Judge Collyer’s order rejecting MetLife’s designation as a systemically important financial institution (SIFI) is a potential watershed moment for regulation in the aftermath of the crisis of 2007-2009 (MetLife, Inc. v. Financial Stability Oversight Council (PDF: 27.3 KB), No 15-cv-0045 (D.D.C., March 30, 2016)).
Responding to legitimate concerns about the performance of financial regulators and central bankers who failed to understand the dangers posed by the credit bubble and the subprime mortgage boom, Congress in the Dodd Frank Act created the Financial Stability Oversight Council (FSOC) and charged it with responsibility for overseeing the stability of financial markets.
The FSOC’s most important substantive power is its authority to designate non-bank financial institutions as SIFIs and thereby subject them to supervision by the Fed under heightened prudential standards.
There is much to be said for the SIFI idea. The financial crisis demonstrated that shadow banks can pose systematic risks and warrant enhanced regulatory scrutiny.
But FSOC’s implementation of this idea has been problematic. Critics charge that FSOC’s standards for SIFI designation are vague and inconsistently applied and that its decisions are politicized and cloaked in secrecy.
All four of FSOC’s nonbank SIFI designations have been controversial. But only one institution has challenged the decision in court. Prudential appealed within the FSOC but abandoned the fight when the agency affirmed its initial designation. GE Capital downsized in an effort to shed its SIFI status. AIG accepted the designation even though its days as a high-flying bond insurer are long past.
The decisions by these firms to eschew a judicial challenge undoubtedly reflected sober assessments of the probabilities. Judges usually defer to decisions by administrative agencies, especially when – as here – those actions are backed by a massive administrative record. The political environment was not favorable. And if a judicial challenge failed, as was likely, the institution causing the problem might not be viewed with affection by the officials it had sought to avoid.
MetLife, however, did seek judicial review of its SIFI designation. On March 30 it won an unexpected victory: District Judge Rosemary Collyer entered judgment in favor of MetLife and rescinded the FSOC’s order designating MetLife as a SIFI.
Taken in context, Judge Collyer’s decision displays a stiffened judicial resolve to exercise genuine authority over the administrative state. The decision should hearten those who believe that the judiciary must play a meaningful role in policing against error or abuse by regulatory agencies, and should disappoint those who believe that the public interest in effective regulation should trump concerns of fairness to regulated firms.
The MetLife story is far from complete. There is little prospect for a settlement in the aftermath of Judge Collyer’s decision. In the appeal that will almost certainly follow, MetLife’s prospects of success are uncertain.
History demonstrates that trial-level judges tend to be more sympathetic to the views of regulated firms and appeals courts tend to favor administrative agencies. The reason is that the trial courts review the evidence and thus become sensitized to the concerns of the regulated party. Appeals courts view the dispute from a more abstract perspective and thus may decide according to general principles that recognize a broad scope for agency discretion.
As for the Supreme Court, the prospects are mixed. Although the Justices have often voiced confidence in the administrative process, recent pronouncements have been skeptical (readers of judicial tea leaves might consider Chief Justice Roberts’ warning about a “vast and varied federal bureaucracy” poking into “every nook and cranny of daily life.” City of Arlington v. F.C.C., 133 S.Ct. 1863, 1879 (2013) (dissenting opinion)). If the MetLife case does reach the Supreme Court, it could provide a vehicle for a deeper exploration of the role of the judiciary in controlling excesses of administrative power.
Regardless of how the controversy is resolved, Judge Collyer’s MetLife decision is an important event in the longstanding debate over the powers of the modern administrative state.
Professor Geoffrey P. Miller is the Stuyvesant P. Comfort Professor of Law at NYU School of Law and is Co-Director of the Program on Corporate Compliance and Enforcement.