RS21827 -- Insurance Regulation After the Gramm-Leach-Bliley Act April 26, 2004 Summary Congress passed the Gramm-Leach-Bliley Act in 1999, anticipatingwholesale integration in financial services. Since then, markets have not really integrated, and regulatory silos --with fewexceptions -- remain intact. Congress is now exploring federal standards for some aspects of state regulation ofinsurance. Thisreport was written under the supervision of Barbara Miles, Government and Finance Division, and will be updatedas events warrant. Congress passed the Gramm-Leach-Bliley Act (1) (the GLB Act) in 1999 to enhance competition among financial services providersand to modernize their regulation. (2) Competitionamong those providers has evolved differently than most observers expected itwould, as fewer than expected cross-sectoral mergers and consolidations have occurred. (3) Mergers and consolidation have insteadoccurred largely within sectors, though companies within each sector are producing and distributing a broader rangeof financialproducts. (4) The GLB Act preserved the role of the Federal Reserve Board as an umbrella supervisor for holding companies, (5) and it alsoexpressly preserved state regulation of insurance. (6) It allowed national banks to underwrite insurance in a financial holding companyaffiliate (7) and to sell insurance. (8) These insurance activities were to "be conducted ina manner that is consistent with applicableState regulation." (9) The states were not, however,to frustrate congressional intent by discriminating against banks or theirsubsidiaries or affiliates. (10) The Act implementedthe concept of "functional regulation:" The bill generally adheres to the principle of functional regulation, which holds thatsimilar activities should be regulated by the same regulator. Different regulators have expertise at supervisingdifferent activities. Itis inefficient and impractical to expect a regulator to have or to develop expertise in regulating all aspects offinancial services. Accordingly, the bill is intended to ensure that banking activities are regulated by bank regulators, securitiesactivities are regulatedby securities regulators, and insurance activities are regulated by insurance regulators. (11) The concept of functional regulation as implemented in the GLB Act has been praised and criticized. Some praise it for openingcommunication among sectoral regulators. (12) Others criticize it for not modernizing financial services regulation at all but rathercombining functional and institutional regulation, (13) preserving the status quo, (14) orcreating bias. (15) The purpose of this report is notto resolve that question but instead to examine briefly how functional regulation is evolving in practice. The GLB Act required that state insurance regulators, the Federal Reserve Board, and federal banking regulatorscoordinate effortsand share information about insurers and affiliated depositary institutions. (16) The National Association of Insurance Commissioners(NAIC) (17) has reported that, as of February 2003,46 states had signed regulatory cooperation agreements with the Office of ThriftSupervision; 43 states, with the Office of the Comptroller of the Currency; 47 states, with the Federal DepositInsuranceCooperation, and 38 states, with the Federal Reserve. (18) The NAIC has also consulted with federal banking supervisors "to discussexamination procedures and enhance the development of needed expertise and exchange information with respectto regulatorytrends in the financial services marketplace." (19) The Federal Reserve Board has not itself issued public statements about coordinating with state insurance regulators, though aGovernor has reported that the Board has "established very successful partnerships" with the NAIC and individualcommissioners"to enhance our mutual understandings of our supervisory frameworks and to facilitate the sharing of supervisoryinformation andconsumer complaints." (20) The Board has alsoestablished resource centers to monitor developments in the insurance industry andhas undertaken cross-training with various state insurance supervisors. (21) On the other hand, state insurance regulators and the Office of the Comptroller of the Currency, which chartersand supervisesnational banks, (22) have not always agreed aboutwho should regulate insurance-related activities of national banks. Theirdisagreements have involved both the scope of the preemption standard established in the GLB Act and thedefinition of "insurance." Anticipating such disagreements, the Act provided an expedited judicial review process. (23) Under that expedited review, the U.S. Supreme Court in October 2003 decided not to review an important decision of the 4th CircuitCourt of Appeals. (24) That action left standing the4th Circuit's decision in Cline v. Hawke (25) -- in effect, upholding theComptroller's letter ruling preempting certain provisions of West Virginia's insurance law. (26) Those provisions had imposed somerestrictions on bank employees' selling insurance to loan applicants and had required banks to sell insurance in anarea separate fromits lending and deposit-taking activities. (27) In itsletter, the Comptroller had found that those provisions prevented West Virginiabanks from cross-marketing effectively and efficiently, therefore significantly interfered with their federally grantedpower to sellinsurance, and were thus preempted. (28) The NAIChad disagreed with that standard of preemption, arguing that the GLB Act hadexpressly reaffirmed the McCarran-Ferguson Act and codified functional regulation of insurance by the states. (29) Observersgenerally agree that the effect of this Supreme Court decision and other court cases has been to allow theComptroller to expand thescope of preemption under the GLB Act. (30) The Comptroller and state insurance regulators have also disagreed about the definition of "insurance." The longest running disputehas been about whether "debt cancellation contracts" issued by national banks are "insurance." (31) In essence, a debt cancellationcontract functions like credit insurance -- a borrower pays a fee for a contract (or contractual provision) promisingto cancel or paythe loan in the event of some specified event, such as the borrower's death, disability, or unemployment. (32) State insuranceregulators have maintained that debt cancellation contracts are insurance and therefore subject to their jurisdiction,even when issuedby national banks. The Comptroller has maintained just as steadfastly that debt cancellation contracts are bankingproducts -- notinsurance -- and are therefore not subject to insurance regulation. (33) The GLB Act attempted to resolve this conflict. Title III of the Act, entitled "Insurance," provided that the "insurance activities ofany person ... shall be functionally regulated by the States ...." (34) In the next section, Title III provided an exception for productsauthorized by the Comptroller as of January 1, 1999. (35) Most -- but not all -- states have accepted an interpretation of theseprovisions that excludes their insurance supervisors from regulating debt cancellation contracts. (36) Other states have determined thatdebt cancellation contracts are insurance, but they have declined to regulate them, (37) particularly after the Comptroller adoptedconsumer protection rules in 2002 that flatly excluded state regulation. (38) These disagreements over the scope of "functional regulation" are not academic. They affect the regulatory burdens that attach toparticular product designations. In this example, credit insurance is arguably much more regulated than analogousproducts offeredby national banks as debt cancellation contracts. (39) Redefining the coverage as a "banking product" not subject to insuranceregulation eases banks' regulatory burdens by eliminating 50 sets of state insurance requirements. (40) That is a classic example ofregulatory arbitrage. (41) At least one federalappellate court has declined to make that decision -- i.e. , when does regulatory arbitrageexist under the GLB Act's paradigm of "functional regulation." (42) Representative Oxley, Chairman of the House Committee on Financial Services, has determined to streamlinestate insuranceregulation by imposing federal standards but not federal regulation. (43) Representative Baker, Chairman of the Subcommittee onCapital Markets, Insurance and Government-Sponsored Entities, held a hearing on March 31, 2004, to "craft amiddle ground to[insurance regulatory reform] that strives for improvements while retaining the benefits of state-based regulationconsumers currentlyenjoy." (44) Senator Hollings, Ranking Member ofthe Senate Committee on Commerce, Science, and Transportation has introduced S. 1373 , the Insurance Consumer Protection Act, to mandate federal regulation of insurance. It remains tobe seenwhether such proposed improvements in insurance regulation will improve the operation of the risk transfermarketplace generally inthe U.S. or the regulation of insurers as financial intermediaries. (45) 1. (back) P.L. 106-102 . See CRS Report RL30375, Major Financial Services Legislation, The Gramm-Leach-Bliley Act ( P.L. 106-102 ): AnOverview , by F. Jean Wells and [author name scrubbed]. 2. (back) See, e.g., Federal Reserve Bank of SanFrancisco, "The Gramm-Leach-Bliley Act and Financial Integration," FRBSF EconomicLetter, vol. 2000-10, March 31, 2000, available at http://www.frbsf.org/econrsrch/wklyltr/2000/el2000-10.html , visited April 4,2004. 3. (back) CRS Report RS21807, Convergencein Financial Services: The Insurance Market , by [author name scrubbed] 4. (back) Ibid.; Insurance Information Institute andFinancial Services Roundtable, Financial Services Fact Book 2004 (New York:Insurance Information Institute, 2004), pp. 10-11 (showing the financial products available from the top 10companies in eachsector), available at http://financialservicefacts.org/financial2/today/convergence/ , visited April 5, 2004. 5. (back) P.L. 106-102 , sec. 102 and 103, 113 Stat. 1341-51. 6. (back) Ibid., sec. 104 (a), 113 Stat. 1352 ("TheAct entitled 'An Act to express the intent of Congress with reference to the regulation ofthe business of insurance' and approved March 9, 1945 ... (commonly referred to as the 'McCarran-Ferguson Act')remains the lawof the United States.") 7. (back) Ibid., sec. 103 (a), 113 Stat. 1343. 8. (back) Ibid., sec. 104 (c), 113 Stat. 1352-53. 9. (back) U.S. Congress, Senate Committee onBanking, Housing, and Urban Affairs, Financial Services Modernization Act of 1999 , reportto accompany S. 900, 106th Cong., 1st sess., S.Rept. 106-44 (Washington: GPO,1999), p. 11. 10. (back) P.L. 106-102 , sec. 104 (e), 113 Stat.1357; S.Rept. 106-44 , pp. 11-15. 11. (back) S.Rept. 106-44 , p. 9. U.S. Congress,Conference Committee, Gramm-Leach-Bliley Act, conference report to accompany S.900, H. Rpt., 106-434, 106th Cong. 1st sess. (Washington: GPO, 1999), pp. 166-67. 12. (back) "Functional Regulation and FinancialModernization," remarks by Mark W. Olson, member of the Federal Reserve Board ofGovernors, at the annual meeting of the National Conference of Insurance Legislators, Nov. 22, 2003, available at http://www.federalreserve.gov/boarddocs/speeches/2003/20031122/default.htm , visited April 5, 2004. 13. (back) Heidi Mandanis Schooner and MichaelTaylor, "United Kingdom and United States Responses to the Regulatory Challenges ofModern Financial Markets," Texas International Law Journal , vol. 38, spring 2003, pp. 317 et seq. 14. (back) Lissa L. Broome and Jerry W.Markham, "Banking and Insurance: Before and After the Gramm-Leach-Bliley Act," Journal ofCorporation Law , vol. 25, summer 2000, pp. 723 et seq. 15. (back) Peter J. Wallison and Charles W.Calomiris, "The Gramm-Leach-Bliley Act," Statement of the Shadow Financial RegulatoryCommittee Meeting: Papers and Studies, Statement No. 174 (Washington: American Enterprise Institute,Dec. 3, 2001), available at http://www.aei.org/publications/pubID.15942/pub_detail.asp , visited April 5, 2004. 16. (back) P.L. 106-102 , sec. 307, 113 Stat.1415-17 ("...thereby to improve both the efficiency and quality of supervision ...."). 17. (back) The NAIC is a voluntary associationof the chief insurance supervisors of the states and U.S. territories, incorporated in Delawareas a non-profit. It has a 2004 budget of $57.5 million. See http://www.naic.org/about/2004_budget_highlights.htm , visited April14, 2004. 18. (back) National Association of InsuranceCommissioners, "Coordinating with Federal Regulators," Gramm-Leach-Bliley Act: TheStatement of Intent -- Delivering on a Promise , available at http://www.naic.org/GLBA/coordinating_fed.htm , visited April 6,2004. 19. (back) Ibid. 20. (back) Remarks by Mark Olson, supra note13. 21. (back) Ibid. 22. (back) See OCC website at http://www.occ.treas.gov/ . 23. (back) P.L. 106-102 , sec. 304, 113 Stat.1409-10 ("Expedited and Equalized Dispute Resolution for Federal Regulators"). 24. (back) Independent Insurance Agentsand Brokers of America and National Association of Professional Insurance Agents v. John D.Hawke, Comptroller of the Currency , U.S. Supreme Court, No. 02-1620, Oct. 6, 2003, available at http://www.supremecourtus.gov/docket/02-1620.htm , visited March 31, 2004. 25. (back) 51 Fed. Appx. 391, 2002 WL31557392 (4th Cir. 2002). 26. (back) CRS Report RL32197 , Preemption of State Law for National Banks and Their Subsidiaries by the Office of the Comptroller ofthe Currency , by [author name scrubbed], pp. 23-24. 27. (back) U.S. Dept. of the Treasury, Office ofthe Comptroller of the Currency, "Preemption Opinion," Federal Register , vol. 66, no. 195,Oct. 9, 2001, p. 51502. 28. (back) Ibid., pp. 51508-51512. 29. (back) Carolyn Johnson-Speck, "Abstractsof Significant Cases," Journal of Insurance Regulation, vol. 21, Winter 2002, p. 104. 30. (back) CRS Report RL32197 , Preemption of State Law for National Banks and Their Subsidiaries by the Office of theComptroller , by[author name scrubbed], pp. 24-29. 31. (back) U.S. Dept. of the Treasury, Office ofthe Comptroller of the Currency, "Debt Cancellation Contracts and Debt SuspensionAgreements," Federal Register , vol. 67, no. 182, Sept. 19, 2002, pp. 58902- 58904. 32. (back) CRS Report RL31454, ConsumerCredit Insurance , by S. Roy Woodall. 33. (back) Ibid., pp. 7-10. 34. (back) P.L. 106-102 sec. 301, 113 Stat. 1407. For the NAIC's interpretation of this provision, see National Association of InsuranceCommissioners, Definition of Insurance: Definition of Insurance Working Group White Paper (KansasCity, MO: NAIC, 2000). 35. (back) P.L. 106-102 , sec. 302 (b) - (c), 113Stat. 1407-1408. 36. (back) CRS Report RL31454, ConsumerCredit Insurance , by S. Roy Woodall, p. 7. 37. (back) Audrey Samers, Deputy Superintendentand General Counsel, New York Insurance Dept., "Bank Sales of Debt SuspensionAgreements and Debt Cancellation Contracts," Opinion issued April 4, 2003, available at http://www.ins.state.ny.us/rg030411.htm ,visited March 30, 2004; Texas Dept. of Insurance, "Regulatory Position Regarding Debt Cancellation/SuspensionAgreements,"available at http://www.tdi.state.tx.us/company/pcckdeb2.html , visited April 16, 2004, and "Review RequirementsChecklist: DebtCancellation Policy," available at http://www.tdi.state.tx.us/company/pcckdebt.html , visited April 16, 2004. 38. (back) Federal Register , supranote 32, pp. 58902 et seq. 39. (back) Thomas A. Player, "RegulatoryAlchemy: The Conversion of Credit Insurance to Debt Protection," Insurance, Reinsurance, andManaged Healthcare Review , Fall 2003, pp. 1, 5 (including a chart comparing the regulatory requirementsunder both regimes),available at http://www.mmmlaw.com/industry/insurance/fall_2003.pdf , visited April 16, 2004. 40. (back) Beth Climo, James C. Sivon, andJames T. McIntyre, letter on behalf of the American Bankers Insurance Association to JenniferJ. Johnson, Secretary, Board of Governors of the Federal Reserve System, r Docket No. R01167, Jan. 30, 2004,available at http://www.federalreserve.gov/SECRS/2004/February/20040205/R-1167/R-1167_114_1.pdf , visited April 16,2004. 41. (back) See Peter R. Fisher, Undersecretaryfor Domestic Finance, U.S. Dept. of Treasury, "The Need to Reduce Regulatory Arbitrage,"remarks at the Brooklyn Law School, Sept. 20, 2002, available at http://www.ustreas.gov/press/releases/po3444.htm , visited April16, 2004, for a discussion of regulatory arbitrage and the distinction between product regulation and financialsupervision. 42. (back) Bowler v. Hawke, No. 02-1738(1st Cir., Feb. 13, 2004). 43. (back) Chairman Michael G. Oxley, "RoadMap to State-based Insurance Regulatory Reform," speech to the National Association ofInsurance Commissioners, March 14, 2004, (released March 15, 2004), available at http://financialservices.house.gov/news.asp ,visited April 16, 2004. 44. (back) "Baker Subcommittee To DiscussInsurance Regulatory Reform," Press Release, House Committee on Financial Services, Mar.30, 2004, available at http://financialservices.house.gov/news.asp , visited April 16, 2004. 45. (back) See CRS Report RL32138 , Revising Insurance Regulation: Policy Considerations , by [author name scrubbed], for a discussion of relatedissues.

Summary:
Congress passed the Gramm-Leach-Bliley Act in 1999, anticipatingwholesale integration in financial services. Since then, markets have not really integrated, and regulatory silos --with fewexceptions -- remain intact. Congress is now exploring federal standards for some aspects of state regulation ofinsurance. Thisreport was written under the supervision of Barbara Miles, Government and Finance Division, and will be updatedas events warrant.