On May 29th, Eliot Spitzer, Governor of New York, signed an executive order creating the New York Commission to Modernize the Regulation of Financial Services.  The Commission’s objective is to streamline state regulation of an industry that has become increasingly complex over the past decade.  The Commission was created in response to several recent studies that suggested that the United States, and New York City in particular, were at risk of losing their spot as the world leader in the financial services industry due to an outdated and complex system of federal and state regulation.  The studies concluded that the regulatory burden of the Sarbanes-Oxley Act of 2002 and overlapping state regulators are factors that are driving business away from New York to places like London, where regulatory restrictions are significantly less burdensome.

In New York State, for example, the financial services industry is regulated by the Insurance Department, the Department of State, the Banking Department and the Attorney General’s Office.  This compartmentalized structure developed as a result of Depression-era legislation such as the Glass-Steagall Act, which prevented financial service firms from participating in securities business.  The need for compartmentalized regulation ended in 1999 with the passage of the Gramm-Leach-Bliley Act, which removed many of the restrictions imposed on financial services firms by Glass-Steagall.  Since the passage of Gramm-Leach-Bliley, financial services firms are free to operate as “one-stop shops” offering banking, securities and insurance services.

It is in response to this growing complexity in the financial services industry that the Commission was established.  Eric R. Dinallo, New York State Insurance Superintendent, was appointed Chairman of the group.  Other members of the Commission include leaders in the financial services industry, government and consumer groups.  A complete list of the appointed members can be found here.  The Commission has committed to produce a report at the end of June 2008, but Superintendent Dinallo has stated that the group will seek to put into effect regulatory and/or statutory changes prior to that date.  One noteworthy regulatory change under consideration by the Commission is the eradication of the current insurance regulatory regime in favor of a principles-based framework.  In such a system, companies are required to adhere to certain broad principles rather than specific rules.  For example, regulations under the current regulatory regime dealing with fraud may be restated simply as “do not defraud customers” in a principles-based system.  Opponents of this kind of regulation argue that it results in oversight that is too lax.  Whether or not a principles-based framework will be adopted remains to be seen.  We will monitor the Commission’s work closely and report any updates to InsureReinsure.com.