At the end of July, the Obama Administration sent to Capitol Hill draft legislation that could have a significant impact on the insurance industry. The Administration’s draft legislation is intended to implement the proposals from the so-called Treasury White Paper on financial regulatory reform.1 In particular, the draft legislation provides for: (1) the designation of the Board of Governors of the Federal Reserve System (the Fed) as the systemic regulator with broad authority over all financial firms, including insurers; (2) the creation of an Office of National Insurance (ONI); (3) the creation of the Financial Services Oversight Council (the Council); and (4) a variety of amendments to existing legislation that would render any insurance company complex that also owns a depository institution a financial holding company subject to regulation by the Fed.

The precise timing and trajectory of financial regulatory reform remain uncertain. House Financial Services Committee Chair Barney Frank (D-Mass.), in a speech to the National Press Club on July 29, 2009, reiterated his plan to move forward with financial reform legislation this fall and predicted a bill would be signed into law by the President by the end of this year. However, the most recent reports from the Senate have indicated that the Senate Banking Committee, particularly Chairman Chris Dodd (D-Conn.), may not have the resources to act on financial reform legislation this year.2

Set forth below is an overview of the following aspects of the Administration’s proposed legislation as well as the implications for the insurance industry:

(1) Systemic Risk Regulation by the Fed; (2) the creation and operation of the ONI; (3) the creation and operation of the Council; (4) enhanced resolution authority for systemically important institutions; and (5) a variety of amendments to banking laws that (a) result in a single Federal banking charter and Federal functional regulator, and (b) impact the manner in which all holding companies owning depository institutions are regulated.  

Possible Implications for Insurance Industry – Executive Summary

While the Administration’s recently proposed legislation would result in a number of potentially significant impacts, set forth below is a list of the more prominent issues raised for insurance companies and their holding companies:  

  • Since an insurance company would be engaged in activities that are financial in nature, it, or its holding company depending on the organization’s corporate structure, could be designated as a Tier 1 Financial Holding Company (FHC) by the Fed regardless of whether or not the organization owns a depository institution;  
  • Any insurance holding company or insurer that owns any type of depository institution (e.g., Federal savings bank, limited purpose national banks engaging in trust-only activities, certain State-chartered trust companies, credit card banks, industrial loan companies) will become a financial holding company subject to regulation by the Fed;3  
  • The Fed may prescribe prudential regulations for an insurance company that is designated as a Tier 1 FHC that might conflict with, and likely be more onerous than, those imposed under State insurance laws;  
  • Functionally regulated subsidiaries of a Tier 1 FHC (e.g., an insurance company) may be subject to enforcement actions by the Fed that could include civil money penalties and removal of officers and directors, without coordination with State insurance regulators or the ONI;  
  • By granting the Secretary of the Treasury the power to negotiate and enter into certain international agreements on prudential matters related to insurance, and granting the ONI the authority to preempt inconsistent State law provisions, insurers may be faced with conflicting mandates on prudential matters and may need to focus attention on solvency and other risk management initiatives at both the State and Federal levels;  
  • The Council does not include any representation of the insurance industry as there is no seat at the table for any State insurance regulator, the National Association of Insurance Commissioners (NAIC), or even the ONI.  

Systemic Risk Regulation Under the Federal Reserve4

As anticipated, the proposed legislation calls on the Fed to serve as the systemic risk regulator under the Bank Holding Company Modernization Act of 2009 (BHC Modernization Act). The BHC Modernization Act would grant the Fed the power to: (1) designate any U.S. company or any foreign company engaged in activities that are “financial in nature” and that it determines to be of systemic importance as a Tier 1 FHC; and (2) impose standards on and supervise Tier 1 FHCs and their affiliates. The BHC Modernization Act also provides for the interaction of, and shared oversight where applicable between and among, the Fed and the Council (described below), the Treasury, other Federal regulators, and in some cases, State regulators.  

Designation of Tier 1 FHCs. The proposed BHC Modernization Act would grant the Fed the authority to designate any “United States Financial Company” or “Foreign Financial Company” as a Tier 1 FHC. To be deemed a “United States Financial Company,” the company must be “in whole or in part engaged in, directly or indirectly, activities in the United States that are financial in nature.”5 A Foreign Financial Company could fall under the new regulatory regime if the foreign company, by itself or through a branch in the United States, engages in activities that are financial in nature.  

The Fed may designate a Tier 1 FHC6 by regulation or order, and such designations must be reevaluated by the Fed at least annually. The BHC Modernization Act would provide for an appeal process from both a designation as a Tier 1 FHC and a rescission of such status. In addition, there are emergency/expedited exception procedures to the hearing process that can be put into place upon the vote of a specified number of members of the Board of the Fed.  

In general, a designation as a Tier 1 FHC would be triggered by the Fed’s determination that “material financial distress at the company could pose a threat to global or United States financial stability or the global or United States economy during times of economic stress.” The Fed is expressly directed to consider the following criteria in making a determination as to whether an institution is a Tier 1 FHC:  

  • The amount and nature of the company’s assets;
  • The amount and type of liabilities, including reliance on short-term funding;
  • The company’s off-balance sheet exposure;
  • The degree of interconnectedness in terms of the extent of the company’s transactions and relationships with other major financial companies;
  • The importance of the company as a source of credit and liquidity;
  • The recommendations of the Council; and
  • Other factors the Fed deems appropriate.

If the purported Tier 1 FHC has functionally regulated subsidiaries, then the Fed would be obligated to consult with the primary Federal regulatory agency for such regulated subsidiary before making any designation, or rescinding any designation, as a Tier 1 FHC. The Fed must promulgate regulations with respect to the criteria for designation of Tier 1 FHCs, and must do so in consultation with the Secretary of the Treasury and the Council.

The Fed can require certain U.S. and Foreign Financial Companies to submit information “for the sole purpose of determining whether to designate the company as a” Tier 1 FHC. The following three financial standards are benchmarks7 for the Fed to use in identifying which companies may have to provide information:

  • $10 billion or more in assets;
  • $100 billion or more in assets under management; or
  • $2 billion or more in gross annual revenue.

A Foreign Financial Company that has comparable financial figures derived from U.S. sources may also be required to submit such information.

These figures are surprisingly modest, if they are intended to indicate the size of the firms that might be deemed to be Tier 1 FHCs. The Fed is not required to consider any particular dollar amounts or ranges when making its determination as to whether an institution is a Tier 1 FHC; there is no minimum size requirement for a Tier 1 FHC.

Possible Implications for the Insurance Industry

  • Since a Tier 1 FHC is not required to own or control any type of depository institution but merely must be engaged in activities that are “financial in nature,” such as insurance, an insurance holding company could be designated as a Tier 1 FHC regardless of whether it owns a bank or other depository institution.  
  • It appears that there is no requirement that the Fed consult with State insurance regulators in its determination on whether an insurance company complex should be deemed a Tier 1 FHC, since the requirement for the Fed to discuss such a determination for each functionally regulated subsidiary is limited to the primary Federal regulatory agency of such subsidiary.  
  • The Fed is required to consult with the Council and the Treasury Secretary in promulgating regulations on the criteria for determining Tier 1 FHCs, but is not required to consult with State insurance regulators. Moreover, the Council does not include any State insurance regulators or representatives of the ONI.  
  • Any insurer that meets the relatively modest financial requirements outlined above could be subject to an information request from the Fed, regardless of whether or not such insurer owns a depository institution.

Impact of Designation as a Tier 1 FHC. Once a company is designated as a Tier 1 FHC, it must:  

  • Register with the Fed;  
  • Comply with all prudential standards (e.g., risk-based capital) set by the Fed;  
  • Submit reports to the Fed and disclose certain information to the public;  
  • Be subject to examinations and enforcement by the Fed;  
  • Subject its functionally regulated subsidiaries to certain types of exceptional prudential regulation;  
  • Conform its activities to the requirements applicable to financial holding companies;  
  • Be subject to limits on its acquisition activity; and  
  • Be subject to significant regulatory limitations through a “prompt corrective action” regime.

Registration: Each Tier 1 FHC must register with the Fed as a Tier 1 FHC, on forms designated by the Fed, within 180 days of the designation of such company as a Tier 1 FHC.

Prudential Standards: Any company designated as a Tier 1 FHC must comply with a myriad of prudential standards. These standards are required to be “more stringent than the standards applicable to bank holding companies to reflect the potential risk posed to financial stability.” The Fed is required to consult with the Council on regulations or guidance on prudential standards that will include, but not be limited to:

  • Risk-based capital requirements;
  • Leverage limits;
  • Liquidity requirements; and
  • Overall risk management requirements.

The Fed may prescribe different standards for different Tier 1 FHCs, taking into consideration their risk, complexity and financial activities. In all cases, however, a Tier 1 FHC must, at all times, be well capitalized and well managed.

Reports: The Fed can require each Tier 1 FHC and any of its subsidiaries to provide reports on: (1) its financial condition; (2) its systems for monitoring and controlling financial, operational and other risks; (3) its transactions with any depository institution subsidiaries; and (4) the extent to which its and its subsidiaries’ operations pose a threat to financial stability.

In addition, the Fed must require each U.S. Tier 1 FHC to report periodically to the Fed on:

  • Its plan for “rapid and orderly” resolution in the event of severe financial distress;
  • The nature and extent to which the Tier 1 FHC has credit exposure to other Tier 1 FHCs; and
  • The nature and extent to which other Tier 1 FHCs have credit exposure to the Tier 1 FHC.8

The Fed is required, “to the fullest extent possible,” to use reports that the Tier 1 FHC or its functionally regulated subsidiaries provide to other Federal or State regulatory agencies to satisfy these requirements. In addition, the Fed is directed to collect this information from public reports or externally audited financial statements.

Possible Implications for the Insurance Industry

  • The Fed may prescribe prudential standards for an insurance company that is a Tier 1 FHC that may  be different from those required by State insurance law or by the prudential regulator in the country where the Foreign Tier 1 FHC is incorporated, raising the question of whether the Fed’s prudential standards would preempt State insurance or foreign prudential standards.
  • The Fed can compel any Tier 1 FHC, or any subsidiary of a Tier 1 FHC, including any insurance company, to submit reports, although the Fed is required to use reports provided to other agencies, including State regulatory agencies, to satisfy the requirements.

Examinations and Enforcement: Under the proposed BHC Modernization Act, the Fed would be granted the authority to examine each U.S. Tier 1 FHC and each of its subsidiaries, and any U.S. subsidiaries, branches or agencies of a Foreign Tier 1 FHC. As is the case with the reports described above, to the extent possible, the Fed shall rely on reports of examinations of U.S. Tier 1 FHCs and their functionally regulated subsidiaries made by other Federal or State regulators.

The proposed legislation also grants back-up examination authority to the Federal Deposit Insurance Corporation (FDIC) to access any of the Fed’s examination reports and to recommend to the Fed that a Tier 1 FHC or any of its subsidiaries be examined.9 In the event that the Fed does not initiate an examination after a request from the FDIC, the FDIC can initiate its own examination.10

From an enforcement perspective, the Fed will have all the tools currently available under the Federal Deposit Insurance Act (e.g., cease-and-desist orders, civil money penalties, suspension and removal of officers and directors) to use against a Tier 1 FHC and its non-bank subsidiaries. The BHC Modernization Act defers to “the primary Federal regulatory agency” in actions against a functionally regulated subsidiary, and may direct such agency to take action in writing. If such agency does not take action within 30 days, the Fed can initiate the action.

Possible Implications for the Insurance Industry

  • Insurance companies that are Tier 1 FHCs, or are subsidiaries of Tier 1 FHCs, would be subject to examinations by the Fed, and by the FDIC under its potential “back-up” examination authority.  
  • Insurance companies that are Tier 1 FHCs, or are subsidiaries of Tier 1 FHCs, would be subject to the significant enforcement structure under the Federal Deposit Insurance Act.  
  • While the BHC Modernization Act would require that the Fed act through the “primary Federal regulatory agency” for enforcement actions against a functionally regulated subsidiary, there does not appear to be any role for State insurance regulatory authorities under this regime. Thus, it appears that State-regulated insurance companies would be subject to direct action by the Fed.  

“Exceptional” Regulations Imposed on Functionally Regulated Subsidiaries: The Fed is granted potentially broad authority to prescribe orders, impose regulations, examine or bring enforcement actions against a functionally regulated subsidiary of a Tier 1 FHC if the subsidiary poses a risk to financial stability. In addition, the Fed has the power to “enforce more stringent prudential standards” on such a subsidiary. The Fed must consult with the Council and with “the appropriate Federal regulatory agencies” for the subsidiary before it takes action with respect to the subsidiary.  

Prior to acting, the Fed must also have reasonable cause to believe that the functionally regulated subsidiary is engaged in conduct that could pose a threat to the global or U.S. economy or financial stability. In addition, the Fed must notify the appropriate Federal regulatory agency in writing with a recommendation that such agency take specified actions, and if such agency has not notified the Fed within 30 days that such agency has taken the specified actions, then the Fed may take action.

Possible Implications for the Insurance Industry

  • It does not appear that State insurance regulators need to be consulted prior to the imposition of “exceptional” prudential standards since the Fed is required to act through the “appropriate Federal regulatory agency.”

Transition Issues Non-Conforming Assets: Once identified as a Tier 1 FHC, the activities of such an organization must, within 5 years, be conformed to those permissible for a financial holding company. In general, therefore, any non-financial activities of the Tier 1 FHC would need to be divested. In addition, a Tier 1 FHC is required to conduct all of its activities that are “financial in nature” through a single, intermediate holding company during a 5-year phase-in period, and such intermediate holding company must be established no later than 90 days after the designation as a Tier 1 FHC.

Possible Implications for the Insurance Industry

  • Designation as a Tier 1 FHC could have immediate implications for the corporate structure of an existing insurance holding company by requiring an intermediate holding company to be formed that would own all of the businesses whose activities are “financial in nature.” If none of such holding companies are outside the scope of the term “financial in nature,” then restructuring may be avoided.

Acquisitions: With respect to bank acquisitions, a Tier 1 FHC would be treated as if it were a bank holding company under the BHC Act and subjected to the same approval process. With respect to non-bank acquisitions, there are a number of limitations. Any “large” acquisition of a non-banking company11 is subject to a notice filing to the Fed in advance of such acquisition. In general, the standard review procedures for review of a bank holding company acquisition would apply, although the Fed must deny any acquisition if the Tier 1 FHC is not, both before and immediately after the acquisition, well capitalized and well managed.  

Prompt Corrective Action: Tier 1 FHCs would be subject to a prompt corrective action regime that would require the firm and its primary Federal regulatory agency to take corrective actions as the firm’s regulatory capital levels decline.12 This regime is intended to mirror the prompt corrective action regime for insured depository institutions established under the Federal Deposit Insurance Corporation Improvements Act of 1991. If the Tier 1 FHC is not “well capitalized,” it falls into the category of being “undercapitalized” and it is subject to a panoply of requirements.13 Undercapitalized Tier FHCs would be subject to the following:

  • Most capital distributions could be restricted;
  • The Tier 1 FHC would be subject to Fed monitoring;
  • A capital restoration plan would be required;
  • The Tier 1 FHC would be subject to asset growth restrictions; and
  • Prior approvals would generally be required for acquisitions or new lines of business.

In addition, undercapitalized Tier 1 FHCs may be subject to the following:14 (1) a requirement to raise additional capital; (2) restrictions on transactions among affiliates; (3) stricter asset growth limits; (4) a requirement that the Tier 1 FHC or any of its subsidiaries alter, reduce or terminate any activity that the Fed determines poses excessive risk to the Tier 1 FHC; (5) a requirement to elect and/or appoint new management; (6) a required divestiture or liquidation of any subsidiary if the Fed determines it is “in danger of becoming insolvent, poses a significant risk to the Tier 1 [FHC], or is likely to cause a significant dissipation of” assets or earnings;15 and (7) limitations on bonuses and senior management compensation.

Possible Implications for the Insurance Industry

  • An insurance holding company complex that is deemed to be a Tier 1 FHC and that becomes undercapitalized would become subject to significant and pervasive oversight and, in effect, management, by the Fed.
  • An insurance company subsidiary of a Tier 1 FHC could be compelled to terminate an activity (e.g., the offering of a particular type of product or rider to a product) if the Fed determines that it poses excessive risk to the Tier 1 FHC.
  • The Fed could, in certain circumstance, compel a Tier FHC to divest or liquidate an insurance company subsidiary.16

Office of National Insurance17

Consistent with the Treasury’s White Paper and with H.R. 2609 (a bill introduced by Rep. Paul Kanjorski in May 2009 to create an Office of Insurance Information), Title V of the new legislative proposals titled the “Office of National Insurance Act of 2009” (ONI Act) calls for the establishment of the Office of National Insurance (the ONI) in Treasury. The ONI would be headed by a Director, who would be appointed by the Secretary of the Treasury, and the position would not be subject to Senate confirmation.

The ONI’s role would consist primarily of gathering information about the U.S. insurance industry, monitoring the industry for systemic risk and consulting with State regulators, although it would be given significant power on the international front. In particular, the ONI would be empowered to establish Federal policy on the prudential aspects of international insurance matters, assist in negotiating any International Insurance Agreements on Prudential Measures (International Insurance Agreements),18 and determine whether a particular State insurance measure is preempted by prudential measures in an International Insurance Agreement. In addition, the Secretary of the Treasury would be authorized to negotiate and enter into International Insurance Agreements on behalf of the United States.  

More specifically, the ONI would have the authority, under the direction of the Secretary of the Treasury, to:

  • Monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the U.S. financial system;
  • Recommend to the Fed that it designate an insurer, including its affiliates, as an entity subject to regulation as a Tier 1 FHC;19
  • Establish and coordinate Federal policy on prudential aspects of international insurance matters, including representing the United States in the International Association of Insurance Supervisors and assisting the Secretary of the Treasury in negotiating International Insurance Agreements;
  • Determine, after publication of notice and opportunity for comment, that a State insurance measure20 is preempted by International Insurance Agreements to the extent that the measure: (1) directly or indirectly treats a non-U.S. insurer domiciled in a foreign jurisdiction that is subject to an International Insurance Agreement less favorably than it treats a U.S. insurer domiciled or admitted in that State, and (2) is inconsistent with an International Insurance Agreement; and
  • Consult with the States regarding insurance matters of national importance and prudential insurance matters of international importance.

The ONI would be empowered to collect a broad range of information on and from the insurance industry, insurers and their affiliates, to enter into information-sharing agreements, to analyze and disseminate data and information, and to issue reports on all lines of insurance, except health insurance. In collecting data, the ONI must coordinate with each relevant State insurance regulator to determine if the information is available from the regulator, and the proposal specifically authorizes each such State regulator or other Federal regulator to provide information and data to the ONI. The ONI Act also explicitly states that the submission of any non-public information or data to the ONI “shall not constitute a waiver of, or affect, any privilege” arising out of law or the rules of a court. The ONI would also have the power to require, by subpoena signed by the Director of the ONI, the production of data or information requests, and to have the subpoena enforced by an order of any appropriate U.S. district court.

The ONI Act would not preempt any State insurance measure that governs any insurer’s rates, premiums, underwriting or sales practices, and that it should not be construed to alter, limit or amend any provision of the Consumer Financial Protection Agency Act of 2009. Finally, the Director of the ONI would be required to submit an annual report to the President and to Congress on any preemptive action it took, and on any other information deemed relevant by the Director.

Possible Implications for the Insurance Industry

  • The sweeping powers of the ONI to collect and analyze data on insurers and their affiliates would, for the first time, give the Federal government the analytic tools it needs to critically assess the adequacy and effectiveness of State insurance prudential measures.21
  • The information-gathering and analysis potential of the ONI would require insurers and their affiliates to consider how information currently provided to the States on capital, surplus, reserves, liquidity and risk management might be interpreted by the ONI.
  • The information-gathering and analysis potential of the ONI could have a major impact on the Federal regulation of the insurance industry, as it would form the basis of any recommendations made to the Fed to have an insurer, and its affiliates, designated as a Tier 1 FHC, and may be used in conjunction with the efforts of the Fed and the Council under the BHC Modernization Act.
  • By granting the Secretary of the Treasury the power to negotiate and enter into International Insurance Agreements, while granting the ONI the power to preempt inconsistent State provisions, the ONI Act would cause insurers to pay close attention to the ways that international agreements could impact their solvency and risk management measures.

Establishing a Financial Services Oversight Council22

The proposed legislation would also establish the Council under the Financial Services Oversight Council Act of 2009. The Council will have the following eight members:

  1. The Secretary of the Treasury (serving as the chairman);
  2. The Chairman of the Board of Governors of the Federal Reserve System;
  3. The Comptroller of the Currency and the Director of the Office of Thrift Supervision until their functions are transferred to the newly proposed position of a National Bank Supervisor, at which time the National Bank Supervisor will be the member;
  4. The Director of the Consumer Financial Protection Agency;
  5. The Chairman of the Securities and Exchange Commission;
  6. The Chairman of the Commodity Futures Trading Commission;
  7. The Chairperson of the FDIC; and
  8. The Director of the Federal Housing Finance Agency.

The Council’s role is generally threefold: (1) to advise Congress and the Fed on matters of financial regulation; (2) to recommend to the Fed which firms should be designated as systemically important financial institutions; and (3) to monitor the financial services marketplace and facilitate information sharing and coordination among the financial regulators regarding regulatory issues. The legislation does not contemplate that the Council would have broad powers (e.g., enforcement) outside of those identified above.23

Under the proposed legislation, the Council shall:

  • Advise Congress on financial regulation and make recommendations to enhance, among other things, the stability of the financial markets and investor confidence;
  • Monitor the financial services marketplace for threats to stability;
  • Advise the Fed on the designation of Tier 1 FHCs; and
  • Provide a forum for discussion.24

The Council will be authorized to receive information collected by the Fed with respect to its duties to identify and designate possible Tier 1 FHCs. In addition, the Fed must consult with the Council prior to prescribing rules and prudential standards on Tier 1 FHCs, as described above. The Council could also appoint special advisory committees, the members of which could be any persons the Council desires.  

Possible Implications for the Insurance Industry

  • The insurance industry would have no representation on the Council as there is no role on the Council for any State insurance regulator, the NAIC, or even the Director of the ONI.25
  • The Council could, however, appoint a special advisory committee on the insurance industry, in which case it may include State insurance regulators if the Council desires.
  • The Council could receive information about insurance companies and their affiliates from the Fed and/or the ONI under the proposed legislation.

Enhanced Resolution Authority26

This is the second version of proposed legislation27 that gives the Federal government so-called resolution authority pursuant to which the government can dissolve large, interconnected firms when the stability of the financial system is threatened. The new version is very similar to the proposed legislation released in March, 2009.28

The proposals for the resolution authority are modeled after the resolution authority that the FDIC currently has with respect to banking institutions, and are generally intended to supplement (rather than replace) bankruptcy laws. The current proposal, however, applies to a smaller range of companies, i.e., it covers: (1) bank holding companies; (2) all Tier 1 FHCs; and (3) any subsidiary of the above but excludes subsidiaries that are insurance companies or insured depository institutions or registered broker-dealers that are Securities Investor Protection Corporation members.29

The resolution authority could be invoked only upon the successful recommendation of at least a two-thirds vote by the Fed and a two-thirds vote by the directors of the FDIC or the commissioners of the Securities and Exchange Comission, as the case may be, and upon the approval of the Secretary of the Treasury.30 The proposal would give Treasury the ability to appoint the FDIC or the SEC as conservator or receiver for a failing financial firm that poses a threat to the financial stability of the system in cases where a resolution would avoid or mitigate the adverse effects.31 The conservator or receiver of the firm will have a broad set of powers including the authority to act as a successor to the failing financial firm and to take full control of the operations of the firm.32 The resolution authority also provides for less drastic measures, which include the ability to provide loans, assume liabilities, guarantee obligations, acquire equity interests or assets, or sell or transfer any assets, liabilities, obligations, equity interests or securities of the firm and/or the subsidiary that was determined to be in need of assistance or action.33

Possible Implications for the Insurance Industry

  • Insurance companies or holding companies of insurance companies that themselves are designated as Tier 1 FHCs would be subject to the new resolution authority of the Fed.

Creation of a New National Bank Supervisor34

The Treasury’s proposed legislation creates a National Bank Supervisor (NBS) through the consolidation of the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) under the Federal Depository Institutions Supervision and Regulation Improvements Act of 2009. The NBS would assume all of the functions and responsibilities of the OCC and the OTS. This consolidation will also eliminate the Federal thrift charter and thrift holding company framework.35 The consolidation is intended to address issues of regulatory arbitrage in the Federal bank regulatory system.  

Possible Implications for the Insurance Industry

  • If an insurance company complex includes a Federally chartered thrift institution, such institution would need to be converted into either: a national bank or mutual national bank, regulated by the NBS; a State savings association (regulated by the FDIC); 36 or a State-member bank (regulated by the Fed).
  • After such a conversion, any insurance company complex would be subject to regulation as a financial holding company by the Fed.  

Holding Company Status37

Under the Administration’s proposal all companies that control an insured depository institution would be subject to consolidated supervision and regulation at the Federal level by the Fed and will be subject to the non-financial activity limits contained in the BHC Act. The BHC Act would be amended to require the registration as a bank holding company of any company controlling an insured depository institution.38 Any holding company that owns a thrift would no longer be regulated separately as a savings and loan holding company. The proposal also amends the BHC Act with respect to the conditions required to allow a bank holding company to engage in activities that are financial in nature.39 Under these provisions, to engage in such activities, there is a new requirement that the bank holding company be well capitalized and well managed.

The Fed would have the authority to grant temporary exemptions or provide other appropriate temporary relief to permit affected companies to implement measures necessary to comply with the restrictions on activities imposed on bank holding companies.40 The limited exemptions and grace period for existing non-financial activities may pose significant challenges for grandfathered unitary savings and loan holding companies and commercial companies that own industrial loan companies or credit card banks.  

Possible Implications for the Insurance Industry

  • Insurance holding companies and insurance companies that own depository institutions (including Federal savings institutions, limited purpose national banks, industrial loan companies, credit card banks, certain trust companies) would be regulated by the Fed and be required to register with the Fed as financial holding companies.
  • Financial holding companies face more restrictions than thrift holding companies regarding the type of permissible activities and the type of transactions with affiliates.
  • Any insurance holding company and any insurer that is a financial holding company must be well capitalized and well managed.