FDIC to Avoid Insurance Asset Liens

But "this proposed rule does precisely the opposite," Cline and Vaughan write. "It effectively provides the FDIC the unilateral right to impose a lien on the assets of an insurer whenever the FDIC deems it appropriate."

Members of Congress and Treasury Department officials developed the orderly liquidation provisions in the Dodd-Frank Act in response to complaints that no single regulator had the authority to deal with the problems at American International Group Inc., New York (NYSE:AIG), in September 2008.

The Title II provisions will give the FDIC the authority to step in and take control of many different kinds of "covered companies" – including, in some cases, a troubled, systemically important insurer or insurance holding company. The FDIC can take over an insurer only if the company's home state insurance regulator fails to address the company's problems.

WHAT THE FDIC SAYS

FDIC officials themselves say Section 204 of the Dodd-Frank Act would normally give the FDIC broad authority to take liens when it provides funding to finance orderly liquidation.

Dodd-Frank Section 203(e) requires the FDIC to use state laws to liquidate an insurer, but FDIC officials believe the ordinary orderly liquidation rules would apply to an insurance company subsidiary or affiliate that is not itself an insurance company, officials say.

"The FDIC recognizes that the orderly liquidation of a covered financial company that is a covered subsidiary of, or an affiliate of, an insurance company should not unnecessarily interfere with the liquidation or rehabilitation of the insurance company under applicable State law, and that the interests of the policy holders in the assets of the insurance company should be respected," officials say.

"Accordingly, the FDIC is proposing that it will avoid taking a lien on some or all of the assets of a covered financial company that is an insurance company or a covered subsidiary or affiliate of an insurance company unless it makes a determination, in its sole discretion, that taking such a lien is necessary for the orderly liquidation of the company (or subsidiary or affiliate) and will not unduly impede or delay the liquidation or rehabilitation of such insurance company, or the recoveries by its policyholders," officials say.

COMMENTERS

Cline and Vaughan say the FDIC should not be trying to apply the proposed orderly liquidation authority rule to insurers in the first place, because the drafters of the Dodd-Frank Act specifically excluded insurers from the normal orderly liquidation process.

The FDIC would have authority over failing insurers only in cases in which state regulators failed

to act, and, even then, the FDIC is supposed to manage troubled insurers using the relevant state laws and regulations, Cline and Vaughan say.

"Therefore, the application of this rule to insurance companies violates the explicit language of the Act and, for this reason, the NAIC requests that the rule be changed so it does not apply to insurance companies," Cline and Vaughan say.

The FDIC says in Section 380.6 that the FDIC has the authority to impose liens on affiliates in addition to covered financial companies and covered subsidiaries. The act itself does not give the FDIC authority to impose liens on affiliates, and the FDIC ought to remove the references to affiliates, Cline and Vaughan say.

The guaranty funds say the FDIC could improve the insurer lien provisions by narrowing them.

Except when the FDIC is providing financing for the sale or transfer of an insurer or other "covered financial company," the FDIC should "take a lien on assets owned by an insurance company's subsidiaries (or by the insurance company itself) only to secure repayment of funds provided to the insurance company or its subsidiaries," the funds say.

Julie Spiezio, a senior vice president at the American Council of Life Insurers (ACLI), Washington, says the ACLI believes the FDIC is assuming that there may be times when it will make funds available to an insurance company, even though the insurance company will be subject to liquidation under state insurance insolvency law.

"In this case, we seek confirmation and clarification that any necessary lien on the assets of an insurance company or a covered subsidiary of an insurance company will only be to the extent of the funds actually extended to the insurance company or the covered subsidiary of the insurance company," Spiezio says in a letter submitted on behalf of the ACLI. "This will ensure that any secured claim afforded the FDIC due to its lien in the state insurance insolvency proceeding involving the insurance company will not diminish the amount of other unencumbered assets of the insurance company that support policyholder claims."

The ACLI would like to see the FDIC place liens only on an entity that actually receives funds, and not on an affiliate or subsidiary of that entity, Spiezio says.

Steven Kandarian, chief investment officer at MetLife Inc., New York (NYSE:MET), warns that another orderly liquidation proposal provision, which deals with how various types of parties would be treated in connection with a financial institution liquidation, could disrupt the credit markets, because the provision appears to treat holders of short-term, unsecured debt better than other debt holders.