FSOC Requests Comments on Proposed Guidance for Designating Nonbank Financial Institutions

The phrase "highly fact-specific" is troublesome when used as to the application of any governmental power, including financial regulation. "Highly fact-specific" could wind up being eccentric and not based on principles that can be readily generalized.

FSOC is an agency made up of the members of a single political party. There are no minority party participants in the agency to voice dissent; that raises the risk of highly political decisions that are not readily subject to challenge.

Second, there is no reason to believe that FSOC would be particularly good at anticipating risks. In the FSOC 2022 Annual Report, there are 96 mentions of climate, but only 15 mentions of inflation. None of those mentions of inflation suggest that a few months later the United States would experience significant bank failures to which inflation was a very significant contributor.  

Third, if a particular activity at a particular level is cause for genuine concern, then FSOC, the Administration and/or members of Congress should seek a legislative solution. That is the only way in which new types of entities should be made subject to pervasive regulation; there is no reason to believe that this method is insufficient.

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Among the more technical (and potentially substantive) aspects of FSOC’s proposed revisions to its interpretive guidance on nonbank financial company determinations is the proposal’s discussion of cost-benefit analysis with respect to Section 113 of the Dodd-Frank Act. In particular, FSOC states that Dodd-Frank does not require a cost-benefit analysis prior to the designation of a nonbank financial company under Section 113 because, among other things:

1. “costs and benefits of a designation are not listed considerations in the statute and are not similar to any of the listed considerations”;
2. FSOC views the statutory reference to “risk-related factor” as “meaning a factor related to the risk to U.S. financial stability posed by the company or the company’s activities”; and
3. “even if the potential cost of designation were a ‘risk-related factor,’ [FSOC] does not believe that prescribing a cost-benefit analysis prior to a determination under section 113 is useful or appropriate” (see 88 FR 26238).

Query to what extent these assertions are a reformulation of FSOC’s previous arguments on the matter in light of the 2016 MetLife decision from the U.S. District Court for the District of Columbia. Notably, the proposal includes an explicit reference to that decision in footnote 16, and states the following: “In the final settlement agreement between [FSOC] and MetLife, [FSOC] maintained that its designation of MetLife complied with applicable law. In the agreement MetLife expressly waived any right to argue that the cost-benefit portion of the district court’s opinion had any preclusive effect in any future proceeding before [FSOC] or in any subsequent litigation.”

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