US regulator to change the SIFI designation process

By Kathleen Scott of NortonRoseFullbright

The Financial Stability Oversight Council (FSOC) wasestablished by the 2010 Dodd-Frank Wall Street Reform and Consumer ProtectionAct (commonly referred to as Dodd-Frank), in part, to identify risks to thestability of the US financial system, including being able to designatenon-bank financial companies as systemically significant important financialinstitutions (SIFI).

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

The FSOC has come under almost-constant criticism since itsestablishment regarding the process it follows in designating SIFIs. While theFSOC states in its announcement that it had been studying the designationprocess for several months, the publicity regarding the recent designation ofMetLife as a SIFI, and the subsequent lawsuit filed by MetLife challenging thedesignation and specifying its criticisms of the designation process, may haveled 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 changesincrease both the transparency of the SIFI designation process and the strengthof the FSOC as a whole. The Supplemental Procedures first provide an overallsummary 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

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

Engagement during its annual review of the SIFI designationprocess

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the annual review process, theFSOC will vote on whether to rescind the designation, and, if the designationis not rescinded, it will provide the SIFI a notice explaining why it chose notto do so.

Transparency of the process

Finally, the FSOC will change its policy of not commentingwhen a non-bank financial company makes public the fact that it is underconsideration until a formal designation is made, such as what happened mostrecently when MetLife publicly stated that it was under SIFI consideration,but the FSOC made no public comment until it announced MetLife’s formaldesignation as a SIFI. Up until now, the FSOC will not confirm publiclythe status of any review of a non-bank financial company for a SIFIdetermination, even if the non-public financial company publicly announces thatit is under SIFI review, until it releases its formal designation of thecompany as a SIFI. Under the Supplemental Procedures, if thenon-bank financial company publicly announces it is under SIFI review, uponrequest, the FSOC, at the request of a third party, will now confirm the statusof any such review. The FSOC also will publish in its annual reportsstatistics on the number of non-bank financial companies under specific reviewfor a SIFI designation.  It also will provide additional information onthe process for identifying which non-bank financial companies on which the FSOCwill conduct a preliminary analysis.

http://www.regulationtomorrow.com/us/fsoc-proposes-changes-to-the-sifi-designation-process/