The Obama Administration’s Regulatory Reform Proposal
On June 17th, the Treasury Department released its white paper titled “Financial Regulatory Reform: A New Foundation.” The much anticipated white paper sets out the key proposals intended to restore confidence in the integrity of the financial system. The white paper introduces several new regulators and/or agencies including an Office of National Insurance (ONI), a Financial Services Oversight Council, a National Bank Supervisor and a Consumer Financial Protection Agency. The ONI, as proposed, would not disband the current state insurance regulatory regime; instead, the Treasury ONI would gather information, monitor the insurance industry and make recommendations. Such an office was included in the Insurance Information Act which was reintroduced last month.
The Federal Reserve would have enhanced authority as a result the proposals, including: 1) supervision of all firms that could pose a threat to financial stability, even those that do not own banks; 2) a right to assess risks and set higher standards for Tier 1 financial holding companies; 3) oversight over payment, clearing and settlement systems; and 4) enhanced authority over market infrastructure. The House Financial Services Committee has scheduled a number of hearings on the Administration’s plan through the end of July.
Systemic Risk and Insurance
As noted in our May LRA, Congress held a number of hearings on systemic risk and regulatory reform this month. On June 16th, a hearing entitled “Systemic Risk and Insurance” included testimony on behalf of the European Parliament, National Association of Insurance Commissioners (NAIC), and American Council of Life Insurers (ACLI). Peter Skinner, a member of the European Parliament, testified regarding the insurance regulatory reform (Solvency II) currently underway in the European Union (EU). Among many points, Mr. Skinner noted that the US state-based regulatory system makes the dialogue between the EU and US much more complicated as there is no one insurance contact that can speak for the US as a whole. Specifically, under the recently passed EU Solvency II insurance legislation, a country level equivalence assessment is required that seems almost impossible to conduct for the US under its varying state regulations. The Office of National Insurance as proposed by the Obama Administration would have authority to negotiate international agreements and may sufficiently address the international communication issue. Solvency II will become law across 27 member countries in 2012. In the testimony given on behalf of the ACLI, two structural elements in any regulatory reform package were recommended: 1) cover life insurance in whatever broad systemic risk oversight is made applicable to the banking and securities industries and 2) create a federal functional insurance regulator available to all life insurers on a voluntary basis (i.e., an optional federal charter).
Consumer Protection and Insurance
The newly proposed Consumer Financial Protection Agency (CFPA) was the center of the June 24th House hearing entitled “Regulatory Restructuring: Enhancing Consumer Financial Products Regulation.” The CFPA would be an independent agency with broad jurisdiction over all consumer financial products that are not investment products and services already regulated by the SEC. It would also have sole rulemaking and enforcement authority with respect to consumer financial protection statutes. The Administration plan is silent on whether the CFPA should have any authority over insurance products. While consumer advocacy organizations recommended CFPA jurisdiction over insurance products that are central or ancillary to credit transactions, the NAIC, ACLI and the National Association of Insurance and Financial Advisors (NAIFA) argued otherwise. Testimony proposed on behalf of insurance organizations sought to distinguish insurance products from other financial products that may fall within regulatory gaps. Three main points were highlighted: 1) insurance products are regulated by a comprehensive state system that includes a strong emphasis on consumer protection; 2) the danger in separating insurance product regulation from solvency regulation; and 3) the lack of insurance expertise within the federal government to support a CFPA.
S. 1073 – Rating Accountability and Transparency Act
On May 19th, Senator Jack Reed (D-RI) introduced legislation to make credit rating agencies more accountable for assigned ratings in part by making it easier for investors to file lawsuits against them. Investors could sue rating agencies for knowingly or recklessly failing to conduct a reasonable investigation into the information used in the rating process. Credit rating firms could immunize themselves from litigation by obtaining assessments from independent firms according to the bill.
H.R. 2733 – Indexed Annuities and Insurance Products Classification Act
Representative Gregory Meeks (D-NY) introduced legislation that would preserve state authority over indexed annuities. It would nullify SEC 151A rule which classifies indexed annuities as securities and makes them subject to SEC oversight. This is yet another example of the recent struggles between state regulators and federal regulators regarding who should oversee which financial products.
Barofsky v. Citibank, N.A.
Earlier this month, the plaintiffs’ attorneys filed a voluntary motion to dismiss the case after Citibank filed a motion to compel arbitration. As reported in our May LRA, the Barofsky suit challenged whether an employer has insurable interest in the lives of its employees under thirteen state statutes.
Proposed Interagency Guidance on Funding and Liquidity Risk
Today, the bank regulatory agencies issued proposed Interagency Guidance on Funding and Liquidity Risk Management. The proposed guidance stresses the importance of good liquidity risk management. Although we have not had a chance to review the proposal in detail, we were not surprised to find a reference to BOLI in the text. Under paragraph 12, financial institutions are encouraged to develop both quantitative and qualitative policies that consider “asset concentrations that could increase liquidity risk through a limited ability to convert to cash (e.g., complex financial instruments, bank-owned life insurance, and less marketable loan portfolios).”
Of course, the interagency statement that applies to managing BOLI (i.e., OCC 2004-56), already requires a bank to consider the inherent liquidity risks when purchasing and maintaining BOLI. The proposal’s comment period will be open for 60 days following the date it is published in the Federal Register.
FASB Statements on Securitizations and Special Purpose Entities
On June 12th, FASB released changes to the way banks must account for securitizations and off-balance-sheet special purpose entities through the issuance of Statements No. 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46(R). Both statements will be effective at the start of the company’s first fiscal year beginning after November 15, 2009 (or January 1, 2010 for calendar-year reporting companies). The changes eliminate existing exceptions, enhance disclosure and strengthen standards relating to both securitizations and special-purpose entities. Statements 166 and 167 were developed partly in response to recent requests from the SEC and the President’s Working Group on Financial Markets. A concise briefing document summarizing the changes was also available on FASB’s website.
Joint Forum Credit Ratings Paper
The Joint Forum, chaired by the Comptroller of the Currency, John C. Dugan, released a paper “Stocktaking on the use of credit ratings.” The paper explores how NRSRO credit ratings are used for regulatory purposes (including risk-based capital computations) and whether such uses unintentionally discourage investors from performing their own due diligence.
The Joint Forum includes senior financial sector regulators from the United States, Canada, Europe, Japan and Australia and deals with issues common to the banking, securities, and insurance industries.