December 9, 2019

FSOC Approves Activities-Based Approach for Combating Systemic Risks

Steven Lofchie Commentary by Steven Lofchie

The Financial Stability Oversight Council ("FSOC") approved interpretive guidance establishing an "activities-based approach" to address systemic risk. The interpretive guidance is also designed to improve the "analytical rigor and transparency" of the process used by FSOC in determining whether to subject a nonbank financial company to Federal Reserve Board supervision.

Specifically, FSOC will:

  • identify, evaluate and address potential risks to U.S. financial stability that arise from particular activities and seek to adopt regulations applicable to those activities, rather than making determinations relating to a single entity;

  • perform a cost-benefit analysis when considering a nonbank financial company for a potential determination under section 113 of the Dodd-Frank Act;

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

  • combine the prior three-stage determination process for a determination under section 113 into two stages;

  • improve the new two-stage determination process by updating the procedure and incorporating provisions from the 2015 Supplemental Procedures;

  • clarify the post-designation "off-ramp" to rescind a determination regarding a particular company; and

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

In a public statement, CFTC Chairman Heath P. Tarbert supported FSOC's transition to focusing on activities-based systemic risk while retaining the ability to make entity-based designations, when necessary, to address "residual entity-based sources of systemic risk."


As established by Congress under the Dodd-Frank Act, the powers of FSOC are largely unconstrained by legal standards. This allowed the FSOC to exercise power in an arbitrary and unfair manner. See, e.g., ACLI Files Amicus Brief in MetLife v. FSOC, with Lofchie Comment. The establishment by FSOC of legal standards applicable to itself is a substantial step in the right direction. While it would be even better for Congress to impose these limits on FSOC, as opposed to relying on FSOC to limit itself, this is still a good thing.

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