Lawsuit Challenges Constitutionality of FSOC

The suit alleges that, “Companies that are designated nonbank financial SIFIs will allegedly be seen by the investing public as less risky and will purportedly be able to attract capital at an artificially low rate.”

The suit, “Plaintiff State National Bank of Big Spring, alleges that it is injured by FSOC’s nonbank SIFI designations because it will be forced to compete with financial companies that are able to “attract scarce, fungible investment capital at artificially low costs.”

The suit also contends that Title I of the DFA, which created the FSOC, violates the Constitution’s separation of powers clause because its “open-ended grant of power and discretion to the FSOC, combined with the elimination of the indispensable check of judicial review of the FSOC’s judgments, and the inclusion of members who are neither appointed by the President nor confirmed by the Senate, gives the FSOC unfettered discretion in determining which nonbank financial companies will be designated ‘systemically important.’”

Nelson says that former Kentucky Insurance Commissioner, S. Roy Woodall, who was appointed by President Obama to serve as FSOC’s voting member with insurance expertise, is also named as a defendant in the lawsuit.

He said the two non-voting FSOC members with insurance expertise, Federal Insurance Officer (FIO) Director Michael McRaith and John Huff, the Director of the Missouri Department of Insurance, were not named as defendants.

Among insurers, MetLife is in the process of selling its bank to GE Capital to avoid potential federal regulation as a bank holding company or as a systemically-significant financial institution (SIFI).

The Fed is delaying further scrutiny of MetLife until after it completes the sale of its bank to GE Capital, which must be approved by the Federal Deposit Insurance Corporation.

And, in a note released Tuesday, Sterne Agee cites as a potential negative for American International Group the fact that it might be designated a SIFI.