Federal Register, Volume 76 Issue 17 (Wednesday, January 26, 2011)

[Federal Register Volume 76, Number 17 (Wednesday, January 26, 2011)]
[Proposed Rules]
[Pages 4555-4567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-1551]

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FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Part 1310

RIN 4030-AA00

Authority To Require Supervision and Regulation of Certain
Nonbank Financial Companies

AGENCY: Financial Stability Oversight Council.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Section 113 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``DFA'') provides the Financial Stability Oversight
Council (the ``Council'') the authority to require that a nonbank
financial company be supervised by the Board of Governors of the
Federal Reserve System (``Board of Governors'') and be subject to
prudential standards in accordance with Title I of the DFA if the
Council determines that material financial distress at such a firm, or
the nature, scope, size, scale, concentration, interconnectedness, or
mix of the activities of the firm, could pose a threat to the financial
stability of the United States. The proposed rule describes the
criteria that will inform, and the processes and procedures established
under the DFA for, the Council's designation of nonbank financial
companies under the DFA. The Council, on October 6, 2010, issued an
advance notice of proposed rulemaking regarding the designation
criteria in section 113.

DATES: Comments must be received on or before February 25, 2011.

ADDRESSES: Interested persons are invited to submit comments regarding
this notice of proposed rulemaking according to the instructions below.
All submissions must refer to the document title. The Council
encourages the early submission of comments.
Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
http://www.regulations.gov. Electronic submission of comments allows
the commenter maximum time to prepare and submit a comment, ensures
timely receipt, and enables the Council to make them available to the
public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Mail: Send comments to Financial Stability Oversight Council, Attn:
Lance Auer, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.

Note: To receive consideration as public comments, comments must
be submitted through the method specified above. Again, all
submissions must refer to the title of the notice.

Public Inspection of Public Comments. All properly submitted
comments will be available for inspection and downloading at http://www.regulations.gov.
Additional Instructions. In general comments received, including
attachments and other supporting materials, are part of the public
record and are available to the public. Do not submit any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT: Lance Auer, Deputy Assistant Secretary
(Financial Institutions), Treasury, at (202) 622-1262, or Jeff King,
Senior Counsel, Office of the General Counsel, Treasury, at (202) 622-
1978. All responses to this Notice should be submitted via http://www.regulations.gov to ensure consideration.

SUPPLEMENTARY INFORMATION:

I. Background

Section 111 of the DFA (12 U.S.C. 5321) established the Financial
Stability Oversight Council. Among the purposes of the Council under
section 112 of the DFA (12 U.S.C. 5322), are: ``(A) * * * identify[ing]
risk to the financial

[[Page 4556]]

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) * *
* promot[ing] market discipline, by eliminating expectations on the
part of shareholders, creditors, and counterparties of such companies
that the Government will shield them from losses in the event of
failure; and (C) * * * respond[ing] to emerging threats to the
stability of the United States financial system.''
In the recent financial crisis, financial distress at certain
nonbank financial companies contributed to a broad seizing up of
financial markets, stress at other financial firms, and a deep global
recession with a considerable drop in employment, the classic symptoms
of financial instability. These nonbank financial companies were not
subject to the type of regulation and consolidated supervision applied
to bank holding companies, nor were there effective mechanisms in place
to resolve the largest and most interconnected of these firms without
causing further instability. To address the risks posed by these
companies, the DFA authorizes the Council to designate nonbank
financial companies for enhanced prudential standards and consolidated
supervision by the Board of Governors.
Specifically, section 113 of the DFA (12 U.S.C. 5323) gives the
Council the authority to require that a nonbank financial company be
supervised by the Board of Governors and be subject to enhanced
prudential standards if the Council determines that material financial
distress at such a firm, or the nature, scope, size, scale,
concentration, interconnectedness, or mix of the activities of the
firm, could pose a threat to the financial stability of the United
States.\1\ Section 113 of the DFA sets forth a number of factors or
criteria that the Council must consider in determining whether to
designate a nonbank financial company for supervision by the Board of
Governors.
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\1\ The Council's decision requires the vote of at least two-
thirds of the voting members of the Council then serving, including
the affirmative vote of the Chairperson of the Council (the
Secretary of the Treasury).
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Further, once a nonbank financial company is identified and made
subject to supervision by the Board of Governors, section 165(d)
requires the company to file a resolution plan with the Board of
Governors and the FDIC that is both credible and would facilitate an
orderly resolution of the company. The requirement to prepare and file
a resolution plan will not only assist the Board of Governors to
supervise these companies, but will also provide information essential
if an orderly liquidation of the company under Title II or another
resolution mechanism becomes necessary.
On October 6, 2010, the Council issued an advance notice of
proposed rulemaking (``ANPR'') (75 FR 61653) through which it sought
public comment to gather information in developing the specific
criteria and analytical framework by which it will consider designating
nonbank financial companies for supervision by the Board of Governors.
The ANPR posed 15 questions, all of which focused on how to apply the
statutory considerations for designating a nonbank financial company as
specified in section 113 of the DFA. The comment period for the ANPR
closed on November 5, 2010, and comments were submitted from 50
persons. Of these, 27 were from industry trade associations, 10 from
individual firms, 5 from individuals, and 8 from other groups. (Comment
letters are available online at: http://www.regulations.gov)
These comments addressed the Council's specific questions, as well
as a range of other issues. Commenters generally encouraged further
development of the framework for designations under section 113, and
most supported the overall direction of the ANPR. Commenters, however,
raised a number of conceptual and technical issues that they believed
required additional consideration. Some commenters provided specific
proposed frameworks for applying the criteria in section 113, and
provided feedback on particular metrics and considerations that should
be used in the designation process. In addition, some commenters
provided views on the process of designation itself, emphasizing
transparency and clear communication surrounding all designation
decisions. The questions asked by the Council in the ANPR are provided
below, along with an overview of the comments received on each
question.

II. Summary of Public Responses to ANPR

1. What metrics should the Council use to measure the factors it is
required to consider when making determinations under Section 113 of
DFA?
a. How should quantitative and qualitative considerations be
incorporated into the determination process?
b. Are there some factors that should be weighted more heavily by
the Council than other factors in the designation process?
Most commenters asserted that determinations should be based on a
combination of qualitative and quantitative considerations.
Furthermore, there was general consensus among commenters that the
Council should give significant weight to the following factors in
making a determination: size, leverage, dependence on short-term
funding, substitutability, degree of primary regulation, and
interconnectedness. However, many commenters also emphasized the
importance of other factors such as concentration and diversification,
balance sheet composition, complexity, off-balance sheet exposure,
level of uncollateralized exposures, risk appetite, and a firm's role
in payment and settlement systems. A number of commenters argued that
the first filter in the determination process should be an assessment
of the likelihood of a firm's failure having a material impact on the
financial system, together with an assessment of the likelihood that it
could experience material financial distress. Commenters also argued
that the Council should consider the likelihood that the company would
be resolved under an orderly liquidation procedure under Title II if it
were to fail or experience material financial distress.
2. What types of nonbank financial companies should the Council
review for designation under DFA? Should the analytical framework,
considerations, and measures used by the Council vary across
industries? Across time? If so, how?
The majority of commenters argued that no nonbank financial company
should automatically be excluded from potential review for designation.
Several industry groups and firms also presented arguments generally as
to why they do not present a systemic risk. Commenters generally agreed
that analytical frameworks for designation should be tailored to the
type of industry in which the firm operated, and that the Council
should focus its attention on unregulated firms and activities. Many
commenters also urged the Council to focus on those types of companies
that rely heavily on short-term funding, are highly interconnected with
other parts of the financial system, and are not already subject to
consolidated supervision or heightened reporting.
3. Since foreign nonbank financial companies can be designated,
what role should international considerations play in designating
companies? Are there unique considerations for foreign

[[Page 4557]]

nonbank companies that should be taken into account?
Many respondents noted that many foreign nonbank institutions may
already be subject to prudential regulatory regimes within their home
jurisdictions, including regimes that follow internationally recognized
practices for prudential supervision. These commenters asserted that
these factors should be taken into account by the Council. Many also
stressed the need for outreach and coordination with the home
regulators of foreign institutions, as well as the need to avoid
overlapping or conflicting regulations.
4. Are there simple metrics that the Council should use to
determine whether nonbank financial companies should even be considered
for designation?
Many commenters asserted that the Council should not rely solely on
a limited number of simple metrics in considering firms for
designation, with the most common example noted as asset size. A
majority of commenters argued that the Council should consider several
metrics in combination. However, many of the commenters agreed on one
metric that they believe should be used to exclude a firm from
designation: those firms that are already subject to consolidated
supervision and/or heightened reporting requirements.
5. How should the Council measure and assess the scope, size, and
scale of nonbank financial companies?
a. Should a risk-adjusted measure of a company's assets be used? If
so, what methodology or methodologies should be used?
b. Section 113 of DFA requires the Council to consider the extent
and nature of the off-balance-sheet exposures of a company. Given this
requirement, what should be considered an off-balance sheet exposure
and how should they be assessed? How should off-balance sheet exposures
be measured (e.g., notional values, mark-to-market values, future
potential exposures)? What measures of comparison are appropriate?
c. How should the Council take managed assets into consideration in
making designations? How should the term ``managed assets'' be defined?
Should the type of asset management activity (e.g., hedge fund, private
equity fund, mutual fund) being conducted influence the assessment
under this criterion? How should terms, conditions, triggers, and other
contractual arrangements that require the nonbank financial firm either
to fund or to satisfy an obligation in connection with managed assets
be considered?
d. During the financial crisis, some firms provided financial
support to investment vehicles sponsored or managed by their firm
despite having no legal obligation to do so. How should the Council
take account of such implicit support?
A majority of commenters emphasized the importance of looking at
the scope, size and scale of nonbank financial companies through a
variety of lenses to best understand the underlying risk. However, one
commenter argued that measurement tools should be kept as simple and
uniform as possible across all firms.
It was generally noted by commenters that some form of risk-
weighting should be used in assessing the scope, size, and scale of
nonbank financial companies. However, specific methodologies were not
suggested by commenters.
Asset Size Calculations--Commenters emphasized that asset size
should not be looked at in isolation, and that asset size alone does
not fully reflect a firm's ability to pose systemic risk.
Treatment of Off-Balance-Sheet Exposures--A majority of commenters
argued that off-balance-sheet exposures should not be measured simply
using notional values. In addition, several commenters argued that
potential future exposures--estimated, for example, as part of stress
tests--should include a firm's off-balance-sheet exposures. Commenters
also suggested that off-balance-sheet exposures should include, inter
alia, all contingent liabilities, parental guarantees, capital support
arrangements, special purpose vehicle (SPV) support arrangements, and
repurchase obligations.
Managed Asset Considerations--Many commenters argued that managed
assets are fundamentally less risky than those directly owned by a
financial company. Some commenters also suggested that asset managers
are less interconnected than other significant nonbank financial
companies and engage predominantly in long-only trades, which the
commenters suggested greatly reduced the amount of risk they pose to
the financial system.
Implicit Support--Most commenters argued that implicit support
provided to investment vehicles should not be considered in
calculations of potential exposure. Most noted that the nature of such
support can vary widely, and that legal recourse provides a cleaner
line. In contrast, one commenter argued that the Council should
consider implicit support in the overall exposures of a firm,
referencing the support several institutions provided to funds during
the recent financial crisis, despite having no legal obligation to do
so.
6. How should the Council measure and assess the nature,
concentration, and mix of activities of a nonbank financial firm?
a. Section 113 of DFA requires the Council to consider the
importance of the company as a source of credit for households,
businesses, and State and local governments, and as a source of
liquidity for the United States financial system. Given this
requirement, are there measures of market concentration that can be
used to inform the application of this criterion? How should these
markets be defined? What other measures might be used to assess a
nonbank financial firm's importance under this criterion?
b. Section 113 of DFA requires the Council to consider the
importance of the company as a source of credit for low-income,
minority, and underserved communities. Given this requirement, are
there measures of market concentration that can be used to inform the
application of this criterion? How should these markets be defined?
What other measures might be used to assess a nonbank financial firm's
importance under this criterion?
Comments varied significantly on ways to measure a firm's market
concentration and mix of activities. However, most commenters suggested
that a firm's interconnectedness should be considered in evaluating the
importance of a firm's activities.
Comments also varied significantly on how to define the scope of
the markets referenced in section 113, with some commenters advocating
for broad definitions by product, trading venue and geography, and
others arguing that markets must be considered distinctly (i.e.,
households versus business, state versus local governments) given their
unique characteristics.
7. How should the Council measure and assess the interconnectedness
of a nonbank financial firm?
a. What measures of exposure should be considered (e.g.,
counterparty credit exposures, operational linkages, potential future
exposures under derivative contracts, concentration in revenues, direct
and contingent liquidity or credit lines, cross-holding of debt and
equity)? What role should models of interconnectedness (e.g.,
correlation of returns or equity values across firms, stress tests)
play in the Council's determinations?
b. Should the Council give special consideration to the
relationships (including exposures and dependencies) between a nonbank
financial company and other important financial firms or markets? If
so, what metrics and thresholds should be used to identify

[[Page 4558]]

what financial firms or markets should be considered significant for
these purposes? What metrics and thresholds should be used in assessing
the importance of a nonbank financial company's relationships with
these other firms and markets?
Commenters suggested focusing on measures of interconnectedness by
type of activity rather than by type of firm. Further, most commenters
suggested focusing on those activities most prone to systemic risk
through contagion.
To measure interconnectedness, commenters suggested evaluating,
among other things, liquidity profile, contagion risk, counterparty
credit risk, the nature of derivatives activity, levels of
substitutability, and operational linkages.
8. How should the Council measure and assess the leverage of a
nonbank financial firm? How should measures of leverage address
liabilities, off-balance sheet exposures, and non-financial business
lines? Should standards for leverage differ by types of financial
activities or by industry? Should acceptable leverage standards
recognize differences in regulation? Are there existing standards
(e.g., the Basel III leverage ratio) for measuring leverage that could
be used in assessing the leverage of nonbank financial companies?
Most commenters asserted that it would be important for the Council
to distinguish between different types and sources of leverage (secured
versus unsecured; short-term versus long-term; operational versus
financial). In addition, many commenters suggested varying the
standards and tools for measuring leverage by the type of business and
the amount of regulation present in that industry. One commenter,
however, suggested that leverage rules should be simple and apply
equally to all nonbank firms according to their size.
9. How should the Council measure and assess the amount and types
of liabilities, including the degree of reliance on short-term funding
of a nonbank financial firm?
a. What factors should the Council consider in developing
thresholds for identifying excessive reliance on short-term funding?
b. How should funding concentrations be measured?
c. Do some nonbank financial companies have funding sources that
are contractually short-term but stable in practice (similar to
``stable deposits'' at banks)?
d. Should the assessment link the maturity structure of the
liabilities to the maturity structure and quality of the assets of
nonbank financial companies?
Commenters suggested examining the liquidity profile of a firm,
taking into consideration the quality and duration of funding,
diversity and mix of the sources of funding, the strength of the firm's
liquidity providers, the depth of secondary markets in the firm's
assets, and degree of maturity mismatch. Many also suggested risk-
weighting liabilities to better evaluate the quality and strength of
the liquidity source. One commenter suggested looking at historical
industry trends in capital raising for additional color on the
stability of liabilities for a particular industry.
10. How should the Council take into account the fact that a
nonbank financial firm (or one or more of its subsidiaries or
affiliates) is already subject to financial regulation in the Council's
decision to designate a firm? Are there particular aspects of
prudential regulation that should be considered as particularly
important (e.g., capital regulation, liquidity requirements,
consolidated supervision)? Should the Council take into account whether
the existing regulation of the company comports with relevant national
or international standards?
Commenters argued that firms already subjected to consolidated
regulation are less likely to pose systemic risk than those that
operate in ``regulatory shadows'', and thus are less likely to need
additional oversight. Many commenters also argued against designating a
firm that is already subject to some form of regulation, as this could
result in inconsistencies, interference, and duplication of regulatory
effort. However, one commenter argued that the degree of current
regulation should not be a factor in evaluating whether a firm is
systemically important; it should be a factor in deciding the
appropriate degree of regulation for a designated firm.
Several respondents suggested distinguishing firms by industry and
avoiding imposing bank-centric standards on other industries. The
quality or extent of existing regulation was also cited by some
commenters as a factor to be considered. Some commenters also suggested
that the Council seek to follow international standards, where
applicable, in designating firms and seek to prevent regulatory
arbitrage within a particular industry.
Commenters indicated that the Council has the ability to obtain
necessary information and data through either prudential regulators or
the Office of Financial Research to make its determinations.
11. Should the degree of public disclosures and transparency be a
factor in the assessment? Should asset valuation methodologies (e.g.,
level 2 and level 3 assets) and risk management practices be factored
into the assessment?
Comments related to public disclosures and transparency varied.
Many commenters favored public disclosure, noting that shareholders,
other investors and other stakeholders benefit when rules and
regulations provide adequate protections to owners and ensure that
important information is promptly and transparently provided to the
marketplace. Other commenters asserted that public disclosures do not
have any direct bearing on risk to financial stability, and therefore
should not be a factor in the designation process.
Among the commenters, there was a consensus that risk management
practices be factored into the assessment of a nonbank financial
company, because they are a key factor in determining the probability
of material financial distress. Particular aspects of risk management
practices that were highlighted include: Culture; transparency; risk
appetite; and management philosophy. One commenter in particular cited
that effective firm-wide risk management practices in large part
distinguished companies that experienced the greatest material
financial distress during the financial crisis from those that
weathered the crisis.
Most commenters were silent on asset valuation methodologies except
for one, which stated that valuation methodologies should not be a
material factor in the assessment process.
12. During the financial crisis, the U.S. Government instituted a
variety of programs that served to strengthen the resiliency of the
financial system. Nonbank financial companies participated in several
of these programs. How should the Council consider the Government's
extension of financial assistance to nonbank financial companies in
designating companies?
Some commenters argued that the extension of financial assistance
to nonbank financial companies should not be considered determinative
of which entities present systemic risk. Instead, these commenters
argued that the assistance must be viewed in light of the facts and
circumstances under which it was provided; whether the assistance was
drawn upon; whether such assistance was permitted to expire;

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and any new regulatory changes that have been implemented since the
assistance was initially extended.
Other commenters argued that those entities receiving federal
assistance should be held to a higher standard of supervision and
oversight, and that the receipt of federal assistance should serve as a
threshold question for the Council in evaluating nonbank financial
institutions. One commenter in particular stated that nonbank financial
institutions that received government support during the crisis should
automatically be regulated under section 113 from the outset.
13. Please provide examples of best practices used by your
organization or in your industry in evaluating and considering various
types of risks that could be systemic in nature.
a. How do you approach analyzing and quantifying interdependencies
with other organizations?
b. When and if important counterparties or linkages are identified,
how do you evaluate and quantify the risks that a firm is exposed to?
c. What other types of information would be effective in helping to
identify and avoid excessive risk concentrations that could ultimately
lead to systemic instability?
Responses to this question were few in number, but generally
grouped the types of risk they faced into credit or counterparty risk,
and enterprise risk. Suggested approaches in analyzing and managing
risk were specific to those two categories, and within them, to
industry type.
14. Should the Council define ``material financial distress'' or
``financial stability''? If so, what factors should the Council
consider in developing those definitions?
There was broad consensus that the Council should define ``material
financial distress'' and ``financial stability.''
Commenters suggested that a company be considered to be in
``material financial distress'' if it has substantial difficulty
meeting its financial obligations to its creditors and counterparties,
or faces capital impairment or insolvency. One commenter warned against
keeping the concept of financial distress so broad as to cover
significant problems with a company's business model, a history of
financial losses that have not resulted in failure of the company, or a
significant loss of market value or market share of the company. This
commenter suggested that such concerns should be resolved through
normal operations of the financial markets.
Commenters suggested that ``financial stability'' means a condition
in which financial intermediaries, markets and market infrastructures
can withstand shocks to the financial system. Others suggested that
``financial stability'' is characterized by a stable market defined as
when there are stable prices, an efficient allocation of capital,
availability of short-term funding, and low rates of failure of
financial intermediaries and markets. Commenters also encouraged the
Council to look to widely-used definitions of ``financial stability''
used by the Financial Stability Board, the International Monetary Fund,
the European Central Bank, and the Bank of England.
15. What other risk-related considerations should the Council take
into account when establishing a framework for designating nonbank
financial companies?
Other suggested risk-related considerations are as follows:
Legislative intent. Some commenters argued that a
determination should be based on the legislative history and intent of
the DFA, and whether the treatment of certain industries was discussed
when the legislation was drafted.
Cyclicality. One commenter noted that those least affected
by the cyclical nature of the economy are less likely to be
systemically important. This commenter argued that risks are greatest
at peaks and troughs of economic and market cycles and there is a need
for diverse and countercyclical behavior.
Holistic/enterprise-view of risk management. Some
commenters asserted that an evaluation of a firm should take a holistic
view of the enterprise and consider how it is managing risks. That
analysis should consider the characteristics of the firm, its culture,
risk tolerance and its risk management to help determine the
probability of its material distress. The four firm-wide risk
management practices that commenters identified as differentiating good
from bad performance were: (a) Effective firm-wide risk identification
and analysis; (b) consistent application of independent and rigorous
valuation practices across the firm; (c) effective management of
funding liquidity, capital, and the balance sheet; and (d) informative
and responsive risk measurement and management reporting.
Considering the cost of designation. Some commenters
argued that designation of a nonbank would subject it to regulatory
burdens without providing the company the same benefits that a
regulated bank would enjoy. Thus, the commenters argued, the cost of
designation could reduce the competitiveness of the designated nonbank
institution and could also potentially cause an exit or flight of
businesses to less regulated products or jurisdictions.

III. Overview of Proposed Rule

The proposed rule lays out the framework that the Council proposes
to use to determine whether a nonbank financial company could pose a
threat to the financial stability of the United States. It also
implements the process set forth in the DFA that the Council would use
when considering whether to subject a firm to supervision by the Board
of Governors and prudential standards.

A. Considerations for Determination

As discussed in Part I, there were several themes in the ANPR
commentary regarding how the Council should analyze these factors in
the designation process.
One broad theme was that any analytical framework for designation
should be tailored to the type of industry in which a firm operates,
and that different metrics are needed for different industries. From
the commentary provided, there was clear support for the need to weigh
qualitative considerations in addition to quantitative factors.
With respect to the criteria for designation, one theme was that
that the Council should give significant weight to the following
factors in making a determination: leverage, liquidity risk,
interconnectedness, degree of primary regulation, and substitutability.
Further, responses emphasized the importance of looking at the scope,
size and scale of nonbank financial companies through a variety of
lenses to best understand the underlying risk.
Commenters also noted leverage for its importance and encouraged
the Council to distinguish between different types and sources of
leverage (secured versus unsecured; short-term versus long-term;
operational versus financial), and to use varying standards for
measuring leverage by type of business.
Almost all commenters emphasized the importance of examining the
liquidity profile of a firm, taking into consideration the quality and
tenor of funding, diversity and mix of the sources of funding, the
strength of the liquidity providers, and the degree of maturity
mismatch. Many also suggested risk-weighting liabilities to better
evaluate the quality and strength of the liquidity sources.

[[Page 4560]]

Commenters viewed both the degree to which a firm is already
subjected to regulation or consolidated regulation, as well as the
substitutability of an institution and its activities, as important
factors in making a determination. It was generally argued that firms
already subject to prudential regulation are less likely to pose
systemic risk than those that operate outside a formal regulatory
umbrella.

B. Statutory and Analytical Framework for Designations

As discussed previously, section 113 of the DFA provides the
Council the authority to require that a nonbank financial company be
supervised by the Board of Governors and subject to prudential
standards if the Council determines that material financial distress at
such a firm, or the nature, scope, size, scale, concentration,
interconnectedness, or mix of the activities of the firm, could pose a
threat to the financial stability of the United States.
Pursuant to the provisions of the DFA, the considerations that the
Council must use in making a determination on whether the company
should be subject to supervision by the Board of Governors are as
follows:
(A) The extent of the leverage of the company;
(B) The extent and nature of the off-balance-sheet exposures of the
company;
(C) The extent and nature of the transactions and relationships of
the company with other significant nonbank financial companies and
significant bank holding companies;
(D) The importance of the company as a source of credit for
households, businesses, and State and local governments and as a source
of liquidity for the United States financial system;
(E) The importance of the company as a source of credit for low-
income, minority, or underserved communities, and the impact that the
failure of such company would have on the availability of credit in
such communities;
(F) The extent to which assets are managed rather than owned by the
company, and the extent to which ownership of assets under management
is diffuse;
(G) The nature, scope, size, scale, concentration,
interconnectedness, and mix of the activities of the company;
(H) The degree to which the company is already regulated by 1 or
more primary financial regulatory agencies;
(I) The amount and nature of the financial assets of the company;
(J) The amount and types of the liabilities of the company,
including the degree of reliance on short-term funding; and
(K) Any other risk-related factors that the Council deems
appropriate.
The Council shall consider similar factors in determining whether a
foreign nonbank financial company should be designated. In addition,
the Council shall consider the factors relevant to a U.S. or foreign
nonbank financial company in determining whether a U.S. or foreign
company, respectively, should be designated for supervision by the
Board of Governors under the special anti-evasion provisions in section
113(c) of the DFA.
The proposed rule incorporates each of the statutory factors that
must be considered in determining whether a U.S. or foreign nonbank
financial company should be designated. The Council proposes to use a
framework for applying the statutory considerations to its analysis. In
developing the proposed framework, the Council has taken account of the
comments received on the ANPR. If adopted in a final rule, this
framework would be used by the Council in meeting its statutory
obligations of assessing the threat a nonbank financial company may
pose to the financial stability of the United States, taking into
consideration the factors set forth in the DFA. The proposed framework
for assessing systemic importance is organized around six broad
categories. Each of the proposed categories reflects a different
dimension of a firm's potential to experience material financial
distress, as well as the nature, scope, size, scale, concentration,
interconnectedness and mix of the company's activities. The six
categories are as follows:
1. Size;
2. Lack of substitutes for the financial services and products the
company provides;
3. Interconnectedness with other financial firms;
4. Leverage;
5. Liquidity risk and maturity mismatch; and
6. Existing regulatory scrutiny
Each of the specific statutory factors is relevant to, and would be
considered as part of, one or more categories within this analytical
framework. In addition, the Council would consider any other risk-
related factors that the Council deems appropriate, either by
regulation or on a case-by-case basis, under section 113(a)(2)(K) or
(b)(2)(K) in accordance with this analytical framework. The same
categories and framework would be used in the case of a foreign nonbank
financial company, although the statutory factors included as part of
this analysis would be adjusted to reflect the focus of certain of
those factors on the U.S. operations of the foreign nonbank financial
company.
The six categories can be divided into two groups. The criteria in
the first group--size, lack of substitutes, and interconnectedness--
seek to assess the potential for spillovers from the firm's distress to
the broader financial system or real economy. Firms that are larger,
that provide critical financial services for which there are few
substitutes, and that are highly interconnected with other financial
firms or markets are more likely to create spillovers if they fall into
financial distress and hence pose a greater systemic threat to the
financial stability of the United States. The criteria in the second
group--leverage, liquidity risk and maturity mismatch, and existing
regulatory scrutiny--seek to assess how vulnerable a company is to
financial distress. Firms that are highly leveraged, that have a high
degree of liquidity risk or maturity mismatch, and that are under
little or no regulatory scrutiny are more vulnerable to financial
distress and hence pose a greater systemic threat to the financial
stability of the United States.
The Council would evaluate nonbank financial companies in each of
the six categories, using quantitative metrics where possible. The
Council expects to use its judgment, informed by data on the six
categories, to determine whether a firm should be designated as
systemically important and supervised by the Board of Governors. This
approach incorporates both quantitative measures and qualitative
judgments. As part of the qualitative judgment, the Council would
consider potential spillovers that could occur from financial distress
or failure of the company in normal times, as well as those that could
occur in times of widespread financial stress.
As noted above, each of the statutory factors in sections 113(a)(2)
and (b)(2) of the DFA would be considered as part of one or more the
six analytical categories. This is reflected in the following table,
using the factors relevant to a U.S. nonbank financial company for
illustrative purposes.\2\
---------------------------------------------------------------------------

\2\ The corresponding statutory factors for a foreign nonbank
financial company would be considered under the relevant category or
categories indicated in the table.

[[Page 4561]]

------------------------------------------------------------------------
Category or categories in which
Statutory factors this factor would be considered
------------------------------------------------------------------------
(A) the extent of the leverage of the Leverage.
company;.
(B) the extent and nature of the off- Size; Interconnectedness.
balance-sheet exposures of the
company;.
(C) the extent and nature of the Interconnectedness.
transactions and relationships of the
company with other significant nonbank
financial companies and significant
bank holding companies;.
(D) the importance of the company as a Size; Lack of substitutes.
source of credit for households,
businesses, and State and local
governments and as a source of
liquidity for the United States
financial system;.
(E) the importance of the company as a Lack of substitutes.
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;.
(F) the extent to which assets are Size; Interconnectedness.
managed rather than owned by the
company, and the extent to which
ownership of assets under management
is diffuse;.
(G) the nature, scope, size, scale, Size; Lack of substitutes;
concentration, interconnectedness, and Interconnectedness.
mix of the activities of the company;.
(H) the degree to which the company is Existing regulatory scrutiny.
already regulated by 1 or more primary
financial regulatory agencies;.
(I) the amount and nature of the Size; Interconnectedness.
financial assets of the company;.
(J) the amount and types of the Liquidity risk and maturity
liabilities of the company, including mismatch; Size;
the degree of reliance on short-term Interconnectedness.
funding;.
(K) any other risk-related factors that Appropriate category or
the Council deems appropriate. categories based on the nature
of the additional risk-related
factor.
------------------------------------------------------------------------

Any determinations of the Council made under the proposed rule
using this analytical framework would be based on whether the firm's
material financial distress, or the nature, scope, size, scale,
concentration, interconnectedness or mix of its activities, could pose
a threat to the financial stability of the United States in accordance
with sections 113(a)(1) and (b)(1), as relevant.
Under the proposal, the Council would use the same six categories
embodied in the framework in assessing the systemic importance of
companies in different industry sectors, although the application of
the framework would be adapted for the risks presented by a particular
industry sector and the business models present in each sector. For
example, the metrics that are best suited to measure the six categories
of systemic importance likely will differ across industry sectors. The
Council will review these metrics on a periodic basis and revise them
as appropriate.
The proposed framework is consistent with the international
approach to identifying systemically important firms that is currently
under development by the Basel Committee on Banking Supervision and the
Financial Stability Board, reducing concerns about an unlevel global
playing field and regulatory arbitrage. Receipt of previous federal
assistance as a criterion to identify a systemically significant firm
will not be considered as a separate criteria in the proposed framework
as that assistance should be viewed in light of the facts and
circumstances under which it was provided. Furthermore, the framework
described above incorporates the concepts of ``material financial
distress'' and ``financial stability'' without the need to explicitly
define them in the rule.
The Council expects to begin assessing the systemic importance of
nonbank financial companies under the proposed framework shortly after
adopting a final rule. Subsequently, and on a regular basis, the
Council expects to screen nonbank financial companies using the six
categories to identify companies whose material financial distress, or
the nature, scope, size, scale, concentration, interconnectedness, or
mix of activities, could pose a threat to the financial stability of
the United States. In addition, under the DFA, the Council must review
each designation of a nonbank financial company at least once a year.
The review would follow the same framework as the initial designation
and would consider current data on the six categories described above.

C. Other Aspects of Proposed Rule

The proposed rule also implements the other provisions of section
113 of the DFA, including (i) the anti-evasion authority of the Council
set forth in section 113(c) of the DFA; (ii) the provisions governing
notice of, and the opportunity for a hearing on, a proposed
determination; and (iii) the provisions regarding consultation,
coordination and judicial review in connection with a determination.
Given the importance of this rulemaking and the fact that the
Council already published and received comment on the ANPR, we are
providing a 30-day comment period for this NPR.

IV. Regulatory Flexibility Act

It is hereby certified that this rule will not have a significant
economic impact on a substantial number of small entities. The rule
would apply only to nonbank financial companies whose failure could
pose a threat to the financial stability of the United States. Size is
an important factor, although not the exclusive factor, in assessing
whether a company's failure could pose a threat to financial stability.
The Council does not expect the rule to directly affect a substantial
number of small entities. Accordingly, a regulatory flexibility
analysis under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) is
not required.

V. Paperwork Reduction Act

The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collection of information should be sent to
the Office of Management and Budget, Attn: Desk Officer for the
Financial Stability Oversight Council, Office of Information and
Regulatory Affairs, Washington, DC 20503, with copies to Michael Tae,
Department of the Treasury, Washington, DC 20220. Comments on the
collection of information must be received by March 28, 2011. Comments
are specifically requested concerning:

[[Page 4562]]

Whether the proposed collection of information is necessary for the
proper performance of the functions of the Council, including whether
the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collection of information in these proposed regulations are
found in Sec. 1310.20, Sec. 1310.21 and Sec. 1310.22.
Estimated total annual reporting burden: 500 hours.
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.

VI. Executive Order 12866

It has been determined that this regulation is a significant
regulatory action as defined in section 3 of Executive Order 12866
(``Regulatory Planning and Review'') and it has been reviewed by the
Office of Management and Budget.

List of Subjects in 12 CFR Part 1310

Nonbank financial companies.

Financial Stability Oversight Council

Authority and Issuance

For the reasons set forth in the preamble, the Financial Stability
Oversight Council proposes to establish a new chapter XIII consisting
of part 1310 in Title 12 of the Code of Federal Regulations, to read as
follows:

CHAPTER XIII--FINANCIAL STABILITY OVERSIGHT COUNCIL

PART 1310--SUPERVISION AND REGULATION OF CERTAIN NONBANK FINANCIAL
COMPANIES

Subpart A--General
Sec.
1310.1 Authority and purpose.
1310.2 Definitions.
Subpart B--Determinations
1310.10 Council determination regarding U.S. nonbank financial
companies.
1310.11 Council determination regarding foreign nonbank financial
companies.
1310.12 Anti-evasion provision.
Subpart C--Information Collection and Hearings
1310.20 Council information collection and coordination.
1310.21 Notice and opportunity for a hearing and final
determination.
1310.22 Emergency exception to Sec. 1310.21.
1310.23 Council reevaluation and rescission of determinations.
1310.24 Judicial review of Council's final determination.

Authority: 12 U.S.C. 5321; 12 U.S.C. 5322; 12 U.S.C. 5323.

Subpart A--General

Sec. 1310.1 Authority and purpose.

(a) Authority. This part is issued by the Financial Stability
Oversight Council (Council) under sections 111, 112 and 113 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act'') (12 U.S.C. 5321, 5322 and 5323).
(b) Purpose. The principal purposes of this part are to set forth
the standards and procedures governing Council determinations whether
to require that a nonbank financial company be supervised by the Board
of Governors and be subject to prudential standards because the company
could pose a threat to the financial stability of the United States.

Sec. 1310.2 Definitions.

The terms used in this part have the following meanings:
Board of Governors. The term `Board of Governors' means the Board
of Governors of the Federal Reserve System.
Commission. The term ``Commission'' means the Securities and
Exchange Commission, except in the context of the Commodity Futures
Trading Commission.
Council. The term `Council' means the Financial Stability Oversight
Council.
Foreign nonbank financial company. The term `foreign nonbank
financial company' means a company (other than a company that is, or is
treated in the United States as, a bank holding company) that is--
(1) Incorporated or organized in a country other than the United
States; and
(2) Predominantly engaged in financial activities as defined by
regulation of the Board of Governors under section 102(a)(6) of the
Dodd-Frank Act, including through a branch in the United States.
Member agency. The term `member agency' means an agency represented
by a voting member of the Council.
Primary financial regulatory agency. The term `primary financial
regulatory agency' means--
(1) The appropriate Federal banking agency, with respect to
institutions described in section 3(q) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(q)), except to the extent that an institution is or
the activities of an institution are otherwise described in paragraphs
(2), (3), (4), or (5) of this definition;
(2) The Securities and Exchange Commission, with respect to--
(i) Any broker or dealer that is registered with the Commission
under the Securities Exchange Act of 1934, with respect to the
activities of the broker or dealer that require the broker or dealer to
be registered under that Act;
(ii) Any investment company that is registered with the Commission
under the Investment Company Act of 1940, with respect to the
activities of the investment company that require the investment
company to be registered under that Act;
(iii) Any investment adviser that is registered with the Commission
under the Investment Advisers Act of 1940, with respect to the
investment advisory activities of such company and activities that are
incidental to such advisory activities;
(iv) Any clearing agency registered with the Commission under the
Securities Exchange Act of 1934, with respect to the activities of the
clearing agency that require the agency to be registered under such
Act;
(v) Any nationally recognized statistical rating organization
registered with the Commission under the Securities Exchange Act of
1934;
(vi) Any transfer agent registered with the Commission under the
Securities Exchange Act of 1934;
(vii) Any exchange registered as a national securities exchange
with the Commission under the Securities Exchange Act of 1934;
(viii) Any national securities association registered with the
Commission under the Securities Exchange Act of 1934;
(ix) Any securities information processor registered with the
Commission under the Securities Exchange Act of 1934;
(x) The Municipal Securities Rulemaking Board established under the
Securities Exchange Act of 1934;
(xi) The Public Company Accounting Oversight Board established
under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7211 et seq.);
(xii) The Securities Investor Protection Corporation established
under the Securities Investor Protection

[[Page 4563]]

Act of 1970 (15 U.S.C. 78aaa et seq.); and
(xiii) Any security-based swap execution facility, security-based
swap data repository, security-based swap dealer or major security-
based swap participant registered with the Commission under the
Securities Exchange Act of 1934, with respect to the security-based
swap activities of the person that require such person to be registered
under such Act;
(3) The Commodity Futures Trading Commission, with respect to--
(i) Any futures commission merchant registered with the Commodity
Futures Trading Commission under the Commodity Exchange Act (7 U.S.C. 1
et seq.), with respect to the activities of the futures commission
merchant that require the futures commission merchant to be registered
under that Act;
(ii) Any commodity pool operator registered with the Commodity
Futures Trading Commission under the Commodity Exchange Act (7 U.S.C. 1
et seq.), with respect to the activities of the commodity pool operator
that require the commodity pool operator to be registered under that
Act, or a commodity pool, as defined in that Act;
(iii) Any commodity trading advisor or introducing broker
registered with the Commodity Futures Trading Commission under the
Commodity Exchange Act (7 U.S.C. 1 et seq.), with respect to the
activities of the commodity trading advisor or introducing broker that
require the commodity trading adviser or introducing broker to be
registered under that Act;
(iv) Any derivatives clearing organization registered with the
Commodity Futures Trading Commission under the Commodity Exchange Act
(7 U.S.C. 1 et seq.), with respect to the activities of the derivatives
clearing organization that require the derivatives clearing
organization to be registered under that Act;
(v) Any board of trade designated as a contract market by the
Commodity Futures Trading Commission under the Commodity Exchange Act
(7 U.S.C. 1 et seq.);
(vi) Any futures association registered with the Commodity Futures
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et
seq.);
(vii) Any retail foreign exchange dealer registered with the
Commodity Futures Trading Commission under the Commodity Exchange Act
(7 U.S.C. 1 et seq.), with respect to the activities of the retail
foreign exchange dealer that require the retail foreign exchange dealer
to be registered under that Act;
(viii) Any swap execution facility, swap data repository, swap
dealer, or major swap participant registered with the Commodity Futures
Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et
seq.) with respect to the swap activities of the person that require
such person to be registered under that Act; and
(ix) Any registered entity under the Commodity Exchange Act (7
U.S.C. 1 et seq.), with respect to the activities of the registered
entity that require the registered entity to be registered under that
Act;
(4) The State insurance authority of the State in which an
insurance company is domiciled, with respect to the insurance
activities and activities that are incidental to such insurance
activities of an insurance company that is subject to supervision by
the State insurance authority under State insurance law; and
(5) The Federal Housing Finance Agency, with respect to Federal
Home Loan Banks or the Federal Home Loan Bank System, and with respect
to the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation.
Prudential standards. The term ``prudential standards'' means
enhanced supervision and regulatory standards developed by the Board of
Governors under section 165 of the Dodd-Frank Act.
Significant companies. The terms ``significant nonbank financial
company'' and ``significant bank holding company'' have the meanings
ascribed to such terms by regulation of the Board of Governors.
U.S. nonbank financial company. The term `U.S. nonbank financial
company' means a company (other than a bank holding company, a Farm
Credit System institution chartered and subject to the provisions of
the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.), or a national
securities exchange (or parent thereof), clearing agency (or parent
thereof, unless the parent is a bank holding company), security-based
swap execution facility, or security-based swap data repository
registered with the Commission, or a board of trade designated as a
contract market (or parent thereof), or a derivatives clearing
organization (or parent thereof, unless the parent is a bank holding
company), swap execution facility or a swap data repository registered
with the Commodity Futures Trading Commission), that is--
(1) Incorporated or organized under the laws of the United States
or any State; and
(2) Predominantly engaged in financial activities as defined by
regulation of the Board of Governors under section 102(a)(6) of the
Dodd-Frank Act.

Subpart B--Determinations

Sec. 1310.10 Council determination regarding U.S. nonbank financial
companies.

(a) Determination. The Council may determine that a U.S. nonbank
financial company shall be supervised by the Board of Governors and
shall be subject to prudential standards if the Council determines that
material financial distress at the U.S. nonbank financial company, or
the nature, scope, size, scale, concentration, interconnectedness, or
mix of the activities of the U.S. nonbank financial company, could pose
a threat to the financial stability of the United States.
(b) Vote required. Any proposed or final determination under
paragraph (a) of this section shall--
(1) Be made by the Council and may not be delegated by the Council;
and
(2) Require 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.
(c) Considerations. In making a proposed or final determination
with respect to a U.S. nonbank financial company under this section,
the Council shall consider:
(1) The extent of the leverage of the company and its subsidiaries;
(2) The extent and nature of the off-balance-sheet exposures of the
company and its subsidiaries;
(3) The extent and nature of the transactions and relationships of
the company and its subsidiaries with other significant nonbank
financial companies and significant bank holding companies;
(4) The importance of the company and its subsidiaries as a source
of credit for households, businesses, and State and local governments
and as a source of liquidity for the United States financial system;
(5) The importance of the company and its subsidiaries 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;
(6) The extent to which assets are managed rather than owned by the
company and its subsidiaries, and the extent to which ownership of
assets under management is diffuse;

[[Page 4564]]

(7) The nature, scope, size, scale, concentration,
interconnectedness, and mix of the activities of the company and its
subsidiaries;
(8) The degree to which the company and its subsidiaries are
already regulated by 1 or more primary financial regulatory agencies;
(9) The amount and nature of the financial assets of the company
and its subsidiaries;
(10) The amount and types of the liabilities of the company and its
subsidiaries, including the degree of reliance on short-term funding;
and
(11) Any other risk-related factor that the Council deems
appropriate, either by regulation or on a case-by-case basis.
(d) Consultations. The Council shall consult with the primary
financial regulatory agency, if any, for each nonbank financial company
that is being considered for supervision by the Board of Governors
under this Sec. 1310.10 and with the primary financial regulatory
agency, if any, of any subsidiary of such nonbank financial company
before the Council makes any final determination under this Sec.
1310.10 with respect to such nonbank financial company.
(e) Back-up examination by the Board of Governors. (1) If the
Council is unable to determine whether the financial activities of a
U.S. nonbank financial company, including a U.S. nonbank financial
company that is owned by a foreign nonbank financial company, pose a
threat to the financial stability of the United States, based on
information or reports otherwise obtained by the Council, including
discussions with management and publicly available information, the
Council may request the Board of Governors, and the Board of Governors
is authorized, to conduct an examination of the U.S. nonbank financial
company and its subsidiaries for the sole purpose of determining
whether the nonbank financial company or foreign nonbank financial
company should be designated under this section or Sec. 1310.11, as
applicable, for supervision by the Board of Governors.
(2) The Council shall review the results of the examination of a
nonbank financial company (including its subsidiaries) conducted by the
Board of Governors under this subsection in connection with any
determination by the Council under paragraph (a) of this section or
Sec. 1310.11 with respect to the company.
(f) International coordination. In exercising its duties under this
section with respect to cross-border activities and markets the
Council, acting through its Chairperson or other authorized designee,
shall consult with appropriate foreign regulatory authorities, to the
extent appropriate.

Sec. 1310.11 Council determination regarding foreign nonbank
financial companies.

(a) Determination. The Council may determine that a foreign nonbank
financial company shall be supervised by the Board of Governors and
shall be subject to prudential standards if the Council determines that
material financial distress at the foreign nonbank financial company,
or the nature, scope, size, scale, concentration, interconnectedness,
or mix of the activities of the foreign nonbank financial company,
could pose a threat to the financial stability of the United States.
(b) Vote required. Any proposed or final determination under
paragraph (a) of this section shall--
(1) Be made by the Council and may not be delegated by the Council;
and
(2) Require 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.
(c) Considerations. In making a proposed or final determination
under this section with respect to a foreign nonbank financial company,
the Council shall consider:
(1) The extent of the leverage of the company and its subsidiaries;
(2) The extent and nature of the United States related off-balance-
sheet exposures of the company and its subsidiaries;
(3) The extent and nature of the transactions and relationships of
the company and its subsidiaries with other significant nonbank
financial companies and significant bank holding companies;
(4) The importance of the company and its subsidiaries as a source
of credit for United States households, businesses, and State and local
governments and as a source of liquidity for the United States
financial system;
(5) The importance of the company and its subsidiaries as a source
of credit for low-income, minority, or underserved communities in the
United States, and the impact that the failure of such company would
have on the availability of credit in such communities;
(6) The extent to which assets are managed rather than owned by the
company and its subsidiaries and the extent to which ownership of
assets under management is diffuse;
(7) The nature, scope, size, scale, concentration,
interconnectedness, and mix of the activities of the company and its
subsidiaries;
(8) The extent to which the company and its subsidiaries are
subject to prudential standards on a consolidated basis in the
company's home country that are administered and enforced by a
comparable foreign supervisory authority;
(9) The amount and nature of the United States financial assets of
the company its subsidiaries;
(10) The amount and nature of the liabilities of the company and
its subsidiaries used to fund activities and operations in the United
States, including the degree of reliance on short-term funding; and;
(11) Any other risk-related factor that the Council deems
appropriate, either by regulation or on a case-by-case basis.
(d) Consultation. The Council shall consult with the primary
financial regulatory agency, if any, for each foreign nonbank financial
company that is being considered for supervision by the Board of
Governors under this Sec. 1310.11 and with the primary financial
regulatory agency, if any, of any subsidiary of such foreign nonbank
financial company before the Council makes any final determination
under this Sec. 1310.11 with respect to such foreign nonbank financial
company.
(e) International coordination. In exercising its duties under this
section with respect to foreign nonbank financial companies, the
Council, acting through its Chairperson or other authorized designee,
shall consult with appropriate foreign regulatory authorities, to the
extent appropriate.

Sec. 1310.12 Anti-evasion provision.

(a) Determinations. In order to avoid evasion of this part, the
Council, on its own initiative or at the request of the Board of
Governors, may require that the financial activities of a company shall
be supervised by the Board of Governors and subject to prudential
standards if the Council determines that:
(1) Material financial distress related to, or the nature, scope,
size, scale, concentration, interconnectedness, or mix of, the
financial activities conducted directly or indirectly by a company
incorporated or organized under the laws of the United States or any
State or the financial activities in the United States of a company
incorporated or organized in a country other than the United States
would pose a threat to the financial stability of the United States,
based on consideration of the factors in--
(i) Section 1310.10(b) if the company is incorporated or organized
under the laws of the United States or any State; or
(ii) Section 1310.11(b) if the company is incorporated or organized
in a

[[Page 4565]]

country other than the United States; and
(2) The company is organized or operates in such a manner as to
evade the application of Title I of the Dodd-Frank Act or this part;
(b) Vote required. Any proposed or final determination under
paragraph (a) of this section shall--
(1) Be made by the Council and may not be delegated by the Council;
and
(2) Require 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.
(c) Establishment of an intermediate holding company. (1) Upon a
determination under this section, the company that is the subject of
the determination may establish, subject to such regulations, orders
and guidance as the Board of Governors may issue, an intermediate
holding company in which the financial activities of such company and
its subsidiaries shall be conducted in compliance with any regulations
or guidance provided by the Board of Governors. Such intermediate
holding company shall be subject to the supervision of the Board of
Governors and to prudential standards as if the intermediate holding
company were a nonbank financial company supervised by the Board of
Governors.
(2) To facilitate the supervision of the financial activities
conducted by a company that is the subject of a determination under
this section, the Board of Governors may require the company to
establish, subject to such regulations, orders and guidance as the
Board of Governors may issue, an intermediate holding company that will
be subject to the supervision of the Board of Governors and to
prudential standards, as if the intermediate holding company were a
nonbank financial company supervised by the Board of Governors.
(d) Definition of covered financial activities. For purposes of
this section, the term `financial activities'--
(1) Means activities that are financial in nature (as defined in
section 4(k) of the Bank Holding Company Act of 1956);
(2) Includes the ownership or control of one or more insured
depository institutions; and
(3) Does not include internal financial activities conducted for
the company or any affiliate thereof, including internal treasury,
investment, and employee benefit functions, as such activities may be
defined by the Board of Governors.
(e) Consultation. The Council shall consult with the primary
financial regulatory agency, if any, for each company or subsidiary of
a company that is being considered for supervision by the Board of
Governors under this section before the Council makes any final
determination with respect to such company.
(f) International coordination. In exercising its duties under this
section with respect to a company that is incorporated or organized in
a country other than the United States, the Council, acting through its
Chairperson or other authorized designee, shall consult with
appropriate foreign regulatory authorities, to the extent appropriate.

Subpart C--Information Collection and Hearings

Sec. 1310.20 Council information collection and coordination.

(a) Information Collection regarding Nonbank Financial Companies
from the Office of Financial Research, Member Agencies, the Federal
Insurance Office, and Other Federal and State Financial Regulatory
Agencies. The Council may receive, and may request the submission of,
such data or information from the Office of Financial Research, member
agencies, the Federal Insurance Office, and other Federal and State
financial regulatory agencies as the Council deems necessary or
appropriate to carry out the duties of the Council under Title I of the
Dodd-Frank Act or this part.
(b) Information Collection from Nonbank Financial Companies. (1)
The Council may, to the extent the Council determines appropriate,
direct the Office of Financial Research to require the submission of
periodic, special or other reports concerning one or more nonbank
financial companies, including a nonbank financial company that is
being considered for potential designation by the Council under Sec.
1310.10, Sec. 1310.11, or Sec. 1310.12, for the purpose of assessing
whether a nonbank financial company poses a threat to the financial
stability of the United States.
(2) Before requiring the submission of reports under this paragraph
(b) of this section from any nonbank financial company that is
regulated by a member agency or any primary financial regulatory
agency, the Council, acting through the Office of Financial Research,
shall coordinate with such agency or agencies and shall, whenever
possible, rely on information available from the Office of Financial
Research or such agency or agencies.
(3) Before requiring the submission of reports under this paragraph
(b) from a company that is a foreign nonbank financial company, the
Council shall, acting through the Office of Financial Research, to the
extent appropriate, consult with the appropriate foreign regulator of
such company and, whenever possible, rely on information already being
collected by such foreign regulator, with English translation.

Sec. 1310.21 Notice and opportunity for a hearing and final
determination.

(a) Written notice of Council consideration of determination.
Before providing a nonbank financial company written notice of a
proposed determination under paragraph (b) of this section, the Council
shall provide the nonbank financial company--
(1) Written notice that the Council is considering whether to make
a proposed determination with respect to the company under this part;
and
(2) An opportunity to submit written materials, within such time as
the Council determines to be appropriate, to the Council concerning
whether, in the company's view, material financial distress at the
company, or the nature, scope, size, scale, concentration,
interconnectedness, or mix of the activities of the company, could pose
a threat to the financial stability of the United States. The Council
shall fix a time (not later than 30 days after the Council's notice
under this subsection) and place for the nonbank financial company to
submit written materials. The Council, in its discretion, may also
provide the nonbank financial company additional time to submit written
materials under this paragraph.
(b) Written notice of proposed determination. If the Council
determines under Sec. 1310.10, Sec. 1310.11, or Sec. 1310.12 that a
nonbank financial company or the financial activities of a company
should be supervised by the Board of Governors and be subject to
prudential standards, the Council shall provide to the nonbank
financial company or company written notice of the proposed
determination of the Council, including an explanation of the basis of
the proposed determination of the Council.
(c) Hearing. (1) Not later than 30 days after the date of receipt
of the notice of a proposed determination under paragraph (b) of this
section, the nonbank financial company or company may request, in
writing, an opportunity for a written or oral hearing before the
Council to contest the proposed determination.
(2) Any such request from a nonbank financial company or company
for an opportunity for a written or oral hearing before the Council
shall be transmitted to the Council's Legal Counsel.

[[Page 4566]]

(3) Upon receipt of a timely request under this paragraph (c), the
Council shall fix a time (not later than 30 days after the date of
receipt of the request) and place at which such company may appear,
personally or through counsel, to submit written materials (or, at the
sole discretion of the Council, oral testimony and oral argument)
concerning whether material financial distress at the company, or the
nature, scope, size, scale, concentration, interconnectedness, or mix
of the activities of the company, could pose a threat to the financial
stability of the United States.
(d) Final determination. If the nonbank financial company or
company makes a timely request for a hearing under paragraph (c) of
this section, the Council shall, not later than 60 days after the date
of the hearing under paragraph (c)--
(1) Make a final determination under Sec. 1310.10, Sec. 1310.11,
or Sec. 1310.12 regarding whether the nonbank financial company or the
financial activities of the company shall be supervised by the Board of
Governors and subject to prudential standards; and
(2) Notify the nonbank financial company or company, in writing, of
the final determination of the Council, which shall contain a statement
of the basis for the decision of the Council.
(e) No hearing requested. If a nonbank financial company or company
does not make a timely request for a hearing under paragraph (c) of
this section, the Council shall, not later than 10 days after the date
by which the company could have requested a hearing under paragraph
(c)--
(1) Make a final determination under Sec. 1310.10, Sec. 1310.11,
or Sec. 1310.12 regarding whether the nonbank financial company or the
financial activities of the company shall be supervised by the Board of
Governors and subject to prudential standards; and
(2) Notify the nonbank financial company or company, in writing, of
the final determination of the Council, which shall contain a statement
of the basis for the decision of the Council.

Sec. 1310.22 Emergency exception to Sec. 1310.21.

(a) Exception to Sec. 1310.21. Notwithstanding Sec. 1310.21, the
Council may waive or modify any or all of the notice, hearing and other
requirements of Sec. 1310.21 with respect to a nonbank financial
company or company if--
(1) The Council determines that such waiver or modification is
necessary or appropriate to prevent or mitigate threats posed by the
nonbank financial company or the financial activities of the company,
as appropriate, to the financial stability of the United States;
(2) The Council provides notice of the waiver or modification under
this section and the proposed determination of the Council under Sec.
1310.10, Sec. 1310.11, or Sec. 1310.12 to the nonbank financial
company or company as soon as practicable, but not later than 24 hours
after the waiver or modification is granted.
(b) Opportunity for hearing. (1) If the Council pursuant to
paragraph (a) of this section waives or modifies the requirements of
Sec. 1310.21 with respect to a nonbank financial company or company,
the Council shall allow the nonbank financial company or company, not
later than 10 days after the date of receipt of the notice described in
paragraph (a)(2) of this section, to request, in writing, an
opportunity for a written or oral hearing before the Council to
contest--
(i) The waiver or modification under this section; and
(ii) The proposed determination of the Council under Sec. 1310.10,
Sec. 1310.11, or Sec. 1310.12, as applicable
(2) Any request from a nonbank financial company or other company
under paragraph (b)(1) of this section for an opportunity for a written
or oral hearing before the Council shall be transmitted to the
Council's Legal Counsel.
(3) Upon receipt of a timely request under paragraph (b)(2) of this
section, the Council shall fix a time (not later than 15 days after the
date of receipt of the request) and place at which the nonbank
financial company may appear, personally or through counsel, to submit
written materials (or, at the sole discretion of the Council, oral
testimony and oral argument) regarding--
(i) The waiver or modification granted under this section; and
(ii) Whether material financial distress at the company, or the
nature, scope, size, scale, concentration, interconnectedness, or mix
of the activities of the company, could pose a threat to the financial
stability of the United States.
(c) Notice of final determination. (1) If the nonbank financial
company or other company makes a timely request for a hearing under
paragraph (b) of this section, the Council shall, not later than 30
days after the date of the hearing under paragraph (b)--
(i) Make a final determination regarding--
(A) Any waiver or modifications under this Sec. 1310.22; and
(B) Whether the nonbank financial company or the financial
activities of the company shall be supervised by the Board of Governors
and subject to prudential standards under Sec. 1310.10, Sec. 1310.11,
or Sec. 1310.12, as applicable; and
(ii) Notify the nonbank financial company or company of the final
determinations of the Council described in paragraph (e)(1) of this
section, which shall contain a statement of the basis for the decision
of the Council.
(2) The Council may not make a final determination regarding any
waiver or modifications under this Sec. 1310.22 or whether the nonbank
financial company or the financial activities of the company shall be
supervised by the Board of Governors and subject to prudential
standards under Sec. 1310.10, Sec. 1310.11, or Sec. 1310.12, as
applicable, prior to the earlier of--
(i) The date by which the company could have requested a hearing
under paragraph (b); or
(ii) The date on which the company notifies the Council in writing
that it does not intend to request a hearing;
(d) Vote required. Any determination by the Council under paragraph
(a)(1) of this section to waive or modify the requirements of Sec.
1310.21 shall--
(1) Be made by the Council and may not be delegated by the Council;
and
(2) Require 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.

Sec. 1310.23 Council reevaluation and rescission of determinations.

(a) The Council shall, not less frequently than annually:
(1) Reevaluate each currently effective determination made under
Sec. 1310.10(a), Sec. 1310.11(a), or Sec. 1310.12(a); and
(2) Rescind any such determination, if the Council determines that
the nonbank financial company no longer meets the standards under Sec.
1310.10(a), or Sec. 1310.11(a), as applicable.
(b) Vote required. Any decision by the Council under paragraph
(a)(2) of this section to rescind a determination made with respect to
a nonbank financial company or the financial activities of a company
shall--
(1) Be made by the Council and may not be delegated by the Council;
and
(2) Require 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.

Sec. 1310.24 Judicial review of Council's final determination.

(a) In accordance with 12 U.S.C. 5323(h), if the Council makes a
final

[[Page 4567]]

determination under this part that a nonbank financial company, or the
financial activities of a company, shall be subject to supervision by
the Board of Governors and subject to prudential standards, such
nonbank financial company or company may, not later than 30 days after
the date of receipt of the notice of final determination under Sec.
1310.21(d) or (e) or Sec. 1310.22(e), or Sec. 1310.23(a)(2), bring an
action in the United States district court for the judicial district in
which the home office of such nonbank financial company or company is
located, or in the United States District Court for the District of
Columbia, for an order requiring that the final determination be
rescinded.
(b) Review of a final determination by the Council by the court
shall be limited to whether the final determination made under this
part was arbitrary and capricious.

Dated: January 19, 2011.
Alastair Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the
Treasury.
[FR Doc. 2011-1551 Filed 1-25-11; 8:45 am]
BILLING CODE 4810-25-P-P