The SEC has published its roadmap for the transition to International Financial Reporting Standards (IFRS). Originally announced in August, it aims to move U.S. companies from U.S. generally accepted accounting principles (GAAP) to IFRS, with most large companies making the transition in 2014. However, the 20 largest U.S.-based companies in a given industry according to market capitalization can begin transitioning in 2010 for their financial statements beginning after December 14, 2009. According to the International Accounting Standards Board, approximately 114 countries use IFRS. There will be a 90-day comment period so the proposed roadmap will have to be approved during the first months of the Obama administration.
In October, the IASB, London, a board that helps develop international accounting standards, released an advisory panel’s report on the use of fair value measurement when markets become inactive. The report follows an EESA mandated SEC study on mark-to-market accounting as well as FSP FAS 157-3, issued on October 10 providing clarification regarding determining fair value measurements for financial assets when markets are no longer active (i.e., for that asset). Both FASB and the IASB have received a deluge of complaints of late alleging that they allow too little room for use of valuation judgment under FAS 157 and IAS 139, respectively. FASB and IASB representatives are defending the principle of fair value measurements but have acknowledged the need for expanded guidance when markets become inactive. Others, most notably, the ABA, blame the rigid use of fair value accounting for recent, dramatic, possibly unnecessary fluctuations in banks’ and life insurers’ balance sheets and income statements.
In early November, the Treasury Department announced that insurers would only be eligible for assistance under the Troubled Asset Relief Program (TARP) if they have a federal regulatory link, such as a thrift charter or a bank holding company charter. Some insurers’ parent companies have applied to the Office of Thrift Supervision (OTS) to become a savings and loan holding company. Others are pursuing acquisitions of struggling thrifts as a means of positioning themselves to qualify for TARP support. Notable carriers that are pursuing federal banking oversight include: The Hartford Financial Services Group, Genworth Financial, AEGON and Lincoln National Corp.
Speculation has already begun regarding broader implications on the insurance industry with this shift – particularly the possibility of federal regulation of the industry. Advocates of an optional Federal insurance regulatory scheme have seized upon recent events to bolster their position. Those insurers who opt for an OTS or other federal bank regulated parent holding company, irrespective of whether they access TARP funds, will be making material changes to their regulatory structure (i.e., federal regulation for the holding company and continued state regulation for insurance company subsidiaries). The parent/holding company would have to comply with OTS (or other federal banking regulator) capital requirements which may represent a significant increase in capital held at the parent. Although insurance holding companies are generally not required to hold as much capital, they often do as a means for facilitating timely capital flows to subsidiaries. This Sutherland legal alert provides additional details.
The Emergency Economic Stabilization Act (EESA) would impose executive compensation limits and corporate governance requirements on any financial institution who participates in TARP. The extent and severity of restrictions depends upon whether the troubled assets are acquired via “direct purchase” or “auction sale”. Accordingly, many of the restrictions, as originally outlined, may largely be moot in light of Treasury’s recent announcement it intends to abandon its original game plan of purchasing troubled assets. The Treasury is required to issue guidance to TARP participants to adopt “appropriate standards” including limits on incentive compensation that lead executives to take unnecessary and excessive risks that threaten the value of the financial institution, so-called clawback provisions and prohibitions on the golden parachute payments. The Treasury would further impose a limit on the deductibility of compensation in excess of $500,000 that EESA did not appear to require. The executive compensation restrictions would generally apply to the institution’s senior executive officers who include the CEO, CFO and the three most highly compensated officers who are not the CEO or CFO. There is speculation that the next Congress may consider the EESA restrictions as a general framework for broader restrictions on executive compensation. Note that the EESA executive compensation rules will apply to institutions participating in the Term Asset-Backed Securities Loan Facility (TALF) program, created on November 25, 2008 by the Federal Reserve Board. Under the TALF, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated asset-backed securities (ABS) backed by newly and recently originated consumer and small business loans.
If so inclined, Treasury appears to be granted sufficient leeway to purchase assets directly from pension plans. Notwithstanding its potential authority to do so, Treasury appears unlikely to pursue such a course in light of its recent stated intent to forego using TARP funds for purchasing troubled assets. Treasury’s game plan has changed, at times dramatically, almost daily, and it is possible that it may reverse course yet again and ultimately pursue the direct acquisition of trouble assets. For those interested in understanding the potential implications for TARP funds and pension plans, this Groom Law Group Memorandum provides an excellent summary of the technical issues.
The National Association of Insurance Commissioners has its upcoming quarterly meeting taking place December 5 – 8th. One topic that the insurance commissioners may be considering is temporarily loosening capital requirements to assist life insurers that have recently written down significant assets. As the insurers continue to experience falling stock prices, it has become a strain for many to meet required capital levels. Adjusting the reserves methodology to provide “interim relief” could be done by regulators in individual states or the NAIC could promulgate formal (model) or informal guidelines. All NAIC guidance and model laws are adopted by states on an optional, not mandatory basis.
On October 31st, Barclays Capital announced that it was combining the existing Lehman Brothers and Barclays Capital indices into a single platform under the “Barclays Capital Indices” name.
Public companies could be prohibited from funding nonqualified plans for certain executives if any qualified defined benefit pension is deemed “at risk” under IRC § 409A(b)(3). Treasury has informally affirmed that compliance is required, even while awaiting pending IRS guidance. This Groom Law Group Memorandum provides a summary of the requirements under 409A(b)(3).
Yesterday, the IRS published the final rules regarding information reporting on employer-owned life insurance contracts under section 6039I of the Internal Revenue Code and related IRS Form 8925. The final rules are effective immediately and supplant the interim guidance.