On May 20, the U.S. Senate passed S. 3217 entitled, “Restoring American Financial Stability Act of 2010.” The House reform bill, “Wall Street Reform and Consumer Protection Act,” passed on December 11, 2009. There are significant differences between the House Bill and the Senate Bill, which will be resolved through a conference committee. The conference process is expected to take several weeks, and proponents of the legislation hope to have the compromise bill approved by Congress and delivered to the President by the 4th of July.
We are closely tracking many elements, because they have the potential to significantly impact client banks, SVP providers and BOLI carriers. It is still too early to predict likely outcomes, but we will pass along updates as soon as we become aware of them.
FASB has issued an Exposure Draft of a proposed Accounting Standards Update, intended to improve accounting for financial instruments. The proposal would incorporate both amortized cost and fair value information about financial instruments held for collection or payment of cash flows. One goal of the proposal is to provide more timely information regarding anticipated credit losses to financial statement users. This would be accomplished by removing the “probable” threshold for recognizing credit losses. We are reviewing the proposal for any possible impact on stable value protection (SVP) providers or purchasers of SVP and other BOLI implications. FASB will be hosting a live webcast on the financial instruments proposal on June 30th. The comment period lasts until September 30th.
As reported in our May 6 Ad Hoc LRA, the Congressional Research Service (CRS) issued a report entitled “Corporate-Owned Life Insurance (COLI): Insurance and Tax Issues.” This report, prepared for members and committees of Congress, appears to question the legitimacy of COLI’s tax treatment. The report did not make any specific recommendations. However, the tone appears to be largely in favor of the 2010 and 2011 Administration Budget Proposals’ provision, which would limit the exemption from interest disallowance to employer-owned life insurance contracts covering 20% owners (i.e., the interest expense disallowance would be expanded to apply to policies covering officers and directors). The budget proposals are prospective in nature. To date, no legislation has been introduced on the matter.
On May 4th, the Congressional Research Service (CRS) issued a report entitled, “Corporate-Owned Life Insurance (COLI): Insurance and Tax Issues.” This report prepared for members and committees of Congress appears to question the legitimacy of the tax treatment of COLI. According to the report summary, the report includes a general background on COLI, identifies current legislative proposals regarding COLI (e.g., the Administration’s 2011 Budget Proposal to limit interest expense disallowance to 20-percent owners), and discusses federal and state laws, regulations and limitations with respect to COLI (including some legislative history).
The report asserts that tax arbitrage is “commonly cited as a chief motivation for COLI transactions.” It also questions COLI’s use for funding employee benefits. Additionally, the report generally only references negative secondary sources including reference to old leveraged COLI tax liability suits and five news articles by The Wall Street Journal’s Ellen E. Schultz that depict COLI negatively and quite inaccurately (titles such as “Worker Dies, Firm Profits – Why?” and “Banks Use Life Insurance to Fund Bonuses”).
While this report does not make any specific recommendations, the tone appears to be largely in favor of the 2011 Budget Proposal’s provision relating to interest expense disallowance. The timing of this report may be important as the Senate debate on financial reform bill S. 3217, The Wall Street Transparency and Accountability Act of 2010 is well underway. We will be monitoring to see if any COLI-related amendments are introduced.
About the Congressional Research Service: The Congressional Research Service (CRS) serves shared staff to congressional committees and Members of Congress. CRS experts assist at every stage of the legislative process — from the early considerations that precede bill drafting, through committee hearings and floor debate, to the oversight of enacted laws and various agency activities.