U.S. District Judge Rosemary M. Collyer yesterday heard argument on MetLife’s application, challenging its designation as a systemically important financial institution ("SIFI") made by the Financial Stability Oversight Counsel ("FSOC") in December 2014. MetLife, Inc. v. Financial Stability Oversight Counsel, Case No. 1:15-cv-00045 (U.S. District Court for the District of Columbia. At oral argument, FSOC’s SIFI determination primarily was premised on the company’s size, leverage and interconnectedness with other insurers and financial institutions through MetLife’s products and capital market activities, including the company’s issuance of funding agreement-backed notes and guaranteed minimum return products, as well as its securities lending activities. The FSOC, created within the U.S. Department of the Treasury by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), provides comprehensive monitoring of the stability of the U.S. financial system and is charged with identifying risks to this financial stability, promoting market discipline, responding to emerging risks to the stability of the U.S. financial system and, importantly, designating non-bank financial institutions which present systemic risk. SIFI designation means that MetLife would be placed under the Federal Reserve’s supervision and subject to enhanced prudential regulation, including mandatory stress testing and federal oversight of the company’s dividend and share buyback plans. MetLife is the first of three designated insurance SIFIs to challenge that determination in court.

Chief among MetLife’s complaints was that the FSOC used a flawed methodology to reach the conclusion that the company posed a threat to financial stability. Specifically, MetLife alleges that the FSOC failed to conduct a proper vulnerability analysis to investigate the likelihood that MetLife could become a distressed company. At oral argument, counsel for MetLife argued that the FSOC’s preliminary investigation found that MetLife was healthier than the agency thought and further, that the FSOC shifted focus and initiated analysis with the assumption that the company became distressed.

Judge Collyer acknowledged the flawed process and, at oral argument, inquired of the agency why it was assuming the worst case scenario. The court further questioned why the agency had not delineated staff functions to promote neutrality.

Counsel for the U.S. Department of Justice argued that the threshold vulnerability analysis requirements advocated by MetLife were not required by Dodd-Frank and further, had not been committed to by the FSOC.

MetLife further challenged the FSOC’s SIFI determination on the basis that the FSOC had failed to consider existing state insurance regulation to which the company’s insurance subsidiaries are already subject. MetLife alleges that the SIFI designation is thus “double regulation” in this regard. Surprisingly, the U.S. Department of Justice countered that state regulators do not have any special concern for financial stability. Given that the primary goal of state insurance regulation is financial solvency, this argument lacks credibility.

During oral argument, Judge Collyer acknowledged that the agency did not separate staff functions in a way that would have introduced neutrality into the process, noting that the FSOC’s process for designating non-bank SIFIs “remains bundled together.” Rather than using administrative judges, counsel members merely vote on recommendations based on the analysis of their own staff. Thus, according to the court, there is no one neutral in the process.

Wednesday’s hearing was to determine if MetLife’s case can proceed. Dodd-Frank establishes a high standard for companies designated as SIFIs to reverse the determination. In order to do so, MetLife must prove that the FSOC’s decision was “arbitrary and capricious,” and Judge Collyer must rule accordingly. Given the FSOC voting members’ vast experience in financial service supervision, the use of experts, trade association involvement and the extensive data relied upon by the FSOC, it will be difficult for MetLife to establish that the FSOC’s determination, indeed, was arbitrary and capricious. While Judge Collyer appears sympathetic to MetLife’s position, no decision has yet been rendered. MetLife still has a difficult burden to overcome as courts generally defer to the judgment of regulators.

On the heels of oral argument in MetLife’s litigated challenge to the Financial Stability Oversight Counsel’s (FSOC) determination that MetLife is a systemically important financial institution (SIFI), the Federal Reserve Board (the federal entity which will monitor and supervise SIFIs) announced that it will propose capital rules for insurers. Federal Reserve Chair Janet Yellen appeared before the House Financial Services Committee and characterized the capital rules as “fairly far along” in order to provide guidance for insurance companies, such as MetLife, that are designated as SIFIs by the FSOC.


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