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2010 PLUS International Conference
I Lost HOW Much?
Emerging Trends In
Financial Markets Regulation
The Round-Up…
MODERATOR:
• Cary Meiners, Practice Leader, Public Company Liability,
Travelers
PANELISTS:
• Ivan J. Dolowich, Esq., Partner, Kaufman Dolowich Voluck
& Gonzo LLP
• Wendy Dowd, CFA, Vice President/Worldwide Manager,
Asset Management, Chubb Specialty Insurance
• Atea Martin, Esq., Director of Claims, CNA Global Specialty
• Michael K. O’Connell, MBA, Managing Director, Aon
Financial Institutions Practice
2010 PLUS International Conference
Outline
• What Just Happened?
• Financial Securitization
• Dodd-Frank
Key Elements
Scope and Effect
Underwriting Challenges
• Insurance Impact
• Emerging Exposures and The Net Effect
2010 PLUS International Conference
What Just Happened?
• Would More Regulation Have Prevented
This?
Unemployment at 9.6%
Dow index down 22% from 2007 peak
S&P/Case-Shiller Index down 30% since 2006
4.7% of all mortgages in some state of foreclosure
1/3 of mortgage defaults related to second-home
investment properties
A “foreclosure freeze” which could slow
home sales
2010 PLUS International Conference
Banking Woes Continue
• From 2004-2007 only 3 bank failures
• Then - 25 failures in 2008, 140 in 2009,
139 YTD
2010 bank failures are smaller in size
• Bear Stearns collapse and Lehman Brothers
bankruptcy filing in 2008
• Big banks may have to now buy bad loans
from investors: estimates range from
$20-$134 billion
2010 PLUS International Conference
What Just Happened?
Are Things Getting Better?
• Two views:
Troubled Asset Relief Program (TARP)
♦
$700 billion initial infusion
♦
$340 billion expected cost in 2009
♦
Recent estimates as low as $30 billion in cost
Freddie Mac and Fannie Mae
♦
Worst case now projected at $259 billion
♦
Moderate case now projected at $154 billion
2010 PLUS International Conference
What Just Happened?
Has Systemic Risk Really Declined?
• One Measure is the use of Credit Default Swaps (CDS)
• CDS: Financial Weapons of Mass Destruction
2002--- $2 trillion
2007--- $62 trillion
2010--- $25 trillion
2010 PLUS International Conference
What Just Happened?
• China Will Introduce CDS by Year End
CDS: “Neither evil nor good”
“No repackaging or restructuring of risk”
“We learned a lot from Europe and the U.S., but
there were problems with some of the teachers”
• CDS: Benign or Still Very Risky?
The SEC and the Commodity Futures Trading
Commission will decide this for all CDS players
2010 PLUS International Conference
Financial Securitization
• Current State of Securitization
$1 trillion in bond securitization loss possible
What is the future of securitization?
Has this impacted D&O/E&O underwriting?
Can D&O/E&O underwriting really address
this exposure?
2010 PLUS International Conference
Dodd-Frank and
Regulatory Empowerment
• Regulators Muscle Up
SEC will issue 100 new rules for derivatives
trading, credit rating companies, stockbrokers,
hedge funds and corporate boards
The Federal Reserve will write 50 new rules to
deal with systematic risk
2010 PLUS International Conference
Dodd-Frank and
Regulatory Empowerment
• FDIC
Will set new capital rules for community banks
Will be responsible for liquidating troubled
financial companies
• The Treasury Department
Will chair the Financial Stability Oversight Council
Forms a consumer protection bureau
2010 PLUS International Conference
Dodd-Frank and
Regulatory Empowerment
• Key Elements of Dodd-Frank
Systemic risk/increased regulatory oversight
♦
SEC enforcement expansion and whistleblower
provisions including:
♦
♦
Too big to fail
Aiding and abetting
Morrison decision
Executive compensation
Hedge funds
2010 PLUS International Conference
Systemic Risk
• “Too big to fail”
• “Systemically important” financial firms to be
regulated by the Federal Reserve
Large Interconnected Banks (>$50 billion assets)
Nonbank Financial Companies (TBD)
• Financial Stability Oversight Council (FSOC)
and the Office of Financial Research (OFR)
• Stricter capital, liquidity and other restrictions
• New FDIC liquidation powers
2010 PLUS International Conference
SEC Enforcement Expansion
Whistleblower Provisions
•
SEC Enforcement Issues
Lack of credibility (i.e., Madoff, Stanford)
New enforcement tools under Dodd-Frank
♦
Penalties can be assessed at administrative level
♦
Aiding and abetting
Standard changed from “knowing” to “reckless”
♦
Control person liability
♦
Standards of conduct for broker-dealer
2010 PLUS International Conference
SEC Enforcement Expansion
Whistleblower Provisions
• Morrison Decision
Implications for companies that issue shares on
foreign exchanges
Defense strategies
Response from the plaintiff’s bar
Impact of Dodd-Frank
2010 PLUS International Conference
SEC Enforcement Expansion
Whistleblower Provisions
• Whistleblower Provisions
Protection and monetary rewards for voluntary
suppliers of information to the SEC
The resultant fine or penalty must exceed $1M
Information must be independent and original
Reward within SEC discretion but ranges from
10-30% of monetary sanctions
Protection from public exposure or employer
reprisals
2010 PLUS International Conference
Executive Compensation
Executive Compensation Disclosure:
Pay vs. Performance: SEC review compares 5-year stock performance
Compensation Ratio: CEO versus Median of “Rank & File”
Compensation Committee
Defined independence
SEC review of member consultants/advisors
Shareholder Voting Rights
More frequent proxy/authorization
Clawbacks
Delisting of non-compliant issuers
Accounting restatements
2010 PLUS International Conference
Executive Compensation Form
• “Say-on-Pay”
• Incentive-based compensation
• Independent compensation committee
• Clawbacks
2010 PLUS International Conference
Hedge Funds and Advisers
• Two objectives:
Systemic risk
Investor protection
•
•
•
•
New adviser registration requirement
New reporting and record-keeping requirements
“Statistically important” firms?
Changes to definitions “accredited investors” and
qualified client”
• Volcker rule
• New study – feasibility of forming SRO to oversee
private funds
2010 PLUS International Conference
Dodd-Frank
Scope and Effect
• A Closer Look at Key Provisions
How far-reaching is this legislation?
Does this legislation regulate “the unregulated”?
Did compromise affect this bill too much?
Any glaring weaknesses that should be fixed?
How will insured procedures and behavior
change?
2010 PLUS International Conference
Dodd-Frank
Underwriting Challenges
• Coverage and Policy Language
Key concepts to focus on
Exclusionary language
New coverages needed?
2010 PLUS International Conference
Dodd-Frank and
Regulatory Empowerment
• Backers Cite These Positives:
Requires full and fair disclosure to credit consumers
Mechanism for failed-bank receivership
Requires more disclosure of derivative securities
Banks must be “well-capitalized” and “well-managed”
♦
Debate about this?
Amends SOX to allow small-company exemption
Empowers the Financial Stability Oversight Council to seek
solutions to “systemic risk”
2010 PLUS International Conference
Dodd-Frank and
SEC Empowerment
• Critics note the following:
No reinstatement of Glass-Steagall
Banks can have hedge and equity operations to a
certain threshold
Executive compensation limitations are modest
Leverage ratios are not effectively addressed
No new regulation on credit agencies
2010 PLUS International Conference
Pre-Dodd/Frank Regulatory Environment
Effect and Underwriting Impact
• Was regulation pre-Dodd/Frank effective?
• Did previous regulation dampen investor
confidence?
• If global companies avoided listing on the
U.S. Exchanges before, what will the
response be now?
• Were underwriters really thinking about
regulation until now?
2010 PLUS International Conference
The Net Effect: Problems and
The Regulatory Fix
• Will Dodd-Frank change D&O/E&O
underwriting?
• Can plaintiff attorneys find new niches?
• Could claim trends emerge slowly over time?
• How will the foreclosure freeze impact
insurance?
• Are policy changes or refinement needed?
• What is the market impact?
2010 PLUS International Conference
Questions
&
Answers
2010 PLUS International Conference
Many Thanks To…
• Cary Meiners
• Ivan J. Dolowich
• Wendy Dowd
• Atea Martin
• Michael K. O’Connell
2010 PLUS International Conference