FSOC Proposes Update to Guidance on Non-Bank SIFI Designations

In late March, the Financial Stability Oversight Council (FSOC) voted to issue for public comment proposed interpretative guidance on nonbank financial company designations. The guidance proposes an activities-based approach to designation which includes risks arising from particular activities such as using derivatives, short-term funding reliance, or excessive leverage. This proposal mimics a 2019 proposal that prioritized an activities-based approach rather than identifying specific entities themselves. The proposal also would require a cost-benefit analysis prior to designation including “the likelihood of the company’s material financial distress as part of its analysis of potential benefits and costs of a designation.” In addition, the guidance would allow for a “pre-designation off-ramp” in which FSOC would “identify steps a nonbank financial company or financial regulators could take to address a potential threat to U.S. financial stability based on the Council’s preliminary evaluation and allow time for the material risks to be addressed.” Comments will be accepted on the proposed guidance for 45 days following publication in the Federal Register.

The FSOC is chaired by the U.S. Treasury Secretary and includes the Chairs of the Federal Reserve Board, SEC, CFTC, OCC, FDIC, NCUA, and other government agencies. It was created in 2010 through the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) by former President Barack Obama. The DFA provides the FSOC with broad authority to identify and monitor risks in the financial system, including the designation of non-bank entities, which would trigger additional Fed supervision and enhanced prudential standards.

Click here to read the FSOC press release detailing the proposed guidance.