The Treasury Department’s report in response to the Executive Order, dated
June 2017, stated that its plan would spur lending and job growth by making
regulation “more efficient” and less burdensome. Unlike the Choice Act
passed by House Republicans on June 8, the Treasury Department’s report
calls for most Obama-era financial regulations to be dialed back, not
scrapped.
[9]
House Speaker Paul Ryan characterized the Choice Act as “a jobs bill for
Main Street” that promised to “rein in the overreach of Dodd-Frank that has
allowed the big banks to get bigger while small businesses have been unable
to get the loans they need to succeed”
[10]
that, he claimed, had nothing to do with the financial crisis.
For example, Dodd-Frank includes provisions that gave the Secretary of the
Treasury, in consultation with the President, broad powers to seize
financial institutions the department viewed to be in danger of default.
[11]
Objectively speaking, establishing a regulatory scheme for over-the-counter
(OTC) derivatives was long overdue. Instead, Dodd-Frank just prescribed
regulations (including the Volcker Rule, perhaps the most controversial
part of Dodd-Frank
[12]
) and, to its critics, the Volcker Rule failed to address the confusing
structure of our financial regulatory system since it requires joint
rulemaking from five different agencies to implement. The Volcker Rule
restricts banks from proprietary trading and limits their power to make
hedge fund and private equity investments. Although aimed at limiting risk
on Wall Street, the Volcker Rule generated enormous backlash. In light of
the Treasury Department Report, it is not certain whether the Volcker Rule
will be eliminated or amended. The l Choice Act renames the Consumer
Financial Protection Bureau (“CFPB”) the Consumer Law Enforcement Agency
(“CLEA”) and scales back CFPB’s budget along with its powers, which would,
upon passage of the Choice Act, only be empowered to promote consumer
protection and competitive markets. Further, whereas the CFPB currently has
broad authority to spend whatever it requires from the Federal Reserve
System, the Choice Act would change this system of funding by requiring the
CLEA to obtain its funding through the appropriations process that other
federal agencies utilize, and put CLEA’s employees on the same General
Schedule (GS) pay scale applicable to all government employees. The
agency’s sole director would be terminable at the will of the President and
the salaries of Federal Reserve employees above a certain level would be
released to the public.
[13]
Impact on the Insurance and Reinsurance Industry: Title V of Dodd-Frank
Subtitle A of Title V of Dodd-Frank, commonly referred to as the Federal
Insurance Office Act of 2010, established the Federal Insurance Office
(FIO) within the Department of the Treasury and directs the Treasury
Secretary to appoint a director to head the office. Effective July 2011,
the FIO has authority over most lines of insurance, except health, most
long term care, and crop insurance. Dodd-Frank, Title V, Subtitle
B--State-Based Insurance Reform, also known as the Nonadmitted and
Reinsurance Reform Act (NRRA), primarily empowers the FIO:
· To monitor all aspects of the insurance industry, including identifying
issues that could contribute to a systemic crisis in the insurance industry
or the United States financial system;
· To monitor the extent to which traditionally underserved communities and
consumers have access to affordable insurance products (other than health
insurance);
· To recommend to the Financial Stability Oversight Council that it
designate an insurer as an entity subject to regulation as a nonbank
financial company supervised by the Board of Governors of the Federal
Reserve pursuant to Section 113 of Dodd-Frank (i.e., a SIFI)
[14]
;
· To coordinate Federal efforts and develop Federal policy on prudential
aspects of international insurance matters;
· To determine, through rule-making procedures, whether State insurance
measures are preempted because they improperly discriminate against
non-United States insurers;
· To consult with the States regarding insurance matters of national
importance and prudential insurance matters of international importance;
and
· To receive and collect data and information on the insurance industry and
to enter into information sharing agreements with state regulators.
[15]
FIO’s function is thus primarily designed to gather information, monitor
trends in the insurance industry and provide advice to the industry. While
FIO has no regulatory authority per se, it represents the United
States in international negotiations with respect to insurance regulation
and has a seat on the executive committee of the International Association
of Insurance Supervisors (“IAIS”). In view of its broad authority to
monitor all aspects of the insurance industry, including identifying issues
that could contribute to a systemic crisis in the insurance industry or the
United States financial system, state insurance regulators and certain
insurance trade organizations such as the National Association of
Professional Insurance Agents (PIA) are concerned that the FIO has created
an unnecessary bureaucracy that duplicates the ability of state regulators
to make requests for data calls and is an example of the creeping expansion
of the federal government in the insurance industry. Since the business of
insurance is exempt from federal regulation under McCarran-Ferguson
[16]
, PIA advocates for the elimination of FIO.
[17]
The Choice Act would eliminate FIO, the director of which is currently a
voting member of FSOC. Dodd-Frank separately provided for an “independent
voting member” of FSOC with “insurance expertise.” It would also repeal the
FIO provisions as well as the “insurance expertise” FSOC member and replace
both with the new Office of Independent Insurance Advocate. This would be
compatible with the President’s deeply held negative perception of
bilateral and multilateral trade agreements that do not put “America
First”. As mentioned, Title II of the Choice Act would repeal Dodd-Frank’s
“Orderly Liquidation Authority” and replace it with a new subchapter V to
Chapter 11 of the Federal Bankruptcy Code.
Prior to Dodd–Frank, federal laws to handle the liquidation and
receivership of federally regulated banks existed for supervised banks,
insured depository institutions and securities companies. Most individual
states also granted receivership authority to their own bank regulatory
agencies and insurance regulators.
Dodd–Frank expanded these federal laws to potentially handle receivership
and liquidation of insurance companies and other non-bank financial
companies
[18]
. The law includes provisions for judicial appeal by the affected
institution if its Board of Directors disagrees.
[19]
Depending on the type of financial institution, once a financial company
satisfies the criteria for liquidation, different regulatory organizations
may jointly or independently determine whether to appoint a receiver.
[20]
Title V of Dodd-Frank, also known as the "Nonadmitted and
Reinsurance Reform Act of 2010" (NRRA)
[21]
, applies to surplus lines insurance, direct procurement, and reinsurance.
With regard to nonadmitted insurance, NRRA provides that the placement of
nonadmitted insurance only will be subject to the statutory and regulatory
requirements of the insured's home state, and that no state, other than the
insured's home state, may require a surplus lines broker to be licensed in
order to sell, solicit, or negotiate nonadmitted insurance with respect to
the insured.
[22]
NRRA also provides that no state, other than the insured's home state, may
require any premium tax payment for nonadmitted insurance.
[23]
However, states may enter into a compact or otherwise establish procedures
to allocate among the states the premium taxes paid to an insured's home
state.
[24]
The provisions of Title V of Dodd-Frank, which introduce uniformity into
the manner in which the states regulate primarily reinsurance and the
surplus lines industry, would be largely unaffected by the Choice Act.
Impact on the Insurance and Reinsurance Industry of the Covered
Agreement
On January 13, 2017, the United States and the European Union (EU)
concluded negotiations on an insurance covered agreement envisioned and
promoted by the National Association of Insurance Commissioners (NAIC) and
the U.S. state insurance regulators who are its members, and legislated by
Title V of Dodd-Frank.
[25]
One of the principal goals of the Covered Agreement is to affirm the
authority of the FIO, also established by Dodd-Frank within the United
States Department of the Treasury, to preempt state laws that are
inconsistent with the Covered Agreement and may result in less favorable
treatment for foreign insurers. Although the FIO and the United States
Trade Representative (“USTR”) must consult with Congress on the
negotiations, Dodd-Frank does not require specific authorization or
approval from Congress for the Covered Agreement to take effect.
[26]
Although the Trump Administration never indicated definitively whether it
favored or disfavored the Covered Agreement, on numerous occasions it
alternatively signaled its intention to repeal and replace major portions
of Dodd-Frank as a part of its financial services deregulatory push, in
particular with respect to the provisions of Dodd-Frank that affect
banking, and to a lesser degree insurance, although elimination of the FIO
remains one of the principal goals of Dodd-Frank repeal
[27]
According to the United States Trade Representative (USTR) and Michael
McRaith, a former Illinois Insurance Director named to the post of FIO
Director, who together negotiated the terms of the Covered Agreement with
their counterparts in the EU, the Covered Agreement most significantly:
1. Allows U.S. and EU insurers to rely on their home country regulators for
worldwide prudential insurance group supervision when operating in either
market;
2. Eliminates for EU reinsurers collateral requirements and local presence
requirements for U.S. reinsurers meeting certain solvency and market
conduct conditions; and
3. Encourages information sharing between insurance supervisors.
[28]
FIO Director McRaith resigned his post effective upon the inauguration of
President Trump.
[29]
However, much to the chagrin of U.S. state insurance regulators and certain
insurance trade associations, and despite the goals expressed to Congress
by the NAIC when negotiations began with the EU following the NAIC’s
announcement on November 20, 2015
[30]
, the Covered Agreement does not explicitly call for the “equivalency
recognition” of the U.S. insurance regulatory system in the EU. The issue
remained the proverbial elephant in the room even though negotiators for
the U.S. and EU seemingly finalized the terms of the Covered Agreement on
January 13, 2017.
Recent Unresolved Objections to Covered Agreement by Insurance
Regulators and Trade Associations
[31]
From January 2017 until the present, there were several important
developments signifying a cooling of enthusiasm by certain trade
associations representing different segments of the insurance industry, by
state legislators through NCOIL, and by state insurance regulators through
the NAIC. In some instances, these parties openly disagreed with former FIO
Director Mc Raith’s characterizations of the impact of key portions of the
Covered Agreement. In a newsletter of the Center for Insurance Policy and
Research dated March 2017, NAIC President and Wisconsin Insurance
Commissioner Ted Nickel openly challenged some of McRaith’s assurances:
State insurance regulators were told by the negotiators the two goals of
the process were to gain equivalence for the treatment of U.S. insurers
operating in the EU and recognition by EU of the U.S. insurance regulatory
system. In my view, neither was clearly resolved in the covered agreement.
Fellow regulators and I are concerned with the disparate treatment some EU
jurisdictions are imposing on U.S. insurers. State insurance regulators are
committed to reaching accord on a system of mutual recognition without any
jurisdiction imposing its values and regulatory systems on another. Both
U.S. and EU insurers deserve to receive fair and equal treatment. There
should be no disadvantage to an EU insurer doing business in the U.S.
Similarly, a U.S. insurer should not be disadvantaged when it operates in
the EU.
[32]
To further call Treasury’s attention to those alleged disparities in the
interpretations of the Covered Agreement’s language, on March 15, 2017
state insurance regulators and the NAIC wrote to Treasury asking the
Treasury to work with the EU to clarify certain details and to offer
technical assistance and expertise on the Covered Agreement.
[33]
Despite these ongoing issues of interpretation, in July 2017, the Treasury
Department and the USTR announced that the Covered Agreement would be
signed.
[34]
Then, on September 22, 2017, it was announced that the Covered Agreement
was formally signed by representatives of both sides.
[35]
Whether all the state insurance regulators’ and some industry trade
organizations have satisfied themselves that the signed, final Covered
Agreement eliminates the perceived unfavorable treatment and grants full
recognition to both the U.S. and the EU systems of regulating insurance
will await future analyses of the final language as well as commentary from
the same organizations that raised the issue in January and March 2017.