Legal Expert Sees Flaw In Obama Insurance Receiver Plan

NU Online News Service, March 25, 2:52 p.m. EDT

WASHINGTON–The Obama administration's plans to seek legislation giving it the authority to take over a troubled non-bank financial services company like an insurer is a move to "usurp" the state regulatory and guaranty fund system, an industry lawyer said today.

The administration is expected to provide details on its plans when Treasury Secretary Tim Geithner testifies before the House Financial Services Committee tomorrow.

But, based on an outline of their plans released today, Francine Semaya, a lawyer with Nelson Levin de Luca & Horst LLC, said the proposal likely gives the federal government the authority to regulate the underlying operating insurance subsidiaries of a troubled insurance holding company.

"It is hard to tell from the outline if they plan to regulate only the holding company of a troubled insurance company, or the underlying insurance assets as well," Ms. Semaya said.

"If they do seek authority that will give them the power to deal with the underlying insurance subsidiaries, this bill would be an attempt to usurp the current state receivership and guaranty fund system," she added.

Under their proposal, she said, the new resolving authority, likely the Federal Deposit Insurance Corporation, would have the authority to sell assets, terminate contracts and regulate the underlying state-insurance regulated entities.

Ms. Semaya, the president of the International Association of Insurance Receivers, is Insurance Transactional and Regulatory Practice group chair at New York-based Nelson, Levin and chair of the American Bar Association Federal Involvement in Insurance Regulation Modernization Task Force (FIIRM).

Under current law, the holding company of an insolvent insurance company comes under the authority of the federal bankruptcy court system, while the underlying insurance company subsidiaries are dealt with through the state receivership and guaranty fund system.

Ms. Semaya said her interpretation of the Obama administration proposal is that it would supersede the federal bankruptcy code in supervision of the parent company of an insurance carrier and gain authority over the underlying insurance subsidiaries.

Under an outline of the proposal released by the Treasury Department today, the trustee of the conservatorship or receivership would have broad powers, including the authority to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution's contracts (including with its employees), and to deal with a derivatives book.

The Treasury outline said the conservator would also have the power to fundamentally restructure the institution by, for example, replacing its board of directors and its senior officers.

"None of these actions would be subject to the approval of the institution's creditors or other stakeholders," the outline said.

As Treasury Secretary Geithner testified yesterday before the House Financial Services Committee, he would have the authority to order that a non-bank, such as bank and thrift holding companies and holding companies that control broker-dealers, insurance companies and futures commission merchants, be placed in conservatorship or receivership.

The secretary would act "upon the positive recommendations of both the Federal Reserve Board and the appropriate federal regulatory agency and in consultation with the president."

The criteria to establish eligibility for such action will be that the financial institution in question is "in danger of becoming insolvent," its insolvency "would have serious adverse effects on economic conditions or financial stability in the United States," and taking emergency action "as provided for in the law would avoid or mitigate those adverse effects," the outline said.