On May 12, 2015, U.S. Senator Richard Shelby (R-Ala.), chairman of the Senate's Committee on  Banking, Housing, and Urban Affairs, released a "discussion draft" of the Financial Regulatory Improvement Act of 2015, legislation that would significantly amend the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Like the "Collins Fix" legislation passed by the prior Congress and signed into law by President Obama (under which federal regulators may exclude insurers from certain consolidated risk-based capital requirements),the Shelby discussion draft could offer relief to insurers fearful of bank-centric, Basel-like regulation.

The discussion draft covers a myriad of topics, and will probably be the subject of much review before legislation is finalized, but represents a very useful compendium of key issues likely to be addressed by Congress and regulators in the coming months.

Two principal themes of the proposed legislation are increasing congressional oversight of the Federal Reserve System and relaxing certain restrictions imposed on community banks and credit unions. However, the comprehensive legislation also contains several provisions that could specifically affect insurance companies, as the Board of Governors of the Federal Reserve System (the "Board") assesses how to apply to insurance companies coming under its jurisdiction (generally, insurers designated as "systemically important financial institutions," or "SIFIs," and insurers owning depositary institutions) the capital and other regulatory standards mandated by Dodd-Frank.

Among other things, the discussion draft would

  • mandate that the Financial Stability Oversight Council (the "FSOC") provide detailed explanations to nonbank financial companies that are under review for potential SIFI status and allow such companies to meet with representatives of the FSOC;
  • allow a company under review the opportunity to submit a plan "to modify the business, structure, or operations of the company" in order to address the factors that could cause the company to be subject to SIFI designation; to meet with FSOC representatives to discuss the plan; and to revise the plan after discussions with such representatives;
  • require the FSOC to provide the primary financial regulatory agency of the subject company the opportunity to provide written response to the FSOC regarding the evaluation (in the case of insurance companies under evaluation, such "primary financial regulatory agency" would likely be the applicable state insurance regulator);
  • amend the re-evaluation process for companies that have been designated as SIFIs, allowing such companies to submit to the FSOC a remedial plan and other written materials "to contest the determination, including materials concerning whether, in the view of the company, the material financial distress at the company, or the nature, scope, size, scale, concentration,interconnectedness, or mix of the activities of the company could pose a threat to the financial stability of the United States." If the SIFI provides such information, the FSOC must determine whether the SIFI no longer meets the criteria for SIFI status, in which case the FSOC must rescind the determination and, no less than once every five years, determine whether to renew the determination. If the FSOC does not rescind, or decides to renew, the SIFI will be entitled to notice and an explanation of the decision.

The proposed legislation also contains several insurance-specific provisions. The discussion draft

  • reaffirms Congress' commitment to the McCarran-Ferguson Act (which codifies the primacy of the states in regulating the business of insurance);
  • clarifies that an insurer that is a savings and loan holding company, an affiliate of a depositary institution or a company that controls a depositary institution may be required to be a "source of strength" for such financial institution only under the constraints imposed by the Bank Holding Company Act. These constraints, generally, require the Board to defer to state insurance regulators when seeking to require an insurer to provide support to the affiliated bank;
  • adds rehabilitation as an action that a state insurance regulator may take (in addition to liquidation) in order to preclude the Federal Deposit Insurance Corporation ("FDIC") from exercising its backup authority to commence insolvency proceedings against an insurer that is a "covered financial company" under the Orderly Liquidation Authority provisions of Dodd-Frank;
  • prohibits the FDIC, where it is acting as receiver for an insurance company that is a "covered financial company," from taking a lien on the insurer's assets unless the state insurance regulator is notified, the lien is to secure repayment of funds extended to the company and the lien would "not unduly impede or delay the liquidation or rehabilitation of the insurance company, or the recovery by its policyholders";
  • states that the Board and the director of the Federal Insurance Office should "achieve consensus positions" with state insurance regulators when negotiating before any international forum of financial regulators or supervisors considering insurance regulatory issues;
  • establishes an Insurance Policy Advisory Committee on International Capital Standards and Other Insurance Issues at the Federal Reserve to advise on the application of these standards as well as other insurance-related matters; and
  • institutes annual reporting and mandatory testimony to Congress by the Secretary of the Treasury and the chair of the Board regarding developments at "international standard-setting regulatory or supervisory forums" as well as on the "impact on consumers and markets in the United States" prior to "the adoption of any key elements in any international insurance proposal or international insurance capital standard," a reference to "ComFrame" and related initiatives of the International Association of Insurance Supervisors.