Recently, the Financial Stability Oversight Council (“Council”) unanimously approved a final rule (the “Final Rule”) and related interpretive guidance (the “Final Guidance”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”),  regarding the designation of systemically important nonbank financial companies (often referred to as nonbank “SIFIs”). The Final Rule and Final Guidance describe how the Council will apply the statutory designation standards and the procedures it intends to employ in exercising this authority. Designated companies are required to comply with enhanced prudential standards and are subject to consolidated supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve’s recent proposal regarding these enhanced standards suggests that this will be a comprehensive and rigorous regulatory regime. 
The Final Rule and Final Guidance, which are substantially similar to the Council’s October 2011 proposed rule and guidance (the “October 2011 Proposal”),  do not provide significant new insight as to which companies will ultimately be designated. Nonetheless, it is an important initial procedural step to enable the actual designation process to begin. Secretary of the Treasury Geithner, who chairs the Council, has indicated that the first of these designations will be made this year.
Among the “nonbank financial companies” potentially subject to a systemically important designation by the Council are savings and loan holding companies, insurance companies, private equity firms, hedge funds, asset management companies, financial guarantors, and other U.S. and non-U.S. nonbank companies deemed to be “predominantly engaged” in activities that are financial in nature.
Like the October 2011 Proposal, the Final Guidance incorporates a set of “uniform quantitative thresholds” that the Council will use as a filter to identify the universe of nonbank financial companies that initially will be subject to further review – and, potentially, a systemically important determination – by the Council. Significantly, the preamble to the Final Rule (the “Preamble”) states that, based on currently available data, the Council estimates that fewer than 50 nonbank financial companies will meet these “Stage 1” thresholds. It is difficult to speculate how many of these companies ultimately will be designated, but we do expect this to be an iterative process – i.e., not all of these reviews will be conducted at the same pace.
The Final Guidance makes clear, however, that the Stage 1 thresholds – including the $50 billion asset threshold described below – are not an absolute prerequisite to evaluation by the Council. In fact, the Final Guidance specifically provides that the Council may initially evaluate any nonbank financial company “irrespective of whether such company meets the thresholds in Stage 1.” The October 2011 Proposal provided that Council review of companies that do not meet the Stage 1 thresholds would be done “in limited cases.” That qualifying language has been deleted in the Final Guidance.
The Final Guidance also clarifies that the Council’s assessment of foreign nonbank financial companies will be based solely on the U.S. assets, liabilities and operations of those companies and their subsidiaries.
As noted above, the Final Rule and Final Guidance are substantially similar to the October 2011 Proposal, with several modifications and clarifications noted below and described in more detail throughout this memorandum. Significantly, the Final Rule and Final Guidance:
- provide additional information about how the Stage 1 “quantitative thresholds” will be measured and applied;
- clarify that the Council intends generally to apply the Stage 1 thresholds using information prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) when available;
- clarify that the Council intends to provide companies that receive a notice of proposed designation at least 30 days to submit written materials rebutting the notice;
- require that any final determination be reevaluated at least annually and provide a designated company the opportunity to submit materials to contest the continuation of the designation;
- revise one of the Stage 1 quantitative thresholds from “loans and bonds outstanding” to “total debt outstanding,” broadly including therein loans, bonds, repurchase agreements, commercial paper, securities lending arrangements, surplus notes, and other forms of indebtedness;
- further elaborate on the confidential treatment of nonpublic information voluntarily submitted to the Council by nonbank financial companies;
- clarify that that Council intends that any hearings in connection with waivers or modifications sought by the Council pursuant to its authority to make designations in emergency situations would be nonpublic; and
- provide that the Council does not intend to publicly announce the names of companies being evaluated for a proposed designation due to the preliminary nature of a proposed determination and the potential for misinterpretation by market participants. The Council also intends to provide the nonbank financial company notice at least one business day prior to announcing publicly its final determination.
This last clarification fails to deal with the difficult disclosure issues that will arise for companies that have been informed by the Council that they are subject to a proposed designation.
This memorandum also briefly addresses a related proposed rule issued by the Federal Reserve on April 2, 2012 addressing the universe of activities that will be treated as “financial in nature” when the Council evaluates whether a company is a nonbank “financial company” and therefore potentially subject to designation by the Council.
As detailed in the Final Guidance and consistent with the October 2011 Proposal, the designation process involves three “Stages.” In Stage 1, the Council will apply the six quantitative thresholds to a “broad group” of nonbank financial companies in order to identify those most likely to meet the statutory designation standards. A nonbank financial company with $50 billion or more in “total consolidated assets” will be subject to further evaluation in Stage 2 if the company also meets or exceeds any one of the five other quantitative thresholds: (i) it is the reference entity with respect to $30 billion or more of outstanding credit default swaps, (ii) it has $3.5 billion or more of derivative liabilities, (iii) it has $20 billion or more of total debt outstanding, (iv) it has a leverage ratio of 15 to 1 or greater, or (v) it has a short-term debt-to-assets ratio of 10% or more.
The Council believes these quantitative thresholds will help nonbank financial companies predict whether they will be considered for designation by the Council. As noted above, however, the Council explicitly retains the discretion to evaluate nonbank financial companies that do not meet these thresholds.
A nonbank financial company identified for further review in Stage 1 will be subject in Stage 2 to a more granular, institution-specific analysis of the individual company’s risk profile, involving quantitative analysis and qualitative judgment by the Council. This analysis will be conducted within a framework that divides the statutory considerations for designation into six “categories”: size, interconnectedness, substitutability, leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny. For each of these categories, sample metrics are provided (without quantification) in the Final Guidance.
The Preamble clarifies that, although the Stage 1 quantitative thresholds will initially be applied uniformly to all nonbank financial companies, they may not be appropriate for the risk assessment of hedge funds, private equity firms and other asset management complexes, and suggests that the Council may eventually establish an additional set of metrics or thresholds designed to evaluate those entities and their advisers. The Preamble also notes that the Council is analyzing the extent to which asset management companies could pose threats to U.S. financial stability and, if so, whether such threats are better mitigated through systemic designation by the Council or instead through other regulatory measures.
After completion of the Stage 2 review, the Council will provide each nonbank financial company deemed to merit further evaluation in Stage 3 with written notice that it is being considered for determination and an opportunity to provide written materials explaining why the Council should not adopt a proposed determination. The Final Rule, in a departure from the October 2011 Proposal, provides a minimum of 30 days for responses to this notice of consideration. If the Council nevertheless proceeds to make a proposed determination, it must provide a second notice, including an explanation of the basis for the proposed determination, and the opportunity for the nonbank financial company to request an informal nonpublic “evidentiary hearing” before the Council to contest the proposed determination.
Both a proposed determination and a final determination require at least a two-thirds majority vote of the Council, including the affirmative vote of the Secretary of the Treasury. Any final determination will be announced publicly and is subject to limited judicial review. The Council clarified that it will not publicly announce proposed determinations, but, as mentioned above, a company that is informed of a proposed determination will face disclosure issues. The Council intends, “when practicable and consistent with the purposes of the determination process,” to provide notice to any nonbank financial company prior to a final determination at least one business day before publicly announcing the final determination, to allow the designated company to prepare public communications and disclosures.
A more detailed description of the designation process is set out below.
Under Section 113 of Dodd-Frank, the Council is authorized to require that a “nonbank financial company” be subject to heightened prudential standards and supervision by the Federal Reserve  if the Council determines that the nonbank financial company  is systemically important, i.e., the company could “pose a threat to the financial stability of the United States.” 
“Nonbank financial company” generally includes any U.S. or non-U.S. company (other than a company that is, or is treated in the U.S. as, a bank holding company) that is “predominantly engaged” in financial activities. Under Dodd-Frank, a nonbank company is considered to be “predominantly engaged” in financial activities if (i) its annual gross revenues derived from activities deemed to be financial in nature, and, if applicable, from the ownership or control of one or more insured depository institutions, represent at least 85% of its consolidated annual gross revenues or (ii) its assets relating to such activities represent at least 85% of its total consolidated assets. 
Under Dodd-Frank, the Council must conclude that such a threat could arise (i) as a result of “material financial distress” at the company and/or (ii) as a result of the “nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the . . . nonbank financial company.”  The Final Guidance refers to these as the two statutory “Determination Standards.” “Material financial distress” would exist if the Council finds that a nonbank financial company “is in imminent danger of insolvency or defaulting on its financial obligations” and will be assessed “in the context of a period of overall stress in the financial services industry and in a weak macroeconomic environment.”
In making a determination, Dodd-Frank directs the Council to conduct an institution-specific risk analysis  based on the following statutory considerations:
- the extent of the leverage of the company;
- the extent and nature of the off-balance sheet exposures of the company;
- the extent and nature of the transactions and relationships of the company with other significant nonbank financial companies and significant bank holding companies;
- the importance of the company as a source of credit for households, businesses, and state and local governments and as a source of liquidity for the United States financial system;
- the importance of the company as a source of credit for low-income, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities;
- the extent to which assets are managed rather than owned by the company, and the extent to which ownership of assets under management is diffuse;
- the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company;
- the degree to which the company is already regulated by one or more primary financial regulatory agencies;
- the amount and nature of the financial assets of the company;
- the amount and types of the liabilities of the company, including the degree of reliance on short-term funding; and
- any other risk-related factors that the Council deems appropriate. 
A similar set of statutory considerations applies to the designation of foreign nonbank financial companies, although, as noted above, they will apply solely to the U.S. assets, liabilities and operations of these companies and their subsidiaries.
II. The Final Rule: 3-Stage Review Process
A. Stage 1: Council to Apply Quantitative Thresholds
As noted above, in Stage 1 the Council will apply a set of “quantitative thresholds” to a broad group of nonbank financial companies as a filter for identifying those companies that will be subject to further evaluation. According to the Final Guidance, “[t]he purpose of Stage 1 is to enable the Council to identify a group of nonbank financial companies that are most likely to satisfy one of the Determination Standards.” The Stage 1 quantitative thresholds relate to four of the six “framework categories” that the Council would apply in Stage 2 (described in more detail below) – size, interconnectedness, leverage, and liquidity risk/maturity mismatch – and were chosen because of their applicability to different types of financial markets and industries, the current availability of data, and the Council’s belief that they provide a “meaningful initial assessment . . . regarding the potential for a nonbank financial company to pose a threat to financial stability in diverse financial markets.” The quantitative thresholds are not designed to relate to the framework categories of existing regulatory scrutiny or substitutability.
A nonbank financial company that satisfies a total consolidated assets threshold and meets or exceeds at least one of the five other thresholds will be subject to further evaluation in Stage 2. The Preamble notes that the Council has estimated, based on existing data, that fewer than 50 nonbank financial companies meet the Stage 1 thresholds. The Council clarified that it intends “to reapply the Stage 1 thresholds to nonbank financial companies using the most recently available data on a quarterly basis, or less frequently for nonbank financial companies with respect to which quarterly data are unavailable.”
“Quantitative Thresholds” 
- Total Consolidated Assets:
- U.S. Nonbank Financial Companies: $50 billion in total global consolidated assets;
- Foreign Nonbank Financial Companies: $50 billion in U.S. total consolidated assets.
Although the term “total consolidated assets” is not defined in the description of the Stage 1 quantitative thresholds, the Final Guidance suggests, in the section devoted to assessing the Stage 2 framework category of “size,” that the Council will consider, in that context, “[t]otal consolidated assets or liabilities, as determined under [GAAP] or the nonbank financial company’s applicable financial reporting standards, depending on the availability of data and the stage of the determination process.” The Final Guidance notes in that same section that conventional measures of size (e.g., assets, liabilities, and capital) “may not provide complete or accurate assessments of the scale of a nonbank financial company’s risk potential” and specifically states that the Council “also intends to take into account off-balance sheet assets and liabilities and assets under management in a manner that recognizes the unique and distinct nature of these classes.”
- Five Other Thresholds:
- CDS Outstanding: $30 billion or more in gross notional value of outstanding CDS for which the nonbank financial company is the reference entity. 
- Derivative Liabilities: $3.5 billion or more, measured as the fair value of any derivatives contracts in a negative position taking into account master netting agreements and cash collateral held with the same counterparty on a net basis. The Council clarified in the Final Guidance that for nonbank financial companies that do not disclose the effects of these arrangements, derivative liabilities will equal the fair value of derivative contracts in a negative position when the Council does its Stage 1 analysis. The Council will take into account these arrangements in its Stage 2 and Stage 3 analyses once it has the information available to it.
- Total Debt Outstanding: $20 billion or more. Referred to in the October 2011 Proposal as “loans and bonds,” the Council now defines total debt outstanding broadly to include loans, bonds, repurchase agreements, surplus notes, and other forms of indebtedness.
- Leverage Ratio: 15-to-1 minimum ratio of total consolidated assets (excluding separate accounts) to total equity.
- Short-Term Debt Ratio: threshold ratio of short-term total debt outstanding (as defined above) with a maturity of less than 12 months to total consolidated assets (excluding separate accounts) of 10%.
In Stage 1 the Council intends to rely solely on publicly-available information and information provided by regulatory sources.  The Final Guidance clarifies that the Council intends generally to apply the Stage 1 thresholds using information prepared in accordance with GAAP when such information is available.  If GAAP information is not available with respect to a nonbank financial company, the Council may rely on data reported under statutory accounting principles, international financial reporting standards, or such other data as are available to the Council.
The Council initially intends to apply the quantitative thresholds uniformly to all nonbank financial companies, but notes that these thresholds “may not capture all types of nonbank financial companies and all of the potential ways in which a nonbank financial company could pose a threat to financial stability.” Accordingly, the Final Guidance specifically provides that the Council “may initially evaluate any nonbank financial company based on other firm-specific qualitative or quantitative factors, irrespective of whether such company meets the thresholds in Stage 1” (emphasis added).
Application of Thresholds to Certain Companies
The Preamble notes that “financial guarantors, asset management companies, private equity firms, and hedge funds . . . may pose risks that are not well-measured” under the quantitative thresholds. Accordingly, the Council will consider whether to establish “an additional set of metrics or thresholds tailored to evaluate hedge funds and private equity firms and their advisers.” The Council notes that less data is generally available for hedge funds and private equity firms, but indicated that, in developing any such additional metrics or thresholds, it intends to review financial disclosures that private fund advisers will be required to file with the Securities and Exchange Commission on new Form PF in June of this year.
With respect to asset management companies, the Council and its member agencies, together with the Office of Financial Research, “will consider what threats exist, if any, and whether such threats can be mitigated by subjecting such companies to [Federal Reserve] supervision and prudential standards or whether they are better addressed through other regulatory measures.” The Preamble notes that the Council also “may issue additional guidance . . . regarding potential additional metrics and thresholds relevant to asset manager determinations.”
Although the Stage 1 quantitative thresholds would appear to capture a number of insurance companies, some of the six framework categories to be employed in Stage 2 would seem to mitigate against their designation by the Council, including “existing regulatory scrutiny.” The Council also modified one of the “existing regulatory scrutiny” metrics in the Final Guidance to include not only the existence of a consolidated supervisor, but also the effectiveness of such consolidated supervisor.
As noted, the Council initially will apply the $50 billion “total consolidated assets” threshold uniformly to all nonbank financial companies in Stage 1, regardless of whether the Council ultimately establishes revised or additional metrics or thresholds for hedge funds, private equity firms, or asset managers. Therefore, a key question is whether, and how, funds managed by a nonbank financial company would be consolidated. The Final Guidance clarifies that “for purposes of applying the six thresholds to investment funds (including private equity firms and hedge funds), the Council may consider the aggregate risks posed by separate funds that are managed by the same adviser, particularly if the funds’ investments are identical or highly similar.”
Stage 2: Institution-Specific Assessment
In Stage 2, the Council intends to evaluate the risk profile and characteristics of each individual company that met the Stage 1 thresholds under a wide range of quantitative and qualitative industry- and company- specific factors. The Council rejected commenters’ requests that the Council routinely provide notice to nonbank financial companies that are in Stage 2 review, but retains the right to do so on a discretionary basis. The Final Guidance incorporates an analytic framework that divides the statutory considerations into six “categories,” which will guide the Council’s institution-specific evaluation in Stage 2. The six framework categories are: size, interconnectedness, substitutability, leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny. 
The Council believes the first three categories (size, interconnectedness, and substitutability) assess the potential impact of a nonbank financial company’s material financial distress on the broader economy. The latter three (leverage, liquidity/maturity mismatch, and existing regulatory scrutiny) are intended to evaluate a nonbank financial company’s vulnerability to financial distress.
The Final Guidance expands on this framework by providing “sample metrics” the Council may use for evaluating each of the six categories.
|Framework Category||Sample Metrics|
(Amount of financial services or financial intermediation provided)
(Direct or indirect linkages between financial companies that may be conduits for the transmission of the effects of the nonbank financial company’s material financial distress or activities)
(Extent to which other firms could provide similar financial services in a timely manner at a similar price and quantity if the nonbank financial company withdraws from a particular market)
(Exposure or risk in relation to equity capital)
|Liquidity Risk/ Maturity Mismatch
(Risk that a company may not have sufficient funding to meet its short-term needs, either through cash flow, maturing assets, or assets salable at prices equivalent to book value, or through its ability to access funding markets)
|Existing Regulatory Scrutiny
(Extent to which the company is already subject to regulation, including the consistency of such regulation across nonbank financial companies within a sector, across different sectors, and providing similar services, and the statutory authority of those regulators)
B. Stage 3: Proposed and Final Determinations
After completion of the Stage 2 analysis, any nonbank financial company selected for additional scrutiny will move to Stage 3 and receive a notice from the Council that it is being considered for a “Proposed Determination.” The Stage 3 review will focus on whether one or both of the Determination Standards have been met and will involve analysis of information collected directly from the subject company, along with information collected during Stages 1 and 2.
In Stage 3, the Council will also evaluate a nonbank financial company based on the following three risk- transmission “channels” identified as being “most likely to facilitate the transmission of the negative effects of a nonbank financial company’s material financial distress or activities to other financial firms and markets”:
- Exposure: Creditors, counterparties, investors, or other market participants that have exposure to the company that is significant enough to result in their material impairment and thereby pose a threat to U.S. financial stability (metrics to include total consolidated assets, CDS outstanding, derivative liabilities, loans/bonds outstanding, and leverage);
- Asset Liquidation: The company holds assets that, if liquidated quickly, would significantly disrupt trading or funding in key markets or cause significant losses or funding problems for other firms with similar holdings due to falling asset prices (metrics to include total consolidated assets and short-term debt ratio);
- Critical Function or Service: The company is no longer able or willing to provide a critical function/service that is relied upon by market participants and for which there are no ready substitutes (company-specific analysis, including a review of the “competitive landscape” in the relevant market, the company’s market share, and the ability of other firms to replace those services).
The first and third of these factors would apparently also be considered in Stage 2.
The Council also intends to perform a “resolvability evaluation” for each company in the “Stage 3 Pool,” that is, “an assessment of the complexity of the nonbank financial company’s legal, funding, and operational structure, and any obstacles to the rapid and orderly resolution of a nonbank financial company in a manner that would mitigate the risk that [its] failure would have a material adverse effect on financial stability.” The Final Guidance clarifies that the evaluation of a nonbank financial company’s resolvability may mitigate or aggravate the potential of a nonbank financial company to pose a threat to U.S. financial stability.
Notice of Consideration
As noted above, the Council will send every company in the Stage 3 Pool a written “Notice of Consideration” for a proposed determination, which will include a request for additional information, potentially including confidential business information, internal assessments, internal risk management procedures, funding details, counterparty exposure or position data, strategic plans, resolvability, potential acquisitions/dispositions, and certain other anticipated changes to the company’s structure.  The Preamble notes that “information may be used by the recipients for enforcement, examination, resolution planning, or other purposes, subject to any appropriate limitations on the disclosure of such information to third parties, taking into account factors including the need to preserve the integrity of the supervision and examination process.”
Once a company has received the Notice of Consideration, it will have not less than 30 days  to submit written materials contesting the consideration of a proposed determination, including materials concerning whether the company meets the standards for a determination.
Notice of Proposed Determination
After the Council has provided the Notice of Consideration and an opportunity to submit written materials, and informed the company that its evidentiary record is complete, it may issue a nonpublic written Notice of Proposed Determination, receipt of which triggers a formal appeals process involving the company’s right to request an informal nonpublic “evidentiary hearing” before the Council. Unlike the Notice of Consideration, this second notice must include the Council’s explanation of the basis for its proposed determination. The Council must make a proposed determination within 180 days after the date on which the subject company receives the notice of completion of the Council’s evidentiary record. 
Within 60 days of the evidentiary hearing (if requested), the Council must determine whether to make a final determination and, if made, publicly announce the determination. The Council intends, when practicable and consistent with the purposes of the determination process, to provide notice to any nonbank financial company prior to a final determination at least one business day before publicly announcing the final determination. Within 30 days of receiving a Notice of Final Determination, the subject company may file an action in an appropriate federal district court seeking to rescind the Final Determination on the grounds that it was arbitrary and capricious. Within 180 days of a Final Determination, the company must register with the Federal Reserve.
Reevaluation and Rescission
The Council significantly revised its procedure for reevaluation and rescission of a currently effective determination. Under the Final Rules, the Council must reevaluate, at least annually, each currently effective determination of a systemically important nonbank financial company and rescind any such determination if the Council determines that the nonbank financial company no longer meets either of the Determination Standards. The Council must also provide written notice to each nonbank financial company subject to a currently effective determination prior to the Council’s reevaluation of such determination and must provide such nonbank financial company an opportunity to submit written materials, within such time as the Council determines to be appropriate (which shall be not less than 30 days after the date of receipt by the nonbank financial company of such notice). Like the proposed and final determinations, the decision to rescind a determination requires at least a two-thirds majority vote of the Council, including the affirmative vote of the Secretary of the Treasury. If the Council rescinds a determination, the Council must notify the nonbank financial company and publicly announce the rescission.
While the Final Rule and Final Guidance will be effective 30 days after publication in the Federal Register, the “Fact Sheet” released yesterday states that the Council “will immediately initiate the process of evaluating nonbank financial companies,” suggesting that these reviews will begin prior to the effective date.
III. Related Federal Reserve Proposal
In a related development, on April 2, 2012 the Federal Reserve released a supplemental notice of proposed rulemaking regarding the criteria the Federal Reserve will use in determining whether a company is “predominantly engaged in financial activities” for purposes of Title I of Dodd-Frank (the “Supplemental NPR”).  The Supplemental NPR, which is cited by the Council in the Final Rule, supplements the Federal Reserve’s February 11, 2011 notice of proposed rulemaking defining other key terms under Title I, such as “significant nonbank financial company” and “significant bank holding company,” in addition to addressing the circumstances under which a company will be deemed to be “predominantly engaged in financial activities.” The Supplemental NPR was issued in response to comments received on the February 11, 2011 notice of proposed rulemaking and addresses more specifically what the Federal Reserve will deem to be a “financial activity” for purposes of Title I, including Section 113 of Dodd-Frank.
Section 102(a)(6) of Dodd-Frank defines “financial activities” to include “activities that are financial in nature (as defined in Section 4(k) of the Bank Holding Company Act).”  This includes all activities that the Federal Reserve has determined to be “closely related to banking” for purposes of Section 4(c)(8) of the Bank Holding Company Act (“BHC Act”), as well as those activities specifically deemed to be financial under Section 4(k) of the BHC Act. Particularly in the case of activities permitted under Section 4(c)(8), the Federal Reserve’s regulations describing those activities typically include a number of restrictions or conditions, and to the extent a bank holding company’s conduct of an activity does not conform to all applicable restrictions or conditions it is generally deemed not to be permissible under Section 4(k) of the BHC Act.  As described in the Supplemental NPR, a number of commenters on the Federal Reserve’s February 11, 2011 notice of proposed rulemaking suggested that a company that conducts an activity typically considered to be financial, but that does not do so in conformance with all the requirements imposed by the Federal Reserve’s regulations on the conduct of that activity by a financial holding company, may not in fact be engaged in a financial activity “as defined in Section 4(k) of the BHC Act.”
The Supplemental NPR addresses these comments by proposing that, for purposes of Title I of Dodd- Frank only, any activity permitted under Section 4(k) of the BHC Act will be considered to be a financial activity “without regard to conditions that were imposed on bank holding companies that do not define the activity itself.” That is, conditions that were placed on such activities in order (for example) to limit the safety and soundness risks posed by the activity will not be relevant when the Federal Reserve or, by extension, the Council under the Final Rule is assessing which of a particular company’s activities are “financial in nature” for purposes of Title I of Dodd-Frank. In order to clarify which conditions “do not define [an] activity itself,” the Supplemental NPR contains a new appendix to proposed Subpart N of the Federal Reserve’s Regulation Y that lists all activities deemed to be “financial in nature” under Section 4(k) of the BHC Act, including only those conditions deemed by the Federal Reserve to “define the activity itself.” In essence, the appendix constitutes a simplified list of the permissible activities listed elsewhere in Regulation Y and in Section 4(k) of the BHC Act. For example, making merchant banking investments is listed as a financial activity, without regard to the requirement applicable to financial holding companies that such investments not be in companies that are themselves engaged in activities that are financial in nature. Another example is that arranging real estate financing would be deemed to be a financial activity, regardless of whether the organizer is also participating in the development of the property, even though such participation is prohibited for bank holding companies under Regulation Y. If adopted as proposed, this list would form the basis for any assessment by the Council under the Final Rule regarding whether a particular activity, as conducted by a particular firm, is deemed to be a financial activity for purposes of Title I.
 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
 77 Fed. Reg. ___________( __________, 2012). Available at http://www.treasury.gov/initiatives/fsoc/Documents/Nonbank%20Designations%20-%20Final%20Rule%20and%20Guidance.pdf.
 76 Fed. Reg. 64264 (Oct. 18, 2011).
 The Federal Reserve issued proposed rules on December 20, 2011 to implement the wide- ranging enhanced prudential standards under Section 165 of Dodd-Frank which would apply to nonbank financial companies designated as systemically important. See our memorandum “Systemically Important Financial Companies,” dated December 22, 2011, available at http://www.sullcrom.com/files/Publication/9302aa5a-e29c-4b55-8020-28042c4aa822/Presentation/PublicationAttachment/d14671a2-7d80-4bef-bade-2966a2d2104a/SC_Publication_Systemically_Important_Financial_Companies_12-22-11.pdf.
 The Final Guidance clarifies that the Council intends to interpret the term “company” broadly with respect to nonbank financial companies and other companies to include any corporation, limited liability company, partnership, business trust, association, or similar organization. It does not intend to encompass unincorporated associations within the definition of “company.”
 The Council “will consider a ‘threat to the financial stability of the United States’ to exist if there would be an impairment of financial intermediation or of financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy.”
 Dodd-Frank § 102(a)(6). The Federal Reserve has issued a proposed rule implementing this statutory definition based on amounts reported in consolidated financial statements prepared in accordance with GAAP. 76 Fed. Reg. 7731 (Feb. 11, 2011) (to be codified at 12 C.F.R. pt. 225 Subpart N). As discussed below, the Federal Reserve issued a supplemental notice of proposed rulemaking relating to activities considered to be “financial in nature.”
 Dodd-Frank § 113(a)(1).
 The Preamble notes that the Council does not intend to “provide industry-based exemptions” from potential determinations under Section 113 of the Dodd-Frank Act. In a footnote to this text, the Council notes that under Section 170 of Dodd-Frank the Federal Reserve is “authorized to promulgate regulations on behalf of, and in consultation with, the Council setting forth the criteria for exempting certain types or classes of nonbank financial companies from supervision.” We note that Section 170 of Dodd-Frank says that the Federal Reserve must promulgate such regulations.
 Dodd-Frank § 113(a)(2).
 The Council intends to review the appropriateness of both the Stage 1 thresholds and the levels of the thresholds that are specified in dollars as needed, but at least every five years, and to adjust the thresholds and levels as the Council may deem advisable.
 The Preamble notes, in response to questions from commenters, that the Council currently intends to calculate this threshold using data available through the Trade Information Warehouse, which is operated by a subsidiary of the Depository Trust & Clearing Corporation. It further notes that if other sources for this data become available, the Council may use those sources instead of, or in addition to, this source.
 The Final Guidance notes that “as reporting requirements evolve and new information about certain industries and nonbank financial companies become available, the Council expects to review the quantitative thresholds as appropriate based on this new information. For example, the Council may consider credit exposure data proposed to be collected under section 165 of [Dodd-Frank] by the Federal Deposit Insurance Corporation and the [Federal Reserve].”
 The Council notes that it expects to review financial statements prepared in accordance with statutory accounting principles in Stages 2 and 3, if applicable.
 The Stage 2 analysis will, in general, be based on “information already available to the Council through existing public and regulatory sources, including information possessed by the company’s primary financial regulatory agency or home country supervisor, as appropriate, and information obtained voluntarily from the company.”
 The Council added “and effectiveness” to the Final Guidance.
 The Final Rule clarifies the Council’s authority to accept the submission of data, information, and reports that would be treated as confidential. The Council expects that nonbank financial companies’ submissions will likely contain or consist of “trade secrets and commercial or financial information obtained from a person and privileged or confidential” and information that is “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.” These types of information are subject to withholding under exemptions 4 and 8 of the Freedom of Information Act (“FOIA”) (5 U.S.C. § 552(b)(4) and (8)). To the extent that nonbank financial companies’ submissions contain or consist of data or information not subject to an applicable FOIA exemption, that data or information would be releasable under the FOIA. The Final Rule also provides that, consistent with Dodd-Frank, submission of nonpublic data or information shall not constitute a waiver of, or otherwise affect, any legal privilege arising under federal or state law. See Sec. 112(d)(5)(B) of Dodd-Frank.
 The minimum 30-day notice was not included in the October 2011 Proposal.
 A public company that receives a Notice of Proposed Determination may conclude that applicable securities laws require it to disclose receipt of the notice and potential consequences, notwithstanding that the October 2011 Proposal provides that the Council will publicly announce final determinations but not proposed determinations.
 See Section 102(a)(6) of Dodd-Frank.
 See 12 C.F.R. §§ 225.28(b) and 225.86(b).