I Lost HOW Much? Emerging Trends In Financial Markets Regulation

2010 PLUS International Conference2010 PLUS International Conference2010 PLUS International Conference2010 PLUS International Conference

I Lost HOW Much?I Lost HOW Much?Emerging Trends In Emerging Trends In

Financial Markets RegulationFinancial Markets Regulation

2010 PLUS International Conference2010 PLUS International Conference

The Round-Up…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


OutlineOutline

• What Just Happened?

• Financial Securitization

• Dodd-Frank Key Elements Scope and Effect Underwriting Challenges

• Insurance Impact

• Emerging Exposures and The Net Effect


What Just Happened?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


Banking Woes ContinueBanking 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


What Just Happened? 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



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


• 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



Financial SecuritizationFinancial 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 addressthis exposure?


Dodd-Frank and Dodd-Frank and Regulatory EmpowermentRegulatory 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


• 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



• Key Elements of Dodd-Frank Systemic risk/increased regulatory oversight

♦ Too big to fail SEC enforcement expansion and whistleblower

provisions including:♦ Aiding and abetting♦ Morrison decision

Executive compensation Hedge funds



Systemic RiskSystemic 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


SEC Enforcement ExpansionSEC Enforcement ExpansionWhistleblower ProvisionsWhistleblower 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


• Morrison Decision

Implications for companies that issue shares on foreign exchanges

Defense strategies

Response from the plaintiff’s bar

Impact of Dodd-Frank



• 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



Executive CompensationExecutive 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


• “Say-on-Pay”

• Incentive-based compensation

• Independent compensation committee

• Clawbacks

Executive Compensation FormExecutive Compensation Form


Hedge Funds and AdvisersHedge 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


Dodd-FrankDodd-FrankScope and EffectScope 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?


Dodd-FrankDodd-Frank Underwriting Challenges Underwriting Challenges

• Coverage and Policy Language

Key concepts to focus on

Exclusionary language

New coverages needed?


Dodd-Frank andDodd-Frank and Regulatory Empowerment 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”


• Critics note the following:

No reinstatement of Glass-Steagall

Banks can have hedge and equity operations to acertain threshold

Executive compensation limitations are modest

Leverage ratios are not effectively addressed

No new regulation on credit agencies

Dodd-Frank andDodd-Frank and SEC Empowerment SEC Empowerment


Pre-Dodd/Frank Regulatory EnvironmentEffect and Underwriting Impact

Pre-Dodd/Frank Regulatory EnvironmentEffect 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?


The Net Effect: Problems and The Net Effect: Problems and The Regulatory FixThe 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?


QuestionsQuestions&&

AnswersAnswers


Many Thanks To…Many Thanks To…

• Cary Meiners

• Ivan J. Dolowich

• Wendy Dowd

• Atea Martin

• Michael K. O’Connell

I Lost HOW Much? Emerging Trends In Financial Markets Regulation

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