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Only A First Step

 

On December 20, the Board of Governors of the Federal Reserve (the FRB) issued a proposed rule (the Proposed Rule) that would apply enhanced prudential standards to U.S. bank holding companies with total consolidated assets of USD50 billion or more (Covered Banks) and nonbank financial companies that the Financial Stability Oversight Counsel (FSOC) designates as systemically important (Non-Bank Covered Companies). The Proposed Rules are issued in connection with Sections 165 and 166 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act), which require the FRB to adopt enhanced regulatory, reporting and other rules and requirements governing the operation and potential wind-up of Covered Banks and Non-Bank Covered Companies (collectively, Covered Companies). The Proposed Rules do not cover foreign banking organizations that the Dodd-Frank Act requires to be subject to enhanced standards applied by the FRB, but the release accompanying the Proposed Rules (the Release) states that the FRB "expects to issue shortly" a separate release that will address such foreign banking organizations.

The Proposed Rule represents only a first step in setting out the prudential framework to which Covered Companies will be subject, leaving much to the FRB's future regulatory discretion. This ambiguity is particularly unsettling for Non-Bank Covered Companies, who in many cases will be subject to capital and leverage requirements for the first time under the new regulatory regime. In the attached e-Bulletin, we consider by way of example the potential implications for non-bank affiliated asset managers who could be designated as Non-Bank Covered Companies by FSOC.

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