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From Securities Regulation Daily, May 4, 2013

AIG, Prudential and Others Are Deemed Systemically Important by FSOC, May Face Additional Supervision

By John Filar Atwood

The Financial Stability Oversight Council (FSOC) has proposed to designate American International Group, Inc. (AIG), Prudential Financial, and other non-bank financial companies as systemically important under the authority of Dodd-Frank Act Section 113. The determination means that the named companies will be supervised by the Federal Reserve Board and will be subject to enhanced prudential standards.

AIG and Prudential. The FSOC did not name the firms that it has deemed systemically important, but AIG acknowledged in a press release that it had been notified by the FSOC that it is one of the designees. The company did not disclose whether it intends to fight the proposed designation.

Prudential Financial also received a notice from the FSOC, and the company released a statement saying that it is evaluating whether to request a nonpublic evidentiary hearing to contest the proposed determination. Prudential noted that if the designation stands, it may be subject to stricter standards under the Dodd-Frank Act, including requirements regarding risk-based capital and leverage, liquidity, stress-testing, overall risk management, resolution plans, early remediation, and credit concentration. The company said that it may also face stricter standards regarding capital, public disclosure, and short-term debt limits.

Considering the evidence. The FSOC issued a resolution indicating that it had completed reviewing all of the evidence regarding non-bank financial companies that might be subject to the “systemically important” designation. Among the factors it considered were whether material financial distress at the company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of activities of the company, could pose a threat to the nation’s financial stability.

The FSOC said that potential designees were given the opportunity to provide written materials to contest their consideration for designation. The FSOC considered all such submissions prior to making its final decisions.

Hensarling objection. The FSOC’s determinations were not well received by House Financial Services Committee Chairman Jeb Hensarling (R-Tex). He issued a statement saying that giving any company a “too big to fail” designation is bad policy that helps erode market discipline. The designation gives firms market advantages over competitors, he said, making them “even bigger and riskier than they otherwise would be.”

Hensarling believes the designations put taxpayers at risk of having to fund another bailout of financial firms. “Taxpayers should not be held responsible for the failure of big businesses any longer,” he said. He noted that the Financial Services Committee is working to end bailouts and “too big to fail” forever.

Companies: American International Group, Inc.; Prudential Financial, Inc.

MainStory: TopStory RiskManagement DoddFrankAct

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