Last week, the chairs of key Senate and House committeespromised President Obama they will work together to havelegislation on his desk by year's end creating a "new, more robustregulatory framework" for financial services firms.

Within days of delivering the promise in a letter signed bySenate Banking Committee Chair Chris Dodd, D-Conn., and HouseFinancial Services Committee Chair Barney Frank, D-Mass., twomembers of the House of Representatives introduced a bill thatwould create an Optional Federal Charter (OFC).

The March 30 letter and the April 2 House action followed March26 testimony by Treasury Secretary Timothy Geithner before theHouse Financial Services Committee during which he asked Congressfor authority to create a federal regulator to administer largeinsurance companies. (See NU, March 30, page 6 fordetails.)

During his testimony, Mr. Geithner commented that there is "agood case" to be made for introducing an optional federal charterfor insurance companies.

In their letter to the president, Sen. Dodd and Rep. Frank saidthey endorsed the core principles for modernizing the financialregulatory system articulated by Mr. Geithner, identifying these assystemic risk regulation, strengthening consumer and investorprotection, streamlining prudential supervision, and addressinggaps in regulation.

Addressing areference by Mr. Geithner to the need for internationalcooperation, the two lawmakers wrote, "We also recognize that themobility of capital means that, while the ultimate decision as towhat rules to adopt is a sovereign decision of each individualnation, success in this effort requires us to consult closely withother major financial centers with the goal of achievingappropriate coordination and minimizing any opportunities forregulatory arbitrage."

On Thursday of last week, pointing to the "meltdown of insurancegiant" American International Group, in addition to the broaderfinancial crisis, Rep. Melissa Bean, D-Ill., and Rep. Ed Royce,R-Calif., introduced the National Insurance Consumer ProtectionAct.

The two lawmakers said numerous bipartisan reports have calledfor insurance regulatory reform. Rep. Royce also noted that thefederal government is already heavily invested in an industry ithas no regulatory authority over.

According to a fact sheet distributed by Reps. Bean and Royce,the bill would establish a "parallel, national system of regulationand supervision for insurers, insurance agencies and insuranceproducers, similar to the dual banking system."

Regulated entities would be able to choose national or stateregulation, the fact sheet noted, unless the national commissionerand a newly-created systemic risk regulator determine an insurer is"systemically important," in which case they could require theinsurer to be nationally regulated.

An Office of National Insurance (ONI), responsible for issuingcharters for life, property-casualty and reinsurance companies, aswell as producers, would be created within the Treasury Department,with a commissioner appointed by the president for a five-yearterm, subject to Senate approval.

The commissioner would subject insurers to examinations everytwo years, and producers to examinations in response to a complaintor evidence of violation of a law or regulation. The commissionerwould have enforcement powers patterned after those available tofederal banking agencies.

Additionally, state and national commissioners would have toshare information with a systemic risk regulator, who would be ableto make "corrective action recommendations" to the national andstate commissioners "to take action to mitigate or avoid actionstaken by an insurer or affiliate that would have serious adverseeffects on economic conditions and financial stability."

The systemic risk regulator would have the authority in certainsituations to circumvent an insurance regulator in "emergencycircumstances."

The bill would also set up a Division of Consumer Affairs, whichwould in turn establish offices in each state to act upon questionsand complaints.

Reaction among the insurance industry was varied, with some OFCsupporters praising the bill's intentions but raising concern aboutsome of the particulars.

The Council of Insurance Agents & Brokers, the AmericanBankers Association, the American Bankers Insurance Association,and the Financial Services Roundtable expressed support for thebill. The associations all stated that an OFC will help simplifyinternational regulatory cooperation for larger, nationalcompanies.

Leigh Ann Pusey, president of the American InsuranceAssociation, said her group also supported the bill, noting thatAIA has long supported an OFC.

However, the bill calls for a National Insurance GuarantyCorporation, while also requiring national insurers to participatein state guaranty associations, and Ms. Pusey said she believesconsumers would be best protected under a single guaranty fundsystem.

The Property Casualty Insurers Association of America saidCongress should train its focus on systemic risk, rather than firsttrying to overhaul the entire financial regulatory system.

David A. Sampson, PCI's president and chief executive officer,said, "The reason that discussion of an optional federal chartershould not be part of the systemic risk debate is that it falselypresumes that only large companies pose a systemic risk. In fact,smaller companies can pose significant systemic risk, and largercompanies may pose little or none."

He added that an OFC concerns only one industry, while systemicrisk reaches across all financial services industries.

Cliston Brown, PCI spokesperson, issued an additional responseto the bill via e-mail, stating, "PCI believes the states have notreformed the current regulatory system into a model thateffectively facilitates commerce in the 21st century. To modernize,we support reforming the state-based system, but where the statescontinue to fail to make needed improvements, we may consider otherapproaches if proven necessary to the creation of a fair, effectiveand efficient business environment."

Jimi Grande, NAMIC vice president for federal and politicalaffairs, said, "This convoluted legislation would create a huge newbureaucracy that would have broad, ambiguous powers. The ONI, asdescribed in the legislation, would create multiple layers ofregulation leading to confusion and higher costs forconsumers."

Likewise, the Independent Insurance Agents & Brokers ofAmerica gave the Royce-Bean idea the thumbs down.

IIABA President and CEO Robert Rusbuldt said: "While it has anappealing title, this latest incarnation of OFC legislation woulddamage the stable and healthy insurance marketplace to thedetriment of consumers.

"While the bill reintroduced today has a few changes, it isbasically the same concept–optional federal chartering andderegulation of strong state consumer protections, which hasrightfully been rejected and ignored by previous Congresses. Thereis no doubt the current regulatory system needs more uniformity andefficiency, but there are more prudent ways to accomplish this viatargeted federal legislation," he said.

The group "believes that there is no regulatory crisis in theproperty-casualty insurance market as a whole that necessitates arisky massive overhaul of its current regulatory structure," headded.