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From Banking and Finance Law Daily, May 4, 2013

Non-Bank Companies Named as SIFIs

By John M. Pachkowski, J.D.

In a closed June 3, 2013, meeting, the Financial Stability Oversight Council (FSOC) proposed designating certain non-bank financial companies as “significantly important financial institutions” (SIFIs).

The FSOC is authorized under Section 113 of the Dodd-Frank Act, codified at 12 U.S.C. §5323, to determine that a nonbank financial company’s material financial distress—or the nature, scope, size, scale, concentration, interconnectedness, or mix of its activities—could pose a threat to U.S. financial stability. Companies designated as significantly important financial institutions will be subject to consolidated supervision by the Federal Reserve Board and enhanced prudential standards.

A 2012 final rule adopted by the FSOC, which is codified at 12 C.F.R. 1310, sets forth the criteria, processes, and procedures the Council will use to determine that a nonbank financial company be supervised by the Fed and subject to enhanced prudential standards. The Council also issued guidance that provides a three-stage process the FSOC will use to evaluate a nonbank financial company prior to making its determination.

The FSOC’s latest action follows its May 2013 meeting when the Council unanimously approved a resolution that established its evidentiary record on nonbank financial companies that it determines require enhanced prudential standards.

Although the results of the FSOC’s designation have not been made public in order to provide the companies an opportunity to request a nonpublic hearing to contest the proposed determination in accordance with Sec. 113(e) of the Dodd-Frank Act, accounts in the general media indicate that three companies will be designated as SIFIs—American International Group, Inc. (AIG), Prudential Financial Inc., and GE Capital.

Company responses. Both AIG and Prudential issued statements on the FSOC action. AIG acknowledged that it “received notice from the U.S. Treasury that the Financial Stability Oversight Council has made a proposed determination that AIG is a systemically important financial institution.” Prudential also acknowledged notification of the proposed designation and added, “The Company currently is evaluating whether to request a nonpublic evidentiary hearing before the Council to contest the proposed determination, as it is entitled to do under the applicable regulations.”

Important step forward. A statement attributable to Treasury Secretary Jacob J. Lew, Chairperson of the Financial Stability Oversight Council, provided, “The Council has made significant progress over the last two years in making our financial system safer, stronger, and more resilient. Today, the Council took another important step forward by exercising one of its principal authorities to protect taxpayers, reduce risk in the financial system, and promote financial stability.”

Too big to fail designation. Financial Services Committee Chairman Jeb Hensarling (R-Texas) said the designations put “hardworking taxpayers … at greater risk of being forced to fund yet another Wall Street bailout.” He added, “Designating any company as ‘too big to fail’ is bad policy and even worse economics. It causes erosion of market discipline. It also becomes a self-fulfilling prophecy by giving these firms market advantages over their competitors, helping to make them even bigger and riskier than they otherwise would be.” Hensarling concluded that “Our committee is working to put a stop to bailouts and end ‘too big to fail’ forever.”

Companies: American International Group, Inc.; GE Capital; Prudential Financial Inc.

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