WASHINGTON — The Trump administration quickly dropped the Obama administration's legal backing of the Consumer Financial Protection Bureau in the bureau's constitutionality case. But the administration's calculus appears trickier with regard to legal troubles for another Obama-era invention: the Financial Stability Oversight Council.
The FSOC — made up of heads of the regulatory agencies and chaired by Treasury Secretary Steven Mnuchin — is still appealing a lower-court ruling that set limits on how it designates "systemically important" nonbanks for heightened supervision. Specifically, the ruling threw out the designation for MetLife, which had sued the council.
Although Republican lawmakers and industry stakeholders under the FSOC microscope are urging Treasury to drop the case, it is unclear whether Mnuchin or another administration official can make that decision without approval from the other council members. The council members are still largely Obama appointees, many of whom still likely support the appeal.
“If I was Mnuchin, I wouldn’t drop the case without an FSOC committee vote,” said Oliver Ireland, a partner at Morrison & Foerster.
The government's dropping the appeal in MetLife v. FSOC is a route supported not just by industries where firms have already been designated as systemically important financial institutions, or SIFIs, but also by covered industries increasingly under the FSOC's microscope, such as the asset management sector.
“If I were in the administration, I’d say, ‘Let’s dismiss the appeal, the court got it right, we need to revise this process,’ ” said Paul Schott Stevens, president and chief executive of the Investment Company Institute, who represents asset managers. “Certainly they’re getting support in that regard from the House and Senate, [which] have looked at this and have said there really is a problem with this process.”
Last March a federal judge sided with MetLife, arguing that the FSOC had not followed its own procedures established under the Dodd-Frank Act and had erred by taking for granted that MetLife’s business could be distressed by the SIFI designation process.
The FSOC appealed that ruling, and in October an oral argument was held in the Court of Appeals for the D.C. Circuit, in which the sitting judges appeared sympathetic to the government’s case. There is no formal timetable for an opinion from the court, but a decision could be handed down any day.
But the voices calling on the Trump administration to drop its defense of the case have been loud.
A group of Republicans on the Senate Banking Committee last month called on Mnuchin to use “all of the tools available” to address the problem of "too big to fail." According to a spokesperson for Sen. Tom Cotton, R-Ark., the lead author of the letter, those tools include moving to have the FSOC drop the MetLife appeal.
Such a move would be consistent with the Department of Justice's move last month to reverse its position in the case on the constitutionality of the CFPB's leadership structure. In a lawsuit filed by PHH, a three-judge appeals court panel ruled that the CFPB's single-director leadership was unconstitutional. The case is seen as a bellwether on President Trump's ability to fire CFPB Director Richard Cordray.
After the Obama administration had supported the CFPB's cause, the Trump Justice Department turned against the bureau with a brief filed last month, arguing that President Trump should have the ability to fire the bureau's chief.
The strategy in the CFPB case and the GOP calls to drop the MetLife appeal raise the question why the administration has not yet dropped the FSOC's side of the suit. Mnuchin, for his part, was relatively silent on the issue during his confirmation hearing in January and the Treasury declined to comment for this story.
But Gary Cohn, the chair of the White House National Economic Council and a former top executive at Goldman Sachs, said in an interview with The Wall Street Journal in February that “we don’t think nonbanks should be SIFIs.” Members of the House Financial Services Committee, which held a hearing on March 28, likely favor a similar approach.
Yet there is a diversity of opinion as to whether Mnuchin can act unilaterally to drop the suit. Ireland said that as chair of the FSOC, Mnuchin has a kind of supercharged vote on the council. He has a unilateral veto on the designation of nonbank SIFIs, for example. But according to the statute, he also needs a majority of voting members to move “all decisions that it is authorized or required to make” unless otherwise specified, and litigation is not specified.
For systemic designations — as well as de-designations — of nonbanks as SIFIs, however, the council requires "a vote of not fewer than two-thirds of the voting members then serving."
At present, assuming those FSOC members who voted to designate MetLife as a SIFI would not vote to drop the appeal, it seems that Mnuchin does not have a majority on the council.
But others, including Stevens, point out that FSOC appeared to appeal the MetLife verdict without a vote by the council, so it would stand to reason that a decision on the litigation is the prerogative of the chairman.
Even if Mnuchin does not have the votes to drop the litigation, a determined Treasury secretary could potentially avail himself of another way. The FSOC, like most federal agencies, does not have an independent right of litigation, meaning it is represented in court by the DOJ, which could refuse to argue the case.
But even if the administration chooses to abandon the appeal, the same issues regarding FSOC's ability to designate firms would remain.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that much of the discussion around the litigation misses a larger point. Dismantling the FSOC's authority, she said, would take a painstaking rulemaking process as a start, and likely subsequent congressional action to limit the FSOC’s authority in a more permanent way.
“From a practical perspective, for MetLife’s view, they would ideally like to have Treasury drop the appeal so that the lower court ruling stands and proves the point, rather than have it overturned,” Petrou said. “But who cares? The established law, absent a change in the law by Congress, means they or others could be designated at some future point.”
MetLife, for its part, said in a statement that the company “is not systemically important."
"We’ve made our SIFI views known across the board to members of Congress, journalists, a federal district court, the Obama administration and the Trump administration,” the statement said.
Stevens agreed that a legislative change in the FSOC's authority is still a more effective option than a policy change brought about by resolving the MetLife litigation alone.
“It was never a well-considered provision of” Dodd-Frank, Stevens said of the SIFI designation process. “The only way to remove this sword of Damocles that’s hanging over the asset management industry is to amend [the provision] and remove that authority.”
But Ireland said Mnuchin could also just wait until President Trump can appoint new heads of the regulatory agencies to fill the FSOC seats needed for a majority to support changes in the FSOC procedures. The terms of some of the current council members expire either this year or next.
If the goal is to rescind designations and change the designation rules, Ireland said, Mnuchin will have his opportunity regardless of the outcome of the litigation.
Once new appointees sit on the council “within a year,” Mnuchin would have “the votes to do whatever he wanted, presumably,” Ireland said. “So why not let nature take its course, and then we’ll decide where we go from there?"