Matthew J. Gaul, Douglas S. Kantor and Philip S. Khinda are partners with the law firm of Steptoe & Johnson LLP. Mr. Gaul previously served as Deputy Superintendent for Life Insurance in the New York State Insurance Department and as Chief of the Investor Protection Bureau in the New York Attorney General’s Office. Mr. Kantor formerly served as Deputy Chief of Staff and Special Counsel to Secretary Cuomo at the U.S. Department of Housing and Urban Development, and Mr. Khinda is a former member of the staff of the Division of Enforcement of the U.S. Securities and Exchange Commission.
It has been almost a decade since Attorney General Eliot Spitzer was first dubbed the “Sheriff of Wall Street” by the media after his sensational investigations of research analyst conflicts of interest at major investment banks. Spitzer and his successor, Andrew Cuomo, went on to expand the reach of the New York Attorney General’s Office (the “NYAG”) into areas that had once seemed the exclusive provinces of other state and federal authorities – mutual fund market timing and late trading, insurance broker bidding and compensation practices, reinsurance transaction accounting, student loans, auction rate securities, state pension funds and placement agents, and executive compensation for TARP recipients.
When former New York Attorney General Cuomo was inaugurated as Governor in January, one of his first official acts was to propose the consolidation of the state’s insurance and banking departments. The Governor said that the combined agency would be more efficient, helping to address the state’s weakened fiscal position, and more effective, helping to prevent a repeat of the 2008 financial crisis by taking a more holistic approach to financial services regulation. The proposed legislation, however, went much further than simply combining departments. It also created a powerful new Financial Frauds and Consumer Protection Division. The creation of that new unit and the appointment of Cuomo Chief of Staff and former federal prosecutor Ben Lawsky to run the combined agency are clear indications that the financial services industry has a new sheriff in town.
Superintendent Lawsky was confirmed by the state senate in May and took the reins when the state’s new Department of Financial Services (the “DFS”) opened its doors on October 3rd. It is worth remembering that Lawsky spent more than five years as a federal prosecutor in the Southern District of New York, served as Senator Chuck Schumer’s Chief Counsel and was Cuomo’s right hand for four years in the Attorney General’s office. Seasoned and ambitious, Lawsky would not have left his post as the Governor’s Chief of Staff if he and Cuomo did not have big plans for the new department. Even before the official DFS launch, they had already begun stocking the existing insurance and banking departments with veteran investigators and prosecutors who worked for them at the Attorney General’s Office, and there is little doubt that they will be making waves in areas some might consider new territory for state insurance and banking regulators. In what is perhaps an early sign of things to come, Lawsky recently announced a deal with Goldman Sachs regarding its mortgage servicing practices in the wake of the financial crisis (a business Goldman has since vacated) and may be looking to extract similar concessions from other mortgage industry players.
Meanwhile, the new Attorney General in New York, Eric Schneiderman, is also patrolling these grounds. As some noted during his campaign, Schneiderman has never been a prosecutor but, since taking office, has hired several veterans of Spitzer’s administration who take an expansive view of the office’s enforcement powers. Recently, they have been investigating mortgage securitization practices that they believe contributed to the financial crisis and have complicated related investigations of mortgage servicing practices by other state and federal prosecutors. For example, in exchange for payments into a large settlement fund, the banks have been seeking a release from any civil or criminal enforcement action related to mortgage servicing and mortgage securitization leading up to and including the financial crisis. Scheiderman has reportedly taken heat from the Obama administration, other states and the banks for insisting that any release granted in a mortgage servicing settlement be limited to mortgage servicing activities, so that he and his office would remain free to pursue additional actions against those banks based on securitization issues.
As Schneiderman and Lawsky independently make waves in the mortgage business, there are other early indications that competition between the two agencies will be a hallmark of the New York enforcement arena for some time to come. During the week before the July 4th holiday, Schneiderman subpoenaed several major life insurance companies, demanding information about their claims handling and unclaimed property procedures – an area that lies at the heart of traditional insurance regulation. That same week, the Cuomo/Lawsky Insurance Department sent information requests to roughly 160 life insurance companies and announced that it was revising its regulations surrounding claims handling and unclaimed property. Notably, there is no indication that the agencies will be coordinating their efforts – indeed, some signs suggest that they are instead competing to be first in taking the upper hand.
Given the cross rough of these new competing regimes in New York, many leading companies and institutions will likely find themselves the subject of much unwanted attention. When that scrutiny first comes, and it will come soon, we believe that the best course for them to defend their past practices will be to consider the enforcement and policy objectives of each of these state authorities from the outset, and even if one of them has yet to come calling. Public companies and other leading institutions should be ready to engage either the DFS or the NYAG on the policy merits of corporate conduct from the outset in presenting an account that is mindful of each authority’s independent objectives, and that will also allow for consistent presentations to each office if and when that time comes. While work of this kind takes extraordinary effort and foresight, we believe that its return on investment and protective force will be beyond measure.