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Industry Groups Petition for Nonbank Financial Company SIFI Designation Changes

A group of trade associations filed a petition with the FSOC to amend the Council’s rules in order to “improve the transparency, validity and cohesion of the Council’s SIFI designation process.” The letter argues that the current “vague” process by which nonbank financial entities are designated systemically important could prevent the FSOC from making accurate determinations. According to the group, the lack of transparency prevents companies from mitigating concerns, and evaluating and contesting the FSOC’s preliminary conclusions.

The FSOC’s SIFI designation process has three stages. In “Stage 1,” the company is evaluated using certain asset and debt/leverage thresholds or “other firm-specific qualitative or quantitative factors.” Companies that meet those thresholds continue to “Stage 2,” where the FSOC analyzes publicly available data to determine the level of risk to systemic financial stability posed by the firm. If the FSOC finds that a company merits further review based on the potential threat to systemic stability, the company continues to “Stage 3,” where the company receives notice and the FSOC may request non-public information. The FSOC then makes a final determination using data provided by the company and analysis conducted by the Office of Financial Research.

The letter urges the FSOC to amend Stage 2 of the process to:

  • provide notice to the company that it has entered Stage 2 (at least 270 days prior to any notice that the firm has entered Stage 3), including a copy of data being considered;
  • allow for communication between the FSOC and the company under consideration;
  • allow the company to submit data to the FSOC for consideration; and
  • require the FSOC to request data where it does not have sufficient data.

The letter also requests changes to Stage 3 and notes that the lack of detail in the notice prevents the company from directly addressing the perceived threat to financial stability identified by the FSOC.  The rule change would allow companies to provide information relevant to the FSOC’s concerns. Specifically, the authors request that the FSOC:

  • include in the notice of proposed determination an application of each statutory consideration to the company and potential ways that prudential standards could mitigate concerns, along with any information that a company would need to contest the preliminary determination;
  • allow the company an opportunity to present testimony at a hearing;
  • allow the company to review and correct the evidentiary record;
  • notify a company in the instance that the FSOC has ceased to consider the company for designation and require any reconsideration to begin anew; and
  • include in the notice of determination an application of each statutory consideration to the company, reasoning why actions taken by the company did not sufficiently mitigate concerns, and further areas that the FSOC believes continue to pose a threat.

Lastly, the letter requests that the FSOC give the company’s primary regulator the “opportunity to certify that its regulatory regime can adequately address any . . . identified threat” prior to a final determination by the FSOC. The letter can be accessed here