This is a client memo prepared by the law firm of Davis, Polk & Wardwell.

On February 8, 2011, the Board of Governors of the Federal Reserve System (the “Board”) issued a notice of proposed rulemaking and request for comment setting forth suggested definitions of terms that appear in the systemic risk provisions of Title I of the Dodd-Frank Act—”predominantly engaged in financial activities,” “significant nonbank financial company” and “significant bank holding company.”

The first of these terms will be of most interest to companies that are concerned that they may be designated as systemic, including funds and companies whose activities are part commercial and part financial. The proposed rule provides a framework by which firms can assess whether their activities are “predominantly financial”, by reference to the Board’s historical practice and regulations under the Bank Holding Company Act. The second, “significant nonbank financial company” and “significant bank holding company,” relates to how regulators will evaluate credit exposures and interconnectedness between financial companies as part of the FSOC’s systemic risk regime.