Stephen Zielezienski, Senior Vice President and General Counsel for the American Insurance Association (AIA), submitted comments last week in response to the Financial Stability Oversight Council’s (FSOC) advance notice of proposed rulemaking (ANPR). The ANPR was published in the October 6, 2010 Federal Register regarding authority to require Federal Reserve supervision and regulation of certain nonbank financial companies under Section 113 of the “Dodd-Frank” Wall Street Reform and Consumer Protection Act.
In its comments, AIA recommends that FSOC adopt a two-stage analytic process for implementing Section 113, where the Council first looks to determine whether a company could generate systemic financial instability and then looks internally at the risk-related financial condition of those companies that merit further attention. The first stage of this analytic framework is critical. Under it, AIA believes that the Council must consider the sector-specific context of any nonbank financial company, including the nature of the financial activities, the business model utilized, the relationship between the sector and the larger financial system, and the extent of regulatory supervision applied to the sector’s market participants. All of these industry-specific factors help inform the analysis of whether a specific company is so “interconnected” to the U.S. financial system that it could create instability.
Focusing on the first stage of the proposed evaluation process, AIA is confident that a close examination of these Section 113 factors will demonstrate that property-casualty insurers engaged in traditional insurance activities do not pose a systemic threat to U.S. financial stability and do not warrant further consideration for heightened prudential supervision by the Federal Reserve.