By Ryan Tracy and Lalita Clozel
WASHINGTON -- The Trump administration is endorsing significant
changes in the criteria for regulating large insurers and asset
managers, sending a strong signal that firms such as MetLife Inc.,
Prudential Financial Inc. and BlackRock Inc. can worry less about
strict rules from Washington.
The Treasury Department on Friday recommended an overhaul of the
process for designating nonbank financial institutions as
systemically important, a post-financial crisis label that subjects
some firms to stricter regulatory oversight.
Observers on both sides of the political spectrum said the
recommendations would make it less likely that the Financial
Stability Oversight Council will designate nonbank firms
systemically important.
Regulators can implement the recommendations by rule without
action from Congress.
Trump administration officials already had signaled skepticism
of using the "systemic" label, but the Treasury's report Friday
offered the most definitive critique to date. It calls for allowing
companies targeted for the designation to make changes before
additional supervision is applied and said a cost-benefit analysis
should be part of the process.
Treasury Secretary Steven Mnuchin said in a written statement
the changes would improve FSOC's analysis and increase
transparency.
It was good news for Prudential, the remaining nonbank firm
wearing the systemic tag, as well as for BlackRock and other asset
managers that fought under the Obama administration to avoid the
label.
Prudential is hoping regulators will release the firm from
federal oversight later this year.
A MetLife spokesman said the report "correctly identifies flaws
in the current designation process and endorses strong
remedies."
Representatives of Prudential and BlackRock had no immediate
comment.
For MetLife, the report signals regulators may stop trying to
reassert federal oversight of the company. A U.S. District Judge
rescinded the company's systemically important designation in March
2016, calling it unreasonable. The Obama administration appealed
the ruling. Earlier this year the case was put on hold, pending the
Treasury's report.
The Trump administration hasn't said what it plans to do about
the MetLife case, but the arguments in Friday's report endorsed
many of the company's complaints.
"What it tells you is they are agreeing with MetLife," said
Margaret Tahyar, a partner in the financial institutions group at
Davis, Polk and Wardwell LLP.
The report responds to a memorandum issued in April by President
Donald Trump directing the Treasury to evaluate the designation
process undertaken by FSOC, which is led by the Treasury Secretary
and includes top financial regulators.
The 2010 Dodd-Frank law created FSOC to avoid a repeat of the
2008 financial crisis, when large firms outside the heavily
regulated banking sector, such as American International Group
Inc., received bailouts.
FSOC used its designation power to regulate AIG, General
Electric Co.'s GE Capital, MetLife and Prudential. Sometimes, FSOC
decided not to designate firms. The Obama administration evaluated
but never designated others, including Warren Buffett's Berkshire
Hathaway Inc.
Industry groups and some lawmakers saw FSOC's designations as
unfounded and have been seeking to undo or restrain the FSOC's
authority for years.
In the Trump administration, those voices have found a more
sympathetic ear. Craig Phillips, a top counselor to Mr. Mnuchin on
financial regulation issues, is a former BlackRock executive.
Andrew Olmem, an adviser to president on financial policy at the
White House National Economic Council, represented MetLife and
other financial firms as a lobbyist after leaving his post as a
lawyer on the Senate Banking Committee.
The White House counsel has waived an ethics restriction on Mr.
Olmem, allowing him to participate in work on "reforming the
Financial Stability Oversight Council's [FSOC's] procedures."
White House deputy press secretary Lindsay Walters said in a
written statement that despite the waiver, Mr. Olmem is recused
from "any particular matters involving MetLife as a party" and he
"fully complied with his recusal obligations."
Treasury said in preparing the report it met with academics and
advocacy groups along with industry groups and companies such as
MetLife and BlackRock.
Though the Treasury's recommendations don't suggest axing the
designation process, as Republicans in Congress have proposed, it
could significantly raise the bar for FSOC to justify a
designation.
Thomas Vartanian, a partner at Dechert LLP who has been critical
of FSOC, said the report means "FSOC has to create a better record
to designate nonbanks as [systemic]. If that makes it harder for
them, it's possible that they may not designate" more companies in
the future.
The report suggested FSOC should work with a company's primary
regulator to address systemic risk concerns, in addition to giving
companies the chance to address risks before it moves forward with
a designation. In evaluating a company, FSOC would conduct a
cost-benefit analysis and consider the likelihood that a company
could pose a threat to financial stability.
Marcus Stanley, a Dodd-Frank supporter who is policy director
for the Americans for Financial Reform advocacy group, said the
changes would tilt the process in favor of companies. "You're
letting companies that could be big and sensitive to the financial
system make excuses that claim everything is fine," he said. "I'm
sure AIG in 2005 would have come up with a very good argument."
Once the systemic label is applied, companies should be provided
with a "clear 'off-ramp' " for getting the designation rescinded,
the report added. AIG and GE Capital already have taken an
"off-ramp" by persuading regulators to rescind their systemic
designations.
Write to Ryan Tracy at ryan.tracy@wsj.com and Lalita Clozel at
lalita.clozel.@wsj.com
(END) Dow Jones Newswires
November 17, 2017 17:26 ET (22:26 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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