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_\ èjliXeZ\ è[ljkip# èZcl[è^ 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_\ =èXeZ`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[èXk\=\[\iXc\]]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\idè\#k_ifl^_ilc\$dXbè^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[è^ èjliXeZ\ 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[è]fidXk`fefek_\èjliXeZ\ 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. The Choice Act renames the trade organizations such as the National Association of Professional Consumer Financial Protection Bureau (“CFPB”) the Consumer Insurance Agents (PIA) are concerned that the FIO has created Law Enforcement Agency (“CLEA”) and scales back CFPB’s an unnecessary bureaucracy that duplicates the ability of state budget along with its powers, which would, upon passage regulators to make requests for data calls and is an example of of the Choice Act, only be empowered to promote consumer the creeping expansion of the federal government in the insurance protection and competitive markets. Further, whereas the CFPB industry. Since the business of insurance is exempt from federal currently has broad authority to spend whatever it requires from regulation under McCarran-Ferguson16, PIA advocates for the the Federal Reserve System, the Choice Act would change this elimination of FIO.17 system of funding by requiring the CLEA to obtain its funding The Choice Act would eliminate FIO, the director of which through the appropriations process that other federal agencies is currently a voting member of FSOC. Dodd-Frank separately utilize, and put CLEA’s employees on the same General Schedule provided for an “independent voting member” of FSOC with (GS) pay scale applicable to all government employees. The “insurance expertise.” It would also repeal the FIO provisions as well agency’s sole director would be terminable at the will of the as the “insurance expertise” FSOC member and replace both with President and the salaries of Federal Reserve employees above 13 the new Office of Independent Insurance Advocate. This would be a certain level would be released to the public. compatible with the President’s deeply held negative perception of IMPACT ON THE INSURANCE AND bilateral and multilateral trade agreements that do not put “America REINSURANCE INDUSTRY: First”. As mentioned, Title II of the Choice Act would repeal Dodd- TITLE V OF DODD-FRANK Frank’s “Orderly Liquidation Authority” and replace it with a new subchapter V to Chapter 11 of the Federal Bankruptcy Code. Subtitle A of Title V of Dodd-Frank, commonly referred to as the Federal Insurance Office Act of 2010, established the Federal Prior to Dodd–Frank, federal laws to handle the liquidation and Insurance Office (FIO) within the Department of the Treasury and receivership of federally regulated banks existed for supervised directs the Treasury Secretary to appoint a director to head the banks, insured depository institutions and securities companies. office. Effective July 2011, the FIO has authority over most lines of Most individual states also granted receivership authority to their own bank regulatory agencies and insurance regulators. insurance, except health, most long term care, and crop insurance. Dodd-Frank, Title V, Subtitle B--State-Based Insurance Reform, also CONTINUED ON PAGE 8 PAGE 8 <<

THE IMPACT OF THE CURRENT ADMINISTRATION ON THE FIO AND DODD-FRANK CONTINUED FROM PAGE 7

Dodd–Frank expanded these federal laws to potentially handle 1. Allows U.S. and EU insurers to rely on their home country receivership and liquidation of insurance companies and other non- regulators for worldwide prudential insurance group bank financial companies18. The law includes provisions for judicial supervision when operating in either market; 19 appeal by the affected institution if its Board of Directors disagrees. 2. Eliminates for EU reinsurers collateral requirements and local Depending on the type of financial institution, once a financial presence requirements for U.S. reinsurers meeting certain company satisfies the criteria for liquidation, different regulatory solvency and market conduct conditions; and organizations may jointly or independently determine whether to appoint a receiver.20 3. Encourages information sharing between insurance supervisors.28 Title V of Dodd-Frank, also known as the “Non-admitted and 21 FIO Director McRaith resigned his post effective upon the Reinsurance Reform Act of 2010” (NRRA) , applies to surplus 29 lines insurance, direct procurement, and reinsurance. With regard inauguration of President Trump. to non-admitted insurance, NRRA provides that the placement of However, much to the chagrin of U.S. state insurance regulators non-admitted insurance only will be subject to the statutory and and certain insurance trade associations, and despite the goals regulatory requirements of the insured’s home state, and that no expressed to Congress by the NAIC when negotiations began state, other than the insured’s home state, may require a surplus with the EU following the NAIC’s announcement on November lines broker to be licensed in order to sell, solicit, or negotiate 20, 201530, the Covered Agreement does not explicitly call for the non-admitted insurance with respect to the insured.22 NRRA also “equivalency recognition” of the U.S. insurance regulatory system provides that no state, other than the insured’s home state, may in the EU. The issue remained the proverbial elephant in the room require any premium tax payment for non-admitted insurance.23 even though negotiators for the U.S. and EU seemingly finalized the However, states may enter into a compact or otherwise establish terms of the Covered Agreement on January 13, 2017. procedures to allocate among the states the premium taxes paid to an insured’s home state.24 RECENT UNRESOLVED OBJECTIONS TO COVERED AGREEMENT BY INSURANCE REGULATORS AND The provisions of Title V of Dodd-Frank, which introduce TRADE ASSOCIATIONS31 uniformity into the manner in which the states regulate primarily reinsurance and the surplus lines industry, would be largely From January 2017 until the present, there were several unaffected by the Choice Act. important developments signifying a cooling of enthusiasm by certain trade associations representing different segments of the IMPACT ON THE INSURANCE AND REINSURANCE insurance industry, by state legislators through NCOIL, and by INDUSTRY OF THE COVERED AGREEMENT state insurance regulators through the NAIC. In some instances, these parties openly disagreed with former FIO Director Mc Raith’s On January 13, 2017, the United States and the European Union characterizations of the impact of key portions of the Covered (EU) concluded negotiations on an insurance covered agreement Agreement. In a newsletter of the Center for Insurance Policy envisioned and promoted by the National Association of Insurance and Research dated March 2017, NAIC President and Wisconsin Commissioners (NAIC) and the U.S. state insurance regulators who 25 Insurance Commissioner Ted Nickel openly challenged some of are its members, and legislated by Title V of Dodd-Frank. McRaith’s assurances: One of the principal goals of the Covered Agreement is to affirm State insurance regulators were told by the negotiators the authority of the FIO, also established by Dodd-Frank within the the two goals of the process were to gain equivalence United States Department of the Treasury, to preempt state laws for the treatment of U.S. insurers operating in the EU that are inconsistent with the Covered Agreement and may result and recognition by EU of the U.S. insurance regulatory in less favorable treatment for foreign insurers. Although the FIO system. In my view, neither was clearly resolved in the and the United States Trade Representative (“USTR”) must consult covered agreement. with Congress on the negotiations, Dodd-Frank does not require specific authorization or approval from Congress for the Covered Fellow regulators and I are concerned with the disparate Agreement to take effect.26 treatment some EU jurisdictions are imposing on U.S. insurers. State insurance regulators are committed to Although the Trump Administration never indicated definitively reaching accord on a system of mutual recognition without whether it favored or disfavored the Covered Agreement, on any jurisdiction imposing its values and regulatory systems numerous occasions it alternatively signaled its intention to on another. Both U.S. and EU insurers deserve to receive repeal and replace major portions of Dodd-Frank as a part of its fair and equal treatment. There should be no disadvantage financial services deregulatory push, in particular with respect to to an EU insurer doing business in the U.S. Similarly, a the provisions of Dodd-Frank that affect banking, and to a lesser U.S. insurer should not be disadvantaged when it operates degree insurance, although elimination of the FIO remains one of in the EU.32 27 the principal goals of Dodd-Frank repeal. To further call Treasury’s attention to those alleged disparities in According to the United States Trade Representative (USTR) the interpretations of the Covered Agreement’s language, on March and Michael McRaith, a former Illinois Insurance Director named to 15, 2017 state insurance regulators and the NAIC wrote to Treasury the post of FIO Director, who together negotiated the terms of the asking the Treasury to work with the EU to clarify certain details Covered Agreement with their counterparts in the EU, the Covered and to offer technical assistance and expertise on the Covered Agreement most significantly: Agreement.33 Despite these ongoing issues of interpretation, in July >> PAGE 9

2017, the Treasury Department and the USTR announced that the trade organizations have satisfied themselves that the signed, Covered Agreement would be signed.34 final Covered Agreement eliminates the perceived unfavorable treatment and grants full “equivalence” between the U.S. and the Then, on September 22, 2017, it was announced that the Covered EU systems of regulating insurance will await future analyses of the Agreement was formally signed by representatives of both sides.35 final language as well as commentary from the same organizations Whether all the state insurance regulators’ and some industry that raised the issue in January and March 2017. <<

ENDNOTES will be subject to consolidated supervision by the Federal Reserve and enhanced prudential standards. Portions of the discussion of the Covered Agreement first appeared in AIRROC https://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx. Matters, Vol. 13, No. 2 (Fall 2017) and are reprinted with permission of the Editor and Chair of AIRROC Matters. 15 Federal Insurance Office, NAIC Center for Insurance Policy and Research; January 31, 2017 http://www.naic.org/cipr_topics/topic_fio.htm. 16 McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1015. 1 Tejvan Pettinger, The great recession 2008-13, Economics Help, July 15, 2016 http://www.economicshelp.org/blog/7501/economics/the-great-recession?. 17 R. Donlon, PIA calls for repeal of Federal Insurance office, PropertyCasualty 2 (Pub.L. 111–203, H.R. 4173. 360.com, November 22, 2016; http://www.propertycasualty360. com/2016/11/22/pia-calls-for-repeal-of-federal-insurance-office. 3 The Financial CHOICE Act: Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, H.R.10 - 115th Congress (2017-2018) 18 H.R. 4173 §201. https://www.congress.gov/bill/115th-congress/house-bill/10/text?format=txt. 19 H.R. 4173 §202. 4 R. Williams, Hensarling Pushes Through Financial CHOICE Act, DS News,, May 4, 2017 http://www.dsnews.com/news/05-04-2017/hensarling-pushes- 20 H.R. 4173 §203 (a) (1). financial-choice; M. Egan, The most dangerous part about killing Dodd-Frank, 21 H.R. 4173, § 511. CNN Money, June 12, 2017 http://money.cnn.com/2017/06/12/investing/dodd- frank-bailouts-financial-choice-act-ola/index.html. 22 15 USC §§8202(a) and (b). 5 Supra, fn. 2. 23 15 USC §8201(a). 6 MetLife Inc. v. Financial Stability Oversight Council, case number 16-5086, 24 15 USC §8201(b). in the U.S. Court of Appeals for the District of Columbia Circuit; discussed in 25 Covered Agreement Text: https://www.treasury.gov/initiatives/fio/Documents/ MetLife Wants SIFI Appeal Paused Amid Trump Order, Law360, April 24, 2017 https://www.law360.com/articles/916614/metlife-wants-sifi-appeal- Final%20Covered%20Agreement%20Letters%20to%20Congress%20 paused-amid-trump-order, and Law360, April 12, 2016, A Short-Lived Victory Full%20Text.pdf. The complete title of the covered agreement is the Bilateral For MetLife Over SIFI Designation? Agreement between the European Union and the United States of America https://www.law360.com/articles/783521. on Prudential Measures Regarding Insurance and Reinsurance. 7 Met Life recently requested another stay in the proceedings over the legality 26 F.J. Pomerantz, Uncovering the Agreement, www.insuranceday.com, 29 of the SIFI designation while Treasury reviews FSOC’s authority to make such April 2016. designations. Best Day, July 12, 2017: MetLife Seeks Longer Postponement in 27 B. Webel and R. Fefer, What is the Proposed U.S.-E.U. Covered Litigation Over SIFI Designation. Agreement?, CRS Insight, June 9, 2017 8 D. Paletta, Trump administration calls for scaling back post-crisis financial https://fas.org/sgp/crs/row/IN10648.pdf. regulations, Washington Post, June 12, 2017; R. Schmidt and E. Dexheimer, Trump Administration Calls for Overhaul of Wall Street Rules, Bloomberg 28 Supra fn. iii. Politics, June 12, 2017, https://www.bloomberg.com/news/articles/2017-06-13/ 29 Federal Insurance Chief McRaith Leaving Post on Jan. 20, Insurance trump-administration-calls-for-major-revamp-of-wall-street-rules. Journal, January 6, 2017. See also, J. Heltman, Met Life may be next to lose “too big to fail” label, American Banker, October 2, 2017. 30 http://www.naic.org/newsroom_statement_151120_statement_on_covered_ 9 https://www.treasury.gov/press-center/press-releases/Documents/A%20 agreement_negotiation.htm. Financial%20System.pdf. See also, H.R. 3312-115th Congress (2017-2018) 31 Portions of this section of the article entitled Recent Objections to Covered introduced July 19, 2017. Agreement by Insurance Regulators and Trade Associations first appeared 10 S. Lane, House to vote next week on bill rolling back Dodd-Frank, The Hill, in an article by Fred Pomerantz in AIRROC Matters, Vol. 13, No. 2, Fall 2017 June 2, 2017 entitled Twisting in the Wind. http://thehill.com/policy/finance/336092-house-to-vote-next-week-on-bill-to- 32 http://www.naic.org/cipr_newsletter_archive/vol21.pdf. roll-back-dodd-frank. 33 http://www.naic.org/documents/2017_naic_letter_to_treasury_on_covered_ 11 H.R. 4173 §203(b). agreement.pdf. 12 Title VII, Part II of Dodd-Frank—Regulation of Swap Markets. 34 A. Simpson, Trump Administration to Sign Insurance Regulation Pact 13 http://thehill.com/policy/finance/336092-house-to-vote-next-week-on-bill-to- with European Union, Insurance Journal, July 17, 2017; http://www. roll-back-dodd-frank. insurancejournal.com/news/national/2017/07/17/457712.htm. 14 Under Section 113 of the Dodd-Frank Act, the Council is authorized to determine that a nonbank financial company’s material financial distress—or 35 A. Simpson, U.S. and EU Sign Covered Agreement on Insurance the nature, scope, size, scale, concentration, interconnectedness, or mix of Regulation, Insurance Journal, Sept. 22, 2017; http://www.insurancejournal. its activities—could pose a threat to U.S. financial stability. Such companies com/news/national/2017/09/22/465195.htm..