Professors Submit Brief Supporting FSOC’s Authority

In MetLife, Inc. v. FSOC, MetLife Inc. v. FSOC, 15-cv-00045, U.S. District Court, District of Columbia, “fifteen law and finance professors from leading universities whose research focuses on financial regulation and administrative law, including [Dodd-Frank],” submitted an Amici curiae brief on behalf of the FSOC containing “analysis and academic research” in support of FSOC’s determination that MetLife should be regulated as systemically significant. The professor’s argue that a court has the authority to overturn the determination of FSOC only if such determination was “arbitrary and capricious.” The brief emphasized the “great deference” that courts should be required to show to “the nation’s sole regulatory body with a view of the full sweep of financial markets.”

Lofchie Comment: From a legal standpoint, the principal argument that the learnéd professors make is that the courts do not have the authority to overturn FSOC’s designation of MetLife because (i) the standards by which FSOC’s decisions are judged remain quite low and (ii) the “complex and dynamic nature of systemic-risk analysis often renders quantitative measures [i.e., objective standards] unduly narrow or even misleading. . . .” According to the professors, FSOC is in the business of making “predictive judgments,” and for the courts to “second-guess predictive judgments of this type would do more than improperly interfere with agency prerogatives.” The courts cannot even examine the process by which FSOC made the MetLife decision, since it is a “very basic tenet of administrative law that agencies should be free to fashion their own rules of procedure.”

Much of the substance of the professors’ argument is sound. In Dodd-Frank, Congress gave FSOC authority that is too open-ended to allow any “legal” basis for challenging any of its decisions. There is no basis for any court to overturn a decision that is not subject to any objective standard, is based entirely on predictions of the future, and is not subject to any procedural standard.

Notwithstanding the difficulty of the plaintiff in this case to find a legal basis for challenging the FSOC’s decision, a free society is not based on the eternal truth that “administrative agencies should be free to fashion their own rules of procedure.” A free society should be based on the existence of objective rules that can be understood and interpreted by both the persons to whom the rules apply and by the courts. These rules are supposed to serve as a constraint on the power of the government – even on the freedom of administrative agencies.

In support of the freedom that should be granted to administrative agencies, the professors compare the power of FSOC to that of the National Security Council, another “administrative entit[y having] . . . similarly weighty responsibilities.” However, this comparison misses a fundamental difference between FSOC and the National Security Council. The National Security Council deals with the enemies of our country, while FSOC deals with American citizens and businesses. The fact that the National Security Council operates with a certain freedom from procedural or substantive restraints does not mean that it should serve as model for domestic regulation.

As for the “analysis and academic research” that powered the professors’ brief, it is not outwardly apparent that “Congress carefully designed the FSOC’s structure and procedures,” “[a]nticipating that [FSOC’s] work would demand deep expertise and probabilistic judgments.” Turning out a 2,000 page statute in a couple of months with no previous reports and little substantive debate does not demonstrate a careful design unless one is grading on a curve (and the professors’ students are doubtless all above average).

The professors quote a variety of financial figures that, according to them, demonstrate MetLife’s systemic significance. Yet their central argument is that “quantitative measures [are] unduly narrow or even misleading”. Should it not be sufficient for them to persuade us to concede to FSOC’s collective wisdom and “predictive” prowess?