The Dodd-Frank Act established the Financial Stability Oversight Council (FSOC) to identify threats to the financial stability of the U.S., promote market discipline, and respond to emerging risks to the stability of the U.S. financial system. The FSOC held its first meeting on October 1. Chaired by Treasury Secretary Geithner, the FSOC is made up of ten voting members – nine federal financial regulatory agencies and an independent member with insurance expertise – and five nonvoting members (including a state insurance commissioner, a state banking supervisor, and a state securities commissioner). In addition to two public resolutions discussed below, the FSOC approved its bylaws, a transparency policy and an “Integrated Implementation Roadmap.” The roadmap outlines a coordinated timeline of goals, both of the FSOC and its independent member agencies, to fully implement Dodd-Frank. The roadmap also includes statutory deadlines as well as non-statutory targets for agency work that may be updated over time.
On October 6, the FSOC issued a request for information to the public as part of its mandated study on the implementation of the Dodd-Frank prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds under Dodd-Frank. The FSOC is reviewing ways the Volcker Rule can best serve to promote and enhance the safety and soundness of banking entities, enhance financial stability, and reduce conflict of interests among other considerations. The notice also requests comment on some of the practical challenges of implementing Volcker such as how the definitions in the section should be informed, the factors that should be taken into account in making recommendations on whether additional capital and quantitative limitations are appropriate for permitted activities under the rule and the appropriate time requirements for divesting out of illiquid assets. The federal banking agencies along with the SEC and CTFC must consider the findings of the FSOC study in developing and adopting regulations to implement the Volcker Rule. The study is due to be completed within 6 months of enactment. The comment period ends November 5, 2011.
| Key Volcker Rule Dates | |
|---|---|
| November 5, 2010 |
|
| January 21, 2011 |
|
| October 21, 2011 |
|
|
July 21, 2012
(or one year after the issuance of final agency regulation, whichever is earlier) |
|
|
July 21, 2014
(subject to possible extensions) |
|
Also on October 6, the FSOC issued a notice for proposed rulemaking to gather information as it begins to develop the specific criteria and analytical framework by which it will designate nonbank financial companies for enhanced supervision under Dodd-Frank. Those nonbank financial companies found to be systemically significant will be subject to regulation by the Federal Reserve Board and heightened and broadened prudential standards and other restrictions. The FSOC has the discretion to determine appropriate risk-related factors, but Dodd-Frank also included 10 specific considerations the FSOC must take into account including the extent of the leverage of the company; the importance of the company as a source of credit for households, businesses and government; a company’s nature, scope, size, scale, concentration, interconnectedness, and mix of activities; and the degree to which the company is already regulated by 1 or more primary financial regulatory agencies. It is expected that the largest life insurers will be deemed to be systemically significant. Dodd-Frank also mandated a procedure the FSOC must follow in designating a company as systemically significant including 30 days notice and an opportunity for a hearing. The notice clearly stated that it was not seeking comment on the procedural requirements. The comment period ends on November 5.
On October 19, the Federal Deposit Insurance Corporation (FDIC) published a proposed rule and requested public comment on its liquidation authority granted under the Dodd-Frank Act. The insolvency of systemically important insurance companies or their systemically important subsidiaries and affiliates requires additional considerations than the liquidation of other types of systemically important financial institutions. The Act gives states the primary authority over insurer insolvency. However, if a state regulator takes more than 60 days to file the appropriate appointment or receiver action in court for a systemically important insurer, Dodd-Frank gives the FDIC the authority to step in and liquidate the insurer in accordance with the applicable state insurance laws. A systemically important parent company, subsidiary or affiliate of an insurance company, where such entity itself is not an insurance company, will be subject to FDIC’s authority under Dodd-Frank. The FDIC has taken the position that the ordinary liquidation of a covered financial company that is a subsidiary or affiliate of an insurance company should not unnecessarily interfere with the liquidation or rehabilitation of the insurance company and that the interests of the policyholders should be respected. Therefore, the FDIC proposed that it would avoid taking a lien on some or all of the assets of a covered financial institution that is an insurance company or the insurance company’s subsidiaries or affiliates unless necessary. The notice reaffirmed the FDIC’s authority to apply such liens and that the use of such liens would be determined in the FDIC’s sole discretion. The comment period on the proposed rule itself ends November 18 and responses to questions posed in the notice are due by January 18, 2011.
On September 30, the federal banking agencies published proposed rulemaking (relevant section begins on Federal Register page 60503 (page 7 of the PDF)) to implement a number of changes to the Call Report requirements. One change would require banks to distinguish between general account BOLI and separate account BOLI on schedule RC-F. Currently, there is a single line item for a bank’s collective BOLI holdings. The notice referenced the different risk characteristics (e.g., credit risk and investment risk) of general account and separate accounts and also mentioned the significant losses that some banks have recorded in recent years due to market volatility. Outside of recordkeeping purposes no other proposed uses of the information were articulated.
Notably, the proposed rule was silent on the appropriate reporting of hybrid policies which blend attributes of general account and separate account. The comment period ends November 29 and the proposed changes would be effective March 31, 2011.
On October 12, the New York State Insurance Department circulated an early draft of an amendment to the variable life insurance regulation that includes new sections specifically covering private placement variable life insurance (prior regulations appear to make no references to “private placement” policies). The amendment updates when an issuer would have to value separate account assets, pay death benefits and offer policyholders an option to transfer all separate account funds to the general account among other items specifically drafted to include private placement variable policies. It appears these provisions are directed to high-net worth individual policies more so than COLI/BOLI products. We will be working with carriers and other interested parties to gain a better understanding of the Department’s intent, any potential BOLI/COLI ramifications and will submit comments as necessary. The initial comment period ended on October 25, but there will be an additional comment period once the amendment is published in the state register.
On October 21, the President’s Working Group on Financial Markets released a report outlining possible options for operational and regulatory money market reform. These options range from measures that could be implemented by the SEC under current statutory authorities to broader changes that would require new legislation, coordination by multiple government agencies, and the creation of new private entities. For example, a new requirement that money market funds adopt floating net asset values (NAVs) or that large funds meet redemption requests with in kind distributions could be accomplished by SEC rule amendments. In contrast, options such as a private emergency liquidity facility, insurance for money market funds, conversion of money market funds to special purpose banks, or a two-tier system of money market funds that might combine some of the other measures likely would involve a coordinated effort by the SEC, bank regulators and financial firms. The working group requests that the FSOC consider the options discussed in the report to identify those likely to materially reduce money market funds’ susceptibility to runs and to pursue their implementation. To assist the FSOC, the SEC, as regulator of money market funds, will solicit public comments in the near future.
Fifth Third sued Transamerica and Clark Consulting in an attempt to recover $323 million in losses incurred as a result of BOLI investments in the Falcon Fund. This matter settled on August 3 outside of court. Fifth Third’s 3rd quarter earnings release provided additional details on the settlement terms specifically stating that Fifth Third received $152 million and incurred $25 million in legal expenses; therefore, realizing a net gain of $127 million.