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Federal Reserve Proposes “Systemically Important” Definitions

February 25, 2011

Photo by Spakattacks. Some rights reserved.

To implement the Dodd-Frank Act, the Federal Reserve Board (“Board”) has requested comment on proposed criteria for determining whether a company is “predominantly engaged in financial activities” and for defining the terms “significant nonbank financial company” and “significant bank holding company”. The Financial Stability Oversight Council (“Council”) would use the terms in deciding whether to designate a nonbank financial company for Board supervision if the Council determines the company could pose a threat to the country’s financial stability.

Predominantly Engaged in Financial Activities

A company will be considered predominantly engaged in financial activities if its annual gross financial revenues in either of its two most recently completed fiscal years represent 85 percent or more of the company’s consolidated annual gross revenues; or the consolidated total financial assets of the company as of the end of either of its two most recently completed fiscal years represent 85 percent or more of the company’s consolidated total assets. Financial activities are defined as those permitted by the Bank Holding Company Act, as amended by the Gramm-Leach-Bliley Act, along with a laundry list of other activities including: making, acquiring, brokering, or servicing loans; leasing personal or real property or acting as an agent for such property; trust company functions; foreign exchange, forward contracts, options, futures, options on futures, swaps, and similar contracts; issuing and selling retail money orders; providing data processing, data storage and data transmission services, facilities, or databases regarding financial data; mutual fund back office support; check cashing; and real estate title abstracting.

Significant Nonbank Financial Company and Significant Bank Holding Company

A firm defined as a significant nonbank financial company or a significant bank holding company does not become subject to any additional supervision or regulation. Rather, relationships between firms and these companies are used to make other determinations and additional information is collected about these relationships. The proposed rule defines a “significant nonbank financial company” to mean any nonbank financial company supervised by the Board; and any other nonbank financial company that had $50 billion or more in total consolidated assets as of the end of its most recently completed fiscal year. The proposed rule defines a “significant bank holding company” as any bank holding company, or foreign bank that is treated as a bank holding company, that had $50 billion or more in total consolidated assets as of the end of the most recently completed calendar year.

Catchall Provision

The Board notes that the Dodd-Frank Act gives the Council the authority to subject the financial activities of any company to supervision by the Board if the Council determines that the company is organized and operates in such a manner to evade application of the Dodd-Frank Act and whose material financial distress would pose a threat to the country’s financial stability.

Comments should be submitted on or before March 30, 2011. View the notice of proposed rulemaking and the text of the proposed amendments here.

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