WASHINGTON – Prudential Financial has a fight on its hands that could alter the course of government regulation of large nonbank companies.
The insurance giant entered uncharted legal territory earlier this week when it appealed the government’s decision to subject the firm to stricter supervision. There is no precedent for the challenge because Prudential is one of the first companies that regulators have designated as a systemically important financial institution, or SIFI, a label that would place it under the purview of the Federal Reserve.
While analysts agree that the challenge will be an uphill battle, they say the outcome could have significant bearing on how regulators proceed with future designations. Any decision will be closely watched by Wall Street, since the designation signals a major shift in the oversight of a broad swath of big companies that play in financial markets.
“This is something to watch with fascination,” said Donald Lamson, a banking attorney at Shearman & Sterling. “There may come a point in the proceedings where the parties agree on a designation where the terms would be less onerous than what Prudential fears.”
At issue is the unknown, but potentially damaging, ramifications of being designated by the Financial Stability Oversight Council, the new interagency panel of regulators tasked with policing systemic risk. The label comes with higher capital requirements and other restrictions that could eat into a firm’s profitability.
Treasury Secretary Jack Lew, who heads the council, has said enhanced oversight of firms whose failure could threaten the financial system is essential to protecting taxpayers and promoting economic stability. But Prudential argues that it is not the kind of behemoth company that could destabilize the financial markets.
“We will continue to work closely with regulators to demonstrate our belief that the company does not meet the requirements of the SIFI designation,” the company said in a statement Tuesday. “We have faith in the integrity of the FSOC’s review process, which provides for the ability to contest the proposed designation.”
Prudential has requested a closed-door hearing before FSOC, which has until August to schedule the meeting. After that, the council will make a final decision within 60 days.
Treasury spokesperson Suzanne Elio said FSOC is not at liberty to discuss the designations until the process is completed.