Big Win for MetLife and Other SIFIs

MetLife notched an important win this week, securing a ruling from a federal court that it is not a systemically important financial institution (SIFI) under Dodd-Frank. Like much of the Dodd-Frank Act, the SIFI designation has been controversial since its introduction in 2010. The designation is intended to help the Financial Stability Oversight Council (FSOC, another Dodd-Frank creation) to monitor companies whose demise could destabilize the country’s financial system. Putting aside the question of whether a group of regulators in Washington could see and stop a crisis more quickly than those in the trenches at the nation’s financial giants, the designation triggers a host of regulatory requirements that many companies would prefer to avoid.

One of the most controversial aspects of the SIFI designation is its black box nature. There is no publicly available SIFI check-list. The rationale for following a more principles- than rules-based approach may be that the definition needs to remain flexible. Companies may be motivated to avoid the letter of such a rules-based approach without avoiding the spirit, leaving FSOC without the ability to monitor a company that, despite not triggering the SIFI designation, still poses a risk to the financial system. But this has left companies in a bind. The SIFI designation has real and substantial ramifications for any company that triggers it, but companies have been unable both to avoid designation and to challenge designation once applied.  It’s hard to argue that you don’t fit a certain definition if you don’t know what the definition is.

Of course, not all companies want to avoid SIFI status. Although some have argued that FSOC and other aspects of Dodd-Frank will prevent future bailouts, it seems naïve to think that the government could designate a company as a risk to the entire financial system and then sit idly by as it burns.  SIFI designation is a wink and a nod, all but assuring government support if the designated company founders in rocky times.

In its case against the government, MetLife argued that its designation as a SIFI was “arbitrary and capricious.” This is the famously deferential standard by which actions by federal agencies are judged. Rarely will a court overstep an agency’s decision to find that it violated this very low bar. And yet this is exactly what Judge Rosemary Collyer found. Although the government may appeal the decision, it will likely spur other SIFIs to challenge their designation as well.

More importantly, however, Judge Collyer’s decision may provide the check-list that companies have been seeking. Judge Collyer issued her opinion under seal, meaning that its details are not currently public. She has asked the parties to weigh in on whether any portions of it should remain hidden, signaling her interest in making the opinion public in the near future. Once the opinion, and Judge Collyer’s legal analysis, is made known, I foresee many lawyers scrambling to set their clients on MetLife’s path.