On April 3, 2013, the Federal Reserve Board (“FRB”) approved a final rule (“Final Rule”) that establishes (1) definitions of the terms “significant nonbank financial company” (or, more commonly referred to as SIFIs or “systemically important financial institutions”) and “significant bank holding company,” and (2) the requirements for determining when a company is “predominantly engaged in financial activities.” These terms are relevant to various provisions of Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), including section 113, which authorizes the Financial Stability Oversight Council (“FSOC”) to designate SIFIs for supervision by the FRB.
Under the Final Rule, the FRB has concluded that there is a sufficient basis for adopting a $50 billion asset threshold for purposes of defining significant nonbank financial companies and bank holding companies. The FRB has not included an inflation adjustment provision in the Final Rule because it determined that an inflation adjustment would add complexity and burden to the definition without any significant benefit in more accurately defining the relevant terms. However, the FRB may consider amending the $50 billion threshold in the future if it determines that such reconsideration is appropriate.
For purposes of Title I of the Act, a company is considered to be “predominantly engaged” in financial activities if either (1) annual gross revenues from financial activities (including subsidiary activities), as well as from the ownership or control of an insured depository institution, represent 85% or more of the consolidated annual gross revenues of the company or (2) the consolidated assets of the company and its subsidiaries related to financial activities, as well as related to the ownership or control of an insured depository institution, represent 85% or more of the consolidated assets of the company.
The Final Rule also enumerates types of “financial activities” for purposes of determining whether a company is predominantly engaged in financial activities under Title I. This list includes the following insurance-related items:
- insurance activities
- insurance company portfolio investments
- insurance agency and underwriting activities
The Final Rule will become effective on May 6, 2013.
To see a copy of the Final Rule, click here.
To see the FRB’s release on the Final Rule, click here.
 Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities and acting as principal, agent, or broker for purposes of the foregoing, in any state, are financial activities specifically enumerated in the Bank Holding Company (“BHC”) Act.
The BHC Act authorizes companies engaged in certain types of insurance activities to make portfolio investments. In particular, financial holding companies are authorized by the BHC Act if: (i) the shares, assets, or ownership interests are not acquired or held by a depository institution or a subsidiary of a depository institution; (ii) such shares, assets, or ownership interests are acquired and held by an insurance company that is predominantly engaged in underwriting life, accident and health, or property and casualty insurance (other than credit-related insurance) or providing and issuing annuities; (iii) such shares, assets, or ownership interests represent an investment made in the ordinary course of business of such insurance company in accordance with relevant state law governing such investments; and (iv) during the period such shares, assets, or ownership interests are held, the bank holding company does not routinely manage or operate such company except as may be necessary or required to obtain a reasonable return on investment.