NAIFA GovWatch

U.S. Treasury Secretary Unveils "Resolution Authority" Proposal and Outlines New Framework for Regulatory Reform

Issue: Financial Services Regulatory Reform

Date: March 26, 2009

Action Taken:Today the House Financial Services (Chairman Frank, D-MA) held a hearing to address the need for comprehensive financial regulatory reform. In the hearing, Treasury Secretary Timothy Geithner laid out the Administration’s blueprint for overhauling the financial system. In conjunction with Secretary Geithner’s appearance before the Congress, the Treasury Department issued an outline of its “Framework for Regulatory Reform,” and released draft legislation granting the Federal Deposit Insurance Corporation (FDIC) resolution authority over a broad range of “financial companies,” including insurance holding companies.

Resolution Authority Proposal: The draft legislation, the “Resolution Authority for Systemically Significant Financial Companies Act of 2009,” is significant for the insurance industry in a number of ways:

With respect to insurance, the draft bill focuses on insurance holding companies, and specifically excludes insurance company subsidiaries of insurance holding companies. The bill does not carefully define insurance holding company, however, nor does it place limits on the type or size of insurance holding companies subject to its provisions. The bill, however, is likely to implicate only a small number of insurance holding companies because its application is limited to situations in which the failure of a company and its resolution under other federal or state bankruptcy or related laws would have “serious adverse effects” on the financial stability or economic conditions of the country.
The legislation is reactive rather than proactive. That is, rather than imposing up-front prudential regulations, the legislation sets forth a resolution process that does not kick-in unless a financial company is in default or near default, as determined by the federal regulators. With respect to an insurance holding company, the FDIC is given authority to make such a determination. This begs the question as to how the FDIC will determine if an insurance holding company is in financial trouble. The bill describes the conditions necessary for a company to be in default or in danger of default, but does not provide any mechanism for the FDIC to obtain information about an insurance holding company to determine if those conditions are met. The bill does not give the FDIC any supervisory or regulatory authority over insurance holding companies, nor does it require the FDIC and state insurance regulatory authorities to work together so that necessary financial information is available.
Although the legislation does not address preemption of state law, it raises significant questions as to the impact on state insurance holding company laws in insolvency situations. State insurance regulators currently have minimal oversight over insurance holding companies, focusing principally on transactions between parent and subsidiary. In recent months, the state regulators have repeatedly noted that this regulatory authority enabled them to prevent AIG from raiding the assets of its insurance subsidiaries. Under the proposed legislation, the FDIC as receiver would have exclusive control over an insurance holding company. It is not clear whether the FDIC could require (or permit) an insolvent holding company to pull assets from its subsidiaries to cover the parent’s obligations. Moreover, it is not clear whether the FDIC as receiver could require the sale of operating subsidiaries, or prevent the states from reviewing/approving changes in control.
The legislation includes a provision that opens the door for finding directors and officers of troubled financial companies personally liable for monetary damages in civil suits brought by FDIC. Liability is limited to actions of gross negligence, and damages are to include – but are not necessarily limited to – losses of principal and interest resulting from the “improvident or otherwise improper” use of the troubled company’s assets.

Comprehensive Regulatory Reform: The Administration’s “Framework for Regulatory Reform” has four components:

Addressing systemic risk
Protecting consumers and investors
Eliminating regulatory gaps
Fostering international coordination

Secretary Geithner told Congress that the President intends to address the international coordination piece of their plan at the G20 Summit in April. He then focused his remarks on the first component of the Administration’s plan: expanding the government’s authority to address systemic risk. The other three components are expected to be addressed in the coming weeks.

With respect to systemic risk, the Secretary outlined six elements of the plan:
Create a single independent regulator with responsibility over systemically important firms and critical payment and settlement systems;
Establish higher standards on capital and risk management for systemically important firms;
Require registration of all hedge fund advisers with assets under management above a moderate threshold;
Create a comprehensive framework of oversight, protections and disclosure for the over-the-counter derivatives market;
Establish new requirements for money market funds to reduce the risk of rapid withdrawals; and
Institute stronger resolution authority to protect against the failure of complex institutions.

Lawmaker Reaction: Chairman Frank urged the committee to act swiftly on expanding the government’s authority to react to systemic risk, while other members of the committee, such as Capital Markets, Insurance, and GSE’s Subcommittee Chairman Paul Kanjorski (D-PA), expressed reluctance to move too fast. Lawmakers were split as to whether they should grant expanded receivership authority to the FDIC before establishing a new systemic risk regulator, or whether they should develop comprehensive reform that includes both pieces.

With respect to insurance, several committee members, including Rep. Gregory Meeks (D-NY), Rep. Kanjorski and Chairman Frank, expressed concern that the Administration’s proposal would impair state regulatory authority over insurance. Secretary Geithner assured members that the plan does not limit state authority over the insurance industry, although it would add additional regulation over any institution – including an insurer – that the government deemed to pose systemic risk. Secretary Geithner expressed support for an Office of Insurance Information. He did not respond, however, when asked whether the Administration prefers a system with a single state regulator or whether the Administration would regulate life insurance and property/casualty insurance differently. Chairman Frank requested Secretary Geithner to respond to these questions in writing. Chairman Frank made very clear that Congress will not pass legislation that allows the federal government to regulate insurance rates.

Next Steps: The Administration intends to announce a detailed version of its systemic risk plan on April 20, 2009. Chairman Frank indicated his intent to hold hearings on the issue with all financial regulators as a group.

NAIFA will continue to keep you informed about these and other critical developments regarding insurance and financial services regulatory reform. For information on NAIFA's regulatory reform policy, including our principles of support for an optional federal charter for insurance, please visit www.naifa.org/irr.

NAIFA Staff Contact: For additional information please contact Jill Edwards at jilledwards@naifa.org.

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