FDIC Final Rule: Definition of "Predominantly Engaged in Activities That Are Financial in Nature or Incidental Thereto" (Fed. Reg. Version)
Commentary by Scott Cammarn
The FDIC is adopting a final rule that establishes criteria for determining if a company is predominantly engaged in "activities that are financial in nature or incidental thereto" for purposes of Dodd-Frank Title II ("Orderly Liquidation Authority"). A company that is predominantly engaged in such activities is a "financial company" for purposes of Title II unless it is one of the few entities specifically excepted by Dodd-Frank. A financial company, other than an insured depository institution, may be subject to Title II's orderly liquidation authority if, among other things, it is determined that the failure of the company and its resolution under otherwise applicable law would have serious adverse effects on financial stability in the United States.
Effective Date: July 10, 2013.
See: 78 FR 34711.
Commentary
Today, the FDIC issued its final regulation interpreting the scope of entities that are deemed to be "predominantly engaged in activities that . . . are financial in nature or incidental thereto" for purposes of Title II of Dodd-Frank (the "Orderly Liquidation Authority" provisions). The final regulations are similar to, but not identical to, the proposed regulations issued by the FDIC last year. The FDIC's Title II rulemaking is intended to define what entity is a "financial company" and thus can be designated (i.e., deemed "covered") and thereby subjected to an FDIC-managed orderly liquidation process under Title II rather than be allowed to enter a U.S. bankruptcy proceeding. This standard is similar to, but not the same as, the standard found in the Federal Reserve's Title I rulemaking defining what entity is a "nonbank financial company" and therefore can be subjected to the Federal Reserve's ongoing supervision as systemically important (the Fed issued its Title I rulemaking on April 3rd).
There are several key differences between the FDIC and the Federal Reserve's final rulemakings. These differences were driven by inconsistent statutory language between Title I and Title II:
- For purposes of defining "predominantly engaged," Title I employs a revenue or asset test, while Title II employs a revenue-only test.
- For purposes of defining the scope of relevant activities, Title I focuses on activities that are "financial in nature," while Title II focuses on activities that are "financial in nature or incidental thereto." Thus, activities that are considered "incidental" to a financial-in-nature activity can cause an entity to be a "financial company" under Title II but cannot cause the entity to be a "nonbank financial company" for purposes of Title I. There is only one such activity that is currently considered to be "incidental to a financial in nature activity" - so-called "finder's activities." Thus, an entity engaged predominantly in finder's activities could become a covered financial company but could not become a nonbank financial company.
- Title I specifically excludes bank holding companies from the definition of "nonbank financial company" (because such entities are already subject to Federal Reserve oversight), and excludes national exchanges, clearing agencies, DCMs, SEFs, DCOs and SDRs. These entities are not excluded from the definition of "financial company" under Title II.
- Companies organized or incorporated outside the U.S. can be "nonbank financial companies" under Title I but cannot be "financial companies" under Title II.
Please note that Title VII uses a similar phrase: "financial entity." There are differences between the statutory definitions of "financial entity," "financial company," and "nonbank financial company." The CFTC has not provided any definitive regulatory guidance regarding how to define "financial entity" under Title VII.
Finally, note that the phrase "financial institution" is used in a number of federal statutes (for example, in the USA PATRIOT Act and in the netting provisions/Reg. EE). There is no correlation between "financial institution" and any of the above definitions.