U.S. court throws out designation of MetLife as ‘too big to fail’

April 6, 2016

A U.S. federal judge rescinded a government designation of MetLife as “too big to fail” and subject to increased regulatory oversight.

The ruling by the judge, U.S. District Judge Rosemary Collyer, is currently sealed, but parts may be made public next month, according to Wednesday’s order, which also said the federal government may appeal.

The ruling rescinded MetLife’s designation by the Financial Stability Oversight Council as a “Systemically Important Financial Institution, or SIFI, and comes as a big legal victory for MetLife, which had argued that the SIFI designation process under the Dodd-Frank regulatory reforms was flawed and secretive.

“Today’s ruling validates MetLife’s decision to seek judicial review of our SIFI designation. From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States. This decision is a win for MetLife’s customers, employees and shareholders,” MetLife’s CEO Steven Kandarian said in a statement.

The immediate implication for the company is that it will not have to break up or shed some of its business units in order to become smaller, a plan it has considered before.

While the Federal Reserve has not yet proposed its rules for nonbank SIFI insurers, the decision would mean that MetLife will not have to abide by enhanced prudential regulations. These include the strict minimum capital requirements under Basel III regardless of the fact that they operate under the statutory accounting principles that are accepted by state regulatory insurance agencies, and the Risk-Based Capital for Insurers Model Act – as adopted by the National Association of Insurance Commissioners.

American Council of Life Insurers (ACLI) President and CEO Dirk Kempthorne also endorsed the decision, and expressed hope that the decision may lead to a revision of FSOC’s designation process.

The stability council had voted 9-1 in December 2014 to designate MetLife as a SIFI. Comprised mainly of regulators, the oversight council was established by the 2010 Dodd-Frank financial overhaul (PL 111-203). The council can name banks and non-banks to the list of “too big to fail” institutions that could pose a systemic threat to the U.S. financial system.

“FSOC’s designation process is anything but transparent, and its decision to designate MetLife as a SIFI certainly seemed to ignore the weight of the evidence MetLife and insurance experts presented. Consequently, the court’s finding that the decision was arbitrary and capricious on multiple fronts was not surprising. We hope this decision prompts FSOC to revisit its other SIFI designations involving insurance companies and to adhere to a more realistic, fair and transparent analytical process going forward,” he said in a statement.

The Treasury Department, was not pleased, and expressed its strong disagreement with the court’s decision in a statement.

“We are confident that FSOC’s determination was lawful and will continue to defend the council’s designations process vigorously,” said a spokesperson for the Treasury Department in a statement.

“In response to the financial crisis, Congress enacted Wall Street reform, created the FSOC, and directed it to address potential threats to financial stability. FSOC conducted a rigorous analysis of MetLife, including extensive engagement with the company, and determined that material financial distress at MetLife could pose such a threat to the financial system. We firmly believe that FSOC acted well within its legal authority to protect the entire global economy.”

A precedent for other SIFI insurance companies?

Technically, the two other SIFI-designated insurance companies, namely AIG and Prudential, appear not to benefit much from the court decision, as they missed the opportunity to legally challenge their designation by the FSOC within the initial 30 days window as allowed under the Dodd-Frank Act rules.

Once the decision is unsealed, however, the reasoning behind Collyer’s ruling may provide valuable insight into whether the court’s decision is predicated on the broader nonbank SIFI designation process or simply on company-specific matters that apply solely to MetLife. If it is interpreted to be applicable to other insurance companies, this could then prompt AIG and Prudential to challenge their designations either through legal action or the regularly scheduled annual revisions.

The decision is currently sealed, and is to remain so until both parties file a joint notice by April 6, 2016 “stating whether any portions” of the opinion should remain under seal.

(This article includes additional material from Reuters and CQ-Roll Call for Thomson Reuters)

(This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on March. 31. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters)

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