The FDIC issued a final rule (the “Final Rule”) that establishes the criteria for determining whether a company is “predominantly engaged in activities that are financial in nature or incidental thereto” for purposes of Title II (Orderly Liquidation) of the Dodd-Frank Act (“Title II”). Title II concerns the orderly liquidation of systemically important financial institutions. The Final Rule adds a new section 380.8 to Part 380 of the FDIC’s regulations.
For purposes of Title II, a company is a “financial company” if it is: (1) a bank holding company; (2) a nonbank financial company supervised by the FRB; (3) predominantly engaged in activities that the FRB has determined are financial in nature or incidental thereto; or (4) a subsidiary of a company described in (1), (2) or (3) that is predominantly engaged in activities that the FRB has determined are financial in nature or incidental thereto, unless it is a subsidiary that is an insured depository institution or an insurance company. A “financial company” that is close to failing and whose failure would have serious adverse effects on financial stability in the U.S. may be subject to Title II’s orderly liquidation provisions.
Under the Final Rule, a company is deemed to be predominantly engaged in financial activities if:
- at least 85% of the company’s total consolidated revenues from either of its two most recent fiscal years were derived directly or indirectly from financial activities; or
- based upon all relevant facts and circumstances, the consolidated revenues of the company from financial activities constitute 85% or more of the company’s total consolidated revenues.
The FRB has adopted a parallel final rule that established its requirements for determining when a company is predominantly engaged in financial activities. The FRB’s final rule became effective on May 6, 2013 and was discussed in the April 9, 2013 Financial Services Alert.
In a separate, but related, matter, on June 3, 2013 the Financial Stability Oversight Counsel (the “FSOC”) voted to designate certain large, nonbank financial companies as “systemically important.” While the FSOC did not disclose the names of companies that it had proposed for designation as “systemically important,” the financial press subsequently reported that Prudential Financial, Inc., American International Group, Inc. and the G.E. Capital Unit of General Electric Co. had confirmed that they would be part of the first group so designated by the FSOC.
The FDIC’s Final Rule will become effective on July 10, 2013.