Dodd-Frank Implementation Hearing
On February 14, 2013, the Senate Committee on Banking, Housing and Urban Affairs held a hearing on the status of Wall Street Reform. Panelists included representatives from Treasury, the FRB, FDIC, OCC, CFPB, SEC and CFTC.
The OCC’s testimony provided an update to the Committee on completed and ongoing rulemakings related to Dodd-Frank. Completed rulemakings include: 1) Revised Regulations to Remove References to Credit Ratings; 2) Final Rule on Dodd-Frank Stress Tests; 3) Interim Final Rule on Lending Limits; 4) Final Rule on Appraisals for Higher Priced Mortgage Loans; and Final Rule on Retail Foreign Exchange Transactions.
Ongoing rulemakings discussed include: A) Volcker Rule Regulations; B) Credit Risk Retention Rule; C) Margin and Capital Requirements for Covered Swap Entities; and D) Incentive-Based Compensation Rules.
The Comptroller noted that the agencies received more than 18,000 comments regarding the proposed Volcker regulations. Overall, commenters urged the agencies to simplify the final rule and reduce compliance burdens. No timeframe was provided for the release of final Volcker regulations, but the industry expects them to be released sometime this summer. As previously reported, the regulators intend to administer the Volcker regulations in accordance with the 2-year conformance period mandated by the FRB.
The OCC’s testimony did not address the status of proposed capital rules (commonly referred to as Basel III).
The FRB’s testimony identified the following four tasks as priorities for 2013: (1) continuing key Dodd-Frank Act and Basel III regulatory implementation work; (2) further developing systematic supervision of large banking firms; (3) improving the resolvability of large banking firms; and (4) reducing systemic risk in the shadow banking system.
According to the FRB testimony, the banking agencies hope to finalize the Basel III rulemaking this spring.
U.S. Senate Bill 173 – Flat Tax Proposal
On January 29, 2013, Senator Richard Shelby (R-AL) introduced Senate Bill 173, Simplified, Manageable, And Responsible Tax Act (“SMART Act”) which would repeal the current Internal Revenue Code and replace it with a flat tax. The proposed flat tax rate is 17%. The bill would also repeal the Alternative Minimum Tax. The bill is proposed to apply to taxable years beginning after December 31, 2013.
The bill was referred to the Committee on Finance. Historically, there have been many flat tax proposals, but to date, none have progressed sufficiently to appear likely for adoption. A flat tax such as SB 173 would have a material impact on all BOLI and COLI products. While we believe it is unlikely it will progress, we will monitor it closely due to the severity of its potential implications.
U.S. House Bill 613 – Capital Adequacy for Large Bank Holding Companies
Congressman John Campbell (R-CA) has sponsored a bill (H.R. 613) that would increase capital requirements for the largest bank holding companies (those with total consolidated assets greater than $50 billion). Among other provisions, the bill would require each bank holding company to issue and maintain long-term subordinated debt of at least 15 percent of total consolidated assets.
In a Bloomberg interview, Mr. Campbell offered the following rationale for this bill: “Being big is not a problem in and of itself, but being big in a sense that it creates a competitive disadvantage and a systemic problem is a bad thing. If you want to stay big that’s fine, you can stay big. But it’s going to be rather expensive.”
The bill would also repeal the Prohibitions on Proprietary Trading (Section 13 of the BHC Act of 1956) and the Enhanced Prudential Standards (Section 165 of Dodd-Frank Act).
The bill was introduced on 2/12/2013 and referred to the House Committee on Financial Services.
NY COLI Franchise Tax Bills
Similar to prior years, NY State Representative Marcos Crespo and NY State Senator Ruben Diaz have introduced companion Assembly (AB 3896) and Senate (SB 388) bills for the 2013 session which would impose a franchise tax on any company receiving benefits from life insurance policies it has obtained on its employees and/or retirees. The tax would be equal to 50% of the gross receipts from all proceeds received from such policies.
Both bills have been referred to committees. We will continue to track this proposal and continue our discussions with carriers regarding their efforts to thwart its adoption.
Cost of Insurance Litigation
A number of cases are in process regarding an insurance carrier’s discretion to set Cost of Insurance (COI) rates and other expenses. This topic is likely to garner increased attention by COLI/BOLI owners in the coming years as general account insurance carriers continue to be constrained by contractually guaranteed minimum guaranteed crediting rates that in many instances are significantly higher than current market yields. As such, carriers are likely to begin increasing policy expenses to offset (at least partially) the impact of crediting above-market rates. Most general account BOLI programs fail to provide explicit policyholder protections regarding a carrier’s right to increase expenses (other than contractually guaranteed maximums).
Litigation continues in a number of jurisdictions in which policyholders are contesting certain increases in expenses, particularly the COI expense. In January 2013, rulings in California and Wisconsin reached materially different conclusions.
A federal district court in California denied the carrier’s (Conseco Life) motion for summary judgment and partially granted the plaintiffs’ cross motion in ongoing multidistrict litigation. The court found that policy language regarding COI rates was ambiguous and construed the ambiguity against the carrier, finding that “changes to the COI rates are contractually bound to changes in mortality rates.”
A federal district court in Wisconsin granted Midland National’s motion for summary judgment and denied the plaintiff’s motions in a similar matter. This court interpreted the presence of the guaranteed maximum rates to clearly indicate discretion to increase the rates. Further, since the increased rates were below the guaranteed maximums, the court found that the “current rates cannot in any reasonable sense be thought to exceed an amount that reflects a mortality risk.”
The plaintiffs alleged that the COI rates were to be “based on” changes in mortality factors (i.e., solely on such factors). The court rejected this argument comparing it to a shipping company whose rates are “based on” the size, weight and destination of a package. The court noted that it is understood that other factors will be considered by the shipper (e.g., cost of fuel, employee salaries, etc.); however, that does not mean that the charges were not “based on” the indicated factors.
An Indiana state trial court recently denied a motion to dismiss a putative class action against Lincoln National Life Insurance Company noting that other courts had reached different interpretations of the phrase “based on” as it relates to COI expenses. As such, the court concluded that the phrase was ambiguous and held that it should be construed against the drafter.
A legal alert published by Sutherland Asbill & Brennan LLP discusses various rulings.
We encourage and assist our clients to gain a better understanding regarding the latitude carriers have to increase COI charges. This is especially important with non-experience rated cases where even small increases can have a material impact on policy economic performance.