On April 21, President Trump issued a Presidential Memorandum directing the Secretary of the Treasury to conduct a review of the Financial Stability Oversight Council (FSOC) processes for determining whether nonbank financial companies are financially distressed and designating nonbank financial companies as “systemically important.” The memorandum explains that a review of these processes is needed because the designations “have serious implications for affected entities, the industries in which they operate, and the economy at large.” The memorandum requires the Secretary to report within 180 days on whether:

  • the FSOC’s processes are sufficiently transparent and provide adequate due process protections;
  • a FSOC designation “give[s] market participants the expectation that the Federal Government will shield supervised or designated entities from bankruptcy”;
  • a determination regarding a nonbank’s systemic importance should include “specific, quantifiable projections of the damage that could be caused to the United States economy”;
  • the processes appropriately account for the costs of designation; and
  • potential designees receive adequate guidance on how to reduce their perceived risk and a “meaningful opportunity to have their determinations or designations reevaluated in a timely and appropriately transparent manner.”

The memorandum further directs the Secretary to include SIFI designation recommendations, including any proposed legislative measures, for improving the processes and opine on whether such processes are consistent with the Administration’s “Core Principles.” The secretary is also directed to make any recommendations for legislation or regulation that would further align FSOC’s activities with the Core Principles.

The President issued a second Memorandum, directing the Secretary to review and report on the Orderly Liquidation Authority (OLA) under Dodd-Frank, with the goal of understanding the “OLA’s full contours and acknowledge the potentially adverse consequences of its availability and use.” Specifically, the memorandum requires that the Secretary assess the following:

  • “the potential adverse effects of failing financial companies on the financial stability of the United States”;
  • whether the framework for employing OLA is consistent with the Core Principles;
  • whether “invoking OLA could result in a cost to the general fund of the Treasury”;
  • whether the use or availability of OLA could lead to excessive risk taking or . . . otherwise lead[] market participants to believe that a financial company is too big to fail; and
  • whether a new chapter in the U.S. Bankruptcy Code would be a “superior method of resolution for financial companies.”

The memorandum also requires that Secretary’s review include a quantitative evaluation of OLA’s “anticipated direct and indirect effects” as well as recommendations for improving OLA. The memo also directs the Treasury Department to refrain from making any systemic risk determination unless it determines, in consultation with the President, that the Doff-Frank criteria require otherwise.”

At the signing of the memo, Treasury Secretary Steven Mnuchin delivered prepared remarks, in which he assured the President and the Public that the Treasury will “work tirelessly” in its efforts to “provide a clear analysis of the extent to which the OLA encourages inappropriate risk-taking and the extent of potential taxpayer liability.”