Thursday, April 2, 2015

A Hard Push Against the FSOC's Non-Bank SIFI Designation

Over the objections many, including asset managers, insurance companies, and even legislators and other regulators, the Financial Stability Oversight Council (FSOC) has pushed ahead with its mandate to identify risks to financial stability that could arise from the material financial distress or failure, or ongoing activities, of nonbank financial companies (Non-bank SIFIs). Thus far, the FSOC has designated four firms as Non-bank SIFIs: On July 8, 2013, the FSOC voted to designate American International Group, Inc. and General Electric Capital Corporation, Inc.; on September 19, 2013, the FSOC voted to designate Prudential Financial, Inc.; and on December 18, 2014, the FSOC voted to designate MetLife, Inc.  MetLife is not taking the FSOC's action lying down, however.  The firm has taken to the courts to challenge its Non-bank SIFI designation. And more influential industry voices are speaking out against not only the designation process, but the very need for prudential oversight of Non-bank SIFIs.
Following the FSOC's December 2014 designation, having exhausted what MetLife saw as every administrative avenue, in January of 2015, MetLife filed an action in federal court challenging the FSOC's decision.  MetLife asserts that the FSOC made numerous critical errors that fatally undermined the reasoning in its designation:
  • The insurance industry is already heavily regulated;
  • The FSOC's decision was arbitrary and capricious;
  • MetLife was denied due process in the decision; 
  • The only FSOC member with insurance experience dissented from the decision.
Now, to the delight of some, but perhaps to the horror of the FSOC, a court will weigh in on the process for Non-bank SIFI designation.  The results of MetLife's legal challenge, if successful, may lay the groundwork for challenges from AIG, GE, and Prudential.  The success of this challenge may also either invalidate the Non-bank SIFI process entirely, or send the FSOC back to the drawing board for some fine tuning.  
Meanwhile, others in the financial industry who until now had not been heard on the Non-bank SIFI matter are taking this opportunity to speak out.  This week, the Mutual Fund Directors Forum (MFDF), an organization representing independent directors on mutual fund boards, in response to a request for comments submitted a letter to the FSOC strongly critical of the need for prudential oversight of asset managers and mutual funds.  According to MFDF, asset managers and mutual funds are already heavily regulated, and the FSOC should defer to the Securities and Exchange Commission, whom MFDF believes is best situated to address systemic risks, if any, posed by such firms.  
In addition, in their own comment letters and press releases, The Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute’s (ICI) held little back in their criticisms of the FSOC's intention to apply SIFI standards to asset managers and investment fund groups.  
Back in November of 2014, The Government Accountability Office (GAO) issued a report pointing out some weaknesses in the FSOC Non-bank SIFI designation process. This report, prepared by the GAO at the request of Michael Crapo, a member of the Senate Banking Committee, found deficiencies concerning FSOC documentation, tracking, and transparency, as well as weaknesses in the way the FSOC evaluates whether companies might pose a threat to financial stability.  This report has given critics of the Non-bank SIFI process some potent ammunition; however, despite the report's timing, it was not sufficient to delay or scuttle the FSOC's designation of MetLife as a Non-bank SIFI.