At its meeting on October 11, 2011, the Financial Stability Oversight Council (FSOC) issued a second notice of proposed rulemaking and proposed interpretive guidance as to the determination of nonbank financial companies that are systemically important financial institutions (SIFIs).  Click here for the FSOC proposal.  Under the Dodd-Frank Act, insurers and reinsurers doing business in the United States are nonbank financial companies.  If an insurer or reinsurer is determined to be a SIFI, it would be subject to federal, as well as state, regulation.  The respective roles of state and federal regulators of insurers or reinsurers that are SIFIs have yet to be developed.

Under the proposed regulations and guidance, FSOC will undertake a three stage process to determine if a nonbank financial company is a SIFI.  In Stage 1, FSOC will analyze all nonbank financial companies with consolidated assets of $50 billion or more and determine if one or more of the following thresholds is also met:

  • National credit default swaps equal or exceed $30 billion
  • Net derivative liabilities equal or exceed $3.5 billion
  • Loans and bonds outstanding equal or exceed $20 billion
  • Leverage ratio is more than 15 to 1
  • Short-term debt equals or exceeds 10% of total consolidated assets

In Stage 2, potential SIFIs identified in Stage 1 will be subject to a “robust analysis of the potential threat” posed by a failure of the nonbank financial company to U.S. financial stability.

Finally, in Stage 3, if FSOC determines, following the Stage 2 analysis, that a potential threat could be posed, FSOC will notify the nonbank financial company that it is under consideration as a SIFI and review additional information, including information provided by the nonbank financial company, before making a final determination.  FSOC may make a SIFI designation by a 2/3 vote.  Note that a nonbank financial company that is notified that FSOC is considering designating it to be a SIFI will have a right to request an FSOC hearing on the matter.  Section 113(h) of Dodd-Frank permits a nonbank financial company to seek rescission of a SIFI designation by a U.S. district court.

FSOC has invited public comments within 60 days after the proposed rulemaking and proposed guidance are published in the Federal Register.  Thus, comments will be due in mid-December.