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Paul Zimmerman

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MetLife and Federal Regulators Battle Over 'Systemically Important' Label

The definition and regulation of systemically important financial institutions (SIFI), including the extension of this designation to certain insurance companies, has bred contention amongst key stakeholders. As federal regulators look to ramp up oversight of large insurance companies (including the imposition of higher capital requirements and other risk management protocols), all eyes are on a significant appeal being heard in the D.C Circuit Court, with potentially massive financial and political implications.

On June 16, 2016, regulators filed their first detailed brief in the U.S. District Court of Appeals for the D.C. Circuit in the ongoing legal battle between the Financial Stability Oversight Council (FSOC) and MetLife, Inc. over its decision to designate MetLife as a SIFI. This brief follows the government’s appeal of U.S. District Judge Rosemary Collyer’s ruling in March, which allowed MetLife to drop its designation as a SIFI. The government argues that the March decision was “profoundly mistaken” as it dealt a major blow to efforts to curb risk in the financial system. FSOC claims that as a result, the court ruling has left one of the largest, most complex, and most interconnected financial companies in the country without the essential regulatory oversight necessary.

In her decision, Judge Collyer ruled that the designation of MetLife as a SIFI was flawed because the FSOC failed to follow its own guidelines and assess the company’s vulnerability to material financial distress before addressing the potential effect of distress. MetLife Inc. v. Financial Stability Oversight Council, 15-cv-00045, U.S. District Court, District of Columbia (Washington). However, the FSOC claims that it is not obliged to factor in the costs of a systemically important designation to the targeted company when making its decision. Further, it argues that it is at liberty to interpret whether a risk-related factor should be taken into account. MetLife’s response will be filed to the appeals court by August 15, 2016.

Meanwhile, the Federal Reserve Board has proposed rules that would require nonbank financial companies with significant insurance activities (a.k.a. SIFIs) to comply with a corporate governance and risk-management standard and a liquidity risk-management standard. These enhanced standards would currently apply to American International Group, Inc. and Prudential Financial, Inc., if adopted as proposed. Under this approach, SIFIs are required to implement an enterprise-wide risk management framework, maintain a risk committee, and appoint a chief risk officer and chief actuary. Further, with regard to managing their liquidity risk, SIFIs would be required to meet key internal control requirements with respect to liquidity risk-management, generate comprehensive cash flow projections, establish and monitor their liquidity risk tolerance, and maintain a contingency funding plan to manage liquidity stress events when normal sources of funding may be unavailable. Further, the proposed rule would also introduce liquidity stress testing requirements for such firms. These proposed rules are open for public comment until August 2, 2016.

Meanwhile, this issue has ignited debate on Capitol Hill. There has been a call by Congressional Republicans to strip the FSOC of the ability to designate insurers and other institutions as systemically important. For instance, House Financial Services Committee Chairman, Jeb Hensarling, has outlined details of the Financial CHOICE Act (FCA), which is the Republican plan to replace the Dodd-Frank Wall Street Reform and Consumer Protection Act. “CHOICE” stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs. Rep. Hensarling reasons that “to end tax-payer funded bailouts…we must also end Washington’s ability to designate any institution as systematically important.”

While only an outline of the proposed FCA has been presented, it was warmly embraced by House Speaker, Paul Ryan, as part of the House GOP’s “Better Way” agenda. The FCA aims for significant relief from duplicative and overly burdensome regulatory mandates for strongly-capitalized financial institutions. While no official comment has been given by Republican presumptive nominee, Donald Trump, Ryan has stated that GOP lawmakers remain “very confident that our presumptive nominee is comfortable with this agenda.” In contrast, House Minority Leader, Nancy Pelosi, advises caution regarding the proposal’s economic implications, stating that the so-called “special interest Republican agenda” would roll back critical protections for American consumers and take “the Cops off the Wall Street beat.”

In any event, the outcome of the November election will no doubt affect policy regarding SIFI designations, and M&R will closely track the issue and offer updates as appropriate.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.