Notes on the Merger of New Yorks Insurance and Banking Departments
By William D. Latza and Michael J. Moriarty
Editor’s Note: This article was originally published on March 29, 2011. On March 31st, Governor Cuomo announced passage of the New York State Budget Bill for 2011-2012 that contained the authority to merge the New York State Insurance and Banking Departments.
The New York State budget for Fiscal Year 2011-12, which includes provisions to merge the New York State Insurance and Banking Departments, has generated an unusual (though not surprising) amount of attention from insurance companies and banks in New York State. The Stroock law firm has provided an overview of the merger and identifies some of its possible implications for insurance companies in New York.
Proposed Department of Financial Services
Scope of Authority
The section of the budget addressing the merger (the “merger bill”) combines the New York State Insurance Department and the New York State Banking Department into a single agency – the Department of Financial Services (“DFS”).1 The DFS will be charged with taking any actions it believes are necessary to accomplish the following goals:
(1) foster the growth of the financial industry in New York and spur state economic development through judicious regulation and vigilant supervision;
(2) ensure the continued solvency, safety, soundness, and prudent conduct of the providers of financial products and services;
(3) ensure fair, timely, and equitable fulfillment of the financial obligations of such providers;
(4) protect users of financial products and services from financially impaired or insolve nt providers of such services;
(5) encourage high standards of honesty, transparency, fair business practices, and public responsibility;
(6) eliminate financial fraud, other criminal abuse, and unethical conduct in the industry; and
(7) educate and protect users of financial products and services and ensure that users are provided with timely and understandable information to make responsible decisions about financial products and services.2
The legislation also grants the DFS “the power to conduct investigations, research, studies and analyses of matters affecting the interests of consumers of financial products and services, including tracking and monitoring complaints.”3 The DFS will oversee both banks and insurance companies, as well as entities covered by regulations to be promulgated in accordance with the new law.4
Additionally, the DFS will be charged with oversight responsibility for any other entity selling a financial product or service that is not specifically excepted from the DFS’s jurisdiction. Such excepted items will include products or services that are regulated exclusively by a federal agency, regulated for the purpose of consumer or investor protection by another New York State agency, or whose regulation would be pre-empted by federal law. Credit that retailers provide exclusively for consumer purchases also is excepted from DFS coverage.5 Structure: Separate Insurance and Banking Bureaus Under provisions of the merger bill, the new agency will consist of two bureaus – one for banking and one for insurance.6 The merger bill also creates a state charter advisory board, which would work to retain state-chartered banking institutions and to encourage federally-chartered institutions to switch to a New York State charter.7
Investigatory and Enforcement Powers
The merger bill provides the DFS with sweeping investigatory and enforcement powers. The bill creates a financial frauds and consumer protection unit in the DFS – not to be confused with the Consumer Protection Board being set up under the Department of State – that will be authorized to undertake an investigation if it has reasonable suspicion that any person or entity is engaged in fraud or misconduct under the relevant statutes and regulations. 8 The DFS also will be authorized to conduct adjudicatory proceedings under the State Administrative Procedures Act9 and to issue subpoenas compelling witnesses to attend hearings.10
Additionally, the DFS will be authorized to penalize violators of the financial fraud and consumer protection rules with civil fines of up to $5000 per offense for violations of statutory provisions and up to $2500 for violations of regulations promulgated by the DFS.11 These penalties are in addition to any other civil or criminal sanctions that regulated entities face. (The blanket civil penalty for general violations of the Insurance Law has been increased from $500 to $1000.)12 Whistleblower Provision Finally, the merger bill includes a whistleblower provision that will insulate from civil penalties and civil causes of action of “any nature,” persons who, in good faith, supply information about suspected violations of the Banking or Insurance Laws.13
Consumer Protection Board
The merger bill replaces the current New York Consumer Protection Board with a new Consumer Protection Division in the Department of State. This new Division will take complaints from consumers and work with the attorney general and the appropriate state agencies to enforce laws that protect consumers.14 Although the Consumer Protection Division would have some investigatory powers, its enforcement authority would not be as extensive as the authority granted to the DFS.15
Discussion
Prior versions of the merger bill contained a number of provisions that attracted opposition, some of which have been removed from the current version. For example, prior versions would have authorized the new agency to investigate Martin Act violations and included provisions under which the level of funding for the DFS’s financial frauds and consumer protection unit would have been determined based on the fines collected for violations. These provisions have been removed. Similarly, an earlier version of the merger bill would have increased the fine for general violations of the Insurance Law dramatically, from $500 to $10,000 per violation. As noted above, this was reduced to $1000 per violation in the current merger bill, which still represents a 100% increase over current law.
Notwithstanding these changes, several provisions of the merger bill merit careful attention. For example, although the definition of “financial fraud” (which in earlier drafts, included the phrase “any fraud or intentional misrepresentation involving a financial product or service”16) has been removed from the current merger bill altogether, and the definition of “financial product or service” has been narrowed, concerns remain.
One is that the new definition of “financial product or service” is based not on the characteristics of the product or service itself, but on the nature of the entity selling the product or service, raising concerns that products such as health insurance might be deemed to be financial products.17 Another concern is that even though the merger bill excepts specified products and services from the DFS’s jurisdiction, that jurisdiction is otherwise exceedingly broad, encompassing any financial product sold by a bank or insurance company “or any financial product or service offered or sold to consumers” not specifically exempted from inclusion under the law.18 Arguably, the DFS could invoke this phrase to assert authority over an almost limitless array of products and services.
Another point that will merit attention relates to the assessments collected under current Section 332 of the Insurance Law and how those assessments are used. The merger bill contains a similar assessments system, which will take effect on April 1, 2012, but with some notable changes.19 The bill provides that insurance companies will be “assessed by the superintendent for the operating expenses of the department that are solely attributable to regulating persons under the insurance law.”20 This provision, which was added in part to address insurance industry concerns over the current practice of using these assessments to fund operations not directly related to regulating the business of insurance, is to ensure that assessments on insurance companies are not used to cover the Department’s operating expenses associated with banks.21
The merger bill is silent as to the New York Liquidation Bureau. While the Superintendent of Insurance is the statutory receiver of insurance companies and the Bureau is the part of the New York Insurance Department through which the Superintendent fulfills that role, the Bureau is held to be a private entity.22 Consequently, although the bill does not state that there will be any change regarding the Bureau, its place in the regulatory scheme remains unclear. Finally, insurance companies should be aware that the Executive Budget Agency Presentations memorandum associated with the DFS states there will be an increase in the number of onsite examinations of insurance companies (although this is not addressed in the merger bill itself).23 The ostensible goal is to provide “savings to the insurance industry by reducing costly direct-pay examinations for which insurers contract with costly outside vendors.”24 Insurers would continue to bear the cost of such inspections themselves,25 and it is unclear how many more onsite inspections the governor intends to conduct. The NAIC has initiated a risk assessment process, which hopefully will mitigate and manage some of the cost of this.
Whether the merger will achieve its intended goals remains to be seen. While originally put forth as one response to the financial crisis, states such as Illinois have recently reversed similar mergers that had been proposed on similar grounds. In addition, the merged agency may come to be an uneasy co-habitation of largely federal banking regulation and state insurance regulation. One thing is certain: change is coming, and with change will come both opportunities and challenges.
William D. Latza, a Partner in the Insurance Practice Group of Stroock & Stroock & Lavan LLP, and Michael J. Moriarty, an Insurance Finance Consultant with Stroock & Stroock & Lavan LLP. The authors gratefully acknowledge the assistance of Russell Sharp, awaiting admission to the bar. Stroock & Stroock & Lavan LLP is a law firm with a national and international practice serving clients that include investment banks, commercial banks, insurance and reinsurance companies, mutual funds, multinationals and foreign governments, industrial enterprises, emerging companies and technology and other entrepreneurial ventures. For More Information contact William D. Latza 212.806.5807, wlatza@stroock.com; Michael J. Moriarty,mmoriarty@stroock.com.
1 Although lawmakers reached an agreement with respect to the budget this past weekend, the final version has not yet been signed into law.
2 New York Financial Services Law § 201(b) (proposed). Merger Bill Section 1 contains the new Financial Services Law. Unless otherwise noted, citations in this Stroock Special Bulletin refer to the sections as we anticipate they will be codified in the Consolidated Laws.
3 Fin. Serv. Law §§ 201, 301(b) (proposed).
4 Id. § 104(a)(4) (proposed).
5 Id. § 104(a)(2) (proposed).
6 Id. § 205 (proposed).
7 Id. § 205-b (proposed).
8 Id. § 404 (proposed).
9 Id. §§ 304-a, 305 (proposed).
10 Id. § 306 (proposed).
11 Id. § 408 (proposed).
12 Merger Bill § 55.
13 Fin. Serv. Law § 405 (proposed).
14 Exec. Law § 94-a(3)(a) (proposed) (included in Merger Bill § 21-a).
15 It will instead “cooperate with and assist the attorney general and the department of financial services in the carrying out of legal enforcement.” Executive Law § 94-a(3)(a)(5) (proposed).
16 Fin. Serv. Law § 104(a)(3) (proposed).
17 Under the latest version, the definition of “financial product or service” begins with the phrase “any financial product or service.” Fin. Serv. Law § 104(a)(2) (proposed). 18 Id .§ 104(a)(2) (proposed).
19 Insurance Law Section 332 is repealed and replaced with Financial Services Law Section 206. Merger Bill § 15; Fin. Serv. Law § 206 (proposed).
20 Fin. Serv. Law § 206(a) (proposed).
21 The merger bill contains similar language with respect to banks: “Persons regulated under the banking law shall be assessed by the superintendent for the operating expenses of the department that are solely attributable to regulating persons under the banking law.” Fin. Serv. Law § 206(a) (proposed).
22 Dinallo v. DiNapoli, 9 N.Y.3d 643 (2007).
23 State of New York, 2010-11 Executive Budget Agency Presentations at 131, available at http://publications.budget.state.ny.us/eBudget 1112/agencyPresentations/pdf/dfr.pdf. Note that the new department originally was named the Department of Financial Regulation.
24 Id.
25 Fin. Serv. Law § 206(f)(1) (proposed). Under current law, insurers generally bear the costs of any examination, although such charges may be remitted after a finding of good cause. Ins. Law § 313(a).
