Federal Reserve Board Proposes Rule Defining Covered Nonbank Financial Companies That May Capture the Largest Hedge Funds

On February 8, 2011, the Federal Reserve Board (Board) issued a proposed rule (Proposed Rule) that implements two provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).  The Dodd-Frank Act requires the Board to issue regulations that establish criteria for determining whether a company is “predominately engaged in financial activities” and to define the terms “significant nonbank financial company” and “significant bank holding company” for purposes of designation by the Financial Stability Oversight Council (FSOC) of systemically important nonbank financial companies that may become subject to Board supervision.  The Proposed Rule defines a company as “predominately engaged in financial activities” if it, or its subsidiaries, derives 85 percent or more of its gross revenues or assets from activities defined as “financial in nature” under the Bank Holding Company Act of 1956 (BHCA), as amended by the Gramm-Leach-Bliley Act of 1999 and Board regulations.  The Proposed Rule also addresses how to treat the revenues and assets attributable to equity investments in other organizations that are not consolidated with the company.  The Proposed Rule would also deem a firm a “significant nonbank financial company” or “significant bank holding company” if it controls $50 billion or more in total consolidated assets, or the FSOC has designated it as “systemically important.”  We summarize the most pertinent parts of the Proposed Rule.

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