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It has been less than ten years since the second most devastating and widespread recession in U.S. history. The “Great Recession” was largely caused by 1) banks and other lenders becoming more aggressive and willing to loosen their criteria for giving mortgages, 2) the repackaging and reselling of “bad” mortgage loans to financial institutions around the world, 3) the realization that banks and other lending institutions were short of liquidity, harming consumer and investor confidence and leading to lower spending and investment, and 4) a sharp fall in investment and consumer spending leading to an even sharper decline in real GDP [1] . The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203, signed by former President Obama and effective in July 2010, hereafter “Dodd-Frank”) [2] was enacted to correct perceived gaps in regulations impacting certain practices in the financial services industry.

On June 8, 2017, the U.S. House of Representatives voted to 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 Senate without major revisions because of the need for Democratic support, particularly in the Senate, some parts of the legislation may survive. Repeal of Dodd-Frank was a central theme of the GOP 2016 Platform and the campaign of President Donald J. Trump.

The repeal process has commenced, and as we will explore, jeopardizes the effectiveness of a covered agreement between the U.S. and the EU by revoking the authority of the Federal Insurance Office (“FIO”) to negotiate one and, accordingly, jeopardizes the progress made by the NAIC and the states to reverse the requirement for full collateral funding of alien reinsurers and, at the same time, jeopardizes the state regulators’ efforts, made for over ten years, to achieve recognition of the U.S. system of solvency regulation as functionally “equivalent” to that of the EU.

Goals of the Choice Act’s Drafters: Dodd-Frank Repeal

The bill's architect, Rep. Jeb Hensarling (R-TX), claimed that the legislation will end taxpayer-funded bank bailouts and unleash America’s economic potential, taking away the post-recession powers granted to federal authorities to help them deal with a financial emergency like the insolvencies of Lehman Brothers, AIG, and parts of the U.S. auto industry. Title II of Dodd-Frank, known as Orderly Liquidation Authority, allows regulators to resolve a failing financial firm in a manner similar to that in which the FDIC resolves failing banks. Proponents of the Choice Act argue that these emergency powers in Dodd-Frank have made “Too Big to Fail” permanent policy by implying the federal government will always be ready to bail out financial institutions that through their own risky behavior find themselves in existential danger. [4]

The Trump Administration’s Executive Order and Treasury’s Reply

The Choice Act would replace Title II with a new chapter of the U.S. Bankruptcy Code intended to insulate the financial markets from the most serious impacts of the failure of a large, complex financial institution. Further, the Choice Act would retroactively repeal the authority of the Financial Stability Oversight Council (“FSOC”) to designate firms as “systemically important financial institutions” or SIFIs. [5] President Donald Trump’s Executive Order 13772, “On Core Principles for Regulating the United States Financial System,” dated February 3, 2017 proposed eliminating the designations of AIG, Met Life and Prudential as “systemically important financial institutions” (and, therefore, the term no longer applies to any U.S. domestic insurer). The appeal of the reversal of Met Life’s designation as an SIFI, which has been awaiting a decision of the United States Court of Appeals for the District of Columbia Circuit [6] , is in abeyance and, by implication the Executive Order, the designation “SIFI” has no current impact on their status or operations [7] . The Trump administration’s Executive Order called for a review by the U.S. Treasury Department of Dodd-Frank, calling on the government to ease, though not eliminate, many of the restrictions imposed on Wall Street after the financial crisis. [8]

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.



This article is being reprinted with the permission of the IRUA. This article was first published in Vol 24, No 3 issue of the Journal of Reinsurance - a publication of the IRUA

Portions of the discussion of the Covered Agreement first appeared in AIRROC Matters, Vol. 13, No. 2 (Fall 2017) and are reprinted with permission of the Editor and Chair of AIRROC Matters.

[1] Tejvan Pettinger, The great recession 2008-13, Economics Help, July 15, 2016 ?

[2] (Pub.L. 111–203, H.R. 4173

[3] The Financial CHOICE Act: Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs , H.R.10 - 115th Congress (2017-2018)

[4] R. Williams, Hensarling Pushes Through Financial CHOICE Act, DS News,, May 4, 2017 ; M. Egan, The most dangerous part about killing Dodd-Frank, CNN Money, June 12, 2017

[5] Supra , fn. 2

[6] MetLife Inc. v. Financial Stability Oversight Council , case number 16-5086, in the U.S. Court of Appeals for the District of Columbia Circuit; discussed in MetLife Wants SIFI Appeal Paused Amid Trump Order, Law360, April 24, 2017 , and Law360, April 12, 2016, A Short-Lived Victory For MetLife Over SIFI Designation?

[7] Met Life recently requested another stay in the proceedings over the legality of the SIFI designation while Treasury reviews FSOC’s authority to make such designations. Best Day, July 12, 2017: MetLife Seeks Longer Postponement in Litigation Over SIFI Designation

[8] D. Paletta, Trump administration calls for scaling back post-crisis financial regulations , Washington Post, June 12, 2017; R. Schmidt and E. Dexheimer,Trump Administration Calls for Overhaul of Wall Street Rules, Bloomberg Politics, June 12, 2017, . See also, J. Heltman,, Met Life may be next to lose “too big to fail” label, American Banker, October 2, 2017.

[9] . See also, H.R. 3312-115th Congress (2017-2018) introduced July 19, 2017.

[10] S. Lane, House to vote next week on bill rolling back Dodd-Frank, The Hill, June 2, 2017

[11] H.R. 4173 §203(b).

[12] Title VII, Part II of Dodd-Frank—Regulation of Swap Markets

[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 the nature, scope, size, scale, concentration, interconnectedness, or mix of its activities—could pose a threat to U.S. financial stability. Such companies will be subject to consolidated supervision by the Federal Reserve and enhanced prudential standards.

[15] Federal Insurance Office , NAIC Center for Insurance Policy and Research; January 31, 2017

[16] McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1015

[17] R. Donlon, PIA calls for repeal of Federal Insurance office, PropertyCasualty, November 22, 2016;

[18] H.R. 4173 §201

[19] H.R. 4173 §202

[20] H.R. 4173 §203 (a) (1)

[21] H.R. 4173, § 511

[22] 15 USC §§8202(a) and (b)

[23] 15 USC §8201(a)

[24] 15 USC §8201(b)

[25] Covered Agreement Text: . The complete title of the covered agreement is the Bilateral Agreement Between the European Union and the United States of America On Prudential Measures Regarding Insurance and Reinsurance.

[26] F.J. Pomerantz, Uncovering the Agreement,, 29 April 2016

[27] B. Webel and R. Fefer, What is the Proposed U.S.-E.U. Covered Agreement?, CRS Insight, June 9, 2017

[28] Supra fn. iii

[29] Federal Insurance Chief McRaith Leaving Post on Jan. 20 , Insurance Journal, January 6, 2017

[31] Portions of this section of the article entitled Recent Objections to Covered Agreement by Insurance Regulators and Trade Associations first appeared in an article by Fred Pomerantz in AIRROC Matters, Vol. 13, No. 2, Fall 2017 entitled Twisting in the Wind

[34] A. Simpson, Trump Administration to Sign Insurance Regulation Pact with European Union , Insurance Journal, July 17, 2017;

[35] A. Simpson, U.S. and EU Sign Covered Agreement on Insurance Regulation , Insurance Journal, Sept. 22, 2017;