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.
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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 A U.S. District Judge rescinded the company's systemically important designation in March 2016, calling it unreasonable.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, a former MetLife lobbyist, is advising the president on financial policy at the White House National Economic Council.
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."
A White House spokeswoman said Mr. Olmem is recused from the MetLife litigation but didn't immediately answer a question about his role in Friday's report.
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 email@example.com and Lalita Clozel at lalita.clozel.@wsj.com
(END) Dow Jones Newswires
November 17, 2017 15:57 ET (20:57 GMT)