WASHINGTON The Financial Stability Oversight Council and their allies plan to beat a legal challenge to the agency's power to designate nonbanks as systemically important by demonstrating just how high the legal bar is for a federal court to block an administrative decision.
Several groups including academics, insurance regulators and public interest groups filed amicus briefs last month siding with FSOC in a suit brought by life insurance giant MetLife to overturn its designation. Companies named as systemically important financial institutions are subject to enhanced supervision and regulatory requirements, though the exact nature of those requirements has not yet been determined.
FSOC said in its reply to MetLife's suit that it had engaged in more than 17 months of analysis of the insurance giant, reaching a near-unanimous conclusion among the council's regulatory members that the insurer would pose a systemic threat if it were distressed.
FSOC said that because Congress gave it the power to address systemic risks before they occur, the council acted within its powers and MetLife does not have a basis for challenging its determination. Congress further limited judicial review of SIFI designations to whether FSOC had acted in an "arbitrary and capricious" standarda high bar to clear, FSOC said.
"This nonbank designation authority is a centerpiece of Congress's framework to address the risks exposed during the financial crisis, including risks posed by insurance organizations," said FSOC, which is chaired by Treasury Secretary Jack Lew, in its brief. "Arbitrary and capricious review is particularly deferential where, as here, the agency's decision involves highly technical analysis of complex financial information within its expertise, as well as predictive judgments about financial markets."
A group of fifteen law and finance academics from leading institutions sided with FSOC in its amicus brief, saying that Dodd-Frank explicitly gave FSOC the power to designate nonbanks as SIFIs based on their potential for systemic harm. In such cases, which rely on a predictive and inherently subjective judgment, the Supreme Court has said agencies should be afforded even more deference from the courts.
"Notably, Congress did not require the FSOC to show that a designated firm's distress would pose a threat to financial stability, although Congress did impose that evidentiary burden as a condition for other regulatory actions authorized by Dodd-Frank," the amicus brief said. "Particularly deferential review is warranted here because the judgment under review is fundamentally predictive in nature."
But MetLife is arguing that FSOC acted arbitrarily when designating the firm because it did not consider certain material facts. Specifically, the firm claimed that the council did not consider that the insurance industry, including MetLife, is regulated by individual states, and did not consider factors that would mitigate its systemic impact despite its large size. The firm also said that FSOC relied on "vague standards and assertions, unsubstantiated speculation, and unreasonable assumptions" in its analysis and denied the firm access to data that the council was using to make its determinations.
It's likely to face an uphill battle in convincing a court to agree, however, according to observers. They pointed to the arbitrary and capricious standard as particularly tough to challenge. So long as the agency acted reasonably, a court is unlikely to consider the merits of whether the decision was correct.
Oliver Ireland, a partner with Morrison Foerster and former Fed official, said the task of proving arbitrary and capricious behavior especially in the economic arena is "fraught with difficulty." What is more, many groups are joining FSOC's side of the argument because they would prefer to see the agency's position prevail so other large firms can be designated as SIFIs as well.
"I think you've got a lot of people who are on the side of the government because they think the government ought to have the power to prevent future financial crises," Ireland said. "Whether it will prevent future financial crises is a different issue."
To date, MetLife has been fighting its designation alone none of the other three firms that have been designated have joined the suit in its defense. Insurance companies AIG and Prudential have not contested their designations, and a top AIG official said in January that he does not think MetLife will prevail in its suit. GE Capital, meanwhile, announced last month that it would spin off and downsize much of its financial businesses in order to get out from under its SIFI designation.
The American Council of Life Insurers, an industry trade group, has said that it intends to file its own amicus brief backing MetLife's claims before the June 26 filing deadline.
MetLife said in a statement that FSOC's arguments do not address its argument that rather than being a source of systemic risk, it is a source of systemic strength, and the council wrongly designated it as a nonbank SIFI.
"Far from presenting systemic risk to the U.S. economy, MetLife is a source of financial stability," the company said. "We strongly disagree with the arguments laid out by the government in its brief and look forward to responding in court later this month."
But MetLife's relatively lonely quest to overturn its SIFI designation does not necessarily mean that the industry is not on MetLife's side.
The regulatory relief bill recently introduced by Senate Banking Committee Chairman Richard Shelby, R-Ala., includes provisions that would make the SIFI designation process more interactive and give the firms under consideration more leverage to challenge a designation on procedural grounds. Ireland said those efforts suggest a difference in strategy, not end result, between MetLife and its contemporaries.
The "likelihood to get redress is probably better legislatively than it is in the courts," Ireland said. "This statute was written in a way that was designed to make it difficult to challenge these determinations."