This month, the Administration issued its last legislative text as prescribed by its white paper, “Financial Regulatory Reform: A New Foundation” released in June. Among the proposed legislation delivered to Capitol Hill was the National Bank Supervisor and Resolution Authority legislation. This proposed legislation would create a National Bank Supervisor through the consolidation of the Office of Thrift Supervision (OTS) and Office of the Comptroller of the Currency (OCC); provide the government with emergency authority to resolve any large, interconnected financial firm in an orderly manner; provide the Treasury authority to appoint a conservator or receiver; require prompt corrective action from Tier 1 FHCs should their capital levels decline; and require all Tier 1 FHCs to prepare and maintain a credible plan for the rapid resolution of the firm in the event of severe financial distress. Also proposed was the Investor Protection Act of 2009 which would prohibit credit rating agencies from providing other services, like consulting services, to companies that contract for ratings; prohibit or require the management and disclosure of conflicts of interest arising from the way a rating agency is paid; and require that credit rating agencies implement procedures to review ratings of an issuer if that issuer hired an employee of a rating agency within a year prior to its rating.
In our July LRA, we noted that the SEC is requesting public comments on its proposals relating to the regulatory framework of money market funds. The comment period ends September 8, 2009. In June, the Obama Administration directed the President’s Working Group on Financial Markets, a government advisory body, to consider whether money market funds should be forced to abandon the practice of maintaining a $1 net asset value (NAV) or be required to set up “emergency liquidity facilities.” The group is set to issue a report on the money market industry on September 15th.
As the life settlement industry develops, it will be worthwhile to monitor how the various state laws evolve and how courts will apply those laws. There are some principles that BOLI/COLI policies and life settlement transactions have in common such as transfer for value and insurable interest matters. Last month, the U.S. District Court for the Southern District of New York granted a motion by defendants, New York investors in life insurance policies, to dismiss a suit by the executor of the insured’s estate and others, holding that under California law, only the issuing insurer has standing to challenge a policy’s validity on the ground that the purchaser lacked an insurable interest. In contrast, New York Insurance Code Section 3205(b)(4) allows either the insured or his executor to bring an action to recover benefits wrongfully paid to a third party. In order to determine whether California or New York law governed, the court applied the “grouping of contacts” choice of law theory. Under this approach, a court weighs all the significant contacts and identifies which contacts are to be given more weight in its analysis. In this case, the deceased insured was a California resident, each of the plaintiffs were domiciled in California, a number of the insurance policies had California as the governing choice of law, the defendants were Delaware companies with principal places of business in New York, the contracts were negotiated, placed and drafted in New York and finally the premiums were paid from New York. The opinion stated that when the rights created by a life insurance contract are disputed, courts generally apply the local law of the state where the insured was domiciled at the time the policy was applied for unless there is some overarching governmental interest in the matter. Recognizing no overarching New York governmental interest, the court determined that California law governed the dispute and dismissed the plaintiffs’ suit.
On August 27th, the Basel Committee on Banking Supervision released a set of high level guiding principles to assist the International Accounting Standards Board (IASB) in addressing issues related to provisioning, fair value measurement and related disclosures. The guidance suggests that the new standard should not be overly complex and should limit the use of options and need for interpretations. On fair value, the guidance provides that the new approach should not result in an expansion of fair value accounting (this is in contrast to FASB, which recently stated that they are considering expanding fair value to encompass other assets, including loans); should not require fair value for items which are managed on an amortized cost basis in accordance with the firm’s business model; should recognize that fair value is not effective when markets become dislocated or are illiquid; and should promote a level playing field across jurisdictions. FASB is expected to issue its Exposure Draft addressing the measurement, classification and impairment of financial instruments by the end of this year or early 2010.
This month, the Congressional Budget Office (CBO) released Budget Options, Volume 2 one of several reports provided regularly to the House and Senate Committees on the Budget. This volume presented 188 options for altering federal spending and revenue. Under Revenue Option 17, life insurance companies would inform policyholders annually of the investment income that had been realized on their accounts and policyholders would include those amounts in their taxable income for that year. Under this option, disbursements from life insurance policies would no longer be taxable when they were paid. The list of options is intended to reflect a range of possibilities rather than a ranking or a comprehensive list. While inside buildup is listed in the report, there does not seem to be real momentum for insurance-related revenue raisers at this time.
The federal banking and thrift regulatory agencies are seeking comment on a proposed regulatory capital rule related to the FASB’s adoption of Statements No. 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46(R). Beginning in 2010, these accounting standards will make substantive changes to how banking organizations account for many items, including securitized assets, that are currently excluded from these organizations’ balance sheets. Banking organizations affected by the new accounting standards generally will be subject to higher minimum regulatory capital requirements. The agencies’ proposal seeks comment and supporting data on whether a phase-in of the increase in regulatory capital requirements is needed. It also seeks comment and supporting data on the features and characteristics of transactions that, although consolidated under the new accounting standards, might merit an alternative capital treatment, as well as on the potential impact of the new accounting standards on lending, provisioning, and other activities. Comments on all aspects of the proposed rule are due within 30 days after its publication in the Federal Register, which is expected shortly.