Today, the Federal Reserve issued a final rule for determining when a company is “predominantly engaged in financial activities” for purposes of Title I of the Dodd-Frank Act. The rule will be used by the Financial Stability Oversight Council (FSOC) when it considers the potential designation of a nonbank financial company as systemically important. Under Title I of the Dodd-Frank Act, a nonbank financial company can be designated as systemically important by the FSOC only if it is “predominantly engaged in financial activities.”
A nonbank financial company that is designated as systemically important by the FSOC will be subject to consolidated supervision by the Federal Reserve and a host of new Dodd-Frank enhanced prudential standards including capital, liquidity, stress testing, single counterparty credit limits, enhanced risk management standards, resolution planning requirements and an early remediation framework.
Under Title I of the Dodd-Frank Act, a company is considered to be predominantly engaged in financial activities if 85 percent or more of the company’s revenues or assets are related to activities that are defined as financial in nature under Section 4(k) of the Bank Holding Company Act.
Among other things, the final rule contains an appendix that lists the activities considered to be financial activities for purposes of determining whether a company is predominantly engaged in financial activities under Title I of the Dodd-Frank Act. For each activity, the list includes those conditions imposed on bank holding companies conducting the activity that the Federal Reserve believes are necessary to define the activity as financial but excludes those conditions imposed on bank holding companies conducting the activity that the Federal Reserve believes are related to the safe and sound conduct of the activity, compliance with other law or other factors not related to whether the activity is financial.
The final rule will become effective on May 6, 2013.
Federal Reserve, Definitions of “Predominantly Engaged In Financial Activities” and “Significant” Nonbank Financial Company and Bank Holding Company (Final Rule), available here: http://www.gpo.gov/fdsys/pkg/FR-2013-04-05/pdf/2013-07688.pdf