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FSOC to Implement Designation Process Changes

At an open meeting last week, the Financial Stability Oversight Council (FSOC) discussed changes to the process for designating non-bank systemically important financial institutions (SIFIs). FSOC staff presented recommended changes to the designation process in three areas: earlier engagement with companies under review, more information on the designation process and its reasoning, and more robust engagement and information in the annual review process. In discussing the changes, several Council and FSOC staff members cited a recent report from the Government Accountability Office that highlighted suggested improvements to the process. Treasury Secretary and FSOC Chair Jacob Lew noted that “designating a firm is not a decision that the Council reaches lightly,” and that the Council’s “goal is to refine the Council’s process through enhanced engagement and transparency, while maintaining our ability to identify and respond to potential risks to financial stability.”

Under the current designation process, the FSOC analyzes publicly available data in stage one to determine if a company exceeds certain set thresholds (though the thresholds are not dispositive and a company may advance despite falling below applicable thresholds). In stage two, the FSOC performs a preliminary assessment of the company, again using public data. If the Council finds that the company merits further assessment, the company advances to stage three. At this point, the company first receives notification that it is under review and is able to provide information to the FSOC for consideration. At the end of stage three, the FSOC may propose a SIFI designation for the company.

In response to feedback from stakeholders, FSOC staff recommended that the Council engage companies earlier in the designation process and notify a company that it is under review in stage two instead of the current policy of beginning communication in stage three. The staff also suggested that the FOSC should provide a list of the primary public sources of information being considered when requested by a company, and that companies should have the opportunity to meet with FSOC staff and submit pertinent information in stage two. At the beginning of stage three, staff indicated that it would meet with the company to discuss the process for analysis and any specific issues identified in stage two. Lastly, the staff would notify the company’s primary regulator in stage two and begin consultation with the regulator in advance of any vote to advance company to stage three.

The recommendations also address the need to provide additional information to the public. The staff suggested that, if a company in stage two or stage three publicly announces that it is under review, FSOC should confirm that fact. The Council also should include more information in its public basis for designations, and publish more information in annual reports including the number of nonbanks that the FSOC decided to advance or to not advance. Finally, the staff suggested that the FSOC should provide more information on how the stage one thresholds are calculated to provide more clarity on how companies are selected to move forward in the designation process.

The staff also proposed changes to the annual review process for designated companies.  The staff recommended that companies be given the opportunity to meet with FSOC staff at the onset of the annual review process to discuss relevant changes to the company’s situation. Further, if the company contests the annual designation, the FSOC should provide the company with a written explanation of the decision not to rescind the designation. Lastly, the staff proposed that companies should have the opportunity for an oral hearing before the full Council every five years to contest the designation.

Secretary Lew stated that he agreed with the recommended changes and hoped that they could be formalized for approval at the next meeting of the Council. Several other council members expressed agreement as well, but noted a belief that the current designation process is “robust.”