US regulator to change the SIFI designation process

US regulator to change the SIFI designation process

By Kathleen Scott of NortonRoseFullbright

The Financial Stability Oversight Council (FSOC) was established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank), in part, to identify risks to the stability of the US financial system, including being able to designate non-bank financial companies as systemically significant important financial institutions (SIFI).

On February 4, 2015, it announced changes to its designation process through issuance of supplementary procedures.

The FSOC has come under almost-constant criticism since its establishment regarding the process it follows in designating SIFIs. While the FSOC states in its announcement that it had been studying the designation process for several months, the publicity regarding the recent designation of MetLife as a SIFI, and the subsequent lawsuit filed by MetLife challenging the designation and specifying its criticisms of the designation process, may have led the FSOC to release its revised guidance now. See our blog post on the MetLife SIFI designation.

Supplemental guidance details

Treasury Secretary Jacob Lew stated these changes increase both the transparency of the SIFI designation process and the strength of the FSOC as a whole. The Supplemental Procedures first provide an overall summary of the current process and then launch into a description of the procedures, which the FSOC indicates could be divided into three categories:

Engagement during the SIFI designation process

The FSOC will notify a non-bank financial company being considered for a SIFI designation earlier in the process, at the time that it undertakes a preliminary analysis of a company for possible designation rather than when it decides to undertake a more detailed review of the company. The company will be able to submit information and meet with staff during this stage of the designation process. The FSOC also will begin earlier in the process to consult and coordinate with regulatory agencies or home country supervisors that might have jurisdiction over the company.

Engagement during its annual review of the SIFI designation process

The FSOC reviews its SIFI decisions each year to determine if the SIFI-designated non-bank financial companies still meet the criteria for the designation. The FSOC will now allow SIFIs to submit information and meet with staff during the review process. If a non-bank financial company contests its SIFI determination during the annual review process, the FSOC will vote on whether to rescind the designation, and, if the designation is not rescinded, it will provide the SIFI a notice explaining why it chose not to do so.

Transparency of the process

Finally, the FSOC will change its policy of not commenting when a non-bank financial company makes public the fact that it is under consideration until a formal designation is made, such as what happened most recently when MetLife publicly stated that it was under SIFI consideration, but the FSOC made no public comment until it announced MetLife’s formal designation as a SIFI. Up until now, the FSOC will not confirm publicly the status of any review of a non-bank financial company for a SIFI determination, even if the non-public financial company publicly announces that it is under SIFI review, until it releases its formal designation of the company as a SIFI. Under the Supplemental Procedures, if the non-bank financial company publicly announces it is under SIFI review, upon request, the FSOC, at the request of a third party, will now confirm the status of any such review. The FSOC also will publish in its annual reports statistics on the number of non-bank financial companies under specific review for a SIFI designation.  It also will provide additional information on the process for identifying which non-bank financial companies on which the FSOC will conduct a preliminary analysis.