WASHINGTON Insurance giant MetLife sharpened its legal argument against the Financial Stability Oversight Council this week, saying that the council overstepped its authority and its own rules by designating the firm as systemically important.
In a response brief filed June 16, MetLife argued that the Dodd-Frank Act may have given FSOC broad discretion in designating companies as systemically important, but that authority "is not boundless" and is subject to certain prescribed limits. In particular, the law sets a specific definition of what kinds of companies may be eligible for designation as nonbank systemically important financial institutions.
Specifically, a company must have at least 85% of its revenues originating from U.S. activities that are "financial in nature." MetLife said that more than 15% of its revenues stem from foreign, nonfinancial activities, making it ineligible under the law's definition.
But MetLife went on to say that, even if it were eligible, the plain language of Dodd-Frank and its implementing rules would have suggested that the firm should not have been designated as a SIFI.
There are a number of conditions that must be met before it can be considered a SIFI, the brief says, including its vulnerability to "material financial distress." In its designation, FSOC assumed MetLife was vulnerable rather than demonstrating it and ignored other mitigating factors that make the risk of the firm's insolvency more remote, the firm said.
"FSOC focused myopically on MetLife's size and exaggerated its interconnections with other financial companies, while discounting almost entirely the safeguards built into the existing, comprehensive oversight of MetLife's subsidiaries by state, federal, and international regulators," MetLife said.
Among those factors was the assumption that a network of state agencies which act as the primary prudential regulators for the insurance industry would either not intervene if MetLife faced a stress event, or, if they did, they would make the crisis worse by precipitating a lack of public confidence in the company. MetLife said that, contrary to FSOC's contention that its judgments should be afforded deference from the courts, none should be given if the conclusions that regulators are reaching are irreconcilable with the combined record of industry performance and expert opinion.
"While FSOC attempts to characterize this speculation as a 'predictive judgment' entitled to judicial deference, no deference is due where, as here, the agency disregards the basic features of the business it seeks to regulate, dismisses without explanation relevant historical precedent, ignores the views of its own subject matter experts, and adopts a mode of analysis utterly divorced from accepted principles of risk assessment, settled standards of rational decision-making, and the agency's own regulatory framework," MetLife said.
MetLife's suit is the first to be brought against FSOC since the council was created by Dodd-Frank in 2010, and the outcome of the case could have a major effect on how the agency interprets its authority to designate firms and activities as systemically important. FSOC has so far designated three other firms insurance providers AIG and Prudential, as well as GE Capital but none have fought the designation in court, though GE said it in April that it would begin to spin off its financial holdings in an effort to shake the SIFI designation.
Designated firms are subject to enhanced prudential standards enforced by the Federal Reserve, though the central bank has not yet issued specific rules outlining what those enhanced standards would be.
The FSOC nonbank designation process has nonetheless cultivated some dedicated critics. Republican lawmakers have repeatedly introduced a bill that would revise the nonbank SIFI designation process or place a moratorium on designations pending an investigation of the agency's inner workings. Critics say the process is too opaque and leaves firms that are under FSOC's microscope little meaningful recourse to challenge their designations.
FSOC addressed at least some of those concerns earlier this year when it unveiled several revisions to its designation process, namely by informing firms that they were being reviewed earlier in the designation process, allowing firms under review to submit documents and expert opinions to FSOC for consideration, and elaborating on the procedures for rescinding a designation once it has been assigned. Though FSOC has not closed the door to further revisions to its process, insurance industry groups and critics in Congress have said that the revisions do not go far enough.