On March 25, the Financial Stability Oversight Council (FSOC) released for public comment proposed interpretive guidance on nonbank financial company designations. The guidance proposes to replace FSOC’s 2023 guidance and analytic framework for financial stability risks (covered by InfoBytes here), and would reinstate a number of elements first introduced in the council’s 2019 interpretive guidance (covered here). Among other things, the proposed guidance: (i) prioritizes an activities-based approach focusing first on risks from specific activities and practices across markets, reserving entity-specific designations for risks not adequately addressed through that approach; (ii) incorporates economic growth and economic security into FSOC’s analysis; (iii) commits FSOC to conducting a cost-benefit analysis before any designation, proceeding only if the expected benefits justify the expected costs; and (iv) restores an assessment of the likelihood of a nonbank financial company’s material financial distress as part of its benefits analysis, a step eliminated in the 2023 guidance.

Additionally, the guidance: (i) introduces a new pre-designation “off-ramp,” under which FSOC would identify steps a nonbank financial company or regulators could take to address a potential threat, generally allowing 180 days to resolve material risks; (ii) raises the threshold for interpreting “threat to the financial stability of the United States” to mean an impairment of financial intermediation or market functioning “sufficient to inflict severe damage on the broader U.S. economy,” a higher standard than used in the 2023 framework; and (iii) adds a new process allowing member agencies to act directly to address potential risks, requiring a written response from the relevant agency within a set period. The proposed guidance is open for a 45-day public comment period following publication in the Federal Register.