Earlier this year, a federal court threw out the federal government’s designation of Metlife as “systemically important” and therefore “too big to fail.” The Dodd-Frank Act creates a process whereby a council of financial regulators, the new Financial Stability Oversight Council (FSOC), can determine which firms are systemically important and therefore subject them to heightened supervision by the Federal Reserve. The FSOC determined that Metlife was such an institution, but Metlife challenged the designation and it won.
The court found in part that the FSOC initially adopted guidance explaining how it would designate financial firms, and then departed from its guidance in the actual designation of Metlife without any explanation.
The court found that the FSOC guidance had two parts. First, it would consider what might cause a firm to become materially distressed, and second, consider whether an individual firm’s distress might impact the broader financial system in determining whether the firm should be regulated by the Federal Reserve. But in designating Metlife, FSOC essentially ignored part one!
Why the fuss? Because FSOC wanted to designate Metlife, but it wasn’t sure whether it could show that the company was highly prone to failure. Life insurance payouts aren’t highly correlated to economic crisis the way other financial companies are. People tend to die at predictable rates no matter the state of the economy. Without relying on scenarios cooked up in an imagination unmoored to reality, the FSOC would have been hard pressed to show that this 148-year-old life insurance company was highly prone to failure.
But the Federal Reserve wanted to gain back regulatory authority over Metlife after losing it when Metlife sold off subsidiary banks a few year prior.
The cake was already baked, and so with the Fed’s urging, the FSOC cut corners and hoped no one would notice. But a federal district judge in Washington noticed, and she rightly labeled the decision an abuse of authority. Congress created this new authority, but housed it within a body of legal precedent governing how administrative agencies are allowed to exercise the power created for them by the Congress.
In particular, the Dodd-Frank Act used terms of art contained in that body of law allowing a court to overturn an FSOC determination if found to be an “abuse of discretion.” Courts have interpreted the Administrative Procedure Act of 1946 and other elements of constitutional law and statutory interpretation to develop a body of law often called “administrative law.”
The history of administrative law is one generally characterized by courts deferential to agencies. Yet over that history, courts have periodically admonished agencies during both Republican and Democratic administrations for exceeding their statutory or constitutional authority.
The Metlife challenge is only one such example. The same Democratic senator who sponsored the Administrative Procedure Act, Sen. Pat McCarran (Nev.), also sponsored the McCarran-Ferguson Act which established in 1945 that insurance regulation would be left primarily to the states. In the Dodd-Frank Act, Congress respected the legacy of McCarran, in that it both permitted entities designated by the FSOC to challenge the decision under the “arbitrary and capricious” standard familiar in administrative law, and it also left the McCarran-Ferguson structure intact.
Critics of the holding in the case are wrong to think of this case solely as principally one about Wall Street regulation. It would be a tragedy if discussion about this case falls along the traditional dichotomies of those who support the Dodd-Frank Act and those who oppose it.
The legal principles involved in these D.C. Circuit administrative law opinions stretch vastly beyond the individual policy issue or agency involved. The principles in this case form part of the same body of law that regulates how federal agencies treat prisoners in their custody, considers approval of new lifesaving drugs, and regulates the rights of unions to bargain collectively.
The Metlife opinion is a victory for the rule of law, and its benefits extend far beyond the financial markets policy arena or the debate over the Dodd-Frank Act.
Verret is an assistant professor at the Antonin Scalia Law School at George Mason University and a senior scholar with the Mercatus Center at George Mason University.