May 2008

LEGISLATIVE DEVELOPMENTS

Corporate Executive Compensation Accountability and Transparency Act

On April 15th, SB 2866 was introduced by Senator Reid (on behalf Senator Clinton).  If enacted, The ‘Corporate Executive Compensation Accountability and Transparency Act’ would require, among other things, an amendment to IRC § 409A imposing a $1 million annual aggregate limitation on amounts deferred (and to earnings on such amounts) beginning with taxable years beginning after December 31, 2008.  The proposal also aggregates all non-qualified plans offered by an employer and treats any rule failures as taxable income (to the extent of the failure and if there is not a substantial risk of forfeiture).

The Act would also amend § 304 of SOX (addressing executive reimbursement of compensation related to misconduct) and the SEC Act of 1934 to require an annual vote by shareholders for approval of executive compensation, shareholder approval of golden parachute compensation and impose new rules regarding the disclosure of compensation consultant activities and requiring their independence.

 

Economic Substance Doctrine

The Codification of Economic Substance Doctrine language that appeared last year in SB 2242 has resurfaced in HB 5790, the Universal Homeowner Tax Cut Act of 2008, introduced on April 15th.  Lack of economic substance was a key component of the IRS’s multi-pronged attacks on “leveraged COLI” plans.

 

Florida Insurable Interest

Florida SB 648 introduced in late March by Senator Posey is intended to clarify insurable interests and the purchase of life insurance.

Historically, FL’s statutory and case law has provided scant guidance on whether an insurable interest exists.  The bill would provide welcome clarification, including an employer’s insurable interest in its employees.

 

JUDICIAL DEVELOPMENTS

Fifth Third Bank v. Transamerica Life Insurance Company and Clark Consulting, Inc.

On April 17th, Fifth Third Bank filed suit in US District Court against Transamerica Life Insurance Company and Clark Consulting seeking to recover over $323 million in damages in connection with a BOLI plan.  The suit discloses that the original premiums Fifth Third paid in connection with the BOLI plan in question totaled $612 million and confirmed that the funds were allocated to The Falcon Fund (this was widely speculated previously).  Among other allegations, Fifth Third contends that Transamerica and Clark failed to monitor and implement an “Automatic Re-Allocation Event” which, if acted upon would have resulted in a transfer of funds to a more conservative investment division and curtailed further losses.  According to Fifth Third, an Automatic Re-allocation Event occurred on January 31, 2007 and further alleges that Transamerica and Clark admitted that an Event should have been declared by May 31, 2007.  In the case of the former, Fifth Third asserts that it would have avoided all damages suffered.  In the case of the latter, Fifth Third would have avoided substantially all of the damages it has suffered since the end of October 2008 (suggesting that liquidity restrictions would have required approximately 6 months to consummate a complete reallocation).   The complaint notes that Transamerica and Clark are subsidiaries of AEGON USA and affirms that Bank of America provided the stable value protection.

 

REGULATORY DEVELOPMENTS

Washington Insurable Interest

Washington State adopted regulation WAC 284-23-580 effective as of 1/17/2008 clarifying rules for insurers and employers relating to business owned life insurance.  Among other things, the regulation requires the insurer to obtain and keep evidence that the business had an insurable interest in the life of the insured and that the insured was a “key person” at the time the contract was made.  Importantly, the regulation also stipulates that policies resulting from exchanges under IRC § 1035 do not require the insurer to obtain a new employee consent so long as the incumbent insurer provides the new insurer a copy of the original signed consent.  With the exception of DE and GA, most states are silent on the implications of IRC §1035 exchanges.

Although the WA regulation requires the insurer to obtain and keep evidence that the business had an insurable interest in the life of the insured and that the insured was a “key person” at the time the contract was made, we believe it is advisable for employers to adopt similar internal policies and practices (we include such documentation within our BOLI Permanent Records Binders).  We are also advising new clients to include a provision within insurer letters of understanding requiring the insurer to provide a replacing insurer copies of employee consents in the event of IRC § 1035 exchanges.

 

BASEL II

According to American Banker and Risk Magazine, The Financial Stability Forum said that the Basel Committee on Banking Supervision is developing new rules likely to raise capital requirements for off-balance sheet holdings, certain asset classes and for liquidity risk.  Guidance related to liquidity risk, including that attendant to off-balance sheet holdings, is expected to be published by July.  The Basel Committee is also expected to raise the capital requirements for certain complex structured credit products (e.g., CDO, ABS).

 

Treasury’s Blueprint for a Modernized Financial Regulatory Structure

On March 31st, the Department of the Treasury issued its voluminous ‘Blueprint for a Modernized Financial Regulatory Structure.’  The report proposes both “short-term” and “intermediate-term” recommendations intended to improve and reform the U.S. financial services regulatory framework.  The short-term measures are directed to addressing the recent events in the mortgage and credit markets.  The intermediate recommendations attempt to modernize the regulatory structure of the banking, insurance, securities and futures markets.  Echoing several recent private studies, the Treasury recommends the establishment of an optional federal charter (OFC) for insurers within the current structure.  The OFC approach would enable federal chartering, licensing, regulation and supervisory oversight of insurers, reinsurers and producers.  The current state-based regulatory framework would continue for those electing to forego federal regulation.

Not surprisingly, the proposal elicited strong reactions from state regulators who strenuously oppose the change.  Representative Paul Kanjorski, Chairman of the House Financial Service Committee’s Capital Markets Subcommittee announced on April 16th that he plans to introduce a bill seeking to establish an interim federal insurance oversight agency.

The Treasury Report may provide traction for two National Insurance Act bills introduced in 2007 (HR 3200 and SB 40) or similar measures yet to be introduced.  At a minimum, the report is likely to further intensify the NAIC’s and other state regulator’s resolve to improve the efficiency of the present state- based system.

 

ACCOUNTING DEVELOPMENTS

FASB Statement No. 162

Last week FASB published Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles.  FAS 162 provides a framework for selecting the principles used in the preparation of financial statements in conformity of GAAP.  The existing GAAP hierarchy set forth in AICPA Statement of Auditing Standards No. 69 has been criticized for being directed to auditors rather than the business entity and for being complex.  FASB concluded that the GAAP hierarchy should be directed to entities because they are responsible for selecting the accounting principles for financial statements in conformity of GAAP (not the auditor).

The statement will become effective 60 days following the SEC’s approval of PCAOB amendments to AU Section 411, ‘The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.’

 

Ad Hoc LRA – May 15, 2008

BOLI Related Earnings Announcements

We have received a number of inquiries regarding Wachovia and BB&T’s recent BOLI related earnings announcements.  Accordingly, we prepared this BOLI special report.

 

Ad Hoc LRA – May 20, 2008

BOLI Related Earnings Announcements

There is an article on page C-1 of the Wall Street Journal (also available on WSJ.com) today titled ‘Citigroup Hedge-Fund Loss Weighs on Three Banks‘ by David Enrich which discusses Fifth Third Bank’s and Wachovia’s recent BOLI related losses.