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Regulation and Compliance > Federal Regulation

New York Proposes Guidelines For Principles-Based Regulation

By Jim Connolly

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New York has issued a draft of a proposal that would establish a foundation on which to build a system of principles-based state regulation.

Proposed Regulation 185 was introduced by New York Insurance Superintendent Eric Dinallo on November 5.

The draft includes 10 principles for industry as well as 10 principles for regulators. The draft will be distributed for discussion by the industry and consumers and will be on the agenda of the New York State Commission to Modernize the Regulation of Financial Services.

A principles-based system seeks to look at companies individually rather than applying formulas to determine risk.

“As a code of conduct, the principles are reasonable rules that can be easily incorporated into the business philosophy and operations of regulated parties with little or no expense. In fact, most regulated entities should already be operating in accordance with such principles,” Dinallo said. “Importantly, the principles will not expose companies to additional private lawsuits because New York’s Insurance Law generally does not provide for private rights of action. Only the regulator can enforce the principles. This is, in fact, a significant competitive advantage for New York.”

Dinallo said the proposed regulation expands on actions the department has already undertaken including requiring property insurers to create a reserve for catastrophes, such as hurricanes, and having top-rated non-U.S. reinsurers post the same collateral as U.S. companies.

The 10 industry principles are as follows:

(1) A licensee shall lawfully conduct its business with integrity, due skill, and diligence.

(2) A licensee shall take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems.

(3) A licensee shall maintain adequate financial resources.

(4) A licensee shall observe proper standards of market conduct.

(5) A licensee shall pay due regard to the interests of its clients and treat them fairly.

(6) A licensee shall pay due regard to the information needs of its clients, and communicate information to them in a way that is clear, fair and not misleading.

(7) A licensee shall manage conflicts of interest fairly, both between the licensee and its clients and between clients.

(8) A licensee shall take reasonable care to ensure the appropriateness or suitability of its advice and discretionary decisions for any person or other entity that is entitled to rely upon such.

(9) A licensee shall ensure that the assets of any client for which the licensee is responsible are adequately protected.

(10) A licensee shall interact with the superintendent and other regulators in an open and cooperative way, and shall disclose to the superintendent any information relating to the licensee of which the superintendent would reasonably expect notice.

The New York department also intends to issue a circular letter listing 10 principles for regulators. They are:

(1) Regulators, and the regulatory system as a whole, should assess risk comprehensively and concentrate resources on the most important areas.

(2) Regulators should be accountable for the efficiency and effectiveness of their activities, while remaining independent and objective in the decisions they make.

(3) Guidance from the regulator should be readily available and easily understood.

(4) Interested parties should be consulted as appropriate prior to issuance of written guidance by the regulator.

(5) When developing new regulations, the regulator should consider how they can be implemented and enforced using existing systems and data to minimize the administrative burden on regulated entities.

(6) No investigation or inquiry should take place without an appropriate basis.

(7) The regulator should not require a regulated entity to provide unnecessary or needlessly duplicative information.

(8) All regulatory action should be proportionate to the issue being addressed.

(9) Regulators should allow and encourage competition and innovation, while ensuring against insolvency and protecting consumers and markets, and only intervene as necessary to protect consumers and markets.

(10) Regulators should respect the responsibility of a firm’s senior management for its activities and for ensuring that its business complies with requirements and hold senior management responsible for risk management and controls.

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