Fed: We Know Financial Activities When We See Them

The FSOC is an arm of the Treasury Department that is supposed to help the government identify events and trends that could hurt the U.S. financial system.

Section 113 of the Dodd-Frank Act gives the FSOC the authority to call for extra federal oversight to be imposed on nonbank financial companies that appear to pose a threat to U.S. financial stability.

Section 102(a)(6) of the Dodd-Frank Act defines "financial activities" as "those activities that have been determined – by statute, regulation, order – to be financial in nature under Section 4(k) of the Bank Holding Company Act, as amended by the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, officials say in a preamble to the proposed rule.

Because the Fed helps apply the Bank Holding Company Act and is in charge of updating Regulation Y, it is revising Regulation Y to reflect Dodd-Frank Act changes and the needs of the FSOC.

For purposes of systemic risk oversight provisions, the Dodd-Frank Act says a company is considered to be "predominantly engaged" in financial activities if 85% of the annual gross revenues or 85% of the company's assets are derived from financial activities.

Because Section 102(a)(6) of the Dodd-Frank Act refers only to activities that have been determined to be financial in nature under Section 4(k), "activities that have been (or are) determined to be 'incidental' to financial activities … or to be 'complementary' to financial activities under section 4(k) are not considered financial activities for purposes of determining whether a company is predominantly engaged in financial activities under section 102(a)(6) of the Dodd-Frank Act," officials say.

The Fed refers in Regulation Y to some activities that are financial in nature as a result of the Gramm-Leach-Bliley Act rather than the Bank Holding Company Act.

"Acting as a principal or agent in the sale of insurance or annuities" is financial in nature under Gramm-Leach-Bliley, officials say.

The Dodd-Frank Act puts no new limits on what the Fed can define as an activity that is financial in nature under Section 4(k) of the Bank Holding Company Act, officials say.

Section 4(k) of the Bank Holding Company Act lets the Fed work with the Treasury secretary to "determine in the future that additional activities are 'financial in nature,"" Fed officials say.

The proposed rule "expressly recognizes that additional activities, beyond those already determined to be financial in nature" and listed in Regulation Y may be found to be financial in nature under Section 4(k), officials say.

"The proposed rule provides that a company may request a determination by the Board as to whether a particular activity is financial in nature for purpose of section 4(k) of the BHC Act," officials say. "This procedure is substantially similar to the procedure outlined in Section 225.88 of Regulation Y under which a financial holding company or other interested entity may request a determination from the Board that an activity is financial in nature or incidental to a financial activity."

Large or interconnected nonbank companies could be deemed systemically important under Section 113 of the Dodd-Frank Act might use the determination procedure to find out whether some of their activities are financial in nature, officials say.

Comments on the proposed rule are due March 30.