United States: The New York State Department Of Financial Services' Recent Enforcement Efforts

As we have previously noted, the New York State Department of Financial Services ("DFS") has emerged as an aggressive watchdog of financial institutions and insurers doing business in New York since its inception in October 2011.1 In the past year, DFS continued to investigate and regulate emerging financial and insurance issues and did not hesitate to pursue enforcement actions and penalties. Because DFS sees its approach as a model for other states and regulators to foster nationwide change, it is worthwhile for legal and compliance professionals at financial institutions and insurers, located within and outside of New York, to continue to monitor DFS's activities. 

DFS's Enforcement Philosophy 

DFS's aggressive approach to enforcement is exemplified by its head, Superintendent Benjamin W. Lawsky, a former federal prosecutor. In a March 2014 speech, Lawsky articulated how he believes DFS and financial regulators should approach enforcement. In Lawsky's view, financial regulators should not focus exclusively on corporate accountability for misconduct but must increasingly address individual accountability.2 Indeed, Lawsky said that a financial regulator fails in its enforcement mission if it cannot find "some person to hold accountable" for corporate misconduct. Lawsky called on regulators to employ "real deterrents" against individual misconduct. Such deterrents include "publicly exposing, in great detail, the actual, specific misconduct that individual employees engaged in" and imposing penalties against individuals who break the rules, such as suspension, termination, and clawing back bonuses. In a recent application of this approach, DFS banned billionaire investor Philip Falcone from having any role running an insurance company licensed by New York for seven years in the wake of his civil settlement with the Securities and Exchange Commission.3

In the same March 2014 speech, Lawsky urged imposing, in appropriate circumstances, corporate penalties that go beyond fines, which in his view may not effectively deter misconduct. Lawsky believes an appropriate penalty may include banning a company from conducting the type of business that was at the heart of its misconduct for an extended period. DFS recently imposed such a penalty on an accounting firm, which agreed to a one-year suspension from consulting work at financial institutions regulated by DFS as a result of alleged misconduct in its consulting work. 

DFS's Focus in the Past Year

In the past year, DFS pursued investigations or enforcement initiatives on many fronts, including ownership of insurance companies by private equity firms, captive insurance companies, monitors, force-placed insurance, virtual currencies, cybersecurity, conduct involving countries subject to sanctions, nonbank mortgage servicing, and consumer protection. We review these matters in turn. 

Ownership of Insurance Companies by Private Equity Firms. As a result of concerns surrounding what DFS perceived to be a growing trend of private equity firms investing in the annuity business, DFS began an investigation into such activity in 2013. One of DFS's primary concerns was that private equity firms—which may seek comparatively short-term returns on investments—might be at odds with the annuity business, which typically focuses on ensuring long-term security for policyholders. Because of such concerns, DFS threatened to halt two private equity firms' plans to acquire annuity companies.4 DFS later blessed the acquisitions only after the investment firms agreed to DFS's request to implement increased policyholder protections as part of the acquisition plans.5 The increased protections consisted of heightened capital standards, the establishment of an additional "backstop" trust account dedicated to further safeguarding policyholder claims, and the private equity firms agreeing to enhanced regulatory scrutiny by DFS of their investments, operations, dividends, and reinsurance. 

Captive Insurance Companies. Captive insurance arrangements involve a non-insurance parent company that creates and owns a "captive" to insure the parent's risk. DFS's investigations into captive insurance companies resulted from concerns surrounding the increased use of offshore and out-of-state special purpose vehicles to act as captives. DFS believes these arrangements were pursued to benefit from other jurisdictions' looser reserve and oversight requirements. In June 2013, DFS released a report claiming that New York-based insurers and their affiliates had put at least $48 billion in captive insurance transactions through shell companies located in other states or offshore.6 The report recommended that DFS require New York-based insurers and their affiliates to disclose in detail their use of captive insurance transactions. The report also recommended that (i) the National Association of Insurance Commissioners ("NAIC") develop enhanced disclosure requirements for captive insurance companies around the country in the interest of national uniformity, and (ii) federal and other state agencies investigate the use of captive insurance nationwide. NAIC later announced it was investigating the controversy concerning captive entities, the resolution of which could take several years.7 In response, Lawsky criticized as inadequate NAIC's proposal to monitor captive insurance companies.8 

Monitors. Monitors or consultants are periodically placed in a bank or insurer to ensure compliance with a regulatory or prosecutorial order or agreement. Lawsky has stated that regulators place special reliance on monitors because of regulators' limited resources.9 DFS is concerned, however, with monitors' independence, particularly in circumstances where they are hired by banks, embedded physically at banks, paid by banks, and depend on banks for future business. DFS's investigation into the monitoring and consulting industry alleged that no one was regulating monitors or consultants.10 To oversee monitors, DFS has relied on a century-old New York banking statute requiring DFS approval for monitors or consultants to access confidential banking information. This statute allows DFS to determine whether monitors or consultants can work for particular banks. DFS is using this statute as a basis to suspend and penalize monitors or consultants who work for banks under DFS.11 DFS intends to continue to pursue this approach, which it believes could serve as a national model for changes that should be implemented in the monitoring and consulting business.

Force-Placed Insurance Companies. In September 2013, DFS proposed rules to reform the force-placed insurance industry.12 Force-placed insurance, or lender-placed insurance, is insurance that a bank, lender, or mortgage service places on a property that does not have the coverage required by the mortgage. Lenders typically obtain force-placed insurance to replace coverage that the borrower has allowed to lapse or to supplement coverage the bank or mortgage servicer determines is insufficient. According to DFS, its investigation into force-placed insurance companies revealed an alleged "kickback culture" in the industry that resulted in "inflated premiums," which the proposed rules are designed to curb. DFS's new regulations will apply to the industry going forward and any new insurers that enter the market.

Virtual Currencies. As we have previously discussed,13 since August 2013, DFS has been engaged in a fact-finding inquiry of virtual currencies, including Bitcoin, in an effort to develop a regulatory framework for such currencies. As part of this effort, in January 2014, DFS held two days of public hearings regarding virtual currencies.14 At the hearings, Lawsky announced that DFS will put forward "a proposed regulatory framework for virtual currency firms operating in New York" in 2014, making New York the first state to create such a framework.15 Lawsky has said the framework will require DFS to determine "the appropriate licensing, examination, and collateral requirements for the virtual currency industry."16 With regard to licensing, DFS envisions adapting some of the rules for money transmitters and banks in order to issue a specially tailored "BitLicense," which would allow virtual currency exchanges to operate in New York.17 More recently, in March of this year, DFS began accepting proposals and applications for BitLicenses.18 

Cybersecurity. DFS also took an increased interest in issues related to cybersecurity after New York Governor Andrew Cuomo announced the formation of a Cyber Security Advisory Board and appointed Lawsky one of the co-chairs.19 Soon after the formation of the Board, DFS sent so-called "308 Letters"—a request for information to which insurers are legally required to respond—to the largest insurance companies that DFS regulates, requesting information on the policies and procedures they have in place to protect against cyber attacks.20 In May 2014, DFS released a report on cybersecurity based on the results of a year-long survey that DFS conducted of the banks it regulates.21 As a result of what DFS perceives to be an increase in the frequency and sophistication of cyber attacks on financial institutions, the report announces that DFS will conduct new, regular, targeted cybersecurity preparedness assessments of New York banks as part of the regular examination process. 

Conduct Involving Countries Subject to Sanctions. DFS pursued several investigations related to institutions that allegedly conducted transactions with countries and entities subject to U.S. and international sanctions, such as Iran and Sudan. In at least one of these investigations, DFS partnered with the U.S. Department of Treasury and the Federal Reserve. Lawsky has said that, in connection with one investigation, he is considering a deal that would temporarily suspend a financial institution's ability to transfer money through its New York branches on behalf of foreign clients as a penalty for the institution allegedly processing transactions for countries subject to sanctions. DFS also asked reinsurance companies for information about business in Iran, including measures they have taken to ensure they do not underwrite coverage for prohibited shipping.22 Recently, DFS sent subpoenas to four U.S. insurers to determine if they have complied with U.S. laws against doing business with Iran.23

Nonbank Mortgage Servicing. In February 2014, Lawsky called on regulators to halt the expansion of nonbank mortgage servicers.24 Mortgage servicers collect payments from homeowners and distribute the payments to investors who own the loans through mortgage securities. Nonbank mortgage servicers often focus on delinquent loans and those made to buyers with poor credit histories. Lawsky fears some nonbank mortgage servicers are getting too big too quickly and are not equipped to handle the amount of business they have assumed. 

Consumer Protection. In April 2014, Lawsky brought a lawsuit against Condor Capital Corporation, a subprime auto lender based in Long Island, and its owner, for concerns related to the company's practices regarding customer loans and customer data.25 DFS alleges that: (i) Condor stole millions of dollars from borrowers by deceiving them about the positive balances in their accounts, and (ii) the company did not properly safeguard customers' personal information. In pursuing the lawsuit, DFS is relying on a rarely used provision in the Dodd-Frank Act,26 which gives state authorities power to enforce federal consumer protection law. Because DFS is among the first state regulators to take advantage of this provision, DFS's lawsuit may serve as a model for other state regulators to take similar action. Not long after the lawsuit was filed, the court granted DFS's temporary restraining order freezing Condor Capital Corporation's accounts and operations. 

Conclusion

DFS's recent activity and initiatives suggest it will continue to pursue its interest in investigating emerging growth areas and trends, its desire to push its reforms and regulations as models for other jurisdictions, and its wide-ranging enforcement actions and remedies. Legal and compliance professionals at financial institutions and insurers, located in and outside of New York, should accordingly continue to keep informed of DFS and its activities. 

Footnotes

1 For a fuller discussion of the creation of DFS and its powers, please see our December 2011 Jones Day Commentary, "The Department of Financial Services: New York's Newest Financial Regulator" (available at http://www.jonesday.com/department_of_financial_services/). For a discussion of DFS's regulatory and enforcement activities in the first year following its inception, please see our May 2013 Jones Day Commentary, "The New York State Department of Financial Services at the One-Year Mark: A New Aggressive Regulator Worth Following" (available at http://www.jonesday.com/the-new-york-state-department-of-financial-services-at-the-one-year-mark-a-new-aggressive-regulator-worth-following-05-10-2013/).

2 Benjamin N. Lawsky, "Financial Regulatory Enforcement," at the Exchequer Club, Washington, D.C., March 19, 2014 (available at http://www.dfs.ny.gov/about/speeches_testimony/sp140319.pdf).

3 Press Release, DFS, Oct. 7, 2013 (available at http://www.dfs.ny.gov/about/press2013/pr1310071.htm).

4 Mike Spector, "New York to Approve Athene Buyout of Aviva Business," The Wall Street Journal, Aug. 14, 2013; Melodie Warner, "Sun Life Regulatory Review to Delay U.S. Annuity Unit Sale," The Wall Street Journal, June 21, 2013.

5 Press Release, DFS, July 31, 2013 (available at http://www.dfs.ny.gov/about/press2013/pr1307311.htm); Press Release, DFS, Aug. 14, 2013 (available at http://www.dfs.ny.gov/about/press2013/pr1308141.htm).

6 Press Release, DFS, June 12, 2013 (available at http://www.dfs.ny.gov/about/press2013/pr1306121.htm).

7 Leslie Scism, "In Insurance Captive Debate, 'Everything Is on the Table'—NAIC President," The Wall Street Journal, Jan. 30, 2014.

8 Leslie Scism, "Regulator Criticizes Plan to Monitor 'Shadow Insurance,'" The Wall Street Journal, Mar. 24, 2014.

9 Benjamin N. Lawsky, Remarks at the "Regulating Shadow Banking" Conference Sponsored by the Americans for Financial Reform and the Economic Policy Institute, Washington, D.C., Nov. 22, 2013 (available at http://www.dfs.ny.gov/about/speeches_testimony/sp131122.htm).

10 Associated Press, "NY Bank Regulator Vows More Consultant Oversight," The Wall Street Journal, Nov. 1, 2013.

11 Press Release, DFS, June 18, 2013 (available at http://www.dfs.ny.gov/about/press2013/pr1306181.htm).

12 Press Release, DFS, Sept. 19, 2013 (available at http://www.dfs.ny.gov/about/press2013/pr1309191.htm).

13 See Jones Day Commentary, "NY Regulators Turn Their Attention to Bitcoin," Law 360, November 18, 2013 (available at http://www.jonesday.com/files/Publication/fe032af7-5c19-4226-9094-c43d2f1d494b/Presentation/PublicationAttachment/477fb0f2-c361-4cdc-ba54-ce021c7ec446/Bitcoin.pdf).

14 Memo, DFS, Aug. 12, 2013 (available at http://www.dfs.ny.gov/about/press2013/memo1308121.pdf).

15 Paul Vigna, "Bitcoin Firms Will Get 'Regulatory Framework' in 2014, NY's Lawsky Says," The Wall Street Journal, Jan. 28, 2014.

16 Benjamin N. Lawsky, Remarks on the Regulation of Virtual Currencies at the New America Foundation, Washington, D.C., Feb. 11, 2014 (available at http://www.dfs.ny.gov/about/speeches_testimony/sp140212.htm).

17 Paul Vigna, "Lawsky's Office Starts Taking Applications for the 'BitLicense,'" The Wall Street Journal, Mar. 11, 2014.

18 Order, DFS, Mar. 11, 2014 (available at http://www.dfs.ny.gov/about/po_vc_03112014.pdf).

19 Press Release, DFS, May 10, 2013 (available at http://www.dfs.ny.gov/about/press2013/pr1305101.htm).

20 Press Release, DFS, May 28, 2013 (available at http://www.dfs.ny.gov/about/press2013/pr1305281.htm).

21 Press Release, DFS, May 6, 2014 (available at http://www.dfs.ny.gov/about/press2014/pr1405061.htm).

22 Circular Letter, DFS, July 24, 2013 (available at http://www.dfs.ny.gov/insurance/circltr/2013/cl2013_06.htm).

23 Rachel Louise Ensign and Leslie Scism, "NY Regulator Issues Subpoenas to Four US Insurers in Iran Sanctions Probe," The Wall Street Journal, Apr. 8, 2014.

24 Benjamin N. Lawsky, "Remarks on Non-bank Mortgage Servicing in New York City," at the New York Bankers Association Annual Meeting and Economic Forum, New York, New York, Feb. 12, 2014 (available at http://www.dfs.ny.gov/about/press2014/pr1402121.htm).

25 Rachel Abrams, "New York's Top Regulator Sues Subprime Auto Lender," New York Times, Apr. 23, 2014.

26 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1042, 124 Stat. 1376 (2010) (the "Dodd-Frank Act").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Sarah D. Efronson
Bart Green
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions