On January 13, 2015, MetLife followed through on its threat to fight its designation as a systemically significant important financial institution (SIFI), and filed a lawsuit in the United States District Court for the District of Columbia against the Financial Stability Oversight Council (FSOC), the US interagency council formed under the Dodd-Frank regulatory reform act that is authorized to designate nonbank financial companies as being of systemic risk.
Previous blog posts have described the administrative process leading up to this moment. SIFIs are subject to supervision by the Federal Reserve Board and prudential restrictions such as enhanced capital requirements. Relief sought includes not only setting aside the designation of MetLife as a SIFI, but also declaring void the entire administrative process by which the FSOC designates SIFIs.
The 79 page complaint sets out in detail the FSOC administrative designation process that MetLife went through, summarizing the arguments it made to the FSOC in an attempt to persuade the FSOC that it not be designated as a SIFI. The Complaint also emphasizes the dissenting vote on the SIFI designation made by the voting FSOC member from the insurance industry, as well as the objection to the determination that was made by the nonvoting state insurance regulator member.
The Complaint sets out several grounds for challenging the designation as “arbitrary and capricious” and violative of both Dodd-Frank and the Administrative Procedure Act, including the following:
- The FSOC failed to give sufficient weight to the comprehensive state insurance regulation to which 98% of MetLife’s assets already are subject.
- The FSOC first should have considered reasonable alternatives to designating the entire company as a SIFI, such as identifying specific financial activities as systemically significant; MetLife made much of the fact that the FSOC apparently is taking that route regarding its continuing review of asset managers and whether they or some of their activities should be designated as systemically significant.
- The administrative process for designating SIFIs is flawed in several ways, including a lack of separation of powers, in that the FSOC ultimately acts as judge in issuing final decisions based on the criteria that it itself had both promulgated and used in building a case for designation.
- The FSOC violated MetLife’s due process rights in denying it access to the full investigative record compiled during the administrative process and by relying in its determination in part on arguments not raised previously in the administrative process and to which MetLife was unable to respond.
- The FSOC’s determination demonstrated a flawed analysis of MetLife’s vulnerability to material financial distress, failed to take into account statutory factors that should have counted against a SIFI designation (such as its oversight by state insurance regulators), made unsubstantiated assumptions and engaged in unsupported speculation in reaching its decision, and exaggerated the impact of any material financial distress on MetLife’s competitors.
MetLife also raised the argument that it will be at a competitive disadvantage as a SIFI to other traditional insurance companies, because of the additional financial and regulatory costs of being designated a SIFI and becoming subject to Federal Reserve Board supervision; economic effects that MetLife asserted the FSOC had not taken into account in reaching its determination.
