On July 26, 2011, the Financial Stability Oversight Council (“FSOC”) released its first annual report, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  In the report, FSOC describes the current state of the U.S. financial system and includes recommendations for additional steps that should be taken to strengthen the financial system.  The recommendations addressed the following four areas:

– heightened risk management and supervisory attention;
– additional reforms to address structural vulnerabilities;
– legislation affecting housing finance; and
– financial regulatory reform.

FSOC also describes the progress of the implementation of the Dodd-Frank Act and various FSOC activities.  Notably, it discuss the status of the establishment of criteria for identifying nonbank financial companies subject to supervision by the Federal Reserve, and the designation of “financial market utilities.”  The Dodd-Frank Act provides a list of 10 considerations FSOC must use in making determinations under Section 113.  In fall 2010, FSOC began a rulemaking process to further clarify these statutorily-mandated considerations.  However, FSOC indicated in its report that it has not yet made any determinations under Section 113 of the Dodd-Frank Act.

In its report, FSOC also stated that “[w]e need to recognize that policy and regulation will often be behind the curve of innovation, and we must meet assumptions of ongoing stability with a heavy dose of skepticism.”  FSOC went on to say that its “best plan is to plan for constant change and the potential for instability, and to recognize that the threats will constantly be changing in ways we cannot predict or fully understand.”  To address these tasks, FSOC intends to focus its efforts in the following four areas:

– ongoing interaction between the financial system and the economy;
– buildup of systemwide leverage and funding mismatches;
– ongoing evolution of financial market activity and practices; and
– potential opportunities for regulatory arbitrage.

To see a copy of the FSOC’s full 2011 annual report, click here.