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Prudential to fight U.S. proposal to label it 'systemic'

By Sarah N. Lynch

WASHINGTON (Reuters) - Insurance company Prudential Financial Inc said on Tuesday it will contest a proposal by the new U.S. risk council to designate it as systemically important, a tag that would subject it to stricter oversight by federal banking regulators.

In a financial filing on Tuesday, the company declared it would request a closed-door hearing before the Financial Stability Oversight Council, a new body of regulators created by the 2010 Dodd-Frank reform law.

"We continue to have faith in the integrity of the FSOC's review process, which provides for the ability to contest the proposed designation under the applicable regulations," the company said.

So far, only a small group of non-bank financial firms have revealed that the FSOC has proposed tagging them as systemic. Prudential's decision came one day before the end of a 30-day window to notify the FSOC that it intended to legally challenge the designation.

In deciding to appeal, Prudential is wading into uncharted legal territory.

The FSOC, which is chaired by the Treasury Secretary and comprised of the country's top federal financial regulators, is a relatively new federal body that is testing its legal powers.

It is tasked generally with policing for systemic risks in the marketplace. It has the specific power to classify large firms whose failure could threaten financial markets as "systemically important financial institutions," or SIFIs, which triggers additional scrutiny by the Federal Reserve.

The designation also comes with higher capital requirements and other costly rules.

Certain large banks, including Goldman Sachs Group Inc and Citigroup Inc automatically received the SIFI designation.

"The Council has developed a robust process for evaluating whether a nonbank financial company should be subject to Board of Governors supervision and to enhanced prudential standards," a Treasury spokeswoman said about Prudential's decision.

"While the Council does not comment on proposed designations, the Council will grant a hearing within 30 days for any company that contests it.

Under the law, a company can request a hearing if it has concerns about the proposed designations. The FSOC will now have 30 days to schedule a non public hearing for Prudential. After that it will need to make a final decision within 60 days.

"We will continue to work closely with regulators to demonstrate our belief that the company does not meet the requirements of the SIFI designation under the relevant statute," the company said.

The FSOC last month notified Prudential, along with GE Capital and American International Group Inc , that it was proposing to designate all three.

On Tuesday, GE Capital and AIG both signaled they will not appeal the FSOC's proposal.

"We have strong capital and liquidity positions and we are already supervised by the Fed. Accordingly, we have decided not to appeal or ask for a hearing," said Russell Wilkerson, a spokesman for GE Capital, the financial services arm of General Electric Co. "We have been and will be prepared to meet the requirements for SIFIs."

A spokesman for AIG was less direct in his statement, saying AIG "welcomes supervision by the Federal Reserve, and is already working closely with the Federal Reserve Bank of New York."

All three companies previously disclosed what the FSOC was doing because they are publicly traded, but the FSOC is not allowed to name companies until the process is completed.

Although the hearing will not be public, many lawyers are expected to watch the process closely.

Paul Atkins, a former Republican commissioner at the U.S. Securities and Exchange Commission who is a critic of the FSOC, said on Tuesday that he believes Prudential does not meet the criteria to be a SIFI and he is glad the firm is fighting back.

"The FSOC is a travesty," he said. "The process is antithetical to a democratic society - no transparency, no rule of law, no accountability."

Atkins also predicted that an appeal could end up in the courts and noted there is already an outstanding lawsuit challenging the constitutionality of the FSOC's broad powers.

However, he also said that Dodd-Frank limits the grounds on which companies can challenge a SIFI designation.

Alice Joe, executive director of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said the challenge shows frustration with how regulators are applying bank-centric rules to non-banks.

"If Prudential is designated, it will be a slippery slope for all other large insurance companies," Joe said. "Their business models aren't designed to put up capital, so there will be a major transformation of the industry taking place."

(Reporting by Sarah N. Lynch; additional reporting by Emily Stephenson; Editing by Karey Van Hall, Gary Hill and Andre Grenon)

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