At a recent open session meeting, members of the Financial Stability Oversight Council (“FSOC”) announced that they would change the selection process for identifying systemically important financial institutions (“SIFIs”).
At the meeting, the Department of Justice delivered a presentation to FSOC regarding the lawsuit brought by MetLife, Inc. The presentation challenged FSOC’s determination that the company would be subject to supervision by the Board of Governors of the Federal Reserve System and to enhanced prudential standards. FSOC members promised to provide earlier notification than in the past to firms under scrutiny, make more information about their decisions publicly available and conduct more in-depth reviews of their decisions each year.
FSOC has yet to release a written copy of the changes on which they will vote at a future meeting.
Lofchie YouTube Selection regarding the Designation Process: A Call for Volunteers.
Lofchie Comment: It does not speak well of FSOC’s process that, over the past several years, it ignored numerous public suggestions to create a more open and transparent methodology for designating SIFIs, only to concede that the designation process required improvement as soon as it was challenged in court by a designee. FSOC’s retreat raises questions about the fairness of the process by which prior firms were designated. Given the costs imposed on a designated firm, FSOC should consider suspending its prior designations until it has put an improved review process in place and any prior designees are permitted to engage in that improved process.
Whatever improvements may be made eventually, we continue to believe that the substance of the law is flawed. If Congress concludes that the Federal Reserve Board ought to oversee large insurance companies or clearing corporations, then Congress should adopt legislation containing objective measures to determine what firms would be regulated, and should likewise provide at least some guidance on the types of regulation to which firms in each industry would be subject. The notion of adopting a system of substantive regulation that applies to all insurance companies, clearing corporations and perhaps investment advisers is inherently flawed. There are simply no improvements to be made to FSOC’s process that would rescue the underlying substance of the SIFI designation (though greater transparency and more objectivity would still be helpful).