Section 113 of the Dodd-Frank Act authorizes the Financial Stability Oversight Council, or FSOC, to require a nonbank financial company to be supervised by the Board of Governors of the Federal Reserve System and be subject to prudential standards if FSOC determines that material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company, could pose a threat to the financial stability of the United States.  FSOC has issued a proposed rule and guidance describing the manner in which FSOC intends to apply the statutory standards and considerations, and the processes and procedures that the Council intends to follow, in making determinations under Section 113 of the Dodd-Frank Act.

FSOC has developed a three-stage process FSOC expects to apply for determinations in non-emergency situations. Each stage of the determination process would involve an analysis based on an increasing amount of information to determine whether a nonbank financial company meets a determination standard. The proposed guidance provides a detailed discussion of the proposed three-stage review process.

The first stage of the process is designed to narrow the universe of nonbank financial companies to a smaller set of nonbank financial companies using quantitative thresholds that are broadly applicable across the financial sector. Stage 1 is not intended to indicate a determination by FSOC that the nonbank financial companies identified during Stage 1 meet one of the determination standards. Rather, Stage 1 is intended to identify those nonbank financial companies that should be subject to further evaluation in subsequent stages of review.

In the second stage of the process, FSOC will conduct a comprehensive analysis of the potential for the identified nonbank financial companies to pose a threat to U.S. financial stability. In general, this analysis will be based on a broad range of quantitative and qualitative information available to FSOC through existing public and regulatory sources, including industry- and firm-specific metrics beyond those analyzed in Stage 1, and information obtained from the company voluntarily.

Based on the analysis conducted during Stage 2, FSOC intends to contact those nonbank financial companies that it believes merit further review in the third stage. Stage 3 will build on the Stage 2 analysis using quantitative and qualitative information collected directly from the nonbank financial company by the Office of Financial Research or the appropriate regulatory agency in addition to the otherwise available information considered during Stages 1 and 2. FSOC will determine whether to subject a nonbank financial company to Board of Governors supervision and prudential standards based on the results of the analyses conducted during each stage of review.

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