|
Public Policy Analysis & Opinion
New ethics rules place a hitch
in the revolving door
Seats on the Financial Stability Oversight Council are more difficult to fill
By Kevin P. Hennosy
On January 21, 2009, newly inaugurated President Barack Obama signed an Executive Order, which placed restrictions on lobbyists entering service in his administration and members of his administration leaving to join lobbying firms or associations.
This action to strengthen ethical vetting, perhaps more than any other, impedes the Obama Administration's ability to fill senior positions in the financial regulatory agencies. The dynamic is not limited to the financial services or business sector. Several high-profile representatives from labor unions and environmental groups have been denied appointments thanks to the new rules.
At the very least, former lobbyists or representatives of lobbying groups are asked by the Administration to sign a waiver, in which the job candidate promises to limit his or her communications with the former employer to general and open correspondence.
Furthermore, these restrictions on the traditional revolving door between public service and private gain have hindered the recruitment of personnel for agencies related to financial services—including insurance.
Sorry, Larry
The February 11, 2011, edition of The Hill carried the story of former District of Columbia Superintendent Lawrence "Larry" Mirel, who was rejected by the Administration for a position with the National Flood Insurance Program.
Since leaving the D.C. City Government in 2005, Mirel has worked at a Washington-based law firm. He has cultivated a practice populated by insurance clients—some of whom have business before the Flood Insurance Program.
Because insurance is subject to state regulation and because states rely on private groups like the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL) to create policy recommendations, it is quite common for retired regulators to lobby without ever having to register as a lobbyist.
Such is the case with Larry Mirel, who worked the "NAIC Circuit" and other insurance public policy venues. Mirel's private practice bio described him as an expert in: "terrorism risk and natural catastrophe insurance, health insurance policy, privacy compliance, McCarran-Ferguson reform, collateralization requirements for non-U.S. reinsurers, regulation of captive insurers and risk retention groups, class action and medical malpractice reform, and issues of state versus federal regulation."
A Google search on Mirel's name is littered with congressional testimony advocating for various far-right-wing economic policies.
Apparently, the White House has access to Google as well.
According to an e-mail authored by Mirel and addressed to some of his clients, which was obtained by The Hill, the White House decided not to entertain Mirel's desire to join the National Flood Insurance Program. Initially, the Department of Homeland Security's chief ethics officer seems to have approved Mirel's eligibility for government service, but the White House did not agree.
"The White House ethics office has now determined that a waiver would be required and has declined to provide one," Mirel wrote.
The new ethics guidelines may also explain the Administration's failure to fill an open seat on the Financial Stability Oversight Council, which was created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The act empowered the Council with broad powers to identify and monitor excessive risk in the U.S. financial system.
The Council consists of both voting and non-voting members. The Financial Stability Oversight Council has 10 voting members:
1. Secretary of the Treasury (who chairs the Council)
2. Chairman of the Federal Reserve
3. Comptroller of the Currency
4. Director of the Bureau of Consumer Financial Protection
5. Chairperson of the U.S. Securities and Exchange Commission
6. Chairperson of the Federal Deposit Insurance Corporation
7. Chairperson of the Commodity Futures Trading Commission
8. Director of the Federal Housing Finance Agency
9. Chairman of the National Credit Union Administration Board
10. An independent member (with insurance expertise), appointed by the president, with the advice and consent of the Senate, for a term of six years.
The president has not yet named the independent member with insurance expertise. In addition, the Administration has not filled the position of Director of the Federal Insurance Office, which holds a non-voting seat on the council. The constraints on past and future lobbying activity make it difficult to find qualified appointees.
The Administration suffered criticism from congressional leaders and several insurance trade associations for not filling these two insurance-related seats.
In addition to the new ethics rules, sources close to the controversy cite concerns over confidentiality of data being reviewed by the Council. Non-governmental appointees could pose a special risk of conflict of interest and unwarranted disclosure of proprietary information.
Insurance industry advocates have grumbled over the Council's discussions of new restrictions on financial institutions under what is termed "The Volcker Rule." The proposal specifically prohibits a bank or institution that owns a bank from engaging in proprietary trading that isn't at the behest of its clients, and from owning or investing in a hedge fund or private equity fund, as well as limiting the liabilities that the largest banks could hold.
Proprietary trading, or prop trading, occurs when a firm trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments, with the firm's own money as opposed to its customers' money, so as to make a profit for itself.
Property/casualty insurers oppose the imposition of the Volcker Rule on the sector. Representatives of the insurers and trade groups argue that property/casualty insurers did not trigger the financial panic of 2007-2008 and should not be "punished" for it.
In addition, insurer advocates argue that an unfair application of banking-oriented rules is more likely to occur unless the insurance sector has full "representation" on the Council.
Describing the new rules in punitive terms is not necessarily accurate. Even well-noted conservative voices have called for the extension of the Volcker Rule as a restorative step to strengthen the capitalist system by narrowing the scope of all financial institutions.
On February 23, according to a Reuters report, Kansas City Federal Reserve Bank President William Honig told a meeting of Women In Housing and Finance: "We must break up the largest banks, and could do so by expanding the Volcker Rule and significantly narrowing the scope of institutions that are now more powerful and more of a threat to our capitalistic system than prior to the crisis."
Honig also called for restoration of "Glass-Steagall-type" separations between banking, insurance and securities institutions.
Show me the data
The non-voting status of these representatives arises from constitutional constraints on state officials' ability to create federal policy. In addition, federal officials who report to other officials on the Council do not receive a vote. The non-voting members of the Council include:
1. Director of the Office of Financial Research (part of the Treasury Department and established by the Dodd-Frank Act) who is the Council's executive director
2. Director of the Federal Insurance Office (part of the Treasury Department and established in this act)
3. A state insurance commissioner, to be designated by a selection process determined by the state insurance commissioners (two-year term)
4. A state banking supervisor, to be designated by a selection process determined by the state banking supervisors (two-year term)
5. A state securities commissioner (or officer performing like function) to be designated by a selection process determined by such state security commissioners (two-year term)
At present, the Financial Stability Oversight Council receives the benefit of input from the chief insurance regulatory official from the state of Missouri, John M. Huff, and several staff members of the NAIC assigned to the effort. The NAIC staff members had to sign confidentiality pledges before they could take part in the Council's deliberations.
When Missouri Governor Jay Nixon announced his choice to serve as director of the Insurance, Financial Institutions & Professional Registration (DIFP,) you would have thought he was a appointing a rather highly experienced insurance executive. The agency is divided into seven divisions, with four of those divisions overseeing the insurance market in Missouri. The director of DIFP serves as chief regulator in the state of Missouri for insurance, banks, credit unions, and various professional licenses.
When the governor's appointment of John M. Huff as director of DIFP received approval from the Missouri State Senate, Governor Nixon's office went as far as issuing a public statement that praised the new regulator's career accomplishments:
For the past several years, Mr. Huff has worked at Swiss Re, a leading provider of reinsurance in the industry. In his role as managing director and strategic claims officer, he oversaw matters within the company's strategic and emerging claims portfolio. In 2008, Mr. Huff was promoted to the position of global head of key case management and moved to Swiss Re's global headquarters in Zurich, Switzerland. In this position, he managed some of the company's most-complex dispute resolution matters.
Furthermore, Governor Nixon described Director Huff's educational credentials: "Mr. Huff earned his bachelor's in business administration at Southeast Missouri State University. In May 1987, he earned an MBA at St. Louis University, and he graduated from the Washington University School of Law with a Juris Doctorate in May 1990."
Only now, thanks to the learned assessment of Iowa Insurance Commissioner Susan Voss, do we find out the inherent shortcomings of Director Huff's ability to represent "insurance industry concerns and insurance regulatory issues." The comment came in an interview with the Dow Jones News Wire, which appeared on February 15.
Commissioner Voss told the reporter: "We really need to make sure the insurance industry concerns and insurance regulatory issues are represented, and we're not sure that's being done right now."
"We're not sure that's being done right now," is a particularly cold thing to say in the face of the fact that her neighboring state insurance regulator serves on the Council. It is not as if Director Huff lacks business and/or regulatory experience.
To revive the old vaudeville line: What is Director Huff…chopped liver?
At the time Huff was confirmed to serve in Governor Nixon's administration, the governor's office stated: "Mr. Huff's sixteen years of insurance experience will be utilized in protecting Missouri insurance consumers and investors in light of the current difficult economic times."
But what Commissioner Voss might mean is that Director Huff is not subservient enough to special interest viewpoints to please her palate. Perhaps Commissioner Voss would rather see a trained monkey at the end of a chain connected to a trade association organ grinder.
In short, and for the benefit of Commissioner Voss's understanding, the seats on the Council were not placed there to represent the interests of industry sectors. That kind of thinking invited the financial panic from which the world is still trying to recover. The concept is related to why insurance commissioners are called "public servants" and not "industry cheerleaders."
Deregulation in that sector unleashed pervasive misdeeds that nearly put the world into a latter-day Dark Ages. The Council's charge is to re-regulate the financial sector, with or without the latter's consent.
The new regulatory framework should protect consumers and investors in order to protect the entire capitalist system.
The author
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.
|
