For the first time since the passage of Dodd-Frank, a U.S. District Judge is exploring the process by which the Financial Stability Oversight Council (FSOC) designates non-bank financial institutions as systemically important financial institutions (nonbank SIFIs). On February 10, 2016, U.S. District Judge Rosemary Collyer of the U.S. District Court for the District of Columbia heard arguments in the matter of MetLife v. FSOC.
In January 2015, MetLife filed a lawsuit challenging the FSOC’s designation of MetLife as a nonbank SIFI. Specifically, the lawsuit challenged the process the FSOC used to reach its decision with MetLife, describing it as opaque and consequently violating due process and the separation of powers.
Judge Collyer appeared skeptical of the current method, questioning whether the FSOC had the infrastructure in place to independently gather and analyze evidence during the designation process. She highlighted the fact that unlike other agencies, the FSOC did not have a neutral staff, e.g., administrative law judges, who could impartially look at each case and offer an impartial recommendation. Rather, each member’s agency conducted its own analysis and the member then voted based on that analysis, which may be an issue since those parties are all “interested.” Furthermore, the same people at the FSOC made the decision and heard the appeal. The judge noted that determinations and their subsequent reviews in most agencies have different people performing different roles. As such, the judge the questioned if this was a reasonable way for the process to run.
The judge also probed whether MetLife had sufficient information to effectively participate in the designation process. One of MetLife’s key arguments was that the FSOC kept “changing the rules of the game and raising the bar so that MetLife [could not] win.” Along these lines, the judge raised the issue of whether the FSOC outlined one process for the public and used a different one when evaluating MetLife.
Conversely, the Judge highlighted the apparent discretion Dodd-Frank gives the FSOC to make these determinations. Specifically, the law allows the FSOC to designate a financial institution as a SIFI together with stricter solvency and other requirements if that institution “could” threaten the larger financial system.
Three of the four currently-designated nonbank SIFIs have taken steps to have the designation removed by spinning off business components. MetLife announced last month that it may create a separate company to house its retail life and annuity businesses. Even though MetLife is appealing the SIFI designation, the risk of increased capital requirements contributed to the decision to pursue the separation of the business. Similarly, GE Capital announced in October that it had agreed to sell $30 billion worth of commercial lending and leasing businesses to Wells Fargo & Co, meaning GE has signed deals to sell almost all of its U.S. financing businesses. AIG has also announced steps to reorganize into “modular” business segments to create flexibility to sell or take public additional units if they underperform.
The judge did not give any indication as to when she might issue a decision.