Last Wednesday, the Federal Reserve approved a final rule that sets the parameters for when a non-bank company can be designated by the Financial Stability Oversight Council (FSOC) as subject to regulation under Dodd-Frank. According to a press release,
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a nonbank financial company can be designated by the FSOC for supervision by the Federal Reserve only if it is “predominantly engaged in financial activities.” A company is considered to be predominantly engaged in financial activities if 85 percent or more of the company’s revenues or assets are related to activities that are defined as financial in nature under the Bank Holding Company Act. Additionally, the FSOC may issue recommendations for primary financial regulatory agencies to apply new or heightened standards to a financial activity or practice conducted by companies that are predominantly engaged in financial activities.
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The final rule also defines the terms “significant nonbank financial company” and “significant bank holding company.” Among the factors the FSOC must consider when determining whether to designate a nonbank financial company for consolidated supervision by the Federal Reserve is the extent and nature of the company’s transactions and relationships with other significant nonbank financial companies and significant bank holding companies. If designated, those nonbank financial companies will be required to submit reports to the Federal Reserve, the FSOC, and the Federal Deposit Insurance Corporation on the company’s credit exposure to other significant nonbank financial companies and significant bank holding companies as well as the credit exposure of such significant entities to the company. Consistent with the proposal, a firm will be considered significant if it has $50 billion or more in total consolidated assets or has been designated by the FSOC as systemically important.
The new rule will be effective as of May 13, 2013. For analysis, see Regulators Move Closer to Oversight of Nonbanks, U.S. Regulators Approve Rule to Designate Non-Banks Systemic, and Fed Releases Rule Defining Predominantly Financial Firms.