Regulators weigh new restrictions on non-bank firms

• Vote represents first designation of %22systemically important%22 financial firms
• Designations designed to avoid new financial crisis
• Companies named would have 30 days to challenge the rulings

Top federal regulators are expected to vote Monday on making several non-bank financial firms subject to stricter government oversight and financing requirements because they could pose an economic threat in the event of a new financial crisis, according to a person familiar with the issue.

The anticipated decision by the Financial Stability Oversight Council (FSOC) would be the first designation of firms as being so "systemically important" that they require Federal Reserve oversight, according to the person, who was not authorized to comment publicly because of the sensitive nature of the Monday closed-door session.

The oversight council, an interagency panel formed after the 2008 financial crisis and headed by Treasury Secretary Jacob Lew, has not identified the firms. But in filings with the Securities and Exchange Commission, at least three companies — American International Group, Prudential Financial and GE Capital — have disclosed that they're in the final stage of consideration.

"We have substantial staff work going on ... and we're trying to get this matter up for a decision as quickly as possible," Lew replied when Sen. Tim Johnson, D-S.D., chairman of the Senate Committee on Banking, Housing and Urban Affairs, asked about the designation timing during a May 21 committee hearing.

Dennis Kelleher, CEO of Better Markets, a non-profit that has pressed for stricter financial regulation, said it appeared likely, if not certain, the financial council would approve at least three designations during Monday's session.

"While we and others have been critical that it has taken FSOC too long — almost five years since the financial crisis — they are over-processing everything out of an abundance of caution and an attempt to avoid lawsuits," said Kelleher. "But they want to move on it before the actual fifth-year anniversary, and time is running out."

The council is not expected to name the firms publicly. The companies would have 30 days to request a hearing to challenge the designations. If they don't file protests, the council could issue a final designation in 40 days, at which time the firms would be publicly identified.

Firms deemed systemically important would be regulated by the Fed and would be required to maintain larger capital reserves. They would also have to undergo periodic financial stress tests and prepare a plan for safely unwinding operations if collapse threatened.

During the 2008 financial crisis, the funding troubles of some non-bank firms threatened the U.S. financial system and the broader economy. Among the most prominent was AIG, which nearly collapsed under the burden of credit default swaps it sold, which provided insurance against the risk that certain mortgage-backed securities would default. A $182 billion federal bailout saved the firm.

The Dodd-Frank financial reform package enacted after the financial crisis established the financial council and outlined the mechanism for designating systemically important financial institutions.

Some financial analysts and investors have raised concerns that the designations could make it more difficult for companies to buy back shares and raise dividends.

In its most recent quarterly filing with the SEC on May 2, AIG warned that payment of future dividends in part depends on "whether we are determined to be a non-bank systemically important financial institution" under Dodd-Frank.