By Sarah N. Lynch
WASHINGTON, July 2 Insurance company Prudential
Financial Inc said on Tuesday it will contest a proposal
by the new U.S. risk council to designate it as systemically
important, a tag that would subject it to stricter oversight by
federal banking regulators.
In a financial filing on Tuesday, the company declared it
would request a closed-door hearing before the Financial
Stability Oversight Council, a new body of regulators created by
the 2010 Dodd-Frank reform law.
"We continue to have faith in the integrity of the FSOC's
review process, which provides for the ability to contest the
proposed designation under the applicable regulations," the
So far, only a small group of non-bank financial firms have
revealed that the FSOC has proposed tagging them as systemic.
Prudential's decision came one day before the end of a 30-day
window to notify the FSOC that it intended to legally challenge
In deciding to appeal, Prudential is wading into uncharted
The FSOC, which is chaired by the Treasury Secretary and
comprised of the country's top federal financial regulators, is
a relatively new federal body that is testing its legal powers.
It is tasked generally with policing for systemic risks in
the marketplace. It has the specific power to classify large
firms whose failure could threaten financial markets as
"systemically important financial institutions," or SIFIs, which
triggers additional scrutiny by the Federal Reserve.
The designation also comes with higher capital requirements
and other costly rules.
Certain large banks, including Goldman Sachs Group Inc
and Citigroup Inc automatically received the SIFI
"The Council has developed a robust process for evaluating
whether a nonbank financial company should be subject to Board
of Governors supervision and to enhanced prudential standards,"
a Treasury spokeswoman said about Prudential's decision.
"While the Council does not comment on proposed
designations, the Council will grant a hearing within 30 days
for any company that contests it.
Under the law, a company can request a hearing if it has
concerns about the proposed designations. The FSOC will now have
30 days to schedule a non public hearing for Prudential. After
that it will need to make a final decision within 60 days.
"We will continue to work closely with regulators to
demonstrate our belief that the company does not meet the
requirements of the SIFI designation under the relevant
statute," the company said.
The FSOC last month notified Prudential, along with GE
Capital and American International Group Inc,
that it was proposing to designate all three.
On Tuesday, GE Capital and AIG both signaled they will not
appeal the FSOC's proposal.
"We have strong capital and liquidity positions and we are
already supervised by the Fed. Accordingly, we have decided not
to appeal or ask for a hearing," said Russell Wilkerson, a
spokesman for GE Capital, the financial services arm of General
Electric Co. "We have been and will be prepared to meet the
requirements for SIFIs."
A spokesman for AIG was less direct in his statement, saying
AIG "welcomes supervision by the Federal Reserve, and is already
working closely with the Federal Reserve Bank of New York."
All three companies previously disclosed what the FSOC was
doing because they are publicly traded, but the FSOC is not
allowed to name companies until the process is completed.
Although the hearing will not be public, many lawyers are
expected to watch the process closely.
Paul Atkins, a former Republican commissioner at the U.S.
Securities and Exchange Commission who is a critic of the FSOC,
said on Tuesday that he believes Prudential does not meet the
criteria to be a SIFI and he is glad the firm is fighting back.
"The FSOC is a travesty," he said. "The process is
antithetical to a democratic society - no transparency, no rule
of law, no accountability."
Atkins also predicted that an appeal could end up in the
courts and noted there is already an outstanding lawsuit
challenging the constitutionality of the FSOC's broad powers.
However, he also said that Dodd-Frank limits the grounds on
which companies can challenge a SIFI designation.
Alice Joe, executive director of the U.S. Chamber of
Commerce's Center for Capital Markets Competitiveness, said the
challenge shows frustration with how regulators are applying
bank-centric rules to non-banks.
"If Prudential is designated, it will be a slippery slope
for all other large insurance companies," Joe said. "Their
business models aren't designed to put up capital, so there will
be a major transformation of the industry taking place."