October 7, 2009

House Financial Services Committee Convenes Hearing to Address Regulatory Reform, Federal Insurance Office

On Tuesday, October 6, the House Financial Services Committee convened to discuss three regulatory reform proposals introduced by Rep. Paul Kanjorski (D-PA).

The full committee heard testimony from three panels of experts, each discussing draft legislation proposed by Rep. Kanjorski: the first panel addressed the Investor Protection Act, the second panel addressed the Private Fund Investment Advisers Registration Act and the third panel addressed the Federal Insurance Office Act.  The three pieces of legislation are in their respective drafting stages and have not yet been officially introduced on the House floor.

Rep. Kanjorski’s opening comments addressed the liquidity crisis of AIG which prompted the Federal government to issue a multi-billion dollar credit to the company in order to thwart a meltdown of the U.S. financial system: Kanjorski noted for the record that insurance products did not contribute to the failures of AIG or the market.  He further noted that the formation of a federally mandated Federal Insurance Office would help rectify the shortcomings of the financial crisis and promote stability in the markets.

Rep. Ed Royce (R-CA) followed-up Kanjorski’s comments by adding that the “highly fragmented and inconsistent” framework of state-level insurance regulation is not good for consumers.  Rep. Melissa Bean (D-IL) noted the lack of insurance expertise at the Federal level.

The FIO would be within the Treasury Department’s authority and would not have any regulatory oversight; it would serve as a repository for insurance information as no such office currently exists within the Federal government.  Witnesses representing the National Association of Insurance Commissioners, Independent Insurance Agents and Brokers of America, and Property Casualty Insurers Association of America each were concerned that language in the bill is too broad and might set the stage for insurance regulatory oversight at the Federal level.  

Representatives from the American Council of Life Insurers, Reinsurance Association of America and American Insurance Association agree that the office should not have oversight authority but should enjoy an “elevated status,” with AIA going as far as to suggest the office be supervised by an Assistant Secretary of the Treasury, appointed by the President.

The FIO would also serve as a negotiating body for international insurance agreements.  The European Union is on the verge of approving legislation known as Solvency II which would bring the EU under one insurance regulatory umbrella.  The current framework in the U.S. would not allow the Federal government to effectively negotiate on international insurance issues as any agreement would need the approval of the state legislatures.

The second panel of witnesses testified on the Private Fund Investment Advisers Registration Act, which requires advisers of hedge funds, private equity firms, and others who are currently not subject to direct regulatory oversight to register with the SEC.  The bill was drafted to close loopholes exploited by hedge fund managers such as Bernard Madoff and R. Allen Stanford, who defrauded investors out of billions of dollars.

The first panel of witnesses spent much of their time testifying on the “fiduciary standard” amendment under the Investor Protection Act, which would subject broker-dealers who offer investment advice to the same rules and regulations as financial advisers.  This is of particular concern to NAILBA as the proposal is not tailored to recognize the relationship between broker-dealers and registered representatives, nor does it recognize that not all broker-dealers provide investment advice.  There is also concern that it will be exceptionally burdensome for smaller firms to comply with the new fiduciary standards imposed under IPA.

NAILBA staff will continue to monitor developments in the House Financial Services Committee as Congress prepares for the Regulatory Reform debate.

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