When Does a Non-Bank Financial Company Pose a 'Systemic Risk'? A Proposal for Clarifying Dodd–Frank

Traditionally, a non-bank financial company (NBFC) facing financial insolvency would reorganize pursuant to Chapter 11 of the Bankruptcy Code. This was the case for Lehman-Brothers in 2008, culminating with a large portion of the company being sold to Barclays. In the aftermath of the 2008 financial crisis – a crisis that Lehman-Brothers played a role in exacerbating – Congress acted to provide the Treasury with more power to guide the United States economy through a future financial crisis. Specifically, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Title II of Dodd-Frank allows the Treasury to force the dismissal of a NBFC's Chapter 11, and provides the FDIC with almost dictatorial powers to liquidate the company. Title II liquidation authority is triggered by the Treasury finding that allowing the NBFC's Chapter 11 to go forward would pose a “systemic risk” to the economy.The author argues that Title II provides no meaningful standard for determining when allowing a NBFC to go through Chapter 11 poses a “systemic risk”. Even after consulting the relevant regulatory attempts to clarify “systemic risk”, a non-bank financial company would be hard pressed to know where the line is drawn. The regulations simply state that size and interconnectedness will be taken into account. But significant questions remain. How big? How interconnected? The Author does not argue anything so radical as that sensible regulations cannot reduce “systemic risk”. Instead, he simply argues that the definition of “systemic risk” is not adequately certain to serve as a trigger for FDIC liquidation of a NBFC.The author proposes that Dodd-Frank be improved by providing for a no-action letter process similar to that used by the Securities and Exchange Commission. Under this proposed process, a non-bank financial company could assure itself that federal regulators would not interfere with the Chapter 11 reorganization process – restoring an adequate level of ex ante certainty and the Rule of Law