MetLife, Inc. v. Fin. Stability Oversight Council

• Citation: 177 F.Supp.3d 219
• Decision Date: 30 March 2016
• Docket Number: Civil Action No. 15–0045 (RMC)
• Court: U.S. District Court — District of Columbia
• Parties: Metlife, Inc., Plaintiff, v. Financial Stability Oversight Council, Defendant.

177 F.Supp.3d 219

Metlife, Inc., Plaintiff,

v.Financial Stability Oversight Council, Defendant.

Civil Action No. 15–0045 (RMC)

United States District Court, District of Columbia.

Signed March 30, 2016

Amir Cameron Tayrani, Ashley Stocks Boizelle, Eugene Scalia, Gibson, Dunn & Crutcher, LLP, Washington, DC, Indraneel Sur, Gibson, Dunn & Crutcher, L.L.P., New York, NY, for Plaintiff.

Deepthy Kishore, Elisabeth Layton, Eric B. Beckenhauer, U.S. Department of Justice, Washington, DC, for Defendant.

SEALED OPINION

ROSEMARY M. COLLYER, United States District Judge

The Financial Stability Oversight Council (FSOC) has determined that “material financial distress” at MetLife, Inc. could “pose a threat to the financial stability of the United States.” The quoted phrases come from the Dodd–Frank Act, 12 U.S.C. § 5323(a)(1), and were defined by FSOC in formal guidance issued years before MetLife's designation. During the designation process, two of FSOC's definitions were ignored or, at least, abandoned. Although an agency can change its statutory interpretation when it explains why, FSOC insists that it changed nothing. But clearly it did so. FSOC reversed itself on whether MetLife's vulnerability to financial distress would be considered and on what it means to threaten the financial stability of the United States.

FSOC also focused exclusively on the presumed benefits of its designation and ignored the attendant costs, which is itself unreasonable under the teachings of Michigan v. Environmental Protection Agency, ––– U.S. ––––, 135 S.Ct. 2699, 192 L.Ed.2d 674 (2015). While MetLife advances many other arguments against its designation, FSOC's unacknowledged departure from its guidance and express refusal to consider cost require the Court to rescind the Final Determination.

I. FACTS

The following facts are culled from the Complaint, the Joint Appendix (JA) and the parties' four final briefs: Def. Mot. for Summ. J. [Dkt. 84–1] (FSOC Mot.); Pl. Opp'n & Mot. for Summ. J. [Dkt. 86–1] (MetLife Mot.); Def. Opp'n & Reply [Dkt. 84–2] (FSOC Reply); and Pl. Reply [Dkt. 86–2] (MetLife Reply).¹

A. Designation under the Dodd–Frank Act

The 2008 financial crisis is widely considered the worst since the Great Depression. During that crisis, “financial distress at certain nonbank financial companies contributed to a broad seizing up of financial markets and stress at other financial firms.” Authority to Require Supervision & Regulation of Certain Nonbank Financial Companies, 77 Fed.Reg. 21,637, 21,637 (Apr. 11, 2012). Aimed at preventing a reoccurrence, Section 113 of the Dodd–Frank Act empowers FSOC to designate certain nonbank financial companies for supervision by the Board of Governors of the Federal Reserve System (Federal Reserve) under enhanced prudential standards. See 12 U.S.C. § 5323(a).

1. Eligibility for designation

To be eligible for designation under Section 113(a), a designee must be a “U.S. nonbank financial company.” That term is defined under Dodd–Frank as a company incorporated or organized in the United States and “predominantly engaged in financial activities.” 12 U.S.C. § 5311(a)(4)(B). Dodd–Frank borrowed the definition of “financial activities” from Section 4(k) of the Bank Holding Company Act (BHCA), as amended, which lists nine activities that are “financial in nature.” See 12 U.S.C. § 1843(k)(4)(A)–(I). Two of those activities are relevant here:

(B) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State.

...

(I) Directly or indirectly acquiring or controlling, whether as principal, on behalf of 1 or more entities (including entities, other than a depository institution or subsidiary of a depository institution, that the bank holding company controls) or otherwise, shares, assets, or ownership interests (including debt or equity securities, partnership interests, trust certificates or other instruments representing ownership) of a company or other entity, whether or not constituting control of such company or entity, engaged in any activity not authorized pursuant to this section if-

(i) the shares, assets, or ownership interests are not acquired or held by a depository institution or a subsidiary of a depository institution;

(ii) such shares, assets, or ownership interests are acquired and held by an insurance company that is predominantly engaged in underwriting life, accident and health, or property and casualty insurance (other than credit-related insurance) or providing and issuing annuities;

(iii) such shares, assets, or ownership interests represent an investment made in the ordinary course of business of such insurance company in accordance with relevant State law governing such investments; and

(iv) during the period such shares, assets, or ownership interests are held, the bank holding company does not routinely manage or operate such company except as may be necessary or required to obtain a reasonable return on investment.

Id. §§ 1843(k)(4)(B), (I).

These provisions were added to the BHCA by the Gramm–Leach–Bliley Act, Pub.L. 106–102, § 103(a), 113 Stat. 1338, 1342–45 (1999). The purpose of Gramm–Leach–Bliley was to repeal the Glass–Steagall Act's prohibition on banks affiliating with securities firms and other financial institutions, and thus to “enhance competition in the financial services industry.” See id. § 101.

The Federal Reserve promulgated regulations to implement Gramm–Leach–Bliley. See Regulation Y, Bank Holding Companies & Change in Bank Control, 66 Fed.Reg. 400 (Jan. 3, 2001) (codified at 12 C.F.R. § 225). Referring to the activities listed above, the Federal Reserve indicated that they may be conducted “at any location in the United States or at any location outside of the United States subject to the laws of the jurisdiction in which the activity is conducted.” 12 C.F.R. § 225.85(b) (citing id. § 225.86(c) (citing Section 4(k) of the BHCA, 12 U.S.C. §§ 1843(k)(4)(A)–(E), (H), (I) )). This regulation had been in place for nine years before Dodd–Frank incorporated the BHCA definition of “financial in nature.” When the Federal Reserve later promulgated regulations specifically for Dodd–Frank, those regulations merely parroted the statutory definitions above. See 78 Fed.Reg. 20,756, 20,778, 20,781 (Apr. 5, 2013).

To be “predominantly engaged” in financial activities, a company must satisfy either of two tests under Dodd–Frank Section 102. See 12 U.S.C. § 5311(a)(6). Under the first test, 85 percent or more of a company's “consolidated annual gross revenues” must be “derived” from activities that are “financial in nature.” Id. § 5311(a)(6)(A). Under the second test, 85 percent or more of the “consolidated assets of the company” must be “related to activities that are financial in nature.” Id. § 5311(a)(6)(B). If either test is satisfied, a company is “predominantly engaged” in financial activities and eligible for designation by FSOC.

2. Statutory considerations and consequences

Eligible companies may be designated by FSOC for enhanced supervision under either of two determination standards: (1) when “material financial distress” at a company “could pose a threat to the financial stability of the United States”; or (2) when the very “nature, scope, size, scale, concentration, interconnectedness, or mix of the [company's] activities” could pose the same threat. 12 U.S.C. § 5323(a)(1). See generally 12 C.F.R. § 1310 App. A. FSOC relied only on the First Determination Standard when designating MetLife.

Congress identified ten factors that FSOC must consider when assessing whether material financial distress at a company could pose a threat to the national economy:

(A) the extent of the leverage of the company;

(B) the extent and nature of the off-balance-sheet exposures of the company;

(C) the extent and nature of the transactions and relationships of the company with other significant nonbank financial companies and significant bank holding companies;

(D) the importance of the company as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the United States financial system;

(E) the importance of the company as a source of credit for low-income, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities;

(F) the extent to which assets are managed rather than owned by the company, and the extent to which ownership of assets under management is diffuse;

(G) the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company;

(H) the degree to which the company is already regulated by 1 or more primary financial regulatory agencies;

(I) the amount and nature of the financial assets of the company;

(J) the amount and types of the liabilities of the company, including the degree of reliance on short-term funding.

12 U.S.C. § 5323(a)(2). In addition, FSOC “shall consider ... any other risk-related factors that [it] deems appropriate.” Id. § 5323(a)(2)(K).

Upon designation, a company becomes subject to “enhanced supervision” and “prudential standards” that are not yet set by the Federal Reserve. See generally 12 U.S.C. § 5365. The prudential standards shall include, at a minimum:

(i) risk-based capital requirements and leverage limits, [subject to limited exception];

(ii) liquidity requirements;

(iii) overall risk management requirements;

(iv) resolution plan and credit exposure report requirements; and

(v) concentration limits.

Id . § 5365(b)(1)(A). The Federal Reserve may also establish “additional standards,” such as:

(i) a contingent capital requirement;

(ii) enhanced public disclosures; [and]

(iii) short-term debt limits;

Id. § 5365(b)(1)(B). Further, the Federal Reserve is authorized to establish “such other prudential standards as [it] determines are appropriate.” Id. § 5365(b)(1)(...