More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
(ED Note: This story originally appeared on our sister site LifeHealthPro.)
American International Group is on the verge of becoming the first insurance holding company ever regulated by the federal government.
In a statement, the Treasury Department said Sunday that it is launching a public offering of $18 billion of AIG stock. Simultaneously, AIG said it would purchase up to $5 billion of that stock.
AIG is expected to use cash on hand as well as more than $2 billion gained from the sale of some of its remaining holdings in American International Assurance, or AIA Group, its Hong Kong-based life insurance subsidiary. That sale took place Friday.
The decline of U.S. government ownership below 50% would trigger federal regulation, according to a bevy of securities analysts and industry lawyers, some of whom formerly worked at the Federal Reserve Board.
The government owns 53.4% of AIG, according to an investor’s note last week by John Nadel of Sterne Agee & Leach in New York. If the Treasury Department is able to sell all of the shares (it seeks to sell at around $34 a share), it would retain approximately 23% of the company.
Federal regulation of AIG cannot occur before the government’s stake in AIG drops below half because the government cannot regulate something in which it holds a majority interest, according to various industry lawyers, some of whom have worked for federal financial service regulatory agencies.
A spokesman for the Fed would not confirm or deny it.
Under an amendment to the Dodd-Frank financial services reform law, if AIG is regulated as a thrift holding company, it would be subject to consolidated regulation by the Federal Reserve Board.
In a note to investors on Aug. 31, Ray Schoen of Washington Analysis, a buy-side securities analytical group that advises hedge funds and institutional investors, said that, “In short, the company is poised to face real regulatory supervision of its noninsurance financial business for the first time in its history.”
Schoen said that, “While Treasury's exit is certainly a long-term positive for AIG, investors should be aware that federal regulation presents a litany of new restrictions for the company, including minimum leverage and risk-based capital requirements, as well as restrictions on dividend payments and share buybacks.”
The National Underwriter published a story on Aug. 6 based on comments Robert Benmosche, AIG’s president and CEO, made on its Aug. 3 earnings conference call with analysts, where it was said that AIG is preparing for federal regulation in addition to state regulation.
In its comments to security analysts that day, Benmosche added, “in a way, we see it as a big positive.”
The U.S. needs to average about $28.73 on the sales to break even on the stake it acquired as part of a 2008 bailout, not including unpaid dividends and fees, according to a study last year by the Government Accountability Office. The first two offerings were priced at $29 a share and the second two at $30.50.
According to Benmosche and the analysts, AIG will be subject to federal regulation because it owns a savings and loan holding company based in Wilton, Conn., now regulated by the Fed, and/or through its designation by the Financial Stability Oversight Council as systemically significant.
AIG’s thrift was formerly regulated by the Office of Thrift Supervision (OTS), and its noninsurance financial activities were supposedly under OTS oversight.
But, the OTS was shut down and its authority to charter and oversee insurance companies shifted to the Office of the Comptroller of the Currency and the Fed under the Dodd-Frank financial services reform law.
A provision barring the Fed from regulating insurance holding companies was removed through the Dodd-Frank Act.
However, according to an industry lawyer who asked not to be named, the Fed is expected to be a much sterner overseer of thrift holding companies than the OTS was.
In his note to investors, Schoen said that as a savings and loan holding company, AIG will be subject to the examination, enforcement and supervisory authority of the Fed.
Under Dodd-Frank, savings and loan holding companies are subject to the same minimum leverage and risk-based capital requirements required of bank holding companies.
Rules to this effect are currently under development by the Fed, OCC and FDIC.
In his note, Schoen said AIG may also be required to place its financial activities in a holding company separate from its nonfinancial activities, with new restrictions between the two entities.
“Going forward, we expect that AIG will need approval from the Fed before paying dividends,” Schoen said.
As to the offering, Treasury said that besides the initial $18 billion in AIG stock, there will also be grant to the underwriters in offering a 30-day option to purchase up to an additional $2.7 billion in common stock from Treasury to cover overallotments, if any.
Citigroup, Deutsche Bank Securities, Goldman, Sachs & Co., and J.P. Morgan Securities have been retained as joint global coordinators for the offering.
Elizabeth Festa also contributed to this story.