I Lost HOW Much? Emerging Trends In Financial Markets Regulation

1. I Lost HOW Much? Emerging Trends In Financial Markets Regulation

2. The Round-Up… MODERATOR: • Cary Meiners, Practice Leader, Public Company Liability, Travelers PANELISTS: • Ivan J. Dolowich, Esq., Partner, Kaufman Dolowich Voluck & Gonzo LLP • Wendy Dowd, CFA, Vice President/Worldwide Manager, Asset Management, Chubb Specialty Insurance • Atea Martin, Esq., Director of Claims, CNA Global Specialty • Michael K. O’Connell, MBA, Managing Director, Aon Financial Institutions Practice

3. Outline What Just Happened? Financial Securitization Dodd-Frank Key Elements Scope and Effect Underwriting Challenges Insurance Impact Emerging Exposures and The Net Effect

4. What Just Happened? Would More Regulation Have Prevented This? Unemployment at 9.6% Dow index down 22% from 2007 peak S&P/Case-Shiller Index down 30% since 2006 4.7% of all mortgages in some state of foreclosure 1/3 of mortgage defaults related to second-home investment properties A “foreclosure freeze” which could slowhome sales

5. Banking Woes Continue From 2004-2007 only 3 bank failures Then - 25 failures in 2008, 140 in 2009,139 YTD 2010 bank failures are smaller in size Bear Stearns collapse and Lehman Brothers bankruptcy filing in 2008 Big banks may have to now buy bad loans from investors: estimates range from$20-$134 billion

6. What Just Happened? Are Things Getting Better? Two views: Troubled Asset Relief Program (TARP) $700 billion initial infusion $340 billion expected cost in 2009 Recent estimates as low as $30 billion in cost Freddie Mac and Fannie Mae Worst case now projected at $259 billion Moderate case now projected at $154 billion

7. What Just Happened? Has Systemic Risk Really Declined? One Measure is the use of Credit Default Swaps (CDS) CDS: Financial Weapons of Mass Destruction 2002--- $2 trillion 2007--- $62 trillion 2010--- $25 trillion

8. China Will Introduce CDS by Year End CDS: “Neither evil nor good” “No repackaging or restructuring of risk” “We learned a lot from Europe and the U.S., but there were problems with some of the teachers” CDS: Benign or Still Very Risky? The SEC and the Commodity Futures Trading Commission will decide this for all CDS players What Just Happened?

9. Financial Securitization Current State of Securitization $1 trillion in bond securitization loss possible What is the future of securitization? Has this impacted D&O/E&O underwriting? Can D&O/E&O underwriting really addressthis exposure?

10. Dodd-Frank and Regulatory Empowerment Regulators Muscle Up SEC will issue 100 new rules for derivatives trading, credit rating companies, stockbrokers, hedge funds and corporate boards The Federal Reserve will write 50 new rules to deal with systematic risk

11. FDIC Will set new capital rules for community banks Will be responsible for liquidating troubled financial companies The Treasury Department Will chair the Financial Stability Oversight Council Forms a consumer protection bureau Dodd-Frank and Regulatory Empowerment

12. Key Elements of Dodd-Frank Systemic risk/increased regulatory oversight Too big to fail SEC enforcement expansion and whistleblower provisions including: Aiding and abetting Morrison decision Executive compensation Hedge funds Dodd-Frank and Regulatory Empowerment

13. Systemic Risk “Too big to fail” “Systemically important” financial firms to be regulated by the Federal Reserve Large Interconnected Banks (>$50 billion assets) Nonbank Financial Companies (TBD) Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) Stricter capital, liquidity and other restrictions New FDIC liquidation powers

14. SEC Enforcement ExpansionWhistleblower Provisions SEC Enforcement Issues Lack of credibility (i.e., Madoff, Stanford) New enforcement tools under Dodd-Frank Penalties can be assessed at administrative level Aiding and abetting Standard changed from “knowing” to “reckless” Control person liability Standards of conduct for broker-dealer

15. Morrison Decision Implications for companies that issue shares on foreign exchanges Defense strategies Response from the plaintiff’s bar Impact of Dodd-Frank SEC Enforcement ExpansionWhistleblower Provisions

16. Whistleblower Provisions Protection and monetary rewards for voluntary suppliers of information to the SEC The resultant fine or penalty must exceed $1M Information must be independent and original Reward within SEC discretion but ranges from 10-30% of monetary sanctions Protection from public exposure or employer reprisals SEC Enforcement ExpansionWhistleblower Provisions

17. Executive Compensation Executive Compensation Disclosure: Pay vs. Performance: SEC review compares 5-year stock performance Compensation Ratio: CEO versus Median of “Rank & File” Compensation Committee Defined independence SEC review of member consultants/advisors Shareholder Voting Rights More frequent proxy/authorization Clawbacks Delisting of non-compliant issuers Accounting restatements

18. “Say-on-Pay” Incentive-based compensation Independent compensation committee Clawbacks Executive Compensation Form

19. Hedge Funds and Advisers Two objectives: Systemic risk Investor protection New adviser registration requirement New reporting and record-keeping requirements “Statistically important” firms? Changes to definitions “accredited investors” and qualified client” Volcker rule New study – feasibility of forming SRO to oversee private funds

20. Dodd-FrankScope and Effect A Closer Look at Key Provisions How far-reaching is this legislation? Does this legislation regulate “the unregulated”? Did compromise affect this bill too much? Any glaring weaknesses that should be fixed? How will insured procedures and behavior change?

21. Dodd-Frank Underwriting Challenges Coverage and Policy Language Key concepts to focus on Exclusionary language New coverages needed?

22. Dodd-Frank and Regulatory Empowerment Backers Cite These Positives: Requires full and fair disclosure to credit consumers Mechanism for failed-bank receivership Requires more disclosure of derivative securities Banks must be “well-capitalized” and “well-managed” Debate about this? Amends SOX to allow small-company exemption Empowers the Financial Stability Oversight Council to seek solutions to “systemic risk”

23. Critics note the following: No reinstatement of Glass-Steagall Banks can have hedge and equity operations to acertain threshold Executive compensation limitations are modest Leverage ratios are not effectively addressed No new regulation on credit agencies Dodd-Frank and SEC Empowerment

24. Pre-Dodd/Frank Regulatory EnvironmentEffect and Underwriting Impact Was regulation pre-Dodd/Frank effective? Did previous regulation dampen investor confidence? If global companies avoided listing on the U.S. Exchanges before, what will the response be now? Were underwriters really thinking about regulation until now?

25. The Net Effect: Problems and The Regulatory Fix Will Dodd-Frank change D&O/E&O underwriting? Can plaintiff attorneys find new niches? Could claim trends emerge slowly over time? How will the foreclosure freeze impact insurance? Are policy changes or refinement needed? What is the market impact?

26. Questions&Answers

27. Many Thanks To… • Cary Meiners • Ivan J. Dolowich • Wendy Dowd • Atea Martin • Michael K. O’Connell