As reported in our February 15, 2011 Client Alert, New York Governor Andrew Cuomo unveiled a bill (the “Bill”) on February 1, as part of his 2011-2012 budget, proposing to merge the State’s Insurance and Banking Departments and the Consumer Protection Board into a single agency, to be known as the Department of Financial Regulation (the “DFR”). Among other things, this Bill proposed to:

  • expand the scope of financial regulation to include a broad range of financial products and services that may have been previously unregulated;
  • consolidate the offices of the insurance and banking superintendents into a new office of the Superintendent of the DFR (the “DFR Superintendent”) to assume responsibilities of the existing superintendents, as well expanded responsibilities under the new Financial Regulation and Protection Law (the “FRPL”) added by the Bill;
  • grant the DFR Superintendent expansive investigatory and enforcement powers, including an increase in penalties assessable;
  • grant the DFR Superintendent broad discretion to levy assessments on companies; and
  •  enact a new Financial Frauds Protection Act (the “FFPA”) requiring the DFR Superintendent to create a Financial Frauds and Consumer Protection Unit (the “FFCPU”) to investigate and assess penalties with respect to financial fraud as defined by the Bill.

Since its introduction, the Bill has received significant attention from government actors, industry participants and consumer groups. Based on this input, the Governor’s office released a revised version of the Bill (the “Revised Bill”) last week. The Revised Bill contains many of the same provisions as the original Bill, however, certain powers granted to the DFR and the DFR Superintendent have been narrowed and refined.

This Client Alert describes some of the key revisions set forth in the Revised Bill and discusses the Bill’s likely future progress and next steps.

  1. Definition of “Financial Product or Service” is Narrowed

The FRPL grants the DFR authority to regulate financial products and services. The original Bill defined “financial product or service” to include products and services regulated under the FRLP, the insurance and banking laws, as well as any other law. This definition is deleted in the Revised Bill and replaced with the following:

“Financial product or service” shall mean (A) any product or service offered or provided by any person regulated or required to be regulated by the superintendent pursuant to this chapter, the banking law, the insurance law, or otherwise subject to the investigatory or enforcement authority of superintendent under this chapter, the insurance law or the banking law; (B) any investment, credit, debit, lien, deposit, derivative or money management device.

Revised Bill, Part A, Section 1, Article I, Section 104(a)(4).

This revision narrows the definition of “financial product or service” by removing the reference to other laws, thereby limiting the DFR’s authority to products and services regulated under the FRPL, insurance and banking laws. The revised definition also removes, subsection (C) of the definition in the original Bill, which had included in the definition of “financial product or service” any contract involving the types of products or services specified in the definition. Despite the revision, the definition of “financial product or service” is still sufficiently broad to capture products and services that are not presently regulated by the Insurance and Banking Departments individually.

  1. Definition of “Financial Fraud” Narrowed

Currently, fraud impacting the insurance and banking industries are regulated separately – by the insurance frauds bureau and the criminal investigations bureau, respectively. Under the FFPA, these bureaus would be consolidated, along with the consumer financial protection activities of the Consumer Protection Board into a single bureau, the FFCPU, authorized to investigate financial fraud. Bill, Part A, Section 1, Article IV, Sections 401 to 403. The original Bill defined “financial fraud” as “any fraud, intentional misrepresentation or deceptive act or practice involving a financial product or service or involving any person offering to provide or providing financial products or services” and expressly included:

  1. any fraudulent insurance act or fraudulent life settlement act;
  2. deceptive act or practice or false advertising as interpreted under the general business law, and fraud as that term is interpreted under the banking law;  
  3. activities that violate certain specified sections of the penal law, and the general business law (including provisions of the Martin Act), which govern certain fraud related offenses;  
  4. any criminal activity involving a financial product or service or involving any individual or other entity offering to provide or providing financial products or services; or  
  5. any act or omission in violation of federal or state fair lending laws.

Bill, Part A, Section 1, Article I, Section 104(a)(3).

The Revised Bill narrowed the definition:

“Financial fraud shall mean any fraud, intentional misrepresentation involving a financial product or service or involving any person offering to provide or providing financial products or services, including (A) any fraudulent insurance act or fraudulent life settlement act, as those terms are defined by the insurance law; (B) any fraud as that term is interpreted under the banking law; (C) any violation of state or federal fair debt collection practices; and(D) any act or omission in violation of federal or state fair lending laws.”

Revised Bill, Part A, Section 1, Article I, Section 104(a)(3).

There are a number differences between the original and the revised definitions. Perhaps the most significant is that the revised definition removes “deceptive acts or practices” from activities that constitute financial fraud. The standard for proving a deceptive act or practice is lower than the standard for proving an intentional act, and would only have required the DFR Superintendent to show that the act or practice has the tendency to deceive a reasonable person in a material way. Removal of “deceptive acts or practices” from the definition means that intent is now required in order for a conduct to constitute financial fraud. Also of significance is that the Revised Bill removes references to the Martin Act, an act which does not require proof of a violator’s intent to defraud.

  1. No Immunity at DFR Hearings

As noted in our February 15 Client Alert, the DFR Superintendent will retain the enforcement powers afforded to the insurance and banking superintendents under the existing insurance and banking laws, and be granted new powers under the FRPL. Bill, Part A, Section 1, Article III, Section 301 et seq. Among other things, he or she may conduct hearings in connection with violations of the insurance and banking laws, and the FRPL. Bill, Part A, Section 1, Article III, Sections 305, 306 & 309. The original version of the Bill allowed the DFR Superintendent, his deputy or other officer to grant immunity from prosecution under the criminal procedure law to persons testifying at a DFR hearing. Bill, Part A, Section 1, Article III, Sections 307. The right to grant immunity has been removed from the Revised Bill. This is significant as immunity is a powerful tool in compelling testimony. Without offers of immunity, potential witnesses are likely to be less forthcoming.

  1. Penalty Provisions Reduced

Certain penalty provisions of the Bill have been revised. For example, the original Bill increased the monetary penalty for willful violation of the insurance law and regulations from $500 to $10,000 for most violators. Bill, Part A, Section 55. The revised Bill reduced the maximum penalty from $10,000 to $1,000. Revised Bill, Part A, Section 55.

Another change relates to the penalties imposed with respect to financial fraud. Under the FFPA, the original Bill expressly authorized the DFR Superintendent to collect restitution and damages on behalf of any person suffering economic harm arising from financial fraud and may levy a civil penalty of $5,000 for each violation. Revised Bill, Part A, Section 1, Article IV, Section 408. The Revised Bill does not permit collection of damages.

  1. Holding Company Examinations Provision Removed

Another change from the original Bill relates to holding company examinations. The original Bill contained an amendment to Section 1504(b) of the insurance law to permit the DFR Superintendent to examine every holding company and every controlled person within a holding company system if he or she has reason to believe that such person’s operations may impact the operations, management or financial condition of any controlled insurer within the system, without regard to materiality of the effect. Bill, Part A, Section 68. The Revised Bill has deleted this amendment. This is significant. The original Bill would have afforded the Superintendent vast scope to investigate holding companies with only tangential ties to New York insurance practices. As such it could have had dramatic impact on New York’s economy generally. This no longer is the case.

Next Steps

The Revised Bill requires approval of both the State Assembly and Senate. The Senate has already announced that it will hold hearings on the matter and the Assembly may follow suit. We believe that the Bill will undergo further amendment before it is enacted.