The Financial Stability Oversight Council ("FSOC") proposed an "activities-based approach" to address systemic risk issues. Under this approach, FSOC would identify, evaluate and address potential risks to U.S. financial stability that arise from particular activities and would seek to adopt regulations applicable to those activities, rather than requirements that would be imposed on a single entity.

Only where an activity-based approach was not sufficient would FSOC consider the imposition of entity-specific requirements. In that case, FSOC would, among other things:

  • perform a cost-benefit analysis when considering a nonbank financial company for potential determination;

  • evaluate the risk of a "nonbank financial company's material financial distress" when assessing the firm for a potential designation;

  • improve the new two-stage determination process through procedural enhancements and incorporation of provisions from the 2015 Supplemental Procedures;

  • clarify the post-designation "off-ramp" for a company or its regulators to avoid the potential risks; and

  • eliminate the six-category framework outlined in the 2012 Interpretive Guidance.

FSOC's proposed interpretive guidance would replace existing interpretive guidance on nonbank financial company determinations.

Comments must be submitted to FSOC no later than 60 days following publication of the proposal in the Federal Register.

Commentary / Steven Lofchie

This proposal is a large step in the right direction of reforming FSOC. The notion that the government could, on the basis of an almost entirely discretionary and non-transparent set of procedures, impose an open-ended set of requirements on individual companies is fundamentally inconsistent with the notion of the "rule of law."

Currently, there are no non-bank companies that have been designed as systemically significant by FSOC. No such arbitrary individual company designations should be made again. Congress would do well to eliminate this arbitrary power from the regulatory tool kit. In the absence of such action (which is unlikely given the reluctance of the government to cede authority), FSOC is doing the right thing by imposing restraints upon itself.

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