* FSOC finalizes rule on how it will pick systemic firms
* Insurers, hedge funds anxious to see if picked
* Firms expected to get clarity by end of this year
By Dave Clarke
WASHINGTON, April 3 (Reuters) - The U.S. financial risk council approved a final rule on Tuesday laying out how it will decide which financial companies outside the banking industry will face new scrutiny by the Federal Reserve in hopes of preventing a repeat of the 2007-2009 financial crisis.
The financial industry's attention will now turn to which companies will actually be tapped for this additional oversight, something U.S. Treasury Secretary Timothy Geithner has said should happen by the end of this year.
Large insurers, hedge funds and other financial firms are hoping to avoid the systemic designation and have been trying to convince regulators to leave them alone.
BlackRock Inc, General Electric's GE Capital unit and MetLife Inc are among the companies that have written to regulators trying to avoid making the list.
The final rule was approved at a public meeting by the Financial Stability Oversight Council (FSOC), headed by the Treasury secretary and counts all the major financial regulators among its members.
The rule lays out broad measures the council will use to decide which companies should be given a once over but it does not significantly narrow the field of who could be picked, something that will ensure anxiety levels will remain high among executives at firms worried they will be designated.
The ability to keep a closer eye on financial giants other than banks is a major aspect of the 2010 Dodd-Frank reform law and is supposed to prevent the chaos that occurred after the government was caught flat-footed in late 2008 when insurer American International Group Inc ran into trouble.
Ultimately the government rescued AIG with $182 billion in government funds.
Fed oversight could be costly for companies as it involves maintaining higher capital reserves, having a plan for liquidation in the event of a failure and other regulatory requirements laid out in the law.
Companies trying to avoid the systemic designation have also expressed concerns about how a bank regulator such as the Fed would oversee industries outside its area of expertise.
Under Dodd-Frank, banks with more than $50 billion in assets are automatically subject to greater scrutiny by the Fed.
Dodd-Frank created the council to monitor risks to the financial system and to provide a forum for regulators to share information in an effort to get the different agencies to cooperate.
Treasury staff said there are only minor differences between a proposal released in October and what was approved on Tuesday.
The final rule ultimately gives FSOC the ability to designate any financial firm for greater oversight but it provides details on the type of companies that will be considered.
The rule lays out a three-step process for how regulators will evaluate a company that includes allowing firms to contest being designated.
Regulators will first evaluate companies that have more than $50 billion in total consolidated assets and meet at least one of the other criteria including: whether it has $3.5 billion in derivative liabilities and $20 billion in outstanding loans borrowed and bonds issued.
From there the council will analyze information already available to regulators and the public.
If regulators decide they want to the move forward, the council will notify a company it is under consideration and will ask for more information.
After this third step the council can vote to designate a company as systemically important.
The company can request a hearing with regulators to dispute being picked after which the council would have to vote again to make the designation final.
Industry groups have complained some of the criteria are too broad and that regulators need to move faster to let firms know if they will be tagged as systemic.
The U.S. Chamber of Commerce on Tuesday criticized the panel for not being more open, such as by holding public hearings, when writing the rule.
The perfunctory aspect of the public meetings where rules are approved with little discussion has also drawn complaints.
"Today's meeting of the Financial Stability Oversight Council lasted less than 10 minutes and makes the Kremlin's Politburo at the height of the Soviet Union look open and democratic by comparison," said Dennis Kelleher, president of Better Markets, a group that advocates tighter financial regulation.