Ending weeks of speculation regarding the shape of proposed regulatory reform for the financial services industry, President Obama outlined a five part framework for a "New Foundation" for regulation of the capital markets on June 17, 2009. The outline released yesterday is the first step in what is expected to be a lengthy and contentious legislative process -- one that will likely commence in earnest this coming fall and could potentially stretch into next year. Click here to read Sonnenschein's general summary of the outline with links to related documents.

While the precise contours of any regulatory reform effort will be months in the making, it is clear at this point that the fundamental trend is toward greater authority over systemically critical entities, without regard to their status as banks. It is also likely that insurance oversight, and potentially a federal charter, will be on the table in discussions of reforming the regulatory system.

In contrast to some previous initiatives, yesterday’s announcements are those of the Obama Administration. This is not a plan yet supported by Congress.

Regarding insurance, the President’s plan outlines a framework that will create a federal Office of National Insurance and a broader regulatory modernization based on six guiding principles.

The Office of National Insurance

The plan calls for the creation of a new Office of National Insurance, with the following charges:

  • Gather information in the insurance industry in order to identify emerging problems or gaps in regulation;
  • Develop expertise on insurance markets, products, and trends;
  • Negotiate international agreements relating to insurance;
  • Monitor and coordinate policy on insurance issues; and
  • Recommend to the Federal Reserve any insurance companies that should be supervised as Tier 1 FHCs -- firms whose failure could pose a threat to financial stability due to their combination of size, leverage, and interconnectedness.

Insurance Regulatory Modernization

The plan further calls for broader modernization of the insurance regulatory system in line with six guiding principles:

  1. Effective systemic risk regulation with respect to insurance;
  2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies;
  3. Meaningful and consistent consumer protection for insurance products and practices;
  4. Increased national uniformity through either a federal charter or effective action by the states;
  5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business; and
  6. International coordination.

For specific insurance regulatory details, please see pages 40 to 42 in the following link: http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.