The Treasury Department, on Oct. 26, released a report that examines the current regulatory framework for the asset management and insurance industries, making recommendations to ensure the regulatory framework is aligned with the Trump administration’s ‘Core principles for financial regulation.”
It is the third in a series of reports Treasury will prepare for the White House.
The latest evaluation focuses on four key areas: the proper evaluation of systemic risk, ensuring effective regulation and government processes, rationalizing international engagement, and promoting economic growth and informed choices.
“The regulatory framework for both the asset management and insurance industries can be significantly improved,” Treasury Secretary Steven Mnuchin said in a statement. “We are recommending more efficient and effective regulation to give consumers access to the products they need while providing individuals with opportunities to save for retirement.”
Treasury, in the report, calls for improving evaluations related to systemic risk. “The Financial Crisis led to questions about how to address financial stability and create a regulatory framework to mitigate systemic risk,” the report says. “Asset management firms and insurance companies have been evaluated for systemic risk and subjected to some enhanced regulatory standards. Yet, both have legal, structural, and operational characteristics that make them different than banks.”
“Entity-based systemic risk evaluations of asset managers or their funds, or insurance companies are generally not the best approach for mitigating risks arising from the asset management or insurance industries,” it adds. “Instead, primary federal and state regulators should focus on potential systemic risks arising from products and activities, and on implementing regulations that strengthen the asset management and insurance industries as a whole.”
The report opines that “a strong liquidity risk management framework is more effective approach to addressing liquidity risk than stress testing of asset management firms,” and that “state insurance regulators and the Federal Reserve should harmonize their respective ongoing domestic work on insurance capital initiatives, as well as continue their efforts to assess liquidity risk management in the insurance sector.”
Treasury identifies numerous ways to improve the regulatory framework for asset managers and insurance companies, including:
Supporting activities-based evaluations of systemic risk in the asset management and insurance industries;
Improving coordination between the Federal Insurance Office and state insurance regulators;
Continuing engagement in international forums to promote the U.S. asset management and insurance industries and the U.S. regulatory framework;
Increasing transparency of the international standard-setting processes;
Promoting strong liquidity risk management programs for asset managers and insurance companies;
Modernizing fund shareholder reports to permit the use of implied consent for electronic disclosures;
Promoting infrastructure investment by insurers through appropriately calibrated capital requirements.
Additionally, Treasury suggested areas to improve the efficiency of regulations and government processes, including:
Adopting a principles-based approach to liquidity risk management rulemaking for registered investment companies;
Moving forward with a rule for the approval of "plain vanilla" exchange-traded funds;
Realigning the role of the Federal Insurance Office around five pillars of focus, and improving its coordination with state insurance regulators and transparency with the insurance industry;
Reducing duplicative and inefficient oversight of savings and loan holding companies that own insurance companies, by improving coordination and collaboration between the Board of Governors of the Federal Reserve System and state insurance regulators; and
Adopting uniform state data security standards and breach notification requirements based of the National Association of Insurance Commissioners' Insurance Data Security Model Law.
Additional recommendations include:
Amending rules to avoid dual registration requirements for investment companies;
Increasing consumer choice by allowing annuities as investment options for employer-sponsored retirement plans;
Supporting legislative action to eliminate the statutory stress testing requirement for investment advisers and investment companies;
Convening a federal agency-wide task force to focus on policies related to long-term care insurance;
Reconsidering the Department of Housing and Urban Development's disparate impact rule and its impact on the availability of insurance;
Coordinating insurance regulations to reduce or eliminate inconsistencies between existing data calls on terrorism risk insurance; and
Improving information sharing within the insurance industry.
“The Department of Labor should re-examine the implications of the Fiduciary Rule, and delay the full implementation of the rule until the relevant issues are evaluated and addressed to best serve retirement investors,” the report adds. “The Securities and Exchange Commission, the DOL, and the states to work together to implement a regulatory framework appropriately tailored to both preserve investor choice and protect retirement investors in an efficient and effective manner.”