Prudential Financial is laying the groundwork to escape the government's label that it's too big to fail, a move that would dramatically reduce federal oversight of the largest U.S. life insurer.
Prudential is preparing to push the Financial Stability Oversight Council to remove it from a list of non-banks that regulators concluded would threaten the financial system if they collapsed, said two people familiar with the company's plans.
With business-friendly officials appointed by President Donald Trump taking over FSOC, the company sees an opening, said the people, who asked not to be named because a final decision hasn't been made. And the Treasury Department is expected to release a report as soon as next month criticizing how the government has gone about designating companies such as Prudential, which could provide momentum for the insurer to get out.
Another factor helping Prudential is rival MetLife's legal victory last year overturning its label as a systemically important financial institution, or SIFI.
Under the Dodd-Frank Act, big banks such as J.P. Morgan Chase and Goldman Sachs Group automatically received the systemic-risk label, but the number of non-bank companies designated by FSOC has been falling in recent years, with Prudential and American International Group the only two remaining. The label brings tough oversight by the Federal Reserve and a series of difficult supervisory exercises, such as stress tests and the submission of strategies for how the companies can be safely wound down in a bankruptcy.
Prudential quietly began its exit campaign as soon as Mr. Trump's Treasury secretary, Steven Mnuchin, arrived on the job in February, sending him a welcome letter contending that its status as a SIFI wasn't appropriate, the people said.
"We expect that ultimately we may not wind up as a SIFI," Mark Grier, Prudential's vice chairman, told shareholders in a May conference call, adding that Washington is "moving in the right direction" on the topic of non-bank designations. "Exactly how we get there, I'm not quite sure."
Prudential has "long maintained" it shouldn't have been labeled risky in the first place and only got to that point through "flaws" in the council's process, the company said in a Thursday statement to Bloomberg News.
"We support the administration's thorough review of the FSOC determination and designation process and look forward to reviewing the Treasury report upon completion," the statement said.
Prudential could get the ball rolling by sending a letter formally requesting FSOC rescind its risk label, though Treasury says such petitions must typically demonstrate a company has made "an extraordinary change that materially decreases the threat the non-bank financial company could pose." Prudential may have an easier time when Treasury conducts an automatic annual review of its designation.
A firm needs the Treasury secretary and at least six additional FSOC members to agree to rescind its risk label, as happened last year with General Electric Co.'s financial arm, GE Capital, after it shrunk and exited most of its financial services operations. Other FSOC members include the leaders of the Fed, the Securities and Exchange Commission and the Office of the Comptroller of the Currency.
In April, the president directed Mr. Mnuchin to launch a "thorough review" of FSOC's designation methods, with a particular focus on making its approach more transparent and giving firms a better chance of getting out. MetLife has asked a federal court to hold off on ruling on the government's appeal until Treasury completes its review.