United States: FSOC Appeals Metlife SIFI Decision

Last Updated: July 6 2016
Article by Steven D. Lofchie

Most Read Contributor in United States, August 2018

The Financial Stability Oversight Committee ("FSOC") submitted a brief to the United States Court of Appeals for the District of Columbia urging it to reverse a lower court's decision to remove FSOC's designation of MetLife, Inc. ("MetLife") as a nonbank financial company subject to supervision by the Federal Reserve. A number of amici curiae comprised of: (i) current and former members of Congress involved in the creation of the Dodd-Frank Act (the "Legislators"), and (ii) former Chairs of the Board of Governors of the Federal Reserve Ben Bernanke and Paul Volcker, filed briefs in support of the reversal.

In its brief, FSOC argued, among other things, that:

  • FSOC conducted an analysis in the manner required by the statue and its interpretive guidance, neither of which required FSOC to estimate specific counterparty losses or to determine the likelihood that a particular company would be subject to distress;
  • FSOC's analysis of MetLife was consistent with the statute and its interpretive guidance, and included analyses of: (i) liquidity risk and maturity mismatch, (ii) leverage, and (iii) existing regulatory scrutiny;
  • FSOC assessed MetLife's material financial distress, and whether it could pose a threat to U.S. financial stability, by means of an appropriate and "exhaustive" analysis that the district court ignored; and
  • the statute did not require FSOC to consider the potential costs to MetLife of its SIFI designation.

The Legislators argued that the lower court's decision would undermine the legislative plan established by the Dodd-Frank Act, and that the lower court improperly substituted its judgment for FSOC's judgment, despite Congress' decision to establish a "highly deferential" review for FSOC determinations. The Legislators stated:

[T]he District Court's conclusions are inconsistent with Dodd-Frank's text and fundamentally misunderstand its structure and operational design – in particular, the role that FSOC is empowered to play, in conjunction with the Fed, in preventing another calamitous financial meltdown like the one the nation just experienced. The District Court's decision, if upheld, would fundamentally undermine the program that Congress put in place when it enacted Dodd-Frank to try to prevent such financial crises from occurring in the future.

Mr. Bernanke and Mr. Volcker focused argued that:

  • "a determination that a company is likely to experience financial distress should not be prerequisite to [an FSOC] designation decision";
  • "as a prerequisite to a designation decision, FSOC should not have to precisely quantify the adverse effects of material financial distress"; and
  • "a cost/benefit analysis should not be required for FSOC to make a designation decision."

Commentary

Dodd-Frank's established standards for designating financial institutions as "systemically significant" are impossibly open-ended. They include ten factors that may be interpreted in nearly every way conceivable. These can be ignored entirely or considered along with other factors that are not specified in the legislation. Read literally, the standards give FSOC complete authority to improvise interpretations as it goes along. That is bad public policy. To grant such unfettered discretionary power to a government agency should make citizens uneasy, particularly when the body exercising that power is composed almost entirely of members of a single political party.

The contention that the Dodd-Frank standards for designation are sufficiently ambiguous to render any judicial review of an FSOC designation futile seems reasonable. However, Dodd-Frank contains extremely detailed procedures for the judicial review of an FSOC determination (if not for the substance of such a review). Therefore, for this argument to succeed, the amici would have to admit that Dodd-Frank's procedures for judicial review are a sham, since there is no basis on which a court could overturn an FSOC determination. If they are not prepared to make such an admission, then they should at least explain why Dodd-Frank contains a judicial review process at all, and under which circumstances, if any, a court could find an FSOC designation to be inappropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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