The Financial Stability Oversight Council (“FSOC”) released a set of frequently asked questions (“FAQs”) on the nonbank financial company designations process. The FAQs address continued inquiries from insurance companies, asset managers, specialty finance companies, industry associations, and other stakeholders.
Dodd-Frank Section 113 (“Authority to require supervision and regulation of certain nonbank financial companies”) granted FSOC the authority to designate nonbank financial companies for heightened supervision – namely, enhanced prudential standards and consolidated oversight by the Federal Reserve – for the purpose of addressing threats that large, complex, interconnected nonbank financial companies could pose to financial stability.
In April 2012, FSOC issued a rule and guidance on its approach to exercising this authority. This FAQ is intended to provide greater clarity on the designations process.
Lofchie Comment: It is unlikely that this FAQ will serve to answer anyone’s substantive questions as to how FSOC operates or will make designations. The fundamental issue is that the underlying law empowering FSOC is open-ended, giving the agency tremendous amounts of discretionary authority to designate financial institutions as financially significant based on ten factors, each of which may be in itself subjective, and all of which may be weighted in a subjective manner.
The FAQs essentially legitimize FSOC’s authority to make decisions in a completely one-off manner. FSOC asserts, in response to question 20: “In light of the nature, size, and complexity of companies under consideration and as directed by the Dodd-Frank Act, the FSOC conducts its analysis on a company-by-company basis in order to take into account the potential risks and mitigating factors that are unique to each company. Given the diversity of nonbank financial companies, applying identical analyses to all firms would not be an effective approach.” (One might note that a non-identical analysis is not the same as a non-consistent one, but this is not a distinction that the FAQ addresses.)
The FAQs response to question 21, whether the primary regulator for any particular type of financial entity had significant input into the determination of whether particular entities of that type would be designated as financially significant, also poses a problem. In response to this question, the FAQ states: “[As to] the two insurance companies that the FSOC has designated [as significant], the FSOC consulted with multiple state insurance regulators of the companies’ insurance subsidiaries.” The FAQ does not, however, discuss the fact that an insurance regulator who is a member of FSOC opposed the first designation of an insurance company as systemically significant, and may have voted “present” for the second. While nothing prevents FSOC as a group from overriding the input of a single member, disclosure of these facts in regard to question 21 would have provided a more complete answer to the relevant question.
See: Nonbank Financial Company Designations – Questions and Answers.
Recent Related News: FSOC Proposes Preliminary Designation of MetLife as a Non-Bank Systematically Important Financial Institution (September 4, 2014); Representative Maloney Recommends Changes to FSOC Designation Process (August 4, 2014); Governor Tarullo Delivers Speech on Corporate Governance and Prudential Regulation (June 10, 2014); House Financial Services Committee Hearing: “Examining the Dangers of the FSOC’s Designation Process and Its Impact on the U.S. Financial System” (May 22, 2014); House Financial Services Committee Chairman Hensarling Urges Secretary Lew to Cease Using “Too Big to Fail” Designations (May 9, 2014); Representative Garrett Questions the SIFI Designation Authority Granted to FSOC by Dodd-Frank (May 7, 2014).