Defining the Terms “Predominantly Engaged in Financial Activities” and “Significant” Nonbank Financial and Bank Holding Companies

Key takeaways:

On April 3, 2013, the Federal Reserve issued a final rule establishing certain key definitions under Title I of the Dodd-Frank Act.

• First, the rule sets the requirements for determining when a company is “predominantly engaged in financial activities.” In the rule, the Federal Reserve defines “financial activities” broadly to include, notably, the activities of mutual funds, private equity funds and other pooled investment vehicles. A firm predominantly engaged in financial activities may be considered by the Financial Stability Oversight Council (“FSOC”) for designation as a systemically important financial institution (“SIFI”). Firms designated as SIFIs will be subject to enhanced regulatory scrutiny by the Federal Reserve. 
• Second, the rule defines “significant nonbank financial company” and “significant bank holding company” generally to include nonbank financial companies and bank holding companies with $50 billion or more in total consolidated assets (per applicable accounting standards). The definitions do not bear directly on whether a company may be designated a SIFI, but they may be important for credit risk and interconnectedness purposes. Under Dodd-Frank, SIFIs and large bank holding companies will need to file reports regarding credit exposures to significant nonbank financial and bank holding companies. In addition, in deciding whether an entity should be designated as a SIFI, the FSOC will consider the interconnectedness and relationships between the entity and significant nonbank financial and bank holding companies.