The insurance industry is poised to rip a gaping loophole in financial reform's investor protections, working to insert a provision in the conference committee report that was passed by neither the House nor the Senate.
The measure would exempt securities products created by insurance companies from regulation, leaving the job instead to state insurance commissioners. Insurance companies do a lucrative business in selling annuities that guarantee a return to investors but limit the upside and often come with exorbitant commissions and high surrender fees that make access to the money difficult in times of financial need.
The insertion is being pushed by Sen. Tom Harkin of Iowa, a state with a heavily-concentrated insurance industry. His House ally is Rep. Greg Meeks (D-N.Y.), who often represents corporate interests despite having a heavy trade union presence in his district.
Because of the structure of the conference committee, a Democrat needs to win only one more Democrat and the Republican bloc in order to win support for an amendment. That dynamic makes weakening the bill easier than strengthening it, even though few Republicans are expected to vote for the final bill.
Two members of the conference committee, Sens. Blanche Lincoln (D-Ark.) and Pat Leahy (D-Vt.), fellow members of the Agriculture Committee that Harkin long chaired, are cosponsors of his legislation and therefore likely to support it in conference committee.
Harkin attempted to insert the provision into the Senate bill as an amendment but was blocked by Sen. Daniel Akaka (D-Hawaii).
"It appears that he has the votes to at least get this included in the Senate offer," said Barbara Roper, who handles investor protection issues for the Consumer Federation of America. "Meeks, the Harkin counterpart, is on the conference committee and by all accounts is rallying the troops."
The conference committee may take up the issue as early as Tuesday. The remaining question is whether Meeks will be able to win over his House colleagues.
The last-minute insertion of the provision is particularly galling, said Roper, because it hasn't been approved by either chamber and has been the subject of little congressional deliberation.
"Beyond the substance, which is really horrible, the idea that a handful of members of Congress are going to decide this issue with no legislative hearing and no answer to the basic questions... that's just an appalling violation of the integrity of the legislative process," she said.
The insurance loophole is just one in a series of victories by the financial industry over investors. The conferees have already agreed to exempt companies under $75 million from Sarbanes-Oxley audit requirements. Another investor priority, self-funding for the Securities and Exchange Commission, is teetering, and a fourth priority -- that brokers be bound by a fiduciary duty to act in their clients' best interests -- is also under heavy assault. Investors are also losing ground when it comes to proxy access, the ability of shareholders to weigh in on the governance of a corporation they own.
"There is a real question at this point as to whether this investor protection title will do more to weaken investor protections than it will to strengthen them," said Roper.
UPDATE: Harkin, in an interview with HuffPost, says that he thinks he has the votes on the Senate side but isn't sure about the House conferees. He expects the measure to be debated Tuesday afternoon but must chair a committee hearing, so will only be able to vote by proxy. He also defends his provision against consumer-advocate and investor-protection critiques.
"Well they're wrong, they're just wrong," Harkin says of the consumer advocates. "And I've been a big consumer advocate all my life, but they're wrong. I mean, it's like somehow they have this belief that if only the SEC has jurisdiction, everything will be fine. Well, tell me about Bernie Madoff, huh? I mean, that was SEC jurisdiction. You know, look: Were there abuses in the past? I have already said, yes. But the National Association of Insurance Commissioners took care of that. They came out with new guidelines; states have signed up for it. I mean, this is an insurance policy. So I pointed out that during the recent downturn not one person with one of these annuities lost any of their money. Not one. Tell me about people that had securities. Now, what happened to them? So what's wrong with this picture? Now, again, were there abuses? Were people sold these policies that shouldn't've [been]? Yes. That's been fixed, that's been changed. It's almost like the consumer groups are saying it's just like it was 20 years ago, and that's just not the case. I suppose some people just believe that if we just give everything to the SEC everything will be fine, but I just don't believe that. I believe that state insurance commissioners, given the right tools and the right regulatory framework, which they have now, are very capable."
Ryan Grim is the author of This Is Your Country On Drugs: The Secret History of Getting High in America