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Multi-State Hearings under the Holding Company Act
Multi-State Hearings under the Holding Company Act

By: Steven J. Lauwers and Adam C. Varley

To Be Published in the FORC Summer 2017 Ed.

May 2017: In December of 2010, the National Association of Insurance (“NAIC”) adopted various, substantial amendments to its model Insurance Holding Company System Regulatory Act (the “Revised Model Act”). Many, but not all, of these changes related to concerns about systemic risk in the wake of the 2008 financial crisis.

However, one change that received relatively little attention at the time has the potential to substantially alter how Form A hearings are handled when there is a change of control of a holding company that controls insurance companies domiciled in multiple states. In the past, it was assumed that a change of control of such a holding company would be approved by each state insurance department in which a subsidiary insurance company was domiciled and that this approval would be largely independent of the review and approval by other states. It was certainly true that the hearings, determinations, order and approvals were quite separate.

The Revised Model Act now permits consolidated hearings so that a change of control of a holding company owning insurance companies in various states can be handled in a single proceeding. Your first thought might be: “Wow, who wouldn’t prefer a single, consolidated proceeding?”

However, as we have worked through this “opportunity” in several transactions, the benefits and the difficulties have become a bit clearer and much more nuanced. This may explain why states (and clients) have been slow to rush to consolidate such proceedings. We did complete an acquisition earlier this year where three states – Maine, New Hampshire and Vermont – used this consolidated hearing process, but it was the first time for each of the three states.

This article explores both the opportunities and challenges of consolidating Form A proceedings, as well as the role that technology is playing in causing regulators to think innovatively about how they can cooperate in such proceedings and whether and in what manner they should.

I. The Consolidated Hearing Option

No person may acquire direct or indirect “control” of an insurance company in any state without first filing a statement regarding such acquisition (referred to as a “Form A”) and obtaining the prior approval of that state’s insurance regulator. Prior to approving an acquisition of control of an insurer, the state of domicile will hold a hearing.

Since 2010, all states have adopted statutory language substantially adopted the Revised Model Act effective in 2014, and its revised statute includes the following language:

If the proposed acquisition of control will require the approval of more than one commissioner, the public hearing referred to in subparagraph (b) [for a Form A acquisition] may be held on a consolidated basis upon request of the person filing the statement referred to in paragraph I. Such person shall file the statement referred to in paragraph I with the National Association of Insurance Commissioners (NAIC) within 5 days of making the request for a public hearing. A commissioner may opt out of a consolidated hearing, and shall provide notice to the applicant of the opt-out within 10 days of the receipt of the statement referred to in paragraph I. A hearing conducted on a consolidated basis shall be public and shall be held within the United States before the commissioners of the states in which the insurers are domiciled. Such commissioners shall hear and receive evidence. A commissioner may attend such hearing, in person or by telecommunication.

Vermont and Maine have adopted this language in similar form. The Maine statute does, however, go a bit further than the Revised Model Act in specifying the consequences if the Maine Superintendent either leads or participates in a consolidated proceeding. Notably, it provides that to the extent the Maine Superintendent agrees to participate in a consolidated hearing in another state, “…the application is exempt from further review under this section… and the consolidated proceeding, notwithstanding the superintendent’s participation, is not subject to any provisions of the law of this State governing adjudicatory proceedings, judicial review, public records or public meetings.”

To our knowledge, the consolidated hearing option has been little used in the few years since states have adopted the Revised Model Act, such that the recent consolidated hearing among Maine, New Hampshire and Vermont was treading relatively new ground.

II. Benefits and Challenges of Consolidated Hearings

The potential benefits of a consolidated hearing are apparent. Imagine that XYZ Company proposes to acquire control of Holding Company and its affiliates, which includes insurance subsidiaries domiciled in three different states. Ordinarily, this would entail three separate Form A hearings before three different regulators, in different locations and on different dates, and likely with variations in timing and procedures. If these three hearings could be condensed into one proceeding at a single time and location, and with a single set of procedures, then significant efficiencies could be achieved.

These efficiencies are obviously attractive to the involved insurers, and potentially to the regulators as well. But the consolidated hearing process also raises a number of interesting questions and complications. Who will serve as the “lead” regulator for purposes of ordering and conducting the proceeding? If a single hearing is held at a single location in the lead state, how do the other regulators ensure that their constituents have an adequate opportunity to be heard? Where filings are made in each state, but a single hearing is held, how does each regulator dispose of its respective filing (e.g., is there a single, consolidated order issues or separate orders by each regulator)? How does each regulator determine what constitutes the relevant record for the proceeding (e.g., a single record with all filings/testimony or distinct records within the hearing for each state)? What if the issues are somewhat different between the states?

The Model Act appears to envision a role for the NAIC, which could help establish some degree of best practices or appropriate considerations for determining and handling a multi-state proceeding. However, to date, the NAIC has not taken an active role, but has instead expressed a desire to defer to state regulators on implementing the consolidated hearing process. This, of course, is very unlikely to result in standard practice since each new combination of states is likely to be the first. This outcome is a result of the fact that each multi-state proceeding has by definition at least two states and may have many more. Even with only two states, there are about 2,500 possible combinations.

Notwithstanding the legitimate questions raised by a consolidated hearing process, and the absence of guidance from the NAIC, our recent experience demonstrates that there are opportunities to take advantage of the consolidated hearing option. As noted in the introduction, we were counsel in a recently completed transaction where the states of Maine, New Hampshire and Vermont agreed to conduct a consolidated hearing.

The holding company in this instance was domiciled in New Hampshire, with certain subsidiaries and affiliates domiciled in Maine and Vermont, such that New Hampshire took on the role of the “lead” regulator for purposes of conducting the hearing. Both Maine and Vermont agreed to participate in a single hearing conducted in New Hampshire, with notice of the New Hampshire hearing being provided to their respective constituents. The ability to proceed in this fashion was facilitated both by the relatively close geographic proximity of the three states and the substance of the hearing itself (which all parties were confident would not generate significant public interest).

The proceeding was actually handled somewhat differently by Maine and Vermont. Maine had representatives from its Attorney General’s office in attendance at the hearing (and representatives of the Bureau on the phone) and, in accordance with its statutory structure, agreed to sign on directly to the order of the New Hampshire Commissioner. Vermont, which also had a representative at the hearing (also by phone), issued its own order, but based this order on the collective record from the consolidated hearing.

In some ways this transaction represented the perfect test case. The transaction was viewed favorably by the regulators from the outset, there was broad policyholder support and no apparent public interest or opposition, the geographic distances were conducive to a consolidated hearing at a single location and the regulators already had strong, well-established working relationships with one another. Changing one ore more of these variables would likely dim the prospects for a successful consolidated hearing significantly. For example, regulators might be hesitant to cede the conduct of a physical hearing if there is a high level of public interest in the transaction in their jurisdiction. Similarly, a combination may trigger substantive regulatory concerns in one jurisdiction which are simply not present elsewhere. In these situations, it will likely be more efficient for each state to conduct its own proceeding.

III. The Influence of Technology on the Hearing Process

Technology innovation has created opportunities for efficiencies in the hearing process short of formally consolidating multiple hearings under the Revised Model Act provisions. Although the use of technology can present its own challenges, it may be more attractive to regulators who are concerned about maintaining substantive control over the process or physical participation by their constituents.

Taking the multi-state acquisition example described above, technology could allow for a reduction in the burdens imposed on the parties without any state forfeiting its right to allow participation by regulators and constituents in its jurisdiction. Video conferencing in particular has improved significantly to the point where it has become fairly commonplace, and allows for efficient two-way communication. Such technology could allow for a “lead” regulator to conduct a single live hearing for all parties and witnesses, while still allowing for other hearing states to designate a physical space for the public and other interested parties to attend and participate on a “virtual” basis. In fact, in New Hampshire we often have this experience event at “Town Meeting” when there is an overflow crowd!

The concept of “virtual” hearing could allow parties and witnesses to travel to a single jurisdiction on a particular date, thus reducing costs, burdens and redundancies. At the same time, the “virtual” hearing states could preserve the right to meaningfully participate in the live hearing in its own jurisdiction. Such a “virtual” hearing would also not raise the same procedural issues around the scope of the record and the disposition of the matter, because each state would presumably maintain its own docket and issues its own order.

Undoubtedly the concept of a “virtual” hearing may give regulators some pause, particularly to the extent that it may be viewed as less conducive to effective participation. (For example, swearing in, questioning a witness under oath, etc.) However, as the technology continues to improve and as parties, participants and the public increasingly expect use of this technology, regulators may very well need to evolve towards a more virtual regulatory world.

IV. Closing Thoughts

Disrupting the status quo almost always involves growing pains. The consolidated hearing process will likely be no different in this regard. As discussed in this article, however, there may be proceedings that are well suited to this process. Additionally, there may be opportunities to leverage technology to reduce the burdens of multi-state hearings. Of course, as with any change regulators and legal counsel would be well advised to take one step at a time.

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