Visions of financial grandeur at Aetna …

August 2, 2010

Lawyers are a cautious bunch, but when it comes to the corporate sort, they also have a reputation for a certain dullness: They’re not exactly supposed to get carried away with flights of fancy, especially not when drafting public disclosures.

So we were a little surprised to find a new risk factor listed on page 42 of the quarterly report that Aetna (AET) filed last week. In it, the health-insurance giant worries that it could be hit hard by the financial reform legislation signed into law on July 21. It said it seems to fit the law’s definition of a “nonbank financial company,” and that “we cannot predict whether the [government] will designate us a ‘systemically important’ company,” which would subject it to tighter regulation by the Federal Reserve and other agencies.

Mind you, Aetna doesn’t actually give any concrete reason to think it might be labeled a systemically important nonbank financial company, a category created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (aka the “Financial Reform Act” or, more colloquially, “the Wall Street reform bill.”) Instead, it muses:

“We believe that we fall within the Financial Reform Act’s definition of ‘nonbank financial company,’ but we cannot predict whether the Council will designate us a ‘systemically important’ company, which the Financial Reform Act identifies as those that could pose a threat to financial stability either due to the potential of material financial distress at the company or due to the company’s ongoing activities.”

The disclosure goes on to say that getting such a designation would require a two-thirds vote by a panel that doesn’t yet exist, based on criteria that are so far largely unknowable. “As a result,” Aetna’s attorneys fret, “it is difficult to predict the scope and content of systemic risk regulations or their effect on us, should we be designated a ‘systemically important’ nonbank financial company.”

Indeed. Does this mean every non-banking company on the Nasdaq and the New York Stock Exchange with significant financial activity should include a similar disclaimer, just in case they’re designated as systemically important?

Oddly, none of this seems to have been a specific concern while the financial reform legislation was wending its tortured way through Congress. The concept of regulating nonbank companies that have the potential to threaten the financial system (think: AIG and its ilk) has been part of the thinking in Washington from early on. Yet In Aetna’s prior quarterly report, for example, an extensive, 1,073-word risk factor about the general risks of new regulation included nary a word about financial reform.

There’s no question that Aetna is pretty important to the country’s health-care system. But a systemically important nonbank financial company? It’s conceivable: Aetna clearly concluded it qualifies as a nonbank financial company under the new law, so it probably wouldn’t hurt to know why it came to that conclusion.

But if the company has reason to think its forays into the derivatives market — or some other facets of its financial life — may be significant enough to catch the eye of regulators, it should be more specific. And if it doesn’t, maybe it should spare its lawyers the hand-wringing — and its investors the empty boilerplate.

Image source: f-l-e-x via Flickr

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