SIFI Snoopy In Constitutional Dogfight With Feds

January 15, 2015

Some civil Complaints seem destined to become  "landmark" or "historic." You read through the pleading and it hits you that this dispute may change the regulatory landscape, for better or worse. In Metlife,Inc. v. Financial Stability Oversight Council (Complaint, DDC, 15-45, January 13, 2015), we are presented with one such likely candidate for posterity.

The gist of this lawsuit is that Plaintiff Metlife is challenging the decision by the Financial Stability Oversight Council's (the "FSOC's") designation of Plaintiff as a "nonbank systemically important financial institution" (a "nonbank SIFI"). Plaintiff argues that the FSOC did not act properly under the Dodd-Frank Act when it designated the firm as a nonbank SIFI and, further, the allegedly arbitrary and capricious conduct deprives Plaintiff of its Due Process rights.  

In many aspects, Metlife's Complaint is reminiscent of a similar challenge of the Public Company Accounting Oversight Board ("PCAOB") and the Sarbanes-Oxley Act in Free Enterprise Fund Et al. v. Public Company Accounting Oversight Board Et Al. In Free Enterprise Fund, the Petitioners argued that the Sarbanes-Oxley Act contravened the separation of powers by conferring executive power on PCAOB members without subjecting them to Presidential control. Moreover, the Petitioners asserted that the PCAOB's appointment violated the Constitution's Appointments Clause. In a 2010 majority opinion, the United States Supreme Court held that Petitioners were not entitled to broad injunctive relief against PCAOB's continued operations; however, the Court found that Petitioners were entitled to declaratory relief sufficient to ensure that the reporting requirements and auditing standards to which they were subject would be enforced only by a constitutional agency accountable to the Executive Branch. In a nutshell, the let the PCAOB continue to exist but subject to a material reorganization of the line of accountability. Although the issues in Metlife are markedly different than those in Enterprise Fund, there remains the similarity of a Constitutional challenge citing the conduct of the FSOC under Dodd-Frankin a fashion reminiscent of that of the PCAOB under Sarbanes-Oxley. I would argue, however, that what is at stake in Metlife is the ongoing ability to regulate the financial services industry pursuant to a regime that was largely implemented after the Great Recession. What's in the balance is either the perpetuation of Wall Street reforms (a position likely espoused by investor advocates and liberals) versus the elimination of ill-conceived and burdensome regulation (a position likely espoused by industry supporters and conservatives).

Given the importance of the matters in dispute in Metlife and my ambivalence as to some of those issues (and my bias as to others), in lieu of attempting to offer commentary on the lawsuit, I have opted to reprint in full-text the Complaint's "Introduction" section. 

An interesting aside in this litigation is that the Complaint was submitted by Eugene Scalia, Esq. a partner with the prominent Washington, DC law firm  of Gibson Dunn & Crutcher LLP. Eugene Scalia is the son of Antonin Scalia, United States Supreme Court Justice. One wonders whether that relationship may serve as a basis for seeking the recusal of one or more sitting Justices should the case subsequently come to rest on the highest court's docket -- and to whom would one appeal if such a request for recusal is rejected?

READ the Full-Text Complaint


1. This is an action under Section 113(h) of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act" or "DFA"), Pub. L. No. 111-203, 124 Stat. 1376(codified at 12 U.S.C. § 5323(h)), the Administrative Procedure Act ("APA"), 5 U.S.C. § 500 et seq., and the U.S. Constitution, challenging a final decision by the Council to designate MetLife as a nonbank systemically important financial institution ("nonbank SIFI"). See Explanation of the Basis of the Financial Stability Oversight Council's Final Determination that Material Financial Distress at MetLife Could Pose a Threat to U.S. Financial Stability and that MetLife Should be Supervised by the Board of Governors of the Federal Reserve System and Be Subject to Prudential Standards (Dec. 18, 2014) ("Final Designation"). 

2. FSOC's decision to designate MetLife as a nonbank SIFI subjects the Company to enhanced supervision by the Board of Governors of the Federal Reserve System ("Board"). The Council's independent member with insurance expertise-the only voting member with expertise regarding the insurance industry-dissented in writing from the designation, and the non-voting insurance commissioner representative on the Council also issued a statement opposing MetLife's designation. 

3. The Council's designation of MetLife is premised on its conclusion that "MetLife's material financial distress could lead to an impairment of financial intermediation or of financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy." Final Designation at 3. That conclusion was arbitrary and capricious, conflicts with the Council's statutory obligations under the Dodd-Frank Act and the rules and guidance that the Council promulgated for designating nonbank financial companies, and was reached through a procedure that denied MetLife its due process rights and violated the constitutional separation of powers.  

4. FSOC made numerous critical errors that fatally undermined the reasoning in its Final Designation of MetLife. First, FSOC failed to understand, or give meaningful weight to, the comprehensive state insurance regulatory regime that supervises every aspect of MetLife's U.S. insurance business, despite statutory and regulatory requirements that direct the Council to consider existing regulatory scrutiny. Indeed, the Council's "misunderstand[ing] and mischaracteriza[tions]" of state insurance regulation were so fundamental that the non-voting insurance commissioner was struggling "to correct basic factual errors regarding the operation of the state regulatory system just days before" the Council's final vote. Final Designation at 304 (dissent of Adam Hamm). Second, FSOC fixated on MetLife's size and so-called interconnections with other financial companies-factors that, considered alone, would inevitably lead to the designation of virtually any large financial company-and ignored other statutorily mandated considerations that weighed sharply against designation. Third, FSOC consistently relied on vague standards and assertions, unsubstantiated speculation, and unreasonable assumptions that are inconsistent with historical experience (including prevailing conditions in the 2008 financial crisis), basic economic teachings, and accepted principles of risk analysis. In doing so, FSOC wholly ignored the tools used by federal regulators to assess the potential impact of severely adverse economic conditions in other contexts, including Federal Reserve Board "stress tests." Fourth, FSOC repeatedly denied MetLife access to data and materials consulted and relied on by the Council in making its designation determination, thereby depriving the Company of a meaningful opportunity to rebut FSOC's assumptions or otherwise respond to its analysis, in violation of MetLife's due process rights.  

5. As a result of these pervasive errors, there are numerous grounds on which FSOC's Final Designation of MetLife must be set aside, including the following:  

6. MetLife Is Not Predominantly Engaged in Financial Activities. FSOC's designation authority is limited in Section 113(a)(2) of the Dodd-Frank Act to "U.S. nonbank financial compan[ies]." MetLife is not a "U.S. nonbank financial company" eligible for designation because it derives more than 15% of its revenues from, and more than 15% of its assets are related to, insurance activities in foreign markets. Accordingly, MetLife is not "predominantly engaged in financial activities" within the meaning of Section 102(a)(6) of the Dodd-Frank Act and Section 4(k) of the Bank Holding Company Act ("BHCA"). Case 1:15-cv-00045 Document 1 Filed 01/13/15 Page 3 of 794  

7. Failure to Undertake Activities-Based Review. FSOC had an obligation to consider reasonable alternatives to designating MetLife as systemically important. Those alternatives include the "activities-based approach" that FSOC is presently considering for asset managers, which would impose enhanced Board supervision on certain activities that FSOC deems to be particularly risky without designating as systemically important the entire company or companies that conduct them. Despite the repeated statements of key legislators and federal financial regulators that traditional insurance activities do not pose systemic risk to the economy, FSOC provided no reasoned explanation for failing to pursue an activities-based approach for insurance companies.  

8. Failure to Assess Vulnerability. FSOC failed to conduct any threshold inquiry into MetLife's vulnerability to material financial distress, which is mandated by Section 113 of the Dodd-Frank Act and FSOC's own rules and interpretive guidance. See 77 Fed. Reg. 21,637- 39 ("Final Rule"), 21,639-47 ("Interpretive Guidance") (Apr. 11, 2012) (Appendix A to 12 C.F.R. Part 1310). Compounding that error, the Council posited impossibly vague conditions of "material financial distress" at MetLife, "overall stress in the financial services industry," and "weak[ness]" in the "macroeconomic environment," id. at 21,657, and then deployed those undefined concepts at every turn to support its conclusion that MetLife should be designated. For its part, MetLife submitted overwhelming evidence that material financial distress at the Company is extremely unlikely, and that in light of its business model and structure, together with the authority and practice of state insurance regulators to intervene when insurers experience material financial distress, there is no reasonable possibility that material financial distress at MetLife, should it occur, would pose a threat to the financial stability of the United States.  

9. Arbitrary and Capricious Reliance on Unsubstantiated Speculation and Irrational Economic Behavior. Numerous other aspects of the Final Designation are likewise premised on unsupported guesswork and unreasonable conjectures, rather than record evidence. For example, MetLife submitted a study from the Oliver Wyman consulting firm demonstrating that, even under the most unrealistic and adverse assumptions of financial distress at MetLife, the Company could still liquidate its assets to cover its liabilities without posing a threat to the broader U.S. economy. In response, FSOC claimed it had conducted an analysis of its own that showed that asset sales by MetLife could disrupt the financial markets. But the Final Designation's analysis-which included calculations that were never disclosed to MetLife, and rested on the bizarre assumption that MetLife would sell off its assets in a randomized manner rather than in an orderly fashion from most liquid to least liquid-was entirely unreasonable and ahistorical. FSOC's analysis ignored steps MetLife could and would take to avoid a sudden and massive asset liquidation, including exercising contractual rights to defer policyholder payments for up to six months (rights which must be included in policies under the laws of many States). FSOC likewise assumed that any measures by state regulators would be ineffective. Indeed, it assumed that regulators' response to distress at MetLife would destabilize other insurers, but did not identify a single example of the failure of any insurer of any size that led to market-wide "contagion" in the relevant insurance market. MetLife, for its part, provided an analysis-also performed by Oliver Wyman-that examined prior failures of large life insurance companies and found no evidence of contagion. MetLife also demonstrated that its insurance and capital markets activities are not of a nature or magnitude that would expose other financial institutions or counterparties to a meaningful threat of economic harm in the event of MetLife's material financial distress. In straining to find otherwise, the Final Designation unreasonably concluded that the mere possibility of ordinary levels of economic losses would constitute economy-wide destabilizing harms.  

10. Failure to Examine Consequences of its Designation Decision. The designation of MetLife will inevitably impose significant costs on the Company-and its shareholders and customers-a concern that MetLife addressed at length in its submissions to FSOC. The Council nevertheless refused to consider these consequences of designating MetLife. It did not address MetLife's evidence of substantial market and company-specific costs, and did not even opine on whether designating MetLife was, on balance, for good or for ill. In ignoring the effects of its action, the Final Designation unreasonably disregarded an important aspect of the problem that Section 113 of the Dodd-Frank Act required it to address.  

11. Violation of Due Process and Separation of Powers. The FSOC designation process is opaque, sparking criticisms that recently prompted FSOC's Chairman to indicate that the process will be reviewed and reformed. That will come too late for MetLife, which repeatedly was denied access to the full record on which FSOC's action was based. Indeed, the Final Designation contains new evidence and analyses to which MetLife never had an opportunity to respond. In addition, FSOC never identified the thresholds that result in SIFI designation or the manner in which the various statutory and regulatory factors regarding designation are balanced against one another in FSOC's analysis, and, where FSOC guidance did describe thresholds, gave no weight to instances in which MetLife's metrics fell below those thresholds. These procedural shortcomings severely impaired MetLife's ability to respond to FSOC's grounds for designating the Company and denied MetLife the opportunity to modify its activities in order to avoid designation. These deficiencies were exacerbated by the extraordinary design in the Dodd-Frank Act of FSOC itself, which identifies individual companies for designation, establishes the standards that govern the designation decision, and then sits in judgment of its own recommendations, relying each step of the way on the same staff that identified the company for designation in the first place. As a result of these procedural and structural flaws, FSOC's designation of MetLife violated the Company's due process rights and the constitutional separation of powers.  

12. In all of these ways and more, FSOC acted arbitrarily and capriciously, in violation of the Dodd-Frank Act, the APA, and the U.S. Constitution when it designated MetLife as a nonbank SIFI. This Court should set aside the designation and grant the other relief requested below. 

As to the relief sought by Plaintiff Met Life, it is asking the court to issue and Order and Judgment:

a. Declaring that FSOC's designation of MetLife was not in accordance with the Due Process Clause of the Fifth Amendment, the constitutional separation of powers, the Dodd-Frank Act, and the APA, and that it was arbitrary and capricious within the meaning of Section 113(h) of the Dodd-Frank Act and 5 U.S.C. § 706(2)(A);

b. Vacating and setting aside the designation; c. Declaring that the Dodd-Frank Act's conferral of legislative, prosecutorial, and adjudicative functions on the same individuals within an agency, without any separation of functions into offices or divisions, violates the separation of powers, and thus is null and void;

d. Enjoining FSOC and its officers, employees, and agents from implementing, applying, or taking any action whatsoever to designate MetLife until the Board promulgates prudential standards for insurance companies and criteria for exempting nonbank financial companies from Board supervision, and until FSOC finalizes its designation standards;

e. Awarding Plaintiff its reasonable costs, including attorneys' fees, incurred in bringing this action; and 

f. Granting such other and further relief as this Court deems just and proper.

READ the Full-Text Complaint