MetLife’s designation as a systemically important financial institution, or SIFI, by the Financial Stability Oversight Council was overturned Wednesday by a federal judge in a ruling that critics say deals a significant blow to federal attempts to regulate large nonbank financial companies.
Judge Rosemary Collyer of the U.S. District Court for the District of Columbia issued a sealed decision Wednesday agreeing with MetLife that the FSOC “erred” in designating the company a nonbank systemically important financial institution.
Dennis Kelleher, president and CEO of Better Markets, called the court’s ruling “a dangerous development that threatens the entire structure that protects the country and its taxpayers from future financial crashes caused by nonbanks in the so-called shadow banking system.”
Steven Kandarian, MetLife’s chairman, president and CEO, said in a statement that the ruling “validates MetLife’s decision to seek judicial review of our SIFI designation. From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States. This decision is a win for MetLife’s customers, employees and shareholders.”
The Treasury Department issued a statement stating it is confident that “FSOC’s determination was lawful and will continue to defend the Council’s designations process vigorously.”
FSOC, the Treasury said, “conducted a rigorous analysis of MetLife, including extensive engagement with the company, and determined that material financial distress at MetLife could pose such a threat to the financial system. We firmly believe that FSOC acted well within its legal authority to protect the entire global economy.”
Analysts at Washington Analysis issued a statement saying they expect FSOC to appeal the decision to the U.S. Court of Appeals for the D.C. Circuit. Judge Collyer said both parties — MetLife and FSOC — must meet by April 6 to determine whether all or some of Wednesday’s decision will be made public.
Washington Analysis expects the government will request that “aspects of the decision be kept confidential, so as to protect what they view to be proprietary aspects of the designation process.”
The analysts also expect the government will appeal the decision “as there are clear implications for the ability of federal regulators to continue overseeing large nonbank financial companies if today’s decision holds.”
As laid out by Washington Analysis, Judge Collyer agreed, in whole or in part, on three of the nine counts included in the original complaint:
- Judge Collyer agreed in whole with MetLife on Count Four: “FSOC’s designation of MetLife was arbitrary and capricious and violated the Dodd-Frank Act, FSOC’s own regulations, and the [Administrative Procedures Act] because FSOC failed to assess MetLife’s vulnerability to material financial distress.” MetLife contended that FSOC started with the assumption that the company could fail and the impact would reverberate through the financial system, rather than determining whether it was likely that the company would fail during a period of financial distress.
- Judge Collyer agreed in part with Count Six: “FSOC’s designation of MetLife was arbitrary and capricious and violated the Dodd-Frank Act and the APA because it depended upon unsubstantiated, indefinite assumptions and speculation that failed to satisfy the statutory standards for designation and FSOC’s own interpretive guidance.” The substance of the complaint is similar to Count Four, but is tied to MetLife’s argument that the Council allegedly changed its standards for designation over the course of the evaluation process.
- Judge Collyer agreed in whole with MetLife on Count Seven: “FSOC’s designation of MetLife was arbitrary and capricious and violated the Dodd-Frank Act and the APA because FSOC failed to consider the economic effects of designation on MetLife.” Count Seven is similar to other successful legal challenges post-Dodd-Frank that rely on the argument that regulators failed to conduct adequate cost-benefit analyses prior to taking a regulatory action.
Washington Analysis notes that while Judge Collyner’s decision “clearly strengthens” any legal action taken by Prudential and AIG — who have also been designated as SIFIs — neither company “would not be able to file the same suit, because MetLife acted within a 30-day window provided under Dodd-Frank for a company to seek a judicial review.”
Both Prudential and AIG would “likely need to take an alternative legal approach in any attempt to overturn its designation, with the fundamental argument being that they are entitled to equal protection under the law,” the analysts say.
However, FSOC is also required to review each nonbank SIFI designation annually, and SIFIs can request review of their designation at any time, the analysts state.
FSOC “can rescind any designation with a two-thirds vote, providing another pathway for the Council to change a SIFI’s status if material changes to a designated company occur or the boundaries of the Council’s authorities change.”
Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Capital Markets Subcommittee, stated that with the Wednesday decision, “FSOC’s perfect storm of secrecy and intimidation has created a shadow regulatory system that concentrates power in Washington at the expense of hardworking Americans,” adding that he was “pleased to see [that] the judicial branch took a stand for the Constitution with their decision.”
Now that the courts have spoken, he continued, “it’s time for Congress to step in and pull back the curtain on FSOC so the American people can see what this secretive body is really up to.”
Garrett authored H.R. 3557, the Financial Stability Oversight Council (FSOC) Transparency and Accountability Act, which passed the Financial Services Committee in November.
— Check out AIG Advisor Group Sale Fueled by DOL Fiduciary Rule, CEO Says on ThinkAdvisor.