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 company—or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company—could pose a threat to U.S. financial stability.  FSOC has approved a final rule and interpretive guidance on the FSOC’s authority to require supervision and regulation of certain nonbank financial companies.

FSOC intends to use a three step process to identify nonbank financial companies for supervision.  In Stage 1, FSOC will seek to identify a set of nonbank financial companies that merit company-specific evaluation. In this stage, the Council intends to apply quantitative thresholds to a broad group of nonbank financial companies.  FSOC will evaluate nonbank financial companies using only data available to FSOC, such as publicly available information and information member agencies possess in their supervisory capacities.

After the Stage 2 Pool has been identified, FSOC intends to conduct a robust analysis of the potential threat that each of those nonbank financial companies could pose to U.S. financial stability. In general, this analysis will be based on information already available to FSOC through existing public and regulatory sources, including information possessed by the company’s primary financial regulatory agency or home country supervisor, as appropriate, and information voluntarily submitted by the company. In contrast to the application of uniform quantitative thresholds to a broad group of nonbank financial companies in Stage 1, FSOC intends to evaluate the risk profile and characteristics of each individual nonbank financial company in the Stage 2 Pool based on a wide range of quantitative and qualitative industry-specific and company-specific factors.

In Stage 3, the FSOC, working with the Office of Financial Research, will conduct a review of each nonbank financial company in the Stage 3 Pool using information collected directly from the nonbank financial company, as well as the information used in the first two stages. The review will focus on whether the nonbank financial company could pose a threat to U.S. financial stability because of the company’s material financial distress or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company.

Each nonbank financial company in the Stage 3 Pool will receive Notice of Consideration that the nonbank financial company is under consideration for a proposed determination. The Notice of Consideration likely will include a request that the nonbank financial company provide information that FSOC deems relevant to FSOC’s evaluation, and the nonbank financial company will be provided an opportunity to submit written materials to FSOC.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.