Financial Stability Oversight Council Issues Final Rule on Designation of Systemically Important Nonbank Financial Companies: Final Rule Clears Way for Individual Designations

Sullivan & Cromwell LLP - April 4, 2012

Yesterday afternoon, the Financial Stability Oversight Council (“Council”) unanimously approved a final rule (the “Final Rule”) and related interpretive guidance (the “Final Guidance”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), regarding the designation of systemically important nonbank financial companies (often referred to as nonbank “SIFIs”). The Final Rule and Final Guidance describe how the Council will apply the statutory designation standards and the procedures it intends to employ in exercising this authority. Designated companies are required to comply with enhanced prudential standards and are subject to consolidated supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve’s recent proposal regarding these enhanced standards suggests that this will be a comprehensive and rigorous regulatory regime.

The Final Rule and Final Guidance, which are substantially similar to the Council’s October 2011 proposed rule and guidance (the “October 2011 Proposal”), do not provide significant new insight as to which companies will ultimately be designated. Nonetheless, it is an important initial procedural step to enable the actual designation process to begin. Secretary of the Treasury Geithner, who chairs the Council, has indicated that the first of these designations will be made this year.

Among the “nonbank financial companies” potentially subject to a systemically important designation by the Council are savings and loan holding companies, insurance companies, private equity firms, hedge funds, asset management companies, financial guarantors, and other U.S. and non-U.S. nonbank companies deemed to be “predominantly engaged” in activities that are financial in nature.

Like the October 2011 Proposal, the Final Guidance incorporates a set of “uniform quantitative thresholds” that the Council will use as a filter to identify the universe of nonbank financial companies that initially will be subject to further review – and, potentially, a systemically important determination – by the Council. Significantly, the preamble to the Final Rule (the “Preamble”) states that, based on currently available data, the Council estimates that fewer than 50 nonbank financial companies will meet these “Stage 1” thresholds. It is difficult to speculate how many of these companies ultimately will be designated, but we do expect this to be an iterative process - i.e., not all of these reviews will be conducted at the same pace.