A new Iowa bill focusing on employer-owned life insurance was introduced on January 25th. The bill would create a new Code section 507B.4 which would establish as an unfair or deceptive act or practice for an insurance company to issue an employer-owned life insurance contract on the life of an employee for which the employer is the named beneficiary unless an equivalent employer-owned life insurance policy is issued at the same time on the life of the employee with the employee’s dependents named as beneficiaries. The legislation also provides that if an employer-owned life insurance contract is issued on the life of an employee in violation of the new provision, the employee’s dependents shall be treated as beneficiaries under the insurance contract regardless of who is named as beneficiary under the contract. A person who violates the new provision may be subject to cease and desist orders, license suspension or revocation, and civil penalties.
We have informed several carriers’ legal departments about this bill and will pass along updates as the industry responds to this proposed legislation.
On January 21st, the federal banking and thrift regulatory agencies announced the final risk-based capital rule related to the Financial Accounting Standards Board’s adoption of Statements of Financial Accounting Standards Nos. 166 and 167. These new accounting standards make substantive changes to how banking organizations account for special purpose entities (SPEs) on the balance sheet (i.e., many off-balance sheet SPEs must now be reflected on the balance sheet). Banking organizations affected by the new accounting standards generally will be subject to higher risk-based regulatory capital requirements. The agencies believe that the rule better aligns risk-based capital requirements with the actual risks of certain exposures. It also provides an optional phase-in for four quarters of the impact on risk-weighted assets and tier 2 capital resulting from a banking organization’s implementation of the new accounting standards. The delay and subsequent phase-in periods of the implementation will apply only to the agencies’ risk-based capital requirements, not the leverage ratio requirement. The rule also provides a reservation of authority to permit the agencies to require a banking organization to treat entities that are not consolidated under accounting standards as if they were consolidated for risk-based capital purposes, commensurate with the risk relationship of the banking organization to the structure.
The final rule will take effect 60 days after publication in the Federal Registers, which is expected shortly. Banking organizations may choose to comply with the final rule as of the beginning of their first annual reporting period after November 15, 2009.
On January 6, financial regulators (i.e., FRB, FDIC, NCUA, OCC, OTS and FFIEC) issued an Advisory on Interest Rate Risk Management reminding financial institutions regarding supervisory expectations of sound practices for managing interest rate risk (IRR). The Advisory was issued in response to the present, historically low, short-term interest rate environment and affirms the need for vigorous processes for measuring and mitigating exposures to increasing interest rates.
Because each regulator has previously issued guidance regarding the management of IRR, the primary purpose of the Advisory is to re-emphasize the importance of effective policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to IRR exposures. While there are no specific references to BOLI within the Advisory, the following guidance is worth noting:
“Such [IRR management] policies and procedures should ensure the IRR implications of significant new strategies, products and businesses are integrated into IRR management process. Policies and procedures also should document and provide for controls over permissible hedging strategies and hedging instruments. Institutions should ensure the assessment of IRR is appropriately incorporated in firm-wide risk management efforts so that the interrelationships between IRR and other risks are understood.”
Given the nature and extent of regulator mandated IRR measurement methodologies and stress testing requirements (both scenario and sensitivity analysis), institutions owning material amounts of BOLI, especially separate account BOLI with embedded stable value features, might consider reviewing existing IRR/BOLI policies and procedures (i.e., to determine applicability of the Advisory as well as for general update/improvement).
On January 21st, President Obama called for new restrictions on the size and activities of U.S. banks. Among the proposed restrictions is the so-called “Volcker Rule,” named for Paul Volcker, former Chairman of the Federal Reserve Board and current chairman of the President’s Economic Recovery Advisory Board. The Volcker Rule would prohibit a bank or bank holding company from owning, investing in, or sponsoring hedge funds or private equity funds, or engaging in proprietary trading for its own profit (i.e., unrelated to serving its customers). The President also proposed to limit the consolidation of the financial sector by placing broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits The Administration has signaled that it wants to include these new restrictions in the pending comprehensive financial reform legislation.
The President also announced his intention to propose a Financial Crisis Responsibility Fee that would require the largest and most highly leveraged financial firms to pay back taxpayers for the TARP program. The Responsibility Fee is expected to raise $117 billion over 12 years and $90 billion over the next 10 years. The fee would be levied on the debts of financial firms with more than $50 billion in consolidated assets, with the aim of deterring against excessive leverage for the largest financial firms. If enacted, it has been estimated that over 60% of revenues will most likely be paid by the 10 largest firms.
On January 27th, the SEC adopted new rules designed to strengthen the regulatory requirements governing money market funds. The new rules require money market funds to have a minimum percentage of their assets in highly liquid securities so those assets can be readily converted to cash to pay redeeming shareholders. Currently, there are no minimum liquidity mandates. The rules redefine “illiquid” securities as any security that cannot be sold or disposed of within seven days at carrying value. The new rules also place new limits on a money market fund’s ability to acquire lower quality (Second Tier) securities and shorten the average maturity limits for money market funds. In addition to new monthly disclosures and reporting, the rules also require money market funds to be able to process purchases and redemptions electronically at a price other than $1.00 per share. This requirement facilities share redemptions if a fund were to break the buck. Also a money market fund’s board can suspend redemptions if the fund is about to break the buck and decide to liquidate the fund without requesting an order from the SEC. Instead the fund is required to notify the SEC before relying on the rule. Finally, the new rules expand the ability of affiliates of money market funds to purchase distressed assets from the funds in order to protect a fund from losses. Currently, an affiliate cannot purchase securities from the fund before a ratings downgrade or a default of the securities unless it received individual approval.
The new rules are effective 60 days after their publication in the Federal Register. Mandatory compliance with some of the rules will be phased in during the year. The final rules, including compliance dates, are expected to be posted on the SEC website soon.
Earlier this month, this matter was settled for an undisclosed amount. Before settling, this lawsuit garnered a great deal of negative press with multiple articles in the Houston Chronicle as well as being referenced in Michael Moore’s film Capitalism: A Love Story.
On January 5th, the IRS and Treasury Department issued Notice 2010-06 which provides solutions on how to fix many plan document problems, as well as other guidance on Section 409A issues. Taxpayers using the Notice may be able to avoid, or at least significantly limit, the tax penalties that could otherwise be imposed for a Section 409A document failure. The Notice provides strong incentives for an employer to identify and correct document failures as soon as possible. The Notice provides more favorable treatment for corrections made by December 31, 2010.