Proposed Volcker Rule Regulations Released
In mid-October, the Federal regulators (FDIC, Federal Reserve, OCC, and SEC) released the much anticipated proposed Volcker Rule regulations. The Volcker Rule, embodied in Section 13 of the Bank Holding Company Act, generally prohibits a covered banking entity from proprietary trading and from investing in or controlling private equity or hedge funds. The proposed rule is broader than the Volcker Rule requires and provides some greater specificity on certain provisions of Dodd-Frank. The agencies recognized that the Dodd-Frank covered funds definition may capture entities and corporate structures that would not usually be considered a “hedge fund’ or “private equity fund.” Importantly for separate account (SA) BOLI holders, the agencies determined that applying the Volcker Rule prohibitions to SA BOLI would eliminate an investment that helps banking entities to reduce their costs of providing employee benefits as well as other costs.
Therefore, the agencies used their discretion and, in Section 14 of the proposed rule, explicitly provided that a banking entity’s acquisition, retention and/or sponsorship of separate account BOLI are permitted activities under certain conditions. A banking entity that purchases BOLI (i) may not control the investment decisions regarding the underlying assets or holdings of the separate account; and (ii) must hold its ownership interests in the separate account in compliance with applicable supervisory guidance provided by the appropriate Federal regulatory agency regarding BOLI.
Volcker Rule prohibitions will become effective on July 21, 2012, whether or not regulations are finalized by that date. The comment period on the proposed regulations ends on January 13, 2012.
FSOC Proposes Three-Part Test to Identify Non-Bank SIFIs
Dodd-Frank Section 113 authorizes the Financial Stability Oversight Council (FSOC) to require a non-bank financial company to be supervised by the Federal Reserve if the FSOC determines that their material financial distress or the nature, scope, size, scale, concentration, interconnectedness, or mix of activities of the company could pose a threat to the financial stability of the United States. On October 11, the FSOC proposed a rule that would establish a three-part test to identify non-bank systemically important financial institutions (non-bank SIFIs).
The proposed rule consists of a three-stage screening process to identify which non-bank firm might qualify as a SIFI. The first stage (Stage 1) is based on a basic two-part profile in which a firm would move to the next step in the screening process if it met an asset test, and any one of several other quantitative thresholds. The Stage 1 asset test marker is $50 billion in global assets for U.S. firms, or $50 billion in assets in the United States for foreign non-bank financial firms. A firm of that size need only meet one other threshold to move into the second stage of the FSOC’s consideration. The other quantitative thresholds are: (i) $30 billion or more in gross notional credit default swaps (CDS); (ii) $3.5 billion of derivative liabilities (calculated after accounting for netting agreements and cash collateral); (iii) $20 billion of outstanding loans taken or bonds issued; (iv) leverage ratio of total assets to total equity of 15 to 1; and (v) short-term debt equal to 10% of total consolidated assets.
Firms identified as potential risks in Stage 1 would then go through a second stage with a deeper analysis that includes qualitative factors, such as consultations with primary regulators. Finally, the third stage would involve a decision by the FSOC whether to designate the firm as a non-bank SIFI. Any firm designated as a non-bank SIFI could request a hearing and try to convince the FSOC to modify its determination. Comments on the proposed rule are due by December 19, 2011.
Federal Insurance Office Study
Under Dodd-Frank, the Federal Insurance Office (FIO) is required to conduct a study on how to modernize and improve the system of insurance regulation in the United States. On October 17, the FIO published its request for comment in the Federal Register. It poses twelve questions with half of them focusing on Federal regulation of insurance matters. The comment period ends on December 16, 2011.
Federal Reserve Approves Resolution Plan Under Dodd-Frank
In the last LRA, we noted that the Federal Deposit Insurance Corporation (FDIC) approved a final rule to be issued jointly with the Federal Reserve Board to implement Section 165(d) of Dodd-Frank. On October 17, the Federal Reserve approved the rule. The final rule requires bank holding companies with assets of $50 billion or more and non-bank financial firms designated by the Financial Stability Oversight Council (FSOC) for supervision by the Federal Reserve to annually submit resolution plans to the Federal Reserve and the FDIC.
NAIC Fund Demand Disclosure for Institutional Business
As we reported last month, the National Association of Insurance Commissioners (NAIC) is evaluating a new disclosure requirement, based on the New York Liquidity and Severe Mortality Inquiry, which would require insurers to disclose stress liquidity exposures associated with “institutional business.” According to the definition included in the exposure draft, institutional business would not include any separate account business where the fund demand will not be required from an insurer’s general account. There would be a table for insurers to list their 10 largest holders of BOLI and COLI. MBSA reached out to carriers and others in the industry for feedback regarding the anticipated outcome of the initiative. At least one carrier believes that the NAIC will not move forward with the new disclosure requirements at this time.
Insurance carriers who are subject to the New York inquiry already provide a list of their largest BOLI exposures. However, the information is provided on a confidential basis and actual client names are not included on the forms.
MetLife Seeks to End Its Supervision by the Federal Reserve
In an October 25 press release, MetLife disclosed that it the Federal Reserve denied its capital distribution plan that included both an increase in MetLife’s annual dividend as well as the resumption of stock purchases. According to the release, the Federal Reserved concluded that MetLife plan should be tested under a revised adverse macroeconomic scenario which is being developed for those firms that will participate in the 2012 Comprehensive Capital Analysis and Review (CCAR). The CCAR is the Federal Reserve’s forward-looking evaluation of the internal capital planning processes of large, complex bank holding companies and their proposals to undertake capital actions such as increasing dividend payments or repurchasing or redeeming stock. Nineteen bank holding companies have been subject to CCAR since its inception in 2009.
MetLife also announced that it is moving forward with plans to explore the sale of the depository business and mortgage origination activity conducted at MetLife Bank and to take necessary steps to no longer be a bank holding company. MetLife CEO Steven Kandarian stated that such actions would ensure that MetLife is able to operate on a level regulatory playing field with other insurance companies. Regardless of these actions, if MetLife is determined to be a non-bank systemically important financial institution even without the banking business, it would continue to be supervised by the Federal Reserve.