The Financial Stability Oversight Council is voting this week on Prudential Financial Inc. (PRU:US)’s challenge to a risk designation from federal regulators that would impose increased oversight on the insurer, according to two people with knowledge of the matter.
The council, led by Treasury Secretary Jacob J. Lew and including Federal Reserve Chairman Ben S. Bernanke, received voting materials via e-mail today, said the people, who asked not to be identified because the matter hadn’t been made public. The regulators are expected to submit their decisions by tomorrow, one of the people said.
The panel also will vote whether to ratify actions related to Newark, New Jersey-based Prudential while council member Richard Cordray was a recess appointee as Consumer Financial Protection Bureau director, the people said. Regulators on the council have discussed whether Cordray’s actions as a recess appointee could be challenged by companies designated systemically important and subjected to scrutiny by the Fed.
President Barack Obama made Cordray a recess appointment, bypassing Senate confirmation, in January 2012. Cordray was confirmed by the Senate in July of this year and released a “notice of ratification” on Aug. 27 saying he thinks the actions he took as a recess appointee “were legally authorized and entirely proper.”
Bob DeFillippo, a spokesman for Prudential, declined to comment as did Suzanne Elio of the Treasury Department. Prudential declined 1.7 percent to $80.24 at 4:01 p.m. in New York as life insurers slumped amid a decline in bond yields.
The FSOC, which has 10 voting members, proposed designating Prudential as systemically important in June in a 7-2 vote. Under FSOC rules, six votes wouldn’t be enough to sustain the ruling of Prudential as a SIFI. The insurer requested a hearing in July to explain why it shouldn’t get the risk label.
The 2010 Dodd-Frank law created the FSOC in an effort to prevent a systemic crisis in the financial system and enabled the council to designate companies that it determines could pose a threat to U.S. financial stability if they were to fail.
Bernanke said today that “we want to design a regime that is appropriate for the business model of the particular firm.” He was responding to a question about the designation process at a news conference after the central bank refrained from reducing the $85 billion pace of monthly bond buying.
If the council rejects Prudential’s challenge, the insurer would join American International Group Inc. (AIG:US) and General Electric Co.’s finance unit as systemic non-bank bank financial companies. The Fed can impose tighter capital, leverage and liquidity rules on systemically important companies and demand measures including stress-testing and wind-down plans.
Prudential could make an appeal in U.S. district court no more than 30 days after the council’s final ruling.
The regulator hasn’t determined exactly how it will regulate the biggest non-bank financial firms. Insurers have traditionally been monitored by state regulators in the U.S.
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