FSOC gives up effort to designate MetLife as SIFI

WASHINGTON — The Financial Stability Oversight Council filed a joint motion Thursday along with the insurance giant MetLife to dismiss the case challenging the council’s designation of the firm as a systemically important financial institution.

The motion, filed Thursday in the U.S. Court of Appeals for the D.C. Circuit, would bring a yearslong legal fight between the firm and federal authorities to a close, although the move was widely anticipated after Donald Trump’s election in 2016.

The move all but cements the March 2016 lower-court ruling that had thrown out MetLife's SIFI designation by the FSOC under the Obama administration. That ruling had called into question the council's designation process.

Andrew Harrer/Bloomberg

Treasury Secretary Steven Mnuchin said the decision to withdraw the case was "consistent with the recommendation by a majority of FSOC voting members." He added that the council would revise its nonbank designation rules to reflect the March 2016 court ruling in MetLife's favor.

"Treasury has recommended specific reforms to make the designation process more analytically rigorous, clear, and transparent," Mnuchin said. "As chair of FSOC, I will be working with the Council to clarify and revise the nonbank designation rule and guidance. Our recommendations would directly address the concerns identified by the district court in the MetLife case.”

MetLife said in a statement that upon dismissal, it would join the oversight council in a motion “asking the district court to vacate the portion of its opinion concluding that FSOC failed to undertake the required cost-benefit analysis when designating MetLife.” An FSOC spokesperson did not immediately respond to a request for comment.

The Financial Stability Oversight Council was created by the Dodd-Frank Act and empowered to designate nonbanks as SIFIs, which subjects them to heightened supervisory requirements by the Federal Reserve.

The council had designated four firms as SIFIs: MetLife, Prudential, American International Group (all insurers) and GE Capital. But it voted on separate occasions to dedesignate GE Capital and AIG; only Prudential still holds a SIFI label.

MetLife sued the FSOC in January 2015, only weeks after the council voted to designate the firm as a nonbank SIFI in December 2014. The company argued that the council had failed to consider the likelihood of MetLife becoming financially unstable, and instead conducted its analysis on what the consequences might be if it did falter.

In March 2016, the district court agreed, finding that the council had failed to evaluate MetLife’s vulnerability to financial distress and had failed to consider the financial impact that its decision might have on the firm. The FSOC, which then was chaired by former Treasury Secretary Jack Lew, appealed the ruling, arguing that the council has the discretion to designate firms without a detailed analysis of whether instability was likely, especially considering that the purpose of SIFI designation is to shore up firms against unforeseen financial distress.

A panel of D.C. Circuit Court judges appeared sympathetic to the FSOC’s position, but when Trump won the 2016 presidential election, expectations were widely shared that an FSOC made up of Trump appointees would drop its appeal. Instead, the council moved to table the case until the new Treasury secretary — who serves as chairman of the FSOC — could articulate the administration’s new policy toward SIFI designation. The Treasury finalized that report in November.

The suit’s dismissal may have no impact on the council’s “inevitable” dedesignation of Prudential, according to Ian Katz, an analyst for Capital Alpha Partners. The voting dynamics on the council, rather than the outcome of the MetLife litigation, were always the determining factor in that decision.

“Prudential is going to get out because enough FSOC members don’t think it’s a SIFI,” Katz said in a research note.