The Financial Stability Oversight Council (“FSOC”) announced that it voted to designate Prudential as a systemically important non-bank financial company. The FSOC used its authority under Section 113 of the Dodd-Frank Act to subject Prudential Financial, Inc. to consolidated supervision and enhanced prudential standards. The FSOC asserted that material financial distress at Prudential could pose a threat to U.S. financial stability.
In its last 10-K, Prudential had cautioned of the possibility that it might be designated as systemically important and that this could impose additional expenses and burdens on the company. To wit, Prudential had said:
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If so designated [as systemically important], we would become subject to stricter prudential standards, including stricter requirements and limitations relating to risk-based capital, leverage, liquidity and credit exposure, and a requirement to maintain a plan for rapid and orderly dissolution in the event of severe financial distress. Failure to meet defined measures of financial condition could result in substantial restrictions on our business and capital distributions. We would also become subject to stress tests to be promulgated by the [Federal Reserve Board (“FRB”)] which could cause us to alter our business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors of our financial strength.
If designated, we could also be subject, pursuant to future FRB rulemaking, to additional capital requirements for, and quantitative limits on, proprietary trading and sponsorship of, and investment in, hedge, private equity and other covered funds.
[FSOC] could recommend new or heightened standards and safeguards for activities or practices we and other financial services companies engage in. We cannot predict whether any such recommendations will be made or their effect on our business, results of operations, cash flows or financial condition.
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According to FSOC’s press release, Prudential resisted the determination, which is not surprising given that the determination is likely to impose additional costs on the firm. It will be interesting to see whether Prudential appeals FSOC’s decision (Prudential’s press release indicates that the company is considering how to proceed). The problem with attempting any such appeal is that the relevant standards are not really legal standards, except insofar as they may mandate a process for the decision, and thus the basis for an appeal is not clear, unless such an appeal were to be based on the absence of legal standards in Section 11.