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The Impact of the Current Administration on the Fio and Dodd-Frank by Frederick J

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The Impact of the Current Administration on the Fio and Dodd-Frank by Frederick J PAGE 6 << THE IMPACT OF THE CURRENT ADMINISTRATION ON THE FIO AND DODD-FRANK BY FREDERICK J. POMERANTZ Abstract: Repeal of Dodd-Frank was a central theme of the GOP 2016 Platform pushing financial services deregulation and the campaign of Donald J. Trump. Earlier this year, the U.S. House of Representatives voted to pass the Financial Choice Act of 2017 (the “Legislation”) as a part of the GOP’s federal deregulatory push. However, the Legislation has not yet been enacted because of the need for Senate Democratic support. Nevertheless, some parts of the Legislation may survive, most notably the principal provisions of Title V of Dodd-Frank, which introduce uniformity into the manner in which the states regulate regarding reinsurance. The Legislation would, however, eliminate the Federal Insurance Office, whose director is currently a voting member of FSOC. Separately, Dodd-Frank provides for an “independent voting member” of FSOC with “insurance expertise.” The Legislation would replace both the FIO and FSOC member and merge them into a new Office of Independent Insurance Advocate. Fred Pomerantz explores the provisions of the Legislation likely to survive Congressional review and be blocked by the administration which supports deregulating financial services. About the Author: Frederick J. Pomerantz is an AV rated Attorney (Martindale Hubbell 2016) with a record of accomplishment advising U.S. and foreign insurance companies and producers on corporate and regulatory matters. Fred joined Goldberg Segalla’s Global Insurance Services Practice Group three years ago and is currently co-chair of its insurance regulatory practice team. A significant portion of Fred’s practice has involved counseling Canadian, Latin American, Asian, and French insurers and reinsurers with respect to all aspects of their U.S. operations and conducting related state regulatory hearings coast-to-coast. His articles have appeared in Best’s Review, Law360, Insurance Day, Reactions, Mealey’s Data Privacy Law Report, AIRROC Matters, New Appleman on Insurance Law Library Edition, 2016, the FORC Journal, GS’ Insurance and Reinsurance Report insurance regulatory blog, Reinsurance Professional’s Deskbook, 2017-2018 ed., Thomson Reuters and DRI. Fred is in his third term as a Director of the Federation of Regulatory Counsel (FORC), a peer review organization. It has been less than ten years since the second most devastating GOALS OF THE CHOICE ACT’S DRAFTERS: and widespread recession in U.S. history. The “Great Recession” DODD-FRANK REPEAL was largely caused by 1) banks and other lenders becoming more The bill’s architect, Rep. Jeb Hensarling (R-TX), claimed that aggressive and willing to loosen their criteria for giving mortgages, the legislation will end taxpayer-funded bank bailouts and unleash 2) the repackaging and reselling of “bad” mortgage loans to financial America’s economic potential, taking away the post-recession institutions around the world, 3) the realization that banks and other lending institutions were short of liquidity, harming consumer and powers granted to federal authorities to help them deal with a investor confidence and leading to lower spending and investment, financial emergency like the insolvencies of Lehman Brothers, AIG, and 4) a sharp fall in investment and consumer spending leading and parts of the U.S. auto industry. Title II of Dodd-Frank, known as to an even sharper decline in real GDP1. The Dodd-Frank Wall Orderly Liquidation Authority, allows regulators to resolve a failing Street Reform and Consumer Protection Act (P.L. 111-203, signed financial firm in a manner similar to that in which the FDIC resolves by former President Obama and effective in July 2010, hereafter failing banks. Proponents of the Choice Act argue that these “Dodd-Frank”)2 was enacted to correct perceived gaps in regulations emergency powers in Dodd-Frank have made “Too Big to Fail” impacting certain practices in the financial services industry). permanent policy by implying the federal government will always be ready to bail out financial institutions that through their own risky On June 8, 2017, the U.S. House of Representatives voted to behavior find themselves in existential danger.4 pass the Financial Choice Act of 2017 (the “Choice Act”).3 While the Choice Act, as passed by the House, is unlikely to breeze through the THE TRUMP ADMINISTRATION’S Senate without major revisions because of the need for Democratic EXECUTIVE ORDER AND TREASURY’S REPLY support, particularly in the Senate, some parts of the legislation may The Choice Act would replace Title II with a new chapter of the survive. Repeal of Dodd-Frank was a central theme of the GOP U.S. Bankruptcy Code intended to insulate the financial markets from 2016 Platform and the campaign of President Donald J. Trump. the most serious impacts of the failure of a large, complex financial The repeal process has commenced, and as we will explore, institution. Further, the Choice Act would retroactively repeal the jeopardizes the effectiveness of a covered agreement between the authority of the Financial Stability Oversight Council (“FSOC”) to U.S. and the EU by revoking the authority of the Federal Insurance designate firms as “systemically important financial institutions” or Office (“FIO”) to negotiate one and, accordingly, jeopardizes SIFIs.5 President Donald Trump’s Executive Order 13772, “On Core the progress made by the NAIC and the states to reverse the Principles for Regulating the United States Financial System,” dated requirement for full collateral funding of alien reinsurers and, at the February 3, 2017 proposed eliminating the designations of AIG, Met same time, jeopardizes the state regulators’ efforts, made for over Life and Prudential as “systemically important financial institutions” ten years, to achieve recognition of the U.S. system of solvency (and, therefore, the term no longer applies to any U.S. domestic regulation as functionally “equivalent” to that of the EU. insurer). The appeal of the reversal of Met Life’s designation as >> PAGE 7 an SIFI, which has been awaiting a decision of the United States known as the Non-admitted and Reinsurance Reform Act (NRRA), Court of Appeals for the District of Columbia Circuit6, is in abeyance primarily empowers the FIO: and, by implication the Executive Order, the designation “SIFI” 7 Kf dfe`kfi Xcc Xjg\Zkj f] k_\ `ejliXeZ\ `e[ljkip# `eZcl[`e^ has no current impact on their status or operations . The Trump identifying issues that could contribute to a systemic crisis in administration’s Executive Order called for a review by the U.S. the insurance industry or the United States financial system; Treasury Department of Dodd-Frank, calling on the government to ease, though not eliminate, many of the restrictions imposed on Kf dfe`kfi k_\ \ok\ek kf n_`Z_ kiX[`k`feXccp le[\ij\im\[ Wall Street after the financial crisis.8 communities and consumers have access to affordable insurance products (other than health insurance); The Treasury Department’s report in response to the Executive Order, dated June 2017, stated that its plan would spur lending Kf i\Zfdd\e[ kf k_\ =`eXeZ`Xc JkXY`c`kp Fm\ij`^_k :fleZ`c and job growth by making regulation “more efficient” and less that it designate an insurer as an entity subject to regulation burdensome. Unlike the Choice Act passed by House Republicans as a nonbank financial company supervised by the Board of Governors of the Federal Reserve pursuant to Section 113 of on June 8, the Treasury Department’s report calls for most Obama- 14 era financial regulations to be dialed back, not scrapped.9 Dodd-Frank (i.e., a SIFI) ; House Speaker Paul Ryan characterized the Choice Act as “a KfZffi[`eXk\=\[\iXc\]]fikjXe[[\m\cfg=\[\iXcgfc`Zpfe jobs bill for Main Street” that promised to “rein in the overreach of prudential aspects of international insurance matters; Dodd-Frank that has allowed the big banks to get bigger while small Kf[\k\id`e\#k_ifl^_ilc\$dXb`e^gifZ\[li\j#n_\k_\iJkXk\ businesses have been unable to get the loans they need to succeed”10 insurance measures are preempted because they improperly that, he claimed, had nothing to do with the financial crisis. discriminate against non-United States insurers; For example, Dodd-Frank includes provisions that gave the Kf Zfejlck n`k_ k_\ JkXk\j i\^Xi[`e^ `ejliXeZ\ dXkk\ij f] Secretary of the Treasury, in consultation with the President, broad national importance and prudential insurance matters of powers to seize financial institutions the department viewed to be in international importance; and 11 danger of default. Kfi\Z\`m\Xe[Zfcc\Zk[XkXXe[`e]fidXk`fefek_\`ejliXeZ\ Objectively speaking, establishing a regulatory scheme for industry and to enter into information sharing agreements with over-the-counter (OTC) derivatives was long overdue. Instead, state regulators.15 Dodd-Frank just prescribed regulations (including the Volcker 12 FIO’s function is thus primarily designed to gather information, Rule, perhaps the most controversial part of Dodd-Frank ) and, monitor trends in the insurance industry and provide advice to to its critics, the Volcker Rule failed to address the confusing the industry. While FIO has no regulatory authority per se, it structure of our financial regulatory system since it requires represents the United States in international negotiations with joint rulemaking from five different agencies to implement. The respect to insurance regulation and has a seat on the executive Volcker Rule restricts banks from proprietary trading and limits committee of the International Association of Insurance Supervisors their power to make hedge fund and private equity investments. (“IAIS”). In view of its broad authority to monitor all aspects of the Although aimed at limiting risk on Wall Street, the Volcker insurance industry, including identifying issues that could contribute Rule generated enormous backlash. In light of the Treasury to a systemic crisis in the insurance industry or the United States Department Report, it is not certain whether the Volcker Rule financial system, state insurance regulators and certain insurance will be eliminated or amended.
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