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From Securities Regulation Daily, January 13, 2015

MetLife asks court to remove nonbank SIFI label

By Mark S. Nelson, J.D.

MetLife, Inc. will take on the Financial Stability Oversight Council (FSOC) in federal court over the Council’s December 2014 designation of the insurer as a nonbank systemically important financial institution (SIFI). The company filed suit today in the federal district court in Washington, D.C., making good on the litigation option it merely hinted at following the FSOC’s final designation last year (MetLife, Inc. v. Financial Stability Oversight Council, January 13, 2015).

According to MetLife, the FSOC “fixated” on MetLife’s interconnectedness with other financial firms while relying on weak economic assumptions to back its finding. The company also alleged that it had not been given a chance to rebut the FSOC’s reasoning because the Council deprived it of access to key data the FSOC used to label MetLife a nonbank SIFI. MetLife also said the FSOC gave short shrift to the pervasive state regulations insurers must obey. The company noted the dissent from the designation by the lone voting FSOC member with insurance know-how, and that another non-voting insurance member stated worries about the designation.

Steven A. Kandarian, MetLife's Chairman, President and CEO, said in a press release earlier today that the suit aims to correct what the company sees as the FSOC's flawed designation process. "We had hoped to avoid litigation after we presented substantial and compelling evidence to FSOC demonstrating that MetLife is not systemically important." But Kandarian said the company still backs "robust" life insurance regulation despite its feud with the FSOC.

Singled out. The Dodd-Frank Act lets the FSOC designate key financial firms as SIFIs in order to help it and other federal regulators better monitor U.S. financial stability in the post-Great Recession era, but the designation does not imply that a particular company is now experiencing financial distress. Many financial firms have complained that the FSOC’s designation process is flawed and that getting a final designation imposes significant costs on them. The designation process has been especially controversial for nonbank firms.

The Council designated MetLife a nonbank SIFI last December after more than a year of sifting data about the company’s business, including analyzing 21,000 pages of documents submitted by the company. The FSOC’s and MetLife’s representatives met 12 times during the review period, and MetLife got an oral hearing before the FSOC after the Council issued a proposed designation, just over a month before the FSOC made its final designation. The Council based its final designation in large part on the potential for material financial distress at MetLife to be transmitted to other financial firms.

MetLife today reiterated its worries about rising compliance burdens in light of the FSOC’s final designation. MetLife had said last December that it was being unfairly targeted for SIFI treatment.  “As we have said many times, singling out two large life insurance companies for SIFI designation will harm competition, lead to higher prices and less choice for consumers, and ultimately could result in less financial protection for middle-class families – who need it the most.”

“Sheer” speculation. Dodd-Frank Act Title I created the FSOC and imbued it with significant powers, but left a firm tagged with a SIFI designation the option to ask a federal district judge to review the FSOC’s findings. According to Dodd-Frank Act Section 113(h), the court’s review is limited to whether the FSOC’s “final determination” was arbitrary and capricious.

Seven of the counts in MetLife’s 10-count complaint take aim at FSOC’s supposedly arbitrary and capricious designation process. Specifically, MetLife said it is not a “U.S. nonbank financial company” as defined in the Dodd-Frank Act, and that the Council’s designation was premature or otherwise failed to consider data about the company’s susceptibility to the type of financial distress targeted by the reform law.

MetLife alleged that the FSOC ignored commonly used risk principles by not objectively defining key terms, including “overall stress” or “weak macroeconomic environment.” MetLife also said the Council failed to use analytical factors that comport with “real-world experience,” resulting in a final designation that neglected to explain what actions other firm’s would “likely” take when markets are stressed.

MetLife contrasted the FSOC’s methods to the more detailed ones used by the Fed to evaluate big banks under the Comprehensive Capital Analysis and Review. Those tests pose three progressively more severe economic scenarios and employ 28 variables.

While seeming to invoke behavioral economics theories, MetLife said the FSOC wrongly assumed that policyholders may elect to end their policies at the onset of hypothetical reports about MetLife financial woes, despite tax and other penalties. MetLife countered that policyholders are unlikely to surrender their policies if doing so is against their best interest. The company also disputed the FSOC’s worries that institutional and retail policyholders may leave MetLife simultaneously; MetLife said this theory is undercut by contrary evidence the SEC cited in its money market mutual fund reform rules.

Moreover, MetLife said the Council relied on “implausible” scenarios contained in a study on asset liquidations done by the consulting firm Oliver Wyman for its conclusion that MetLife could be forced to engage in market-disruptive asset sales. MetLife also panned the Council’s attempt to link it to AIG-style market contagion risks; MetLife said it primarily engages in traditional insurance businesses and its credit default swaps are different from those once employed by AIG.

All in oneFSOC unconstitutional. In addition to its claims that the FSOC arbitrarily labeled it a nonbank SIFI, MetLife also said the FSOC’s structure violates separation of powers and its actions fell short of due process. MetLife said the FSOC acts legislatively by adopting SIFI designation rules standards, executively by investigating financial firms and proposing SIFI designations, and judicially by issuing final decisions that incorporate reasoning previously developed by the FSOC. MetLife said this structure, as provided by Dodd-Frank Act Sections 112 and 113, runs afoul of the Fifth Amendment due process clause and Articles I, II, and III of the U.S. Constitution.

As for separation of powers, MetLife cited Elliott v. SEC, a 1994 Eleventh Circuit opinion holding that a government agency can perform legislative, executive, and adjudicatory functions under the same roof if their employees do not have any dual roles. Here, MetLife alleged that the Dodd-Frank Act lodges all three functions in the same government body (the FSOC), and that the FSOC’s individuals perform all of these functions too.

On the Fifth Amendment claim, MetLife said it was denied due process because the FSOC failed to tell potential SIFIs what conduct may result in a designation. MetLife also said the FSOC did not adopt clear standards for applying its Dodd-Frank Act mandate.

Specifically, MetLife complained that it lacked access to data the FSOC reviewed before designating MetLife a nonbank SIFI. The company said it filed 10 Freedom of Information Act requests for this data with the FSOC and other regulators, but got nothing from the FSOC or the Federal Insurance Office, although it got one redacted document from the Federal Housing Finance Agency, and 241 pages of already-public data from the Fed. Moreover, MetLife said the FSOC’s final designation contained new evidence that was not in the Council’s earlier proposed designation.

The case is No. 1:15-cv-45.

Attorneys: Eugene Scalia (Gibson, Dunn & Crutcher LLP) for MetLife, Inc.

Companies: MetLife, Inc.

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