ACLI, ICI Demand Fairness, Clarity in SIFI

WASHINGTON – A “fairer, more transparent process” should be used for designating nonbank financial institutions such as life insurers as systemically important financial institutions (SIFI), the American Council of Life Insurers contended Wednesday in Senate testimony.

At the same time, the Investment Company Institute (ICI) testified that it supported the current Financial Stability Oversight Council (FSOC) review of the asset management sector, acknowledging that, in do so the FSOC is merely fulfilling its mandate under the Dodd-Frank Act (DFA).

However, the ICI said, it is “hopeful” the FSOC will conclude that SIFI designation “is unnecessary and inappropriate in the case of funds and their managers.”

Gary Hughes, ACLI executive vice president and general counsel, and Paul Schott Stevens, ICI president and CEO, made their comments at a long hearing by the Senate Banking Committee on “FSOC Accountability: Nonbank Designations.”

In both their comments, the specter of international regulation raised its head, with both voicing concerns that the actions of bodies such as the Financial Stability Board play a role in FSOC decisions.

The issue was brought up early at the hearing by Sen. Richard Shelby, R-Ala., chairman of the banking panel.

“The FSB, however, is not a U.S. regulator,” Shelby said in opening comments addressed to Jacob Lew, Treasury secretary and head of the FSOC.

“And it is not accountable to Congress or to the American people,” Shelby said. “Nonetheless, two out of the three insurance companies that FSOC has designated as systemically important were first designated by the FSB.”

Shelby contended that this “creates a regulatory conflict, because three of the 10 of FSOC's voting members, Treasury, the Fed and the SEC, first engage at the FSB level to determine if a U.S. company is systemically important.”

In his opening remarks to the panel, Hughes of the ACLI said that one of the changes that should be made in the case of insurance companies being considered for designation by the FSOC is that greater weight should be given to the views of the FSOC voting member with insurance expertise.

Moreover, deference to the views of the insurer’s primary, state insurance regulator, Hughes said.

And, in another proposal that reflected the views of MetLife, which is challenging in court its designation as a SIFI, Hughes said that Federal Reserve Board oversight should not be imposed on a company challenging its designation.

“FSOC should be required to conduct a review upon the request of a designated company if there has been a change in the operations of the company or a change in regulation affecting the company,” Hughes said.

In connection with such a review, FSOC should also provide a company with an analysis of the factors that would lead FSOC to de-designate the company, he said.

He added that FSOC should be required to pursue an “activities-based” approach with respect to insurance, with a focus on the specific activities and practices that may pose systemic risk.

And, the FSOC also should be required to appropriately apply the material financial distress standard as set forth in Dodd-Frank, Hughes said, adding that the FSOC should also shed additional light on what metrics, standards or criteria would operate to categorize a company as non-systemic.

Hughes also said that companies under consideration for designation as a SIFI should have more than 30 days to initiate a judicial review of a final determination and that SIFI determinations should be made independent of international regulatory activities.

In his testimony, Schott of ICI reiterated the view of investment companies that the Securities and Exchange Commission “as the regulatory body best equipped to address any concerns about financial stability with respect to funds and fund managers.”

Schott also said that in none of its nonbank designations so far “has the FSOC chosen to explain the basis for its decision with any particularity.”

Instead, Schott testified that it appears to have relied on a single metric – a firm’s size – to the exclusion of the other factors cited in the DFA.

Schott said the FSOC has also has “theorized about risks” instead of conducting the kind of thorough, objective, empirical analysis that should underlie its decisions.

He said the FSOC should be explicit about the systemic risks it identifies arising from a firm’s structure or activities, and the results of any analysis that might lead to designation should be made public.

“This would be beneficial on all sides – it would help market regulators and firms address such risks, and it would promote public understanding of and confidence in what the FSOC regards to be systemically risky and why,” Schott said.

In commenting on FSB actions, Schott said that, “While we believe there is no basis for designating them, recent proposals out of the FSB point to the prospect that the FSOC may soon consider designation for many large U.S. funds and their managers.”

He said that, “If any of these entities was designated, the consequences would be highly adverse to investors and the capital markets.”

He explained that application of bank metrics set forth in the DFA to designated stock and bond funds or their managers “would raise costs on and jeopardize the interests of fund shareholders, greatly distort the fund marketplace, introduce a highly conflicted model of regulation, and compromise the important role that funds play as a source of financing in the economy.”

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].