Category: Regulation

Lawmaker Proposes to Ban AI and Its Discriminatory Impact

Mary Pat Campbell

Link: https://www.governing.com/security/Lawmaker-Proposes-to-Ban-AI-and-Its-Discriminatory-Impact.html

Excerpt:

The Washington state Legislature, which has proposed legislation in the past to tackle issues such as data privacy and the use of facial recognition tech, is now reviewing a bill that would regulate the use of “automated decision systems” and AI technology within state government.

According to the bill, these systems use algorithms to analyze data to help make or support decisions that could result in discrimination against different groups or make decisions that could negatively impact constitutional or legal rights.

As a result, Senate Bill 5116 aims to regulate these systems to prevent discrimination and ban government agencies from using AI tech to profile individuals in public areas.

Author(s): KATYA MARURI, GOVERNMENT TECHNOLOGY

Publication Date: 26 February 2021

Publication Site: Governing

Robinhood and Redditors: Who’s robbin’ who?

Mary Pat Campbell
Robinhood and Redditors: Who’s robbin’ who?

Excerpt:

Robinhood is a broker. It is a FINRA-regulated broker-dealer. It relies on a clearing house to clear its transactions. The clearing house it uses is the National Securities Clearing Corporation (NSCC), which is a subsidiary of the Depository Trust & Clearing Corporation (DTCC). Thus, Robinhood is a “member” of NSCC. The NSCC is a “designated financial market utility” as defined in the 2010 Dodd-Frank Act. Thus, it is “a financial market utility that the Council has designated as a systemically important.” (“The Council” is a regulatory body created by Dodd-Frank. Its ten voting members include the Treasury Secretary, the Fed chair, and the comptroller of the currency.) NSCC is a provider of “financial market infrastructure” (FMI). As such, it must publicly promulgate rules for the computation of the “Clearing Fund” every “member” must maintain with it. While the FMI is responsible for designing its own rules for determining the clearing fund, they are subject to approval or rejection by the regulatory authorities. In particular, the SEC may prohibit any changes NSCC wants to make in its formula for computing the clearing fund of each member. The Bank for International Settlements (BIS) has promulgated a set of “principles” that member states should adhere to in regulating payment and settlement systems. These include, “An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.” 

Thus, the regulatory authorities require clearing houses to require members to keep a risk-adjusted balance with them as a guard against credit risk. In the case of Robinhood, the short squeeze drove this formulaic value up sharply. Robinhood didn’t really have much of a choice about how to respond. It had to both pony up more money for the clearing fund and act to hold off (to the extent possible) further increases in it. Robinhood had to borrow a lot of money to maintain its clearing fund.

Author(s): Roger Koppl

Publication Date: 2 February 2021

Publication Site: EconLib

HMT Review of Solvency II: Call for Evidence—IFoA Response

Mary Pat Campbell

Link: https://www.actuaries.org.uk/system/files/field/document/HMT_SII_v7.pdf

Excerpt:

The current design of the SII risk margin is too interest-rate sensitive and too high, particularly in the current low-interest rate environment. We believe reform, and an overall reduction, in the risk margin is desirable and can be done whilst keeping an appropriate balance between policyholder protection and cost.


The Matching Adjustment (MA) is vitally important to UK insurers, UK pension schemes and individuals. Without it, annuity prices would increase, and it would simply not be affordable for many pension schemes to buy-out with an insurance company. The IFoA fully supports the continued inclusion of the MA; the MA has successfully helped reduced
procyclical investment behaviour, such as during the stressed conditions in early 2020. However, we believe that the MA framework needs to incorporate more pragmatic flexibility, without a lowering of regulatory standards.


We favour incentivisation of ‘green’ investment rather than overly penal disincentives for ‘brown’ asset classes, noting that sectors considered ‘brown’ must also be part of the solution to the challenges of climate change.

Author(s): Institute and Faculty of Actuaries

Publication Date: 19 February 2021

Publication Site: Institute and Faculty of Actuaries

Solvency II Review: Call for Evidence

Mary Pat Campbell

Link: https://www.gov.uk/government/publications/solvency-ii-review-call-for-evidence

Excerpt:

Solvency II is the regime that governs the prudential regulation of insurance firms in the UK. This call for evidence is the first stage of the review of Solvency II.

The review is underpinned by three objectives:

to spur a vibrant, innovative, and internationally competitive insurance sector

to protect policyholders and ensure the safety and soundness of firms

to support insurance firms to provide long-term capital to support growth, including investment in infrastructure, venture capital and growth equity, and other long-term productive assets, as well as investment consistent with the government’s climate change objectives.

The government seeks views on how to tailor the prudential regulatory regime to support the unique features of the insurance sector and regulatory approach in the UK.

Author(s): Her Majesty’s Treasury

Date Accessed: 24 February 2021

Publication Site: Gov.UK

Matching adjustment becomes a battleground in UK’s Solvency II consultation

Mary Pat Campbell

Link: https://www.insuranceerm.com/analysis/matching-adjustment-becomes-a-battleground-in-uks-solvency-ii-consultation.html

Excerpt:

Solvency II sets strict requirements over what kinds of liabilities and assets are eligible for the MA [matching adjustment], and the governance of them. In the UK’s Solvency II consultation, respondents have argued a looser regime would be good for insurers – and good for the country.

…..

Many of these suggestions have been previously floated in industry circles, some since even before Solvency II came into effect in 2016. But there are a growing number of experts calling for a much more dramatic rethink of the MA – and whether it should even exist.

Dean Buckner, a former regulator at the Bank of England who worked on the MA, and Kevin Dowd, professor of finance and economics at Durham University, have been at the forefront of arguing the MA creates “fake capital” and puts annuity payments at risk.

In their submission to the consultation, they write: “The MA allows firms to recognise some anticipated risky future profits as if they were certain, thereby allowing them to be distributed before being realised. If the risky future profits are not realised – bear in mind that they are called ‘risky’ for a reason – then the capital created by MA will vanish, and policyholders will be at risk.”

Author(s): Christopher Cundy

Publication Date: 23 February 2021

Publication Site: Insurance ERM

Why Cuomo Should Be Worried About a Federal Probe

Mary Pat Campbell

Link: https://www.wsj.com/articles/why-cuomo-should-be-worried-about-a-federal-probe-11613945987

Excerpt:

What caught the Justice Department’s eye was Gov. Cuomo’s claim that New York’s nursing-home deaths were lower than many other states’ and that his March 25 order didn’t contribute to the extremely high number of New Yorkers who died from Covid. Given the virus’s disproportionate effect on the elderly, sick and frail, this seemed unlikely. On Aug. 26, Justice’s Civil Rights Division, relying on its jurisdiction to investigate government-run facilities under the federal Civil Rights of Institutionalized Persons Act, asked the Cuomo administration for data on New York’s publicly run nursing homes, which account for less than 5% of nursing homes in the state.

In September, New York produced data showing it had underreported Covid deaths in government-run nursing homes by a third. The undercounting appeared to be due to several factors. First, when a nursing-home resident who contracted Covid died after being transported to a hospital for treatment, New York didn’t count it as a “nursing-home death.” Second, New York didn’t include deaths occurring before the Centers for Medicare and Medicaid Services began requiring Covid reporting from nursing homes in mid-May. CMS made reporting prior Covid deaths optional, and New York apparently elected to keep the information to itself.

Author(s): John B. Daukas

Publication Date: 21 February 2021

Publication Site: Wall Street Journal

GASB Fact Sheet: Financial Reporting Model Improvements

Mary Pat Campbell

Link: https://www.gasb.org/cs/Satellite?c=Document_C&cid=1176176133242&pagename=GASB%2FDocument_C%2FDocumentPage

Executive Summary: https://www.gasb.org/cs/Satellite?c=Document_C&cid=1176176134838&pagename=GASB%2FDocument_C%2FDocumentPage

Excerpt:

Would the GASB’s proposal treat borrowing as revenue?

No. In fact, the proceeds of bond sales, bank loans, and other forms of borrowing are not reported as revenue in the governmental funds under the existing standards. Under the proposal, those proceeds increase fund balance in the governmental funds but are reported as inflows (not revenues) in the resource flows statement. The governmental funds
statements are intended to report inflows and outflows of short-term financial resources, not revenues and expenses; that is the purpose of the government-wide financial statements. In the government-wide financial statements, the borrowing proceeds are recorded as an increase in cash and an increase in long-term debt.

Fund balance is the difference between assets and liabilities in the governmental funds. The portion of fund balance that comes from borrowing should not be mistaken for resources that can be used by a government for any purpose, such as paying bills or employee
salaries—that would be assigned fund balance and unassigned fund balance. Unspent borrowing proceeds are reported in accounts such as fund balance restricted for capital projects; in other words, in this example, those resources can be used only for investment in roads, buildings, equipment, and other capital assets.

Date Accessed: 22 February 2021

Publication Site: GASB

SEC Charges Ratings Agency With Disclosure And Internal Controls Failures Relating To Undisclosed Model Adjustments

Mary Pat Campbell

Link: https://www.sec.gov/news/press-release/2021-29

Excerpt:

he Securities and Exchange Commission today filed a civil action alleging that former credit ratings agency Morningstar Credit Ratings LLC  violated disclosure and internal controls provisions of the federal securities laws in rating commercial mortgage-backed securities (CMBS).

Credit ratings are used by market participants to help evaluate credit risk, price certain securities, and guide the investment decisions of individuals and institutional investors alike.  To promote transparency in the process, the federal securities laws require credit rating agencies to publicly and accurately describe the procedures and methodologies used to determine credit ratings, and to implement effective internal controls to ensure that they follow those procedures and methodologies. 

According to the complaint, in 30 CMBS transactions totaling $30 billion that Morningstar rated from 2015 to 2016, the credit rating agency permitted analysts to make undisclosed adjustments to key stresses in the model that it used in determining the rating for that transaction.  The complaint also alleges that Morningstar failed to establish and enforce an effective internal control structure governing the adjustments for a total of 31 transactions.

Additional link: https://www.sec.gov/litigation/complaints/2021/comp-pr2021-29.pdf

Publication Date: 16 February 2021

Publication Site: SEC

Honest budgeting practices? Loans are not revenues

Mary Pat Campbell

Link: http://hawaiifreepress.com/Articles-Main/ID/28237/Honestbudgeting-practices-Loans-are-not-revenues

Excerpt:

In a Feb. 10, 2021, letter to David R. Bean, GASB director of research and technical activities, Institute Executive Vice President Joe Kent urged that Bean and his colleagues dismiss the proposals, “so government officials will have to deal honestly with public interest groups such as ours that seek sound budgeting practices and accountability.”

As explained by Kent, the proposed new accounting standard and accounting concept would require general and other state budgeted funds to have a “short-term” focus,[3] such as recognizing long-term transactions only “when payments are due.” That would allow lawmakers to continue sweeping long-term liabilities off the books.

“For example,” said Kent, “Hawaii’s latest general fund budget proposal listed $750 million of borrowing as proceeds under ‘other revenues’ being used to balance the budget.[4] We would expect the state Comprehensive Annual Financial Report to highlight this fact, but instead the CAFR’s governmental funds statements support the false claim that the budget has been balanced.” 

Author(s): Grassroot Institute

Publication Date: 15 February 2021

Publication Site: Hawaii Free Press

GASB proposals would stretch meaning of accrual accounting

Mary Pat Campbell

Link: https://www.accountingtoday.com/opinion/gasb-proposals-would-stretch-meaning-of-accrual-accounting

Excerpt:

Every taxpayer and beneficiary of government services and benefits should care about good government accounting. Accountants and other financial professionals should take special note because GASB is attempting to change one of the basic tenets of accounting. This is a rare opportunity to convince GASB to reverse course and move toward true accrual accounting in budgeted funds statements.

GASB currently has two exposure drafts out for public comment: Project 3-20, “Recognition of Elements of Financial Statements,” and Project 3-25, “Financial Reporting Model Improvements.” Together, these proposals assert a foundation in something called the “short term financial resources measurement focus and accrual basis of accounting.”

The proposals, most importantly, do not relate to government-wide financial statements such as the Statement of Net Position (a balance sheet) and Statement of Activities (an income statement), both of which have significantly firmed up their accrual accounting foundations in the last decade. GASB’s proposals relate instead to governmental funds statements, such as those for general funds, which are widely used for budgeting purposes.

Author(s): Bill Bergman

Publication Date: 11 February 2021

Publication Site: Accounting Today

Criminal Tax Cheat Robert Smith of Private Equity Firm Vista Gets a Pass for Conduct Worse Than Apollo’s Leon Black, Now in Epstein Doghouse

Mary Pat Campbell
Criminal Tax Cheat Robert Smith of Private Equity Firm Vista Gets a Pass for Conduct Worse Than Apollo’s Leon Black, Now in Epstein Doghouse

Excerpt:

Smith, who has a $7 billion net worth and is best known for having paid off the student debt of the 2019 graduates of Morehouse College, paid $139 million, admitted to guilt, and agreed to cooperate in the criminal tax fraud case against Texas software billionaire Robert T. Brockman, where the Feds allege $2 billion in tax evasion over 20 years. Brockman put Smith’s Vista in business as the sole investor in its first fund, via a $1 billion capital commitment.

Before we get to the details of the aggressive influence-peddling deployed to keep Smith from being indicted, bear in mind why it’s certain Smith got off easy.

First, the IRS unearthed that Smith’s hidden income, estimated at $200 million, via external means, in this case, being accused by his former wife. That lead probably led to other digging, say probing with Suspicious Activity Reports from Smith’s banks. That means that “more than $200 million” is pretty certain to be the minimum amount of money Smith stashed away from the taxman’s eyes. If Smith had been indicted, prosecutors would have done discovery on Smith’s accounts and probably on those of individuals and companies whose dealings with Smith could possibly have been part of his schemes.

Author(s): Yves Smith

Publication Date: 10 February 2021

Publication Site: naked capitalism

AI, Privacy, Racial Bias Among State Insurance Regulator Priorities for 2021

Mary Pat Campbell

Link: https://www.carriermanagement.com/news/2021/02/10/216927.htm

Excerpt:

The NAIC 2021 priorities and the charges to its key committees are (in no specific order):

COVID-19 — In 2021, the NAIC will continue its “Priority One” initiative designed to support state insurance departments in their response to the ongoing pandemic and its impact on consumers and insurance markets. NAIC has a COVID resource page that includes information on actions taken by individual states in response to the COVID 19 pandemic that impact various lines of insurance. NAIC said insurance regulators will continue to analyze data and develop the tools so that consumer protection keeps pace with changes brought on by the virus.

Big Data/Artificial Intelligence — The Big Data and Artificial Intelligence Working Group is chaired by Doug Ommen, Iowa, joined by Elizabeth Kelleher Dwyer, co-vice chair, Rhode Island and Mark Afable, co-vice chair, Wisconsin.

…..

Race & Insurance — The Special Committee on Race and Insurance is co-chaired by Maine Superintendent Eric Cioppa and New York Executive Deputy Superintendent of Insurance My Chi To.

The 2021 agenda for this panel calls for research into the level of diversity and inclusion within the insurance sector; engagement with a broad group of stakeholders on issues related to race, diversity and inclusion in, and access to, the insurance sector and insurance products; and an examination of current practices or barriers in the insurance sector that potentially disadvantage people of color and historically underrepresented groups.

Publication Date: 10 February 2021

Publication Site: Carrier Management