The Financial Stability Oversight Council voted unanimously on Wednesday to issue proposed interpretive guidance that would implement an activities-based approach to identifying and addressing potential risks to financial stability and enhance “the analytical rigor and transparency” of the council’s process for designating nonbank financial companies, the council said in a statement. 

“Today’s proposal would make significant improvements to how the Council identifies, assesses and responds to potential risks to U.S. financial stability,” Treasury Secretary Steven Mnuchin said in the statement on Wednesday.

Under the proposed guidance, the council would prioritize its efforts to identify, assess and address potential risks to U.S. financial stability through an activities-based approach, monitoring financial markets and market developments in consultation with relevant financial regulatory agencies, according to the proposed guidance. If a potential risk to U.S. financial stability is identified, the council would leverage the expertise of existing regulators to address the risk.

The council would also perform a cost-benefit analysis before designating any nonbank financial company and would only designate a nonbank financial company if the expected benefits justify the expected costs of the designation, according to the proposed guidance.

“When evaluating the costs of a designation, the Council will consider not only the cost to the nonbank financial company from anticipated new or increased regulatory requirements in connection with a designation, but also costs to the U.S. economy,” the guidance stated. “Relevant costs to the company will likely include costs related to risk-management requirements, supervision and examination, and liquidity requirements.” 

The council would assess the likelihood of a nonbank financial company’s material financial distress when evaluating the firm for a potential designation and create a “more efficient and effective nonbank financial company designation process,” according to the guidance.

The FSOC’s current process for designating nonbank financial institutions has come under significant criticism. 

In October, the FSOC unanimously voted to rescind Prudential Financial Inc.’s “too big to fail” tag, meaning no insurers carry the designation anymore — a decision welcomed by major players in the insurance sector. The FSOC had designated Newark, New Jersey-based Prudential as a SIFI in September 2013.

The council removed the designation for New York-based American International Group Inc. in September and jointly moved for dismissal of the litigation involving New York-based MetLife Inc.’s designation in January.

The guidance document includes many questions such as if the FSOC should interpret its authority under the Dodd-Frank Act in a manner consistent with the opinion of the U.S. District Court for the District of Columbia in MetLife Inc. v. Financial Stability Oversight Council. The district judge overseeing the MetLife litigation called the FSOC’s determination was “fatally flawed.”

The interpretative guidance will be open for a 60-day public comment period after it is published in the Federal Register.