Judge’s Decision Does Not Refute Dodd-Frank

The federal District Court’s decision to rescind the Financial Stability Oversight Council’s (FSOC) SIFI designation of MetLife has generated some strong commentary, with suggestions it could even roll back financial reform. Much of this commentary reflects a decided lack of knowledge about insurance regulation. Some of it reflects a lack of understanding about the scope of the decision.

First, the decision is not a refutation of the Dodd-Frank Act. That Act certainly includes provisions, such as improved regulation of derivatives, that have helped to make our financial system more secure. Importantly, the Act also explicitly permits a company designated as a SIFI to seek judicial review of that designation in federal court. MetLife’s case was based solely upon that provision of the Act, and the decision by the court was based solely upon facts specific to MetLife, not the merits of the Dodd-Frank Act.

Second, the court’s decision does nothing to eliminate comprehensive regulatory oversight of MetLife. MetLife has been, and remains, subject to supervision by state insurance authorities, including the New York Department of Financial Supervision, as well as several foreign insurance authorities. These regulators work cooperatively through a “supervisory college” to ensure that all parts of MetLife’s operations are conducted safely and that the interests of policyholders are protected.

Third, the decision does not undermine FSOC’s statutory authority to designate nonbank financial companies for enhanced supervision by the Federal Reserve Board. It does, however, stand for the proposition that in making these critically important decisions, FSOC must follow its own rules.  The court simply found that this did not take place.  This is a procedural matter and one that FSOC can and should correct.

Fourth, the court did not suggest that FSOC should have applied a formal cost/benefit test to its designation process. Certainly, such a test would have undermined the court’s decision since any cost to any one company may appear reasonable if the perceived benefit is protection from a potential financial crisis that may cost trillions of dollars. However, the court did conclude that FSOC has an obligation to consider relevant risk-related factors in making designations. One of those factors is the impact of a SIFI designation itself.

Indeed, the imposition of a new, untested designation with a requirement for a different capital standard than required by state laws could make a company like MetLife more vulnerable in a financial crisis.

The MetLife decision does not spell the end of financial reform. Hopefully, it spells the beginning of an improved process at FSOC that will be commensurate with the gravity of the decisions the agency is tasked with making.

Gary Hughes joined the American Council of Life Insurers in 1977 and was appointed ACLI General Counsel in 1998, Senior Vice President & General Counsel in 1999, Executive Vice President & General Counsel in 2004. He served as Acting President in 2002.