WASHINGTON–House and Senate negotiators completed work early today on sweeping financial services legislation that includes a provision that could ultimately impose a fiduciary standard on sale of investment products.
Amongst other provisions agreed to before the conferees completed work at 5:39 a.m. is one that would impose a tax on large insurance companies as well as banks and other financial services companies for 5 years.
The provision of the bill, H. 4173, would affect insurers with assets under management of more than $50 billion. It is designed to pay for the estimated $19 billion cost of the bill over 5 years. Federal regulators will assess the fee, with higher fees to be assessed on those with the riskiest assets.
Staffers were expected to work through the weekend to prepare the bill for floor action, with the House expected to act early in the week and the Senate by next Friday.
The aim, which is likely to be attained, is to have the bill on President Obama’s desk for signature before Congress leaves for its Independence Day recess July 2.
The bill would create a Federal Insurance Office, with the authority to coordinate with the U.S. trade representative in negotiating bilateral trade agreements on insurance with foreign countries–agreements that might preempt inconsistent state laws.
The office would have no regulatory authority but would have the power to monitor all activities related to the business of insurance except for health insurance and long term care insurance. That power would rest with the Department of Health and Human Services.
The final language also would require the Treasury Department to conduct a study of insurance regulation and make recommendations to Congress within 18 months. The House also added a provision requiring that the study include recommendations on the U.S. and global reinsurance markets.
The bill also contains a provision overhauling regulation of the surplus lines and reinsurance industries.
Negotiators also agreed Wednesday to a key industry request that the resolution authority established by the legislation would not be prefunded with fees imposed on financial companies. That authority would be created to wind down systemically risky financial firms.
A provision was also added to the bill that would add 2 two non-voting members to a proposed Financial Services Oversight Council–a representative from the Federal Insurance Office and a state insurance regulator. The FSOC would be created to oversee large, potentially systemically risky financial institutions.
Although final language was available, life insurers did win certain carveouts that would allow them some flexibility in dealing with the “Volcker rule,” which proposes to severely limit investment activities conducted by insurers that own banks or thrifts.
Although final language is not available, the bill contains language providing flexibility for trading activities insurers conduct in their general investment account as long as these activities are in accord with state insurance investment regulations.
That provision does provide federal regulators with authority to limit these activities if they determine if they are “overly broad,” one insurance industry official said.
Another provision specifically exempts insurers from the Volcker rule if they conduct activities in a trust bank that does not take deposits from the public, does not provide checking or savings accounts and does not borrow from the Federal Reserve Board to finance its activities.
Because derivatives language was debated after midnight, insurance industry officials said they do not expect to see final compromise language providing flexibility to insurers until at least the weekend.
The final language on the fiduciary issues requires the Securities and Exchange Commission to complete a study within 6 months of current rules affecting insurance agents who sell a limited range of products through broker-dealers.
The compromise calls for the S.E.C. to take the results of the study into account when making any rule, but it also gives the commission the authority to impose a fiduciary standard on insurance brokers.
The provision also apparently would give the SEC the authority to require brokers to disclose that they are offering only proprietary products and to reveal how much they are being paid for particular products.
Reacting to the standard-of-care study provision, Chris Morton, vice president, legislative affairs, Association for Advanced Life Underwriting, Falls Church, Va., said, “We are pleased the conference committee recognized the need for additional analysis to ensure that the impact of regulatory action on retail customers is fully informed. We look forward to working with the Securities and Exchange Commission on those issues important to our members and their clients after the bill is signed into law.”
Tom Currey, president of the National Association of Insurance and Financial Advisers, said, “Although the bill’s language does not require the SEC to take into account the study’s findings if it puts in place a best-interest standard, NAIFA is hopeful that the standard would be informed by the study.”
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee and a key conferee, “indicated in comments to the conference that is their Congressional intent and we strongly support that,” Currey said.
Bob Glovsky, chair of the board of directors for the Certified Financial Planner Board of Standards Inc., said, “We are pleased that Congress has laid the foundation for true reform by authorizing the Securities and Exchange Commission to impose the highest standard of care on the delivery of investment advice by brokers. We are hopeful that the SEC will use this authority to insure that all investment advice delivered to consumers–regardless of the source–will be in the clients’ best interests.”
The Financial Planning Coalition also lauded the final language.
An official of a large insurer sought to ease concerns that the insurance industry could not live with the new standard.
The provision at least “points the road towards an end to a conflict with the SEC that has gone on for 10 years,” said the official, who asked not to be named.
He said most insurers are not opposed even to disclosure of commissions paid to agents, “if the disclosure is done appropriately.” Moreover, “if consumers want to know fees paid to captive agents, they are entitled to know,” he said. He also said the provision “will at least allow us to continue to serve the financial needs of clients with more modest financial means.”