An Even More Powerful DFS?

by Andrew Hruska and Kyle Sheahen

Since its birth in 2011 from the combination of the Banking and Insurance Departments, the New York State Department of Financial Services (DFS) has used all of its statutory powers —and then some—to magnify its supervision of financial companies operating in New York State.  A state regulatory agency, DFS has become an extremely active investigator of financial misconduct and, based on the strength of those investigations, has collected over $7.5 billion in fines since 2011.  At the same time, DFS has forced to defend certain actions in court, such as when its Superintendent was sued in 2014 by AIG on constitutional grounds, (See Complaint, Am. Int’l Group. v. New York Dep’t of Fin. Serv., No. 14 Civ. 2355 (AJN) (S.D.N.Y. June 2, 2014)).  Although the suit was resolved with a payment by AIG, the matter nonetheless demonstrated that there may be some practical limits to DFS’s asserted powers.

The latest development came last month on January 17, when Governor Cuomo released the proposed state 2017-18 Executive Budget.  The Budget contains some singular proposed legislation that would meaningfully expand DFS’s powers to enforce its decisions on its own in the state courts and to increase penalties on insurers.

Some background is in order to understand the effect of the proposed changes.  When DFS assumed the powers of the Banking and Insurance Departments, it took on those agencies’ functions and regulatory authority over institutions like banks, credit unions, and life insurance companies and continues to exercise that power today.  At the same time, the Attorney General, a separately elected state official, maintains the authority to bring civil enforcement actions in the courts on behalf of the state. The Budget could muddy the waters by expanding the DFS’s regulatory prerogatives in a few key areas, which are spelled out in the Article VII Legislation Transportation, Economic Development and Environmental Conservation (TED) Bill (one of several pieces of implementing legislation for the Budget).

First, Part Y of the TED Bill would authorize the DFS on its own initiative to prosecute actions to recover civil penalties or enforce administrative orders.  That’s a power now reserved to the Attorney General.  If enacted, this provision could result in conflation—and confusion—of enforcement jurisdiction among state authorities, and possible competition between them, making it more difficult for companies to respond appropriately.  Furthermore, this new section would increase civil penalties for Insurance Law breaches.

Next, Part X of the TED Bill would increase the authority of the DFS to place insurers into administrative supervision proceedings, an action that currently requires a court order.  Even putting aside the uptick in these difficult proceedings for insurers that might result, removing this procedural element gives the DFS more leeway to take such actions without a meaningful check. Insurers can, of course, apply for relief from an administrative hearing to reverse that determination, but this could dramatically affect the negotiating posture when DFS is statutorily empowered to make the first move on its own.

The theme of these changes is the DFS and through it, the Governor, would expand its regulatory powers.  Now, the process of reviewing Governor Cuomo’s proposal is underway and the fate of the DFS provisions remains to be seen.  The agency already has asserted itself as one of the state’s most powerful and effective regulators, having extracted a number of headline-grabbing corporate fines.

Andrew Hruska is a litigation partner in King & Spalding’s New York office and a member of the firm’s Special Matters and Government Investigations Practice Group.  Kyle Sheahen is a senior associate in the Special Matters/Government Investigations Practice Group in King & Spalding’s New York office.


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