FSOC Adopts Rule as the procedures for designating SIFIs (Pre- Fed. Reg. Version)

Section 113 of the Dodd-Frank authorizes FSOC to determine that a nonbank financial company shall be supervised by the Federal Reserve Board and shall be subject to prudential standards, in accordance withTitle I of the Dodd-Frank Act, if FSOC determines that material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company, could pose a threat to the financial stability of the United States. This final rule and the interpretive guidance attached as an appendix thereto describe the manner in which FSOC intends to apply the statutory standards and considerations, and the processes and procedures that FSOC intends to follow, in making determinations under section 113 of the Dodd-Frank Act.

(SL Comment: Although the power of FSOC to designate and regulate "SIFIs" seems to have popular resonance, I believe that it is one of the most troubling provisions in Dodd-Frank (and since I am am general opponent of the statute, I intend this as a strong statement). Regardless of how much "procedure" may be built around the designations, the determination to regulate a nonbank as systemically significant is ultimately a question of subjective and arbitrary judgment. Further, the standards used for determination, such as "interconnectedness", may be interpreted in a myriad of ways by different academics or economists, and even if there were agreement on the meaning of the term, it is a very dynamic economic variable. Whatever non-bank companies are designated as SIFIs will be subject to very substantial expenses under a regulatory scheme that is designed for banks, and is likely to prove ill-suited for non-banks.)

Effective Date: [INSERT DATE THAT IS 30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER]

View rule release in full here (links externally to the Dept. of Treasury website).