FSOC Overhauls SIFI Designation Process
Recently, the Financial Stability Oversight Council (FSOC) voted to overhaul the process to designate nonbank financial companies as systemically important financial institutions (SIFI) which would subject them to supervision by the Federal Reserve and additional regulations. FSOC will now identify potential non-bank SIFIs based on existing information and allow the entity a chance to respond. If the FSOC decides to proceed with designation, the entity would then discuss the matter with its primary regulator and the FSOC. Designation would occur if two-thirds of FSOC's 10 members vote in favor. Designations will be reviewed annually. The new process reverses a Trump administration policy stating that regulators should use an “activities-based approach” rather than singling out individual firms. FSOC proposed these changes in April 2023. While the FSOC has not yet publicly named any targets, it is likely to be highly critical of large asset managers. In her remarks on the framework, Treasury Secretary Janet Yellen noted the framework “provides a clear explanation of how the Council monitors, evaluates, and responds to potential risks to financial stability, regardless of whether they come from activities, individual firms, or other sources.”
The FSOC was established in 2010 under a mandate from the Dodd-Frank Act and is led by Treasury Secretary Janet Yellen. It includes the heads of agencies such as the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve, and five other agencies as full voting members. The FSOC also has one independent member that is appointed by the President, for a total of 10 voting members. Additionally, there are five non-voting members that represent state interests, the Office of Financial Research, and the Federal Insurance Office.
Click here to read an FSOC release covering the changes to the SIFI designation process.Click here to read the full text of the analytic framework.