323(g).
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    Based on the preliminary evaluation in Stage 1, the Council may
vote to commence a more detailed analysis of the company by
advancing the company to Stage 2, or it may decide not to evaluate
the company further. If the Council determines not to advance a
company that has been reviewed in Stage 1 to Stage 2, the Council
will notify the company in writing of the Council's decision. The
notice will clarify that a decision not to advance the company from
Stage 1 to Stage 2 at that time does not preclude the Council from
reinitiating review of the company in Stage 1. For example, the
Council may reinitiate review of the company if material changes
affecting the firm merit further evaluation.
b. Stage 2: In-Depth Evaluation
    Stage 2 involves an in-depth evaluation of any company that the
Council has determined merits additional review.
    In Stage 2, the Council will review the relevant company using
information collected directly from the nonbank financial company,
through the OFR, as well as public and regulatory information. The
review will focus on whether the nonbank financial company could
pose a threat to U.S. financial stability because of the company's
material financial distress or the nature, scope, size, scale,
concentration, interconnectedness, or mix of the activities of the
company. The Council expects that the transmission channels and the
other factors described above will be used to evaluate a nonbank
financial company's potential to pose a threat to U.S. financial
stability.
Engagement With Company and Regulators in Stage 2
    Each nonbank financial company to be evaluated in Stage 2 will
receive a notice (a ``Notice of Consideration'') that the nonbank
financial company is under consideration for a Proposed
Determination. The Council also will submit to the company a request
that the company provide information that the Council deems relevant
to the Council's evaluation, and the nonbank financial company will
be provided an opportunity to submit written materials to the
Council.\24\ This information will generally be collected by the
OFR. Before requiring the submission of reports from any nonbank
financial company that is regulated by a Council member agency or
any primary financial regulatory agency, the Council, acting through
the OFR, will coordinate with such agencies and will, whenever
possible, rely on information available from the OFR or such
agencies. Council members and their agencies and staffs will
maintain the confidentiality of such information in accordance with
applicable law. During Stage 2, the company may also submit any
other information that it deems relevant to the Council's
evaluation. Information considered by the Council includes details
regarding the company's financial activities, legal structure,
liabilities, counterparty exposures, resolvability, and existing
regulatory oversight.
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    \24\ See 12 CFR 1310.21(a).
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    Information requests likely will involve both qualitative and
quantitative data. Information relevant to the Council's analysis
may include confidential business information such as detailed
information regarding financial assets, terms of funding
arrangements, counterparty exposure or position data, strategic
plans, and interaffiliate transactions.
    The Council will make staff representing Council members
available to meet with the representatives of any company that
enters Stage 2, to explain the evaluation process and the framework
for the Council's analysis. If the analysis in Stage 1 has
identified specific aspects of the company's operations or
activities as the primary focus for the evaluation, staff will
notify the company of those issues, although the issues will be
subject to change based on the ongoing analysis. In addition, the
Council expects that its Deputies Committee \25\ will grant a
request to meet with a company in Stage 2 to allow the company to
present any information or arguments it deems relevant to the
Council's evaluation.
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    \25\ The Council's Deputies Committee is composed of senior
officials from each Council member and member agency. It coordinates
and oversees the work of the Council's other interagency staff
committees.
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    During Stage 2 the Council will also seek to continue its
consultation with the company's primary financial regulatory agency
or home country supervisor in a timely manner before the Council
makes any proposed or final determination with respect to such
nonbank financial company. The Council will continue to encourage
the regulator during the determination process to address any risks
to U.S. financial stability using the regulator's existing
authorities; as noted above, if the Council believes the regulator's
actions adequately address the potential risks to U.S. financial
stability the Council has identified, the Council may discontinue
its consideration of the firm for a potential determination under
section 113 of the Dodd-Frank Act.
    Before making a Proposed Determination regarding a nonbank
financial company, the Council will notify the company when the
Council believes that the evidentiary record regarding such nonbank
financial company is complete. The Council will notify any nonbank
financial company in Stage 2 if the nonbank financial company ceases
to be considered for a determination. Any nonbank financial company
that ceases to be considered at any time in the Council's
determination process may be considered for a Proposed Determination
in the future at the Council's discretion, consistent with the
processes described above.
c. Proposed and Final Determination
Proposed Determination
    Based on the analysis performed in Stage 2, a nonbank financial
company may be considered for a Proposed Determination. A proposed
determination requires a vote of two-thirds of the voting members of
the Council then serving, including an affirmative vote by the
Chairperson of the Council.\26\ Following a Proposed Determination,
the Council will issue a written notice of the Proposed
Determination to the nonbank financial company, which will include
an explanation of the basis of the Proposed Determination.\27\
Promptly after the Council votes to make a proposed determination
regarding a company, the Council will provide the company's primary
financial regulatory agency or home country supervisor (subject to
appropriate protections for confidential information) with the
nonpublic written explanation of the basis of the Council's proposed
or final determination. The Council also will publish the
explanation of the basis of the Proposed Determination, subject to
redactions to
[[Page 71769]]
protect confidential information from the company or its regulators.
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    \26\ 12 CFR 1310.10(b).
    \27\ Dodd-Frank Act section 113(e)(1), 12 U.S.C. 5323(e)(1).
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Hearing
    A nonbank financial company that is subject to a Proposed
Determination may request a nonpublic hearing to contest the
Proposed Determination in accordance with section 113(e) of the
Dodd-Frank Act. If the nonbank financial company requests a hearing
in accordance with the procedures set forth in Sec.  1310.21(c) of
the Council's rule,\28\ the Council will set a time and place for
such hearing. The Council has published hearing procedures on its
website.\29\ In light of the short statutory timeframe for
conducting a hearing, and the fact that the purpose of the hearing
is to benefit the company, if a company requests that the Council
waive the statutory deadline for conducting the hearing, the Council
may do so in appropriate circumstances.
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    \28\ See 12 CFR 1310.21(c).
    \29\ Financial Stability Oversight Council Hearing Procedures
for Proceedings Under Title I or Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, available at https://www.treasury.gov/initiatives/fsoc/designations/Pages/Hearing-Procedures.aspx.
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Final Determination
    After making a Proposed Determination and holding any requested
written or oral hearing, the Council may, by a vote of not fewer
than two-thirds of the voting members of the Council then serving
(including an affirmative vote by the Chairperson of the Council),
make a final determination that the company will be subject to
supervision by the Federal Reserve and prudential standards. If the
Council makes a final determination, it will provide the company
with a written notice of the Council's final determination,
including an explanation of the basis for the Council's
decision.\30\ The Council will also provide the company's primary
financial regulatory agency or home country supervisor (subject to
appropriate protections for confidential information) with the
nonpublic written explanation of the basis of the Council's final
determination. The Council expects that its explanation of the final
basis for any determination will highlight the key risks that led to
the determination and include clear guidance regarding the factors
that were most important in the Council's determination. When
practicable and consistent with the purposes of the determination
process, the Council will provide a nonbank financial company with a
notice of a final determination at least one business day before
publicly announcing the determination pursuant to Sec.
1310.21(d)(3), Sec.  1310.21(e)(3), or Sec.  1310.22(d)(3) of the
Council's rule.\31\ In accordance with section 113(h) of the Dodd-
Frank Act, a nonbank financial company that is subject to a final
determination may bring an action in U.S. district court for an
order requiring that the determination be rescinded.
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    \30\ Dodd-Frank Act section 113(e)(3), 12 U.S.C. 5323(e)(3); see
also 12 CFR 1310.21(d)(2) and (e)(2).
    \31\ See 12 CFR 1310.21(d)(3) and (e)(3) and 1310.22(d)(3).
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    The Council does not intend to publicly announce the name of any
nonbank financial company that is under evaluation prior to a final
determination with respect to such company. However, if a company
that is under review in Stage 1 or Stage 2 publicly announces the
status of its review by the Council, the Council intends, upon the
request of a third party, to confirm the status of the company's
review. In addition, the Council will publicly release the
explanation of the Council's basis for any nonbank financial company
determination or rescission of a determination. The Council is
subject to statutory and regulatory requirements to maintain the
confidentiality of certain information submitted to it by a nonbank
financial company or its regulators.\32\ In light of these
confidentiality obligations, such confidential information will be
redacted from the materials that the Council makes publicly
available.
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    \32\ See Dodd-Frank Act section 112(d)(5), 12 U.S.C. 5322(d)(5);
see also 12 CFR 1310.20(e).
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V. Annual Reevaluations of Nonbank Financial Company Determinations
    After the Council makes a final determination regarding a
company, the Council intends to encourage the company or its
regulators to take steps to mitigate the potential risks identified
in the Council's written explanation of the basis for its final
determination. Except in cases where new material risks arise over
time, if a company adequately addresses the potential risks
identified in writing by the Council at the time of the final
determination and in subsequent reevaluations, the Council should
generally be expected to rescind its determination regarding the
company.
    For any nonbank financial company that is subject to a final
determination, the Council is required to reevaluate the
determination at least annually, and to rescind the determination if
the Council determines that the company no longer meets the
statutory standards for a determination. The Council may also
consider a request from a company for a reevaluation before the next
required annual reevaluation, in the case of an extraordinary change
that materially decreases the threat the nonbank financial company
could pose to U.S. financial stability.\33\
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    \33\ See note 12 above.
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    The Council applies the same standards of review in its annual
reevaluations as the standard for an initial determination regarding
a nonbank financial company: Either the company's material financial
distress, or the nature, scope, size, scale, concentration,
interconnectedness, or mix of the company's activities, could pose a
threat to U.S. financial stability. If the Council determines that
the company no longer meets those standards, the Council will
rescind its determination.
    The Council's annual reevaluations generally assess whether any
material changes since the previous reevaluation and since the
determination justify a rescission of the determination, based on
the same transmission channels and other factors that are considered
during a determination decision. The Council expects that its
reevaluation process will focus on whether any material changes--
including changes at the company, changes in its markets or its
regulation, changes in the Council's own analysis, or otherwise--
result in the company no longer meeting the standard for a
determination. In light of the frequent reevaluations, the Council's
analyses will generally focus on changes since the Council's
previous review, but the ultimate question the Council will seek to
assess is whether changes in the aggregate since the Council's
determination regarding the company have caused the company to cease
meeting the Determination Standards. The Council expects that its
analysis in its annual reevaluations will generally be organized
around the three transmission channels described above as well as
existing regulatory scrutiny and the company's complexity and
resolvability.
    Before the Council's annual reevaluation of a determination
regarding a nonbank financial company, the Council will provide the
company with an opportunity to meet with staff of Council members
and member agencies to discuss the scope and process for the review
and to present information regarding any change that may be relevant
to the threat the company could pose to financial stability. Staff
of Council members and member agencies will also be available to
meet with the company during the annual reevaluation, at the
company's request. In addition, during an annual reevaluation, a
company may submit any written information to the Council the
company considers relevant to the Council's analysis. During annual
reevaluations, companies are encouraged to submit information
regarding any changes related to the company's risk profile that
mitigate the potential risks previously identified by the Council.
Such changes could include updates regarding company restructurings,
regulatory developments, market changes, or other factors. If the
company has taken steps to address the potential risks previously
identified by the Council, the Council will assess whether those
risks have been adequately mitigated to merit a rescission of the
determination regarding the company. If the company explains in
detail potential changes it could make to its business to address
the potential risks previously identified by the Council, staff of
Council members and member agencies will endeavor to provide their
feedback on the extent to which those changes may address the
potential risks.
    If a company contests the Council's determination during the
Council's annual reevaluation, the Council will vote on whether to
rescind the determination and provide the company, its primary
financial regulatory agency, and the primary financial regulatory
agency of its significant subsidiaries with a notice explaining the
primary basis for any decision not to rescind the determination. If
the Council does not rescind the determination, the written notice
provided to the company will address each of the material factors
raised by the company in its submissions to the Council contesting
the determination during the annual reevaluation. The written notice
from the Council will also explain in detail why the
[[Page 71770]]
Council did not find that the company no longer met the standard for
a determination under section 113 of the Dodd-Frank Act. In general,
due to the sensitive nature of its analyses in annual reevaluations,
the Council may not in all cases publicly release the written
findings that it provides to the company.
    Finally, the Council will provide each nonbank financial company
subject to a Council determination with an opportunity for an oral
hearing before the Council once every five years at which the
company can contest the determination.
    Dated: December 9, 2019.
Howard Adler,
Deputy Assistant Secretary for the Financial Stability Oversight
Council, Department of the Treasury.
[FR Doc. 2019-27108 Filed 12-27-19; 8:45 am]
BILLING CODE 4810-25-P-P