FSOC Replies to MetLife Lawsuit Challenging Nonbank SIFI Status
In early 2015, MetLife filed a lawsuit challenging its designation as a nonbank systemically important financial institution (nonbank SIFI). On May 11, 2015, the Financial Stability Oversight Council (FSOC) filed a redacted motion to dismiss (or in the alternative a motion for summary judgment) in response to MetLife’s lawsuit.
One of MetLife’s key arguments in its complaint is that FSOC’s designation was arbitrary and capricious. FSOC argues in its motion to dismiss, dated May 11, 2015, that its decision to designate MetLife as a nonbank SIFI came after it conducted an extensive study of MetLife’s business operation, met numerous times with MetLife officials, and was consulted by several insurance experts. FSOC argued:
In making its final determination as to MetLife, the Council extensively considered each of the statutory considerations in Section 113, and provided a reasoned and thorough explanation in the 341-page nonpublic basis, as well as in the public basis. Far from being “vague and generalized,” as MetLife contends, Compl. ¶ 102, the Council’s analysis extensively considered company-specific facts and circumstances, including risk-related factors particular to MetLife. In considering each of the statutory factors, the Council engaged in extensive quantitative and qualitative analysis of MetLife’s business information, and relied on historical examples and financial models to conclude that material financial distress at MetLife could threaten U.S. financial stability. (FSOC Motion to Dismiss at 20).
One of the major issues in this case centers on the breadth and scope of the review that led to the designation. Two reports, a public and non-public, were created that explained the FSOC’s reasoning. The 300+ page non-public report contains sensitive information about MetLife. The much more concise public version (at 31 pages), entitled “Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, Inc.” dated December 18, 2014 (FSOC Basis), analyzed each of the 10 statutory factors that FSOC is required to consider in its decision whether MetLife as a nonbank financial company will be supervised by the Board of Governors of the Federal Reserve and subject to enhanced prudential standards. That report explained in a footnote that:
The Council may also consider any other risk-related factors that it deems appropriate. Dodd-Frank Act section 113(a)(2), 12 U.S.C. §5323(a)(2). (FSOC Basis at p. 4).
FSOC also considered, in its discretion, the impact of MetLife’s reliance on internal and external financing arrangements, including internal receivable assets, investment assets and letters of credit issued by unaffiliated financial institutions to provide equity and statutory capital funding to affiliated reinsurance captives, a subject of intense debate among the state insurance regulators and currently the subject of a referral for Congressional consideration. See our previous blog post here. The FSOC Basis states in relevant part:
In the event of material financial distress at MetLife, losses for MetLife’s customers and counterparties through the exposure transmission channel could be exacerbated due to its use of captives. In addition, the potential for off-balance sheet affiliated captive exposures converting to funded exposures could contribute to asset liquidation risk. (FSOC Basis at p. 13).