In this matter, the plaintiff class sued Hartford for misappropriation of their personal information in connection with COLI/BOLI policies which were allegedly issued without employee notice or consent in the 1980s and 1990s. On June 14th, the parties filed settlement documents for court approval. The settlement would provide for a maximum of approximately $539,000 for an estimated class of 186 members. Each class member would be entitled to $1,800 after fees and costs, the named plaintiffs would receive an additional $5,000 and the plaintiffs’ counsel would be awarded $180,000 in attorney fees. The plaintiffs who do not opt-out of the settlement class would be releasing all claims of any kind connected to the Hartford COLI policies, which would seemingly preclude them from bringing a separate suit against the individual employers (policyholders) connected to the matter.
On June 25, the final language of the financial reform bill was completed by a conference committee charged with reconciling the Senate and House reform bills. This voluminous bill is over 2,300 pages. There were a number of major differences between the bills that required a number of compromises. For example, the new Consumer Financial Protection Bureau will be housed in the Federal Reserve instead of being a standalone agency as prescribed in the House bill. The “Volcker Rule”, which would have banned federally insured firms from trading for their own accounts, was subject to a number of revisions. Banks will now have two years to wind down their proprietary trading activities and what constitutes those trades has been more explicitly defined. Insurance companies would retain limited trading privileges and banks would be able to invest 3% of their Tier 1 capital in hedge/private equity funds.
Regarding derivatives regulation, the conferees forged a compromise that would allow banks to trade derivatives deemed to have value in hedging against their losses; instruments such as interest rate and foreign exchange swaps would be allowed, while making bets on commodity or energy futures would be forced into separate operations. On June 30, Senators Christopher Dodd (D-CT) and Blanche Lincoln (D-AR) wrote a letter to clarify the bill’s legislative intent as it relates to derivatives. “Congress recognized that the capital and margin requirements in this bill could have an impact on swaps contracts currently in existence,” the senators wrote. “We provided legal certainty to those contracts currently in existence, providing that no contract could be terminated, renegotiated, modified, amended or supplemented (unless otherwise specified in the contract) based on the implementation of any requirement in this Act.” The letter also reaffirmed that the legislation does not authorize regulators to impose margin or capital requirements on end users (entities that use swaps to hedge or mitigate commercial risk), nor require clearing for end user trades.
The cost of the legislation was expected to be paid for by the nation’s largest financial institutions, which would have been required to pay approximately $19billion over several years. However, the bill has undergone additional changes to help ensure it has enough votes, particularly in the Senate. Now the cost of the legislation will be offset with an early end to the Troubled Asset Relief Program, which reportedly would yield a savings of $11billion, and an increase to the level of funds the FDIC is required by law to hold in reserves to insure bank customer deposits. The reserve ratio would be increased from 1.15% to 1.35%. The banking industry pays fees to the FDIC to support the fund.
On June 30, the House voted 237-192 in favor of the bill. Lawmakers no longer expect to get the bill to the President by the July 4 deadline. In light of Senator Robert Byrd’s (D-W.VA) death, the Senate will now vote on the bill after the holiday break.
On June 21, the Federal Reserve, OCC, OTS and FDIC issued final guidance on incentive pay. The final guidance is similar to what the Federal Reserve proposed in October 2009, but now will be applicable to all banking institutions and their holding companies. The guidance requires banking organizations to ensure that their incentive compensation arrangements take risk into account and are consistent with safe and sound practices. The final guidance addresses the different expectations regulators will have for large and small firms. Large banks have to follow certain steps such as forming a compensation committee that reports to the board of directors and the board is now required to directly approve compensation arrangements for senior executives. During the next stage, the banking agencies will be conducting additional cross-firm, horizontal reviews of incentive compensation practices at the large, complex banking organizations for employees in certain business lines such as mortgage originators. The agencies will also be following up on specific areas that were found to be deficient at many firms during the first round of in-depth analysis of the 28 largest, most complex banking organizations. The guidance will become effective after publication in the Federal Register, which is expected shortly.
On June 29, the Financial Accounting Standards Board (FASB) issued an Exposure Draft of a proposed Accounting Standards Update intended to develop common requirements for measuring fair value and for disclosing information about fair value measurements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). The proposed Update is the result of joint efforts of FASB and the International Accounting Standards Board (ISAB) to ensure that fair value will have the same meaning in U.S. GAAP and IFRSs. The IASB is publishing their proposal on fair value disclosure, which will be the same as the proposed disclosure requirement in the FASB Update. Both Boards will jointly consider the comments received on their respective exposure drafts as they continue their discussions about fair value measurements after the exposure periods end. The comment period for the FASB Update extends through September 7, 2010.
On June 3, the NAIC appointed a new subgroup to study the impact of principles-based reserving on the life insurance industry. This study will aid in the completion of the NAIC Valuation Manual, which will define the methods used by regulators and insurers to calculate insurance companies’ reserves. Principles-based reserving is expected to more completely identify the obligations created by every insurance policy written by an insurer. It would provide regulators with new information about how much insurers should hold in reserve. In particular, principles-based reserving is intended to better identify tail risks (rare and extreme events), which the NAIC believes are not adequately accounted for with current methods.