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From Banking and Finance Law Daily, December 30, 2014

President signs legislation carving out insurers from Dodd-Frank capital standards

By Jim Hamilton, J.D., LL.M.

The President has signed legislation carving out insurers from Dodd-Frank Act bank capital standards. The changes are to Section 171 of Dodd-Frank (the Collins Amendment). It was never the intent of Congress to include insurance holding companies in the Collins Amendment. Senator Sherrod Brown (D-Ohio), a cosponsor of the legislation, said that while capital standards are important, applying them to insurers does not match their risk profile. The Insurance Capital Standards Clarification Act, S. 2270, adds language to Section 171 clarifying that, in establishing minimum capital requirements for holding companies on a consolidated basis, the Federal Reserve is not required to include insurance activities so long as those activities are regulated as insurance at the state level. The legislation was introduced by Senator Susan Collins (R-Me).

The measure also provides a mechanism for the Federal Reserve, acting in consultation with the appropriate state insurance authority, to provide similar treatment for foreign insurance entities within a U.S. holding company when the entity does not itself do business in the United States. In addition, the legislation directs the Fed not to require insurers that file holding company financial statements to use statutory accounting principles, but instead to prepare their financial statements using generally accepted accounting principles.

Senator Collins has noted the importance of recognizing that Section 171 allows federal regulators to take into account the significant distinctions between banking and insurance and the implications of those distinctions for capital adequacy. Indeed, she has written to the financial regulators on more than one occasion to underscore this point. For example, in a November 26, 2012, letter, she stressed that it was not Congress's intent to replace state-based insurance regulation with a bank-centric capital regime. The senator called upon the federal regulators to acknowledge the distinctions between banking and insurance and to take those distinctions into account in the final rules implementing Section 171.

While the Federal Reserve has acknowledged the important distinctions between insurance and banking, it had repeatedly suggested that it lacks authority to take those distinctions into account when implementing the consolidated capital standards required by Section 171. Hence, the need for a legislative fix. The legislation does not in any way modify or supersede any other provision of law upon which the Federal Reserve may rely to set appropriate holding company capital requirements.

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