The U.S. Financial Stability Oversight Council (“Council”) has now formally responded to increasing concerns regarding the process by which it considers whether to designate a nonbank financial company as a systemically important nonbank financial company (“SIFI”). In November 2014, the Government Accountability Office recommended that the Council take a series of steps to strengthen its process for evaluating companies for potential designation and to provide additional information to the public regarding the designation process.1 Council staff has been meeting with interested parties, including our firm, to discuss potential enhancements to its designation process.

Suggestions have dealt with the fairness of the administrative process, the timeliness of notifications to companies, the extent to which companies are permitted to participate in and understand the record being developed, the consultative process with other regulators and the process for annual reviews of SIFI designations. Meetings have not focused on the quality or substantiation of the Council’s deliberative processes.

On February 4, 2015 the Council announced that it has adopted supplemental procedures regarding SIFI determinations, which include the following elements.

Increased Transparency with Companies Under Consideration for SIFI Designation

  • A nonbank financial company will now be notified by the Council within 30 days after the Council’s Deputies Committee instructs the Nonbank Designations Committee to form an analytical team to commence an active Stage 2 review of the company.
  • A company in an active Stage 2 review will be able to submit to the Council any information the company deems relevant to the Council’s evaluation and may, upon request, meet with staff.
  • The staff will, upon request, provide the company with a list of the primary public sources of information being considered during the Stage 2 analysis.
  • If the Council votes to not advance a company from Stage 2 to Stage 3, it will notify the company in writing of the Council’s decision.
  • If the Council votes to advance a company from Stage 2 to Stage 3, in addition to providing the company with the opportunity to submit materials, the staff will meet with the company’s representatives at the start of Stage 3 to explain the evaluation process and the framework for the Council’s analysis.
  • If the analysis in Stage 2 has identified specific aspects of the company’s operations or activities as the primary focus for the evaluation, the staff will notify the company of those issues.
  • After this meeting, the Council will provide the company with a request for information that will generally indicate how the requested items relate to the Council’s framework for analyzing potential risks described in the Council’s SIFI Rule and Guidance.
  • The Deputies Committee will grant a request to meet with a company in Stage 3, subject to receiving the request at least 30 days prior to the proposed meeting.
  • The Council indicates that it intends to grant any timely request for an oral hearing from a company subject to a proposed SIFI determination.  

Enhanced Interaction with a Company’s Primary Regulator or Home Country Supervisor

  • For any company under active review in Stage 2 that is regulated by a primary financial regulatory agency or home country supervisor, the Council will notify such regulator or supervisor that the company is under active review no later than such time as the company is notified. The Council will seek to begin the consultation process with such regulator or supervisor during Stage 2, before the Council votes on whether to advance the company to Stage 3.
  • If the Council votes to advance a company to Stage 3, the Council will seek to continue its consultation with such regulator or supervisor during Stage 3, before voting on whether to make a proposed determination regarding the company.
  • For any company regulated by a primary financial regulatory agency or home country supervisor, the Council will provide such regulator or supervisor with the nonpublic written explanation of the basis of any proposed or final determination promptly after the Council votes.  

Enhancements to the Annual Reevaluation Process

  • Before the Council’s annual reevaluation of each nonbank financial company, the company will be provided an opportunity to meet with staff on the Nonbank Designations Committee 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, including any restructuring of the company, regulatory developments, market changes or other factors.
  • If a company contests its SIFI status during the Council’s annual reevaluation, the Council intends to 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. The notice will address the material factors raised by the company in its submissions to the Council contesting the determination during the annual reevaluation.
  • The Council will provide each company subject to a determination with an opportunity for an oral hearing before the Council once every five years, during which the company can contest the determination.  

Increased Transparency with the Public

  • The Council plans to set forth sufficient information in its public bases of designation to provide the public with an understanding of the Council’s analysis, while protecting sensitive, confidential information submitted by the company to the Council.
  • The Council will publish in its annual reports the numbers of nonbank financial companies that, since the publication of the Council’s prior annual report: (i) the Council voted to advance to Stage 3; (ii) the Council voted not to advance to Stage 3; (iii) became subject to a proposed or final determination; and (iv) in the aggregate are subject to a final determination at that time.
  • The Council will publish on its website further details explaining how the Stage 1 thresholds are calculated, which may address issues such as: how the Council evaluates the use of various accounting standards for purposes of Stage 1; components of the six Stage 1 thresholds; and practices for calculating the thresholds when incomplete data regarding a company is available.  

The Council’s actions indicate an increasing recognition of the importance of transparency in its deliberations. How this affects the outcome of future designations of potential SIFIs and corresponding legal challenges for failure to adhere to applicable administrative procedures is yet to be seen.

Asset Management Comment Deadline Extended

Also, on February 4, 2015, the Council announced that it was extending the deadline with respect to its request for comments on financial stability implications of the asset management industry until March 25, 2015.