On October 17, 2018, the Financial Stability Oversight Council (“FSOC”) announced that it voted unanimously to rescind its designation of Prudential Financial, Inc. as a so-called “systemically important financial institution” (“SIFI”). Section 113 of the Dodd-Frank Wall Street and Consumer Protection Act (“Dodd-Frank Act”) enables FSOC to identify a nonbank financial company for supervision by the Board of Governors of the Federal Reserve System (“Board”) and be subject to enhanced prudential standards. FSOC was established by Title I of the Dodd-Frank Act. It is comprised of ten voting members, including the leaders of eight federal financial regulators, the Secretary of the U.S. Department of the Treasury (“Treasury”) who serves as chair, and an independent member with insurance expertise who is appointed by the President for a six-year term.
Prudential was designated as a SIFI on September 19, 2013. Last week’s announcement was the culmination of FSOC’s mandatory annual review of its designation that commenced for Prudential in May 2016. As required by its procedures, FSOC reviewed written materials submitted by Prudential and consulted with the its state and federal regulators. In its review, FSOC identified certain factors that materially affected its previously conclusions that Prudential could post a threat to financial stability if it experienced material financial distress through the exposure, asset liquidation, and critical function or service transmission channels. Following the vote, Treasury Secretary Steven T. Mnuchin said, “The Council’s decision today follows extensive engagement with the company and a detailed analysis showing that there is not a significant risk that the company could pose a threat to financial stability. The Council has continued to act decisively to remove any designation that is not warranted.” FSOC previously rescinded its designations of American International Group, Inc., General Electric Capital Corporation, Inc., and MetLife Inc. as nonbank SIFIs. Prudential was the last remaining designated nonbank financial company.
The vote is indicative of a shift in FSOC’s process for making these designations. In November 2017, Treasury issued a memorandum in response to a directive from the President to review FSOC’s process for nonbank financial company designations. Treasury’s recommendations for FSOC include focusing on an activities-based or industry-wide approach to assessing threats to financial stability and providing a clear “off-ramp” to designated nonbank financial companies. Counselor to the Treasury Secretary Craig Phillips has frequently discussed the need for reform to FSOC’s designation process and has said that FSOC members are engaging on the topic. It is expected that FSOC will publish more details on an activities-based designation approach in the near future.