On March 30, a judge in the US District Court for the District of Columbia invalidated the determination by the Financial Stability Oversight Council (FSOC) to designate MetLife as a “systemically important financial institution” (SIFI) that would be subject to stringent prudential regulation and supervision by the US Federal Reserve Board and other regulatory authorities. The opinion invalidating the FSOC designation (Decision) was initially filed under seal, but was unsealed on April 7. Not surprisingly, the US Treasury Department, under whose auspices the FSOC is organized, has appealed the district court’s Decision.
The Dodd-Frank Act allows FSOC to designate a nonbank financial institution as “systemically important” on the basis of specific factors and considerations set forth in section 113 of the Dodd-Frank Act. In turn, the FSOC has adopted substantive and procedural regulations and guidelines implementing the provisions of section 113. Among other things, the FSOC requirements specify several factors that FSOC will take into account in making a SIFI determination.
The Decision invalidated the FSOC determination on relatively narrow administrative law grounds, concluding in substance that FSOC
- unilaterally changed the criteria for the SIFI determination during the MetLife review process without allowing public comment on these changes,
- failed to take into account all of the factors that FSOC regulations and guidance stated that FSOC would consider, and
- failed to conduct a full cost-benefit analysis of the MetLife SIFI determination.
Substantive (and in our view, entirely legitimate) questions have been raised in the financial services industry about the opacity and factual underpinning of the FSOC process for designating nonbank SIFIs or systemically risky activities (e.g., the FSOC’s misadventures in attempting to evaluate asset management as a systemically risky activity). Nevertheless, those who want to see a broad rejection of the Dodd-Frank Act nonbank SIFI framework, or of FSOC’s authority to implement by regulation that framework, will not find it in the Decision.
Instead, the Decision primarily concludes that FSOC, contrary to basic principles of federal administrative law, acted arbitrarily and capriciously in failing to play by its own rules in designating MetLife as a SIFI and unilaterally changing the rules in “mid-stream.” To that extent, the Decision may not have very broad legal implications, and it does leave open the possibility that FSOC can arrive at a legally supportable designation if it “does things right” the next time around. At the same time, the court also said that FSOC was required to conduct a full cost-benefit analysis, even though the Dodd-Frank Act does not expressly require such an analysis. In turn, this statement may have broader consequences for FSOC as it continues its SIFI regulatory activities—or, more generally, for federal agency regulatory activities—if the Decision (or this aspect of it) is upheld by the US Circuit Court of Appeals.
Whether the Decision will encourage other current or prospective nonbank SIFIs to challenge any prior or future FSOC SIFI determinations is an open question at this time.