The Board of Governors of the Federal Reserve System (the FRB) has proposed amendments to Regulation Y necessary to implement various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act), including the ability of the Financial Stability Oversight Council (the Council) to require that certain companies be supervised by the FRB.

The Council, which is chaired by the Secretary of the Treasury, and consists of representatives of nine federal financial regulatory agencies and an appointed independent member with insurance expertise, is tasked with identifying, monitoring and responding to emerging risks to the U.S. financial system. Included within its authority is the ability to require that a “nonbank financial company” become subject to consolidated, prudential supervision by the FRB. The authority of the Council to require that a nonbank financial company become subject to consolidated, prudential supervision by the FRB is designed to address gaps and weaknesses in the financial regulatory system that became evident during the financial crisis, which allowed certain larger financial firms to avoid the type of consolidated, prudential supervision applicable to bank holding companies. Further, the Dodd-Frank Act gives the Council the authority to subject the financial activities of any company to supervision by the FRB if the Council determines that: (1) the company is organized and operates in such a manner to evade application of Title I of the Dodd-Frank Act; and (2) material financial distress related to, or the nature, scope, size, scale, concentration, interconnectedness, or mix of, the company’s financial activities would pose a threat to the financial stability of the United States.

Nonbank Financial Company

Title I of the Dodd-Frank Act defines nonbank financial companies as companies (other than bank holding companies or certain other specified types of entities) that are “predominantly engaged in financial activities.” “Financial activities” are defined under the Dodd-Frank Act by reference to those activities that have been determined to be financial in nature under Section 4(k) of the Bank Holding Company Act (12 CFR § 225.86) and, thus, are permissible for financial holding companies to conduct, including:


  • All of the activities that the FRB had determined before November 12, 1999 to be “so closely related to banking as to be a proper incident thereto” under Section 4(c)(8) of the Bank Holding Company Act (12 CFR §§ 225.28(b) and 225.86(a)(2));
  • Those activities that the FRB had determined to be usual in connection with the transaction of banking and other financial operations abroad (12 CFR §§ 225.86(b)); and
  • Certain activities identified in the Gramm-Leach-Bliley Act (12 CFR § 225.86(c)).

    Section 4(k) also authorizes the FRB, in consultation with the Treasury, to determine in the future additional activities that are financial in nature.

    For purposes of Title I of the Dodd-Frank Act, a company is deemed to be “predominantly engaged” in financial activities if either:


    • The consolidated annual gross financial revenues of the company in either of its two most recently completed fiscal years represent 85 percent or more of the company’s consolidated annual gross revenues (as determined in accordance with applicable accounting standards) in that fiscal year; or
    • The consolidated total financial assets of the company as of the end of either of its two most recently completed fiscal years represent 85 percent of more of the company’s consolidated total assets (as determined in accordance with applicable accounting standards) as of the end of the year.

      The proposed rule defines the “consolidated annual gross financial revenues” and “consolidated total financial assets” as that portion of a company’s consolidated annual gross revenues or consolidated total financial assets that were derived from or related to: (1) activities that are financial in nature under Section 4(k) of the Bank Holding Company Act; or (2) the ownership, control or activities of an insured depository institution or any subsidiary of an insured depository institution. Revenues or assets attributable to an insured depository institution are considered financial for purposes of this definition. The rules also provide guidance on the application of the test above to any minority, less than controlling interests that a company may have in unconsolidated entities.

      To reduce the potential for companies to attempt to manipulate the 85 percent financial test by changing accounting standards, the rule specifically provides that the accounting standards used to determine the predominantly financial test must be the same standards that the company uses in the ordinary course of business in preparing its consolidated financial statements.

      In addition to the two-year revenues and assets test above, the proposed rule allows the FRB, on a case-by-case basis, to determine that a company meets the statute’s 85 percent financial revenues or asset test based on the full range of information that may be available concerning the company’s activities and assets at any time. Such determination may occur if a company’s mix of revenues or assets change as a result of a merger, establishment of a new business line or the initiation of a new activity.

      Significant Nonbank Financial Company and Bank Holding Company

      A firm that is defined as a significant nonbank financial company or a significant bank holding company does not become subject to any additional supervision or regulation by virtue of that classification. Rather, relationships between firms and these significant nonbank financial companies or significant bank holding companies become a relevant factor in other determinations and additional information is collected about these relationships.

      The proposed rule defines a significant nonbank financial company as: (1) any nonbank financial company supervised by the FRB; and (2) any other nonbank financial company that had $50 billion or more in total consolidated assets as of the end of its most recently completed fiscal year. The proposed rule defines a significant bank holding company as any bank holding company, or foreign bank that is treated as a bank holding company, that had $50 billion or more in total consolidated assets as of the end of the most recently completed calendar year.

      In addition to being relevant to the Council’s determinations regarding whether to subject a nonbank financial company to FRB supervision, the terms significant nonbank financial company and significant bank holding company are used in connection with the credit exposure reports that nonbank financial companies supervised by the FRB and bank holding companies and foreign banks treated as bank holding companies with $50 billion or more in assets must prepare and file under the Dodd-Frank Act.

      The FRB is accepting comments on the proposed rule through March 30, 2011, and will then issue a final rule.

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