The Financial Stability Oversight Council (Council) approved the attached 

resolution by notational vote on September 19, 2013, by a vote of seven to two

(with the Acting Director of the Federal Housing Finance Agency and the 

independent member with insurance expertise opposed), except with respect to the 

first resolution paragraph thereof, appearing on page 5, which the Council 

approved with nine members voting in favor and none opposed. The Chair of the 

Securities and Exchange Commission recused herself from the vote.

Dissenting opinions of certain voting and nonvoting members of the Council are 

also attached hereto. 

The basis for the Council’s determination is available at www.fsoc.gov.
1

RESOLUTION APPROVING FINAL DETERMINATION

REGARDING PRUDENTIAL FINANCIAL, INC.

WHEREAS, section 113 of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (the “DFA”) authorizes the Financial Stability Oversight Council 

(the “Council”) to determine that a nonbank financial company shall be supervised 

by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) 

and shall be subject to enhanced prudential standards if the Council determines that 

material financial distress at the nonbank financial company, or the nature, scope, 

size, scale, concentration, interconnectedness, or mix of the activities of the 

nonbank financial company, could pose a threat to the financial stability of the 

United States; and 

WHEREAS, in making a determination under section 113 of the DFA, the Council 

must take into consideration the following: (A) the extent of the leverage of the 

company; (B) the extent and nature of the off-balance-sheet exposures of the 

company; (C) the extent and nature of the transactions and relationships of the 

company with other significant nonbank financial companies and significant bank 

holding companies; (D) the importance of the company as a source of credit for 

households, businesses, and State and local governments and as a source of 

liquidity for the United States financial system; (E) the importance of the company 
2

as a source of credit for low-income, minority, or underserved communities, and 

the impact that the failure of such company would have on the availability of credit 

in such communities; (F) the extent to which assets are managed rather than owned 

by the company, and the extent to which ownership of assets under management is 

diffuse; (G) the nature, scope, size, scale, concentration, interconnectedness, and 

mix of the activities of the company; (H) the degree to which the company is 

already regulated by one or more primary financial regulatory agencies; (I) the 

amount and nature of the financial assets of the company; (J) the amount and types 

of the liabilities of the company, including the degree of reliance on short-term 

funding; and (K) any other risk-related factors that the Council deems appropriate; 

and

WHEREAS, the Council issued a final rule and accompanying interpretive 

guidance (the “Rule and Guidance”), codified at 12 C.F.R. Part 1310, that 

describes the criteria and the processes and procedures by which the Council will 

determine that a nonbank financial company shall be supervised by the Federal 

Reserve and shall be subject to enhanced prudential standards under the DFA; and

WHEREAS, the Rule and Guidance describes a three-stage process that the 

Council expects to use for evaluating a nonbank financial company prior to a 
3

Council vote on a proposed determination; and

WHEREAS, the Council has evaluated Prudential Financial, Inc. (“Prudential”), 

which the Council previously advanced to stage 3, in accordance with the DFA and 

the Rule and Guidance, including conducting an assessment of all of the 

considerations set forth in section 113 of the DFA; and 

WHEREAS, the Council has considered a broad range of information available 

through existing public and regulatory sources, as well as information collected 

directly from Prudential; and 

WHEREAS, based on the stage 3 evaluation, the Council made a proposed 

determination regarding Prudential and provided Prudential written notice of the 

proposed determination, including an explanation of the basis of the proposed 

determination; and 

WHEREAS, the Council provided Prudential an opportunity to request a hearing 

before the Council to contest the proposed determination; and 

WHEREAS, Prudential requested a written and an oral hearing before the Council; 
4

and

WHEREAS, the Council held a written and an oral hearing in which Prudential 

contested the proposed determination; and

WHEREAS, based on the evaluation of Prudential, the staffs of the Council 

Members and of their Agencies recommend that the Council make a final 

determination regarding Prudential; and 

WHEREAS, under the provisions of the DFA and the Rule and Guidance, the 

Council is required to notify a nonbank financial company of the final 

determination of the Council, which shall contain a statement of the basis for the 

decision of the Council; and

WHEREAS, under the provisions of the Rule and Guidance, the Council is 

required to publicly announce any final determination of the Council under 

section 113 of the DFA; and

WHEREAS, the members of the Council have considered the issues and the record 

in connection with the following actions.
5

NOW, THEREFORE, BE IT RESOLVED, that, to avoid the appearance of any 

uncertainty regarding certain actions previously taken by the Council, the Council 

hereby ratifies: (1) the Resolution Approving Publication of the Final Rule and 

Guidance on Nonbank Financial Company Designations, approved by the Council 

April 3, 2012; (2) the Resolution Approving the Advancement of a Subset of 

Nonbank Financial Companies That Were Considered in Stage 2 to Stage 3 of the 

Evaluation Process, approved by the Council October 18, 2012; (3) the Resolution 

Approving the Adoption of Amendments to the Hearing Procedures to Govern 

Hearings Requested by a Nonbank Financial Company, Financial Market Utility, 

or Financial Institution Engaged in a Payment, Clearing, or Settlement Activity 

That Is the Subject of a Proposed Determination or Designation, approved by the 

Council April 4, 2013; (4) the Resolution Approving the Completion of the 

Evidentiary Record Regarding a Set of Nonbank Financial Companies, approved 

by the Council May 24, 2013; (5) the Resolution Approving the Proposed 

Designations of an Initial Set of Nonbank Financial Companies, approved by the 

Council June 3, 2013; and (6) the Resolution Granting Request for Oral Hearing in 

Connection with Proposed Determination Regarding Nonbank Financial Company, 

approved by the Council July 8, 2013.
6

BE IT FURTHER RESOLVED, that, based on the information, considerations, 

and analysis set forth in the attached “Basis for the Financial Stability Oversight 

Council’s Final Determination Regarding Prudential Financial, Inc.” (the “Basis”), 

and on a review of the administrative record, the Council hereby determines, 

pursuant to section 102 of the DFA and the Federal Reserve’s Regulation PP, that 

Prudential is a nonbank financial company and thus eligible for a determination by 

the Council under section 113 of the DFA.

BE IT FURTHER RESOLVED, that, based on the information, considerations, 

and analysis set forth in the Basis, and on a review of the administrative record, the 

Council hereby makes a final determination, pursuant to section 113 of the DFA, 

that material financial distress at Prudential could pose a threat to the financial 

stability of the United States and that Prudential shall be supervised by the Federal 

Reserve and shall be subject to prudential standards, in accordance with Title I of 

the DFA.

BE IT FURTHER RESOLVED, that the Council has considered and hereby 

approves the attached “Notice of Final Determination and Statement of the Basis 

for the Financial Stability Oversight Council’s Final Determination Regarding 
7

Prudential Financial, Inc.” (the “Notice”) and authorizes the Notice to be sent to 

Prudential.

BE IT FURTHER RESOLVED, that the Council hereby approves the Basis and 

authorizes the Basis to be released to the public.

BE IT FURTHER RESOLVED, that the Council hereby delegates authority to the 

Chairperson, or his designee, to make technical, nonsubstantive, or conforming 

changes to the text of the Notice and the Basis.
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1

The following is a public version of the dissent of the Council’s Independent Member delivered 

to Council Members.

Views of the Council’s Independent Member having Insurance Expertise

As the Financial Stability Oversight Council’s (the “Council”) Independent Member having 

insurance expertise, I dissent from the Final Determination of the Council that, based on the 

analysis and conclusions presented in the Basis for the Financial Stability Oversight Council’s 

Final Determination Regarding Prudential Financial, Inc. (“Basis”) and the administrative 

record, the material financial distress of Prudential Financial, Inc. (“Prudential”) could pose a 

threat to the financial stability of the United States.1 

In making its Final Determination, the Council has adopted the analysis contained in the Basis. 

Key aspects of said analysis are not supported by the record or actual experience; and, therefore, 

are not persuasive. The underlying analysis utilizes scenarios that are antithetical to a 

fundamental and seasoned understanding of the business of insurance, the insurance regulatory 

environment, and the state insurance company resolution and guaranty fund systems. As 

presented, therefore, the analysis makes it impossible for me to concur because the grounds for 

the Final Determination are simply not reasonable or defensible, and provide no basis for me to 

concur.

Many of my views, as well as those of Director Huff and others, are underscored by arguments 

presented by Prudential in response to the Council’s earlier Proposed Determination analysis. 

What follows represents the most serious of my major points of disagreement with the rationale 

for the Final Determination.

Transmission Channels

The Council identified three transmission channels as avenues by which a nonbank financial 

company could transmit risk of instability to the financial system: (1) exposure; (2) asset 

liquidation; and (3) critical function or service. The Council has determined that Prudential’s 

material financial distress could pose a threat to financial stability focusing on two of the 

channels: exposure and asset liquidation.2

 

1 The Council has based its conclusion solely on what is referred to as the First Determination Standard; namely: 

“material financial distress at the nonbank financial company could pose a threat to the financial stability of the 

United States.” See Appendix A to Part 1310 – Financial Stability Oversight Council Guidance for Nonbank 

Financial Company Determinations (“Interpretive Guidance”), 12 C.F.R. pt. 1310, app. A (2013). The Council did 

not consider Prudential under the “Second Determination Standard,” which relates to specific activities of the 

company, as discussed further below.

2 Prudential’s share of generally fragmented and competitive markets does not appear large enough to cause a 

significant disruption in the provision of services should Prudential experience material financial distress and be 

unable or unwilling to provide such services. 
2

(1) Exposure Transmission Channel

The Council’s Interpretive Guidance explains that its consideration of the exposure channel 

would involve exposures “significant enough to materially impair” creditors, counterparties, 

investors, or other market participants.3 

Neither the Basis nor the administrative record supports the conclusion that the exposure of 

Prudential’s creditors, counterparties, investors, and other market participants to Prudential are 

significant enough that Prudential’s material financial distress could materially impair those 

entities and thereby could pose a threat to U.S. financial stability. No specific adverse effect on 

the financial condition of those other entities is presented to support any conclusion of material 

impairment. Absent supporting analysis regarding the resulting financial condition of those 

entities, it is not possible to make such a conclusion.

The Basis does not establish that any individual counterparty would be materially impaired

because of losses resulting from exposure to Prudential. Instead, the Basis relies on broader 

market effects and aggregates the relatively small individual exposures to conclude that 

exposures across multiple markets and financial products are significant enough that material 

financial distress at Prudential could contribute to a material impairment in the functioning of 

key financial markets. Although aggregate exposures are large, individual losses may be able to 

be absorbed by counterparties or policyholders without materially impairing financial condition, 

financial services or economic activity.

I do not agree, without further supporting analysis, that relatively small exposures spread among 

many financial institutions would materially impair these same institutions simply because of 

broader market effects. Moreover, such a line of reasoning would inevitably lead to a conclusion 

that any nonbank financial company above a certain size is a threat – contradicting 

pronouncements that “size alone” is not the test for determination.

The assumed failure of Prudential, both at the holding company level and across all of its 

subsidiaries, would be a significant market event leading to destabilizing and negative effects for 

individuals, firms, and markets. The Basis reasonably predicts where the relatively small losses 

would fall. But while losses borne broadly among financial market participants would have a 

small impact on their capital, the conclusion that these exposures could serve to spread material 

financial distress at Prudential to counterparties and financial markets more broadly is not 

supported by the Basis or the administrative record. In addition, the other impacts noted in the 

Basis regarding potential effects on policyholders, state guaranty funds, or other insurers are not 

convincing. 

 

3 Interpretive Guidance, 12 C.F.R. pt. 1310, app. A (2013). 
3

(2) Asset Liquidation Transmission Channel

The Council’s asset liquidation channel hinges on an assumed run by millions of life insurance 

policyholders, who would collectively surrender or withdraw a significant portion of life 

insurance cash values. In addition to alleging that such withdrawal and surrender requests could 

strain Prudential’s liquidity resources to meet such a run with all of its insurance subsidiaries 

being rendered insolvent, put into receivership, and liquidated, the Basis postulates that such a

run could cause liquidity runs on other life insurers. In addition to a run by life insurance 

policyholders, the Basis appears to assume that separate account holders, like variable annuity 

and other contract holders, would also run en masse, causing asset liquidations, and that these 

consequences would lead to financial instability.

The Council’s analysis is flawed in several significant respects.

• While there have in fact been liquidity runs on life insurance companies, no historical, 

quantitative or qualitative evidence exists in the record that supports a run of the scale 

and speed posited, or to support a rapidly spreading sector-wide run. The asset 

liquidation analysis appears to assume a contemporaneous run against the general and 

separate accounts by millions of life insurance policyholders and a significant number of 

annuity and other contract holders of products with cash surrender value – a scale for 

which there is no precedent, and for which the likelihood is believed by most experts to 

be extraordinarily low. The Basis provides no support for why such a construct is 

warranted or reasonable. Other more plausible failure hypotheses could have been used.

• The run behavior assumed in the Basis is a homogenous view of Prudential’s policy and 

contract holders in disregard of important distinctions in behaviors of institutional versus 

retail customers; customer demographics and domicile; an insured’s health; economic, 

market risk, penalty, tax and substitution disincentives; and product type and design (i.e., 

terms and conditions). There also appears to be a false perception, contradicted by facts 

and experience, that policyholders value life insurance only or primarily as cash 

instruments. 

• The First Determination Standard requires that the Council consider Prudential, as the 

parent holding company, to be in material financial distress, but such distress does not 

necessarily include the material financial distress of all of its major insurance 

subsidiaries. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“DoddFrank”)4 does not require the Council to presume an unfathomable and inexplicable 

simultaneous insolvency and liquidation of all insurance subsidiaries, and to do so

confuses failure at the holding company level with failure at the operating insurance 

entity level. Nevertheless such an approach highlights the fact that the Notice’s analysis 

 

4 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), Pub. L. No. 111-203, 124 Stat. 

1376 (2010).
4

under the First Determination Standard is dependent upon its misplaced assumptions of

the simultaneous failure of all of Prudential’s insurance subsidiaries and a massive and 

unprecedented, lightning, bank-style run by a significant number of its cash value 

policyholders and separate account holders, which apparently is the only circumstance in 

which the Basis concludes that Prudential could pose a threat to financial stability. I 

believe that, absent a catastrophic mortality event (which would affect the entire sector 

and also the whole economy), such a corporate cataclysm could not and would not occur. 

• One of the key bases underpinning the Basis is the proposition that a significant portion

of U.S. general account cash surrender values would be payable within a very short 

period of time and that Prudential would be unable to accommodate such a large cash 

outflow, thereby incentivizing other “runners” from Prudential’s life insurance companies 

as well as other non-affiliated life insurance companies. The existing built-in fail-safes of 

insurance and annuity product terms and conditions, and Federal and State regulatory and 

judicial stay authorities – all combine to impede the transmission and slow the potential 

asset liquidation to a point that it could be managed by Prudential. The Basis rightly 

notes that any asset liquidation could be slowed by certain mitigating factors, such as 

Prudential deferring payouts on a significant portion of the immediately payable cash 

surrender values or the imposition of stays on withdrawals and surrender by state courts. 

The Basis contends though that these tools could affect market confidence in the life 

insurance sector as a whole, and possibly trigger surrenders and withdrawals at other 

insurers. Even assuming arguendo that such fail-safes might perhaps lead to other 

negative effects,5 the alleged threat to financial stability from a feared rapid asset 

liquidation can be countered.

• Runs from separate accounts and asset management accounts are indistinguishable from a 

market perspective. Therefore, it is difficult to reconcile the Basis’s analysis of assumed 

runs and forced asset liquidation tied to separate account products and its skepticism as to 

the sale or transfer of whole companies or blocks of such business, with its different 

conclusions as to a possible reputational run, asset liquidation, and transfers of 

Prudential’s asset management business. 

• The Basis does not give enough weight to mitigants and appears to question both the 

professional judgments of regulators to intervene and the effectiveness of stays to stop 

runs. Such reasoning suggests a misled and partial or incomplete understanding of statebased insurance regulatory system guided by mandatory interventions under State riskbased capital laws. In fact, not only the U.S. State insurance regulators, but also the 

 

5 It is also equally plausible that the use of such existing fail-safes might engender greater confidence in the 

protections afforded insurance consumers and in the regulatory system, and thereby result in long-term positive 

effects.
5

Securities and Exchange Commission (“SEC”),6 and Japan’s Financial Services Agency, 

all have the authority to impose early stays. These stays would almost certainly stop any 

runs and halt the resulting asset liquidations that the Basis indicates would lead to severe 

impairments of financial intermediation or financial market functioning that would 

significantly damage the economy. 

• Having already contemplated Prudential and its insurance subsidiaries to be in material 

financial distress, insolvent, and in liquidation, the Basis’s analysis becomes distracted by 

certain solvency issues, such as captive reinsurance.7 

• The Basis’s reliance on the lack of a precedent for a failure of an insurance company the 

size and scale of Prudential begs the question. The question that should be asked is why 

there has been no such precedent? It seems inherently unreasonable to make negative 

inferences about the current state resolution and guaranty systems based on the lack of 

such precedent, while presuming material financial distress and the failure across all 

insurance subsidiaries; without a reasonable and complete assessment of the extremely 

low probability of such a scenario occurring. Even though Prudential does not currently 

have a consolidated regulator, there are many U.S. and non-U.S. regulators overseeing 

Prudential’s operating entities. That there is “no precedent” is, in large part, a testament 

to the proven results of State insurance regulators, individually and collectively working 

through the National Association of Insurance Commissioners (“NAIC”), in 

strengthening the quality, depth and sophistication of the State regulatory framework for 

its legal entity supervision, particularly over the last two decades.8

• The Basis also does not give sufficient credence to the ability of the state resolution and 

guaranty systems to serve as a mitigant. 

 

6 Section 22(e) of the Investment Company Act prohibits suspension of redemptions and provides a seven-day 

window for payment of proceeds. However, Section 22(e)(2), and (3) provide authority for the SEC to grant relief 

from the statute, through rulemaking or an exemptive order. 7 Use of affiliated captive reinsurance by life insurers is a notable trend and State insurance regulators face serious 

challenges in reaching a consensus approach to reform. I favor the Council making recommendations to the primary 

financial regulators and the Board with respect to capital treatment on a consolidated basis. However, for purposes 

of the analysis at hand, captive reinsurance has only limited relevance as a potential amplifier of loss exposure to 

counterparties given the arbitrage of capital quality, but which the analysis does not quantify. Captive reinsurance 

would be more relevant to the analysis had the Council relied on credit risk to cedent affiliates as a basis in modeling 

which insurance subsidiaries might become distressed or insolvent, leading to a more plausible scenario of 

transmission through the resolution and the guaranty systems. However, under the analysis, the insolvency and 

failure of all insurance subsidiaries is presumed, making issues of affiliate risk and capital transfer less important. 8 Moreover, the Basis’s analysis confuses material financial distress at the holding company level with distress at the 

operating entity level. Prudential is a diversified financial conglomerate, not an operating insurer. 
6

Significant Damage to the Broader Economy

The Basis and the administrative record lack any analysis as to how Prudential’s material 

financial distress would lead to a threat where “there would be an impairment of financial 

intermediation or financial market functioning that would be sufficiently severe to inflict 

significant damage on the broader economy.”9 The Basis does not contain any analysis that 

presents any findings as to severe impairment of financial intermediation; severe impairment of 

the functioning of U.S. and global financial markets; or resulting significant damage to the 

economy. No empirical evidence is presented; no data is reviewed; no models are put forward. 

There is simply no support to link Prudential’s material financial distress to severe consequences 

to markets leading to significant economic damage.

Conclusion

In view of my disagreement with the rationale in the Basis concerning the major areas discussed 

above, I respectfully dissent from the Council’s Final Determination. I also have other 

reservations and concerns, as set forth below.

Other Reservations and Concerns

In addition to the dissent from the Final Determination discussed above, several other matters 

have also weighed heavily on my consideration of this determination. 

(1) First and Second Determination Standards

After including extensive review of the profile of Prudential and its activities under the First 

Determination Standard, the Council decided to not evaluate Prudential under the Second 

Determination Standard. Given the questionable and unreasonable basis for the Council’s 

reliance solely on the First Determination Standard, it is my position that it would have been 

prudent for the Council also to have considered the Second Determination Standard pertaining to 

activities.

This absence from the analysis is regrettable, as much of the public discussion and the focus of 

regulators (domestic and international), policymakers, academics, and industry participants has 

been on activities. As a result, the Council’s decision to designate Prudential will provide no 

direction, clarity or transparency to the public or to State insurance regulators, international 

supervisors, or Prudential itself, as to what activities need to be addressed or modified. The 

Council fails to make any recommendation to the primary financial regulatory agencies10 or the 

Federal Reserve Board of Governors (“Board of Governors”), as anticipated (and provided for) 

in Dodd-Frank as well as in the Council’s own Interpretive Guidance.11 The analysis should 

 

9 Interpretive Guidance, 12 C.F.R. pt. 1310, app. A (2013) (emphasis added).

10 Dodd-Frank §112(k), 12 U.S.C. §5322(k). 11 Interpretive Guidance, 12 C.F.R. pt. 1310, app. A (2013). 
7

have identified any risky or disfavored activities conducted by Prudential; and, in so doing, the 

Council would have provided needed and useful guidance to inform on-going domestic and 

international efforts to strengthen the stability of the insurance sector and the financial system as 

a whole.

(2) The Collins Amendment

A determination by the Council that Prudential could pose a threat to financial stability is a 

prerequisite to its determination whether to subject the company to supervision by the Board of 

Governors. A plain reading of Section 113 of Dodd-Frank sets out a two-part determination 

process whereby: 

1. “if the council determines that material financial distress at the U.S. nonbank 

financial company, or the nature, scope, size, scale, concentration, 

interconnectedness, or mix of the activities of the U.S. nonbank financial 

company, could pose a threat to the financial stability of the United States[;]”

2. “[it] may determine that a U.S. nonbank financial company shall be supervised by 

the Board of Governors and shall be subject to prudential standards, in accordance 

with this title[.]”12 

The penultimate question is whether to subject Prudential to Board of Governors supervision, 

which is a significant regulatory action. Irrespective of the separate determination as to whether 

the company could pose a threat to financial stability, I believe that the Council should exercise 

its discretion and defer a Final Determination as to whether Prudential should be supervised by 

the Board of Governors and subject to enhanced prudential standards at this time.

The Council’s Final Determination will subject the company to a new supervisory and capital 

regime.13 However, the Basis is silent as to any possible alternative considerations.

It is critical that more consideration be given to the regulatory capital regime that would be 

imposed on Prudential or any consolidated organization predominated by insurance companies 

under Board of Governors supervision, especially minimum capital requirements pursuant to 

section 171 of the Dodd-Frank (commonly referred to as the “Collins Amendment”). The 

Council’s Final Determination that Prudential should be supervised by the Board of Governors 

will ultimately lead to the imposition of requirements that are by all indications ill-suited for 

 

12 Dodd-Frank §113(a)(1), 12 U.S.C. §5323(a)(1) (emphasis added). 13 I am not advocating for lower capital requirements. In some circumstances higher capital requirements may be 

necessary. But I am in favor of capital requirements that are appropriate and that make sense. 
8

insurance companies; and when, unfortunately, the Board of Governors may be constrained in 

tailoring.14 

It is generally conceded that the Collins Amendment’s requirements could potentially have a 

significant impact on Prudential. The possible unintended negative consequences to consumers, 

the insurance marketplace, and the broader economy are not at all clear at this point. The 

competitive disadvantage for Prudential relative to other peers remains a concern. 

Time is not of the essence in this case, for Prudential is not in financial distress, material or 

otherwise. There is no suggestion that it poses an actual threat to U.S. financial stability.15 

There are no exigent (emergency) circumstances,16 and no specific threatening activities have 

been identified. 

In light of this, the Council should actually refrain from making a final determination and should 

instead employ other tools or methods at its disposal to address risks, such as subjecting 

Prudential to on-going, heightened monitoring. The Council could then use this additional time 

to consider making recommendations to the Board of Governors as to the Collins Amendment.17 

In addition, the Council should make recommendations to Congress pertaining to the Collins 

Amendment, including any needed legislation. 

(3) Systematic Risk versus Idiosyncratic Risk to the System

The Basis is also flawed in its approach to overall systematic risk that could apparently be 

triggered via the state-based resolution and guaranty systems by other large life insurance 

companies – not just Prudential. It should be recognized that the Board of Governors, as 

consolidated regulator, has no authority under Dodd-Frank Section 165 to address systemic risk 

presented by any perceived flaws in state resolution processes or state guaranty funds (absent the 

guaranty funds themselves being designated).18 To the contrary, state-based resolution of 

insurance companies and guarantee protections are preserved, as is, in Title 2 of Dodd-Frank.19 

Yet in spite of its apparent concerns, the Council has taken no other action, nor made or tabled 

for consideration any recommendations to the primary financial regulators, the States, or 

Congress as to the state resolution and guaranty systems. 

 

14 The Board of Governors has authority under section 165 to tailor the application of the standards, including 

differentiating among covered companies on an individual basis or by category. See Dodd-Frank §165(a)(2)(A), 12 

U.S.C. §5356(a)(2)(A). However, this does not address the potential restraint on the Board of Governors in tailoring 

those standards due to the Collins Amendment. 

15 Dodd-Frank §121, 12 U.S.C. §5331. 16 Dodd-Frank §113(f), 12 U.S.C. §5323(f). 17 Dodd-Frank §§115(a)(2), 112(2)(I), 12 U.S.C. §§5325(a)(2), 5322(2)(I). 18 The state guaranty funds themselves could possibly qualify as nonbank financial companies eligible for 

designation. 

19 Dodd-Frank §203(e), 12 U.S.C. §5383(e).
9

(4) Recent Regulatory Scrutiny by the Global Insurance Regulators, Finance Ministers, and 

Central Bankers

The Basis omits any mention of recent international regulatory scrutiny of Prudential. On July 

18, 2013, the Financial Stability Board (“FSB”) announced that, in consultation with the IAIS 

and “national authorities,” the FSB had identified an initial list of nine global systemically 

important insurers (“G-SIIs”).20 The FSB list identified Prudential as a G-SII. It appears that 

the U.S. “national authority” apparently assented to the FSB designation of Prudential as a G-SII 

– even prior to Prudential’s evidentiary hearing before the Council on its Proposed 

Determination and to any final decision by the Council.21 It seems reasonable to conclude from 

the spirit and intent of Dodd-Frank that the Council is the primary national authority in the U.S. 

responsible for financial stability and designating systemically important companies.

Although not binding on the Council’s decision, the declaration of Prudential as a G-SII by the 

FSB based on the assessment by the U.S. and global insurance regulators, supervisors, and others 

who are members of the IAIS,22 has overtaken the Council’s own determination process. While 

the FSB’s action should have no influence, I have come to be concerned that the international 

and domestic processes may not be entirely separate and distinct, especially where the FSB 

pronouncements of policy measures to be imposed on the G-SIIs, including Prudential, can only 

be achieved in the U.S. through a subsequent Council designation.23 Thus, the action by the FSB 

interjects a new consideration for me to weigh in that the failure of the Council in not 

designating Prudential could be viewed to be a failure of the U.S. to comply with decisions made 

within the G-20.

In considering these new international issues, I am at a disadvantage, particularly in not being 

privy to the deliberations, insights and results of the methodological assessment of the IAIS and 

its members, which developed the underlying basis for the FSB’s action, in spite of the Council’s 

information-sharing Memorandum of Understanding. 

 

20 The FSB is currently working to identify global systemically important financial institutions (“G-SIFIs”) in 

furtherance of the financial regulatory reform agenda of the Group of Twenty Finance Ministers and Central Bank 

Governors (“G-20”). G-SIFIs are defined by the FSB as “institutions of such size, market importance, and global 

interconnectedness that their distress or failure would cause significant dislocation in the global financial system and 

adverse economic consequences across a range of countries;” and G-SIIs are one class of SIFIs. 21 The FSB also designated MetLife, Inc. as a G-SII, without even a proposed determination by the Council. 22 There are several members of the IAIS from the United States: the individual State insurance commissioners, 

including the Missouri Director of Insurance, Financial Institutions, and Professional Registration, John Huff; the 

NAIC; and Treasury’s Federal Insurance Office, whose director is Michael McRaith.

23 FSB, Press Release: “FSB identifies an initial list of global systemically important insurers (G-SIIs)” (July 18, 

2013) (“For the institutions identified today, implementation of enhanced group-wide supervision commences 

immediately ... .”); See also FSB, “Global systemically important insurers (G-SIIs) and the policy measures that 

will apply to them” at ¶¶4, 7.
1

View of Director John Huff, the State Insurance Commissioner Representative

I do not believe that there is a sufficient basis for the Council’s final determination that 

Prudential’s material financial distress could pose a threat to the financial stability of the United 

States. In particular, there appears to be a lack of recognition given to the nature of the 

insurance business and the authorities and tools available to insurance regulators. Insurance is 

not the same as a banking product yet the Statement of the Basis for the Council’s Final 

Determination (the “Basis”) inappropriately applies bank-like concepts to insurance products and 

their regulation, rendering the rationale for designation flawed, insufficient, and unsupportable. 

Consumers purchase insurance primarily to indemnify against a contingent event, protect against 

property loss or damage, replace the loss of income in the event of death or disability, and 

provide stable retirement income. Indeed, consumers seek insurance as a source of stability even 

in times of economic stress and the authorities of insurance regulators have long protected 

insurance consumers in difficult times such as the Great Depression and the recent financial 

crisis. For these and the following reasons, the analysis continues to be insufficient in several 

key respects:

1) The Basis identifies the asset liquidation channel as a primary concern regarding 

Prudential’s potential threat to U.S. financial stability yet it offers merely speculative 

outcomes related to the liquidation of assets that are not supported by a sufficient

understanding of the heterogeneity of insurance products or insurer asset disposition. 

There is little analysis linking realistic but severe liability run scenarios to readily 

available liquidity, liquidity obtained through asset sales, and the impact of such asset 

sales on financial markets. Without such analysis, it is difficult to attach any 

credibility to the conclusions in the Basis. 

The Basis discusses liabilities with certain withdrawal characteristics, presuming that 

a large majority of Prudential’s policyholders would exercise withdrawal rights as

depositors to a bank might. It suggests that a significant amount of Prudential’s 

liabilities would be subject to policyholder surrender and payout, but summarily 

dismisses scenarios more supportable by the evidentiary record involving much lower 

amounts. In doing so, the Basis does not give sufficient weight to contractual 

provisions that allow Prudential to manage a significant amount of the potential 

withdrawals over a lengthy period of time and the ability of regulators to impose 

additional stays on surrenders. Rather, the Basis merely speculates, without any 

evidence, that the imposition of stays or contractual deferrals of surrenders would 

undermine confidence in insurance markets to such a degree that it would threaten the 

financial stability of the United States. 

In fact, all of these scenarios are highly unlikely as they effectively assume that all 

policyholders eligible to surrender their policies will do so despite the significant 
2

disincentives to policyholder withdrawals including federal income tax liability, 

federal income tax penalties, surrender penalties, and the loss of guarantees., which 

the Basis gives little weight. The Basis also asserts that policyholders, in deciding 

whether to surrender, would consider the amount of the death or retirement benefit as 

a less important consideration than the cash surrender value, which is much lower

than the death benefit. It further argues that the more appropriate comparison would 

be between the cash surrender value and the “associated liabilities” (i.e., the reserve), 

explaining that the comparison to the death benefit does not take into account the time 

value of money or the payments policyholders would continue to make. This is

simply incorrect. In making any decision to surrender an insurance policy, 

policyholders would not know the reserve amount of their policy (which requires an 

actuarial calculation to determine) and would instead consider the reason they 

purchased the policy, the death or retirement benefit. In light of this, it is beyond 

comprehension how policyholders would be able to or even why they would desire to 

make any other comparison except as between the cash surrender value and the death 

or retirement benefit. Most policyholders do not view their insurance policies as 

checking accounts, or even as typical investment accounts. Policyholders pay 

premiums to obtain the protection insurance provides. 

The Basis also fails to demonstrate that the potential extent of the assets required to 

be liquidated to pay policyholder surrenders under such scenarios would be 

significant enough to pose a threat to the financial stability of the United States. In 

this context, the Basis does not give appropriate weight to evidence demonstrating

that Prudential’s holdings do not comprise a disproportionately large share of any 

asset market.

2) The exposure channel analysis is not a compelling basis for the final determination as 

it does not set forth sufficient evidence to conclude that Prudential’s exposures to 

different counterparties are significant enough to pose a threat to the financial 

stability of the United States. The Basis also does not adequately analyze actions 

taken by Prudential’s counterparties, which include several of the largest U.S. banks,

or their regulators, which include several of my fellow Council members, to manage 

the risks arising from transactions with Prudential or other financial counterparties. 

In attempting to address the fact that individual exposures would not have a systemic 

impact, the Basis aggregates exposures and argues that together such exposures could 

pose a threat to the financial system of the United States. In so doing, the Basis

merely demonstrates that Prudential is a large insurance company, yet it has been a 

long accepted principle of this process that size alone is not a sufficient basis for 

designation. 
3

With respect to exposures to policyholders, the Council does not set forth a 

reasonable basis to conclude that the financial stability of the United States would be 

threatened if policyholders were unable to access cash surrender values or suffered

losses in the event of Prudential’s material financial distress. Accordingly, reliance 

on such scenarios is inappropriate. It also overstates the guaranty fund’s importance 

to the analysis and does not sufficiently support the apparent conclusion that the 

impact of Prudential’s failure on the guaranty fund system could pose a threat to the 

financial stability of the United States. 

3) Some of the statements and arguments in the Basis suggest a lack of appreciation of

the operation of the state-based regulatory framework, particularly its resolution 

processes. The Basis states that the authority of an insurance regulator to ring-fence 

the insurance legal entity could complicate resolution and could pose a threat to 

financial stability. Ring-fencing is a powerful regulatory tool utilized by insurance 

regulators to protect policyholders. In fact, ring-fencing augments financial stability 

by providing policyholders with the confidence that their policies will be honored, 

thereby reducing the likelihood and amount of policyholder surrenders as well as 

decreasing asset liquidation risk. Moreover, ring-fencing does not necessarily

prevent a transfer of assets; rather it prevents the transfer of assets without regulatory 

approval. Accordingly, regulators—U.S. and international—can use this tool to 

ensure assets remain with the firm long enough to assess liabilities and determine the 

most appropriate approach to resolving the firm. 

In addition, while Prudential may be a complex organization as suggested by the 

Basis, it is not clear how that complexity translates into a threat to the financial 

stability of the United States as defined in the Council’s rule and guidance, as the 

analysis does not properly take into account key elements of the insurance resolution 

process. Insurance regulators have a history of working together in judicially 

overseen and orderly resolutions. 

4) The Basis also mischaracterizes, does not sufficiently consider, or otherwise ignores 

other regulatory authorities and tools. These authorities and tools include, but are 

not limited to, the ability to take over the company by placing it in administrative 

supervision or declaring it to be in hazardous financial condition, regulatory riskbased capital triggers, and the ability to stop or slow surrenders. In the event of 

Prudential’s material financial distress or failure, insurance regulators have the 

authority to take action to minimize the impact that Prudential’s failure would have 

on policyholders and counterparties. Given that one of the primary concerns is 

policyholder surrenders and the resulting asset liquidation, the ability of regulators to 

intervene to manage such surrenders is a critical component to any such analysis and 

should be given more recognition. Instead, the Basis speculates that the use of stays 
4

or similar powers would undermine confidence in the insurance industry but

provides no evidence to support that conclusion.

5) The Council indicated in its rule and guidance that it will consider a firm’s material 

financial distress to be a threat to financial stability if there would be impairment of 

financial intermediation or of financial market functioning that would be sufficiently 

severe to inflict significant damage on the broader economy. While there are 

conclusory statements in this regard throughout the Basis, there is insufficient 

analysis to support application of such statements to Prudential. 

6) The Council also indicated in its rule and guidance that its determination will be made 

on a firm-specific basis. However, the Basis includes arguments that I do not believe 

meet that standard, such as concerns regarding state guaranty fund capacity and 

implicit application of such severe macroeconomic stress that it is unclear whether 

Prudential is even causing or amplifying the stress in question. Further, these 

arguments are presented with no limiting principle, which raises concerns that broad 

industry or macroeconomic related issues, rather than firm-specific issues, could 

subject a company to designation.

In conclusion, the designation of insurance companies that could pose a threat to the financial 

stability of the United States is a serious exercise, the result of which could have significant

implications for 1) the stability of the financial system, 2) policyholders that may be 

disadvantaged to the benefit of financial counterparties, 3) the cost and availability of insurance

products, and 4) the competitiveness of the insurance sector. It is critically important that these 

decisions are based on robust analytics and a thorough understanding of the insurance business 

and insurance regulation. The analysis contained in the basis for the final determination in large 

part relies on nothing more than speculation. It gives little weight, if any, to evidence in the 

record, the historical experience of the insurance sector, and the expertise and experience of 

insurance regulators and, in particular, my colleagues in the states of New Jersey, Connecticut, 

and Arizona that are primarily responsible for regulating Prudential. 

For these reasons, I do not believe that the Council has a sufficient basis to conclude that 

Prudential’s material financial distress could pose a threat to the financial stability of the United 

States.