November 2010


FSOC Requests Comment on Implementation of Volcker Rule

As previously covered in the October LRA and an Ad Hoc LRA (sent 11/11/10), we have been providing updates regarding the implementation of the Volcker Rule and the Financial Stability Oversight Council’s (FSOC’s) forthcoming study and recommendations on the subject.  A number of trade associations and financial institutions submitted comments to the FSOC.  The most prevalent comments regarding private offering separate account (SA) BOLI included 1) that SA BOLI be explicitly exempted from the definition of hedge funds and private equity funds; 2) that SA BOLI be specifically referenced in the permitted activities provisions of Section 619; and 3) that SA BOLI be allowable as a permitted activity of an insurance company doing business on behalf of its bank clients.

Industry trade groups and associations remain guardedly optimistic that remedial clarification will ultimately be granted for an array of products and funds impacted by the seemingly unintended consequences of the Volcker Rule’s over broad language, including, but not limited to: SA BOLI and other investment structures that rely on exceptions in the Investment Company Act of 1940;  insurance carriers’ general account investments in hedge funds and private equity funds; investment holdings within bank sponsored ERISA plans; and investments held in various trusts wherein a bank acts in the capacity of trustee.

The FSOC must complete its study and issue its recommendations regarding the Volcker Rule by January 21, 2011.  On the same day the Federal Reserve must issue regulations regarding any applicable extensions that may be available. We are higlighting a few more noteworthy comments which were not referenced in the Ad Hoc LRA:


FRB Requests Comment on Volcker Rule Conformance Periods

On November 17, the Federal Reserve Board (FRB) issued its proposed rule to implement provisions of the Dodd-Frank Act requiring banks to conform their activities and investments to the Act within a defined period of time.  Dodd-Frank permits the FRB to extend the generally available two-year conformance period by up to three additional one-year periods; or an aggregate conformance period of five years.  The proposed rule implements that authority; however, extensions will be granted on an individual bank basis by which a banking entity would have to 1) provide a written request at least 90 days prior to the expiration of the applicable time period; 2) provide the reasons why the banking entity believes the extension should be granted; and 3) provide a detailed explanation of the banking entity’s plan for divesting or conforming the activity of investment(s). The proposed rule also clarifies how the conformance period will apply to a company who first becomes a banking entity after July 21, 2010 (generally providing for a two-year conformance period), what assets will be determined illiquid funds and the extended transition period for illiquid funds.  The comment period ends on January 10, 2011.



Havenstrite Employer Suits

The plaintiffs’ firm McClanahan, Myers Espey has filed suits against two of the twelve employers who Hartford issued policies to which were at the center of the Havenstrite v. Hartford class action lawsuit settled in September.  The latest lawsuits have practically identical complaints; one suit was filed against American Greetings Corporation (filed 10/01/2010) and the other against AstraZeneca (filed 11/03/2010).  The named plaintiffs in both matters are representatives of former employee estates and claim that they were unaware of the policies until they received the Havenstrite Class Action Notice.  The plaintiffs allege that insurance policies were taken on the lives of rank-and-file employees without notice or consent and that the employers did not have insurable interest.  The plaintiffs in both actions are seeking class action certification and recovery under the insurable interest statutes of Oklahoma and 11 other states, all of which allow a private right of action for insureds (or their representatives) to recover death benefits paid under a policy to an unlawful beneficiary.



New York Compensation Disclosure Rule Effective Soon

We have been providing updates on the NY Producer Compensation Transparency rule (Insurance Regulation 194) since December 2009.  Insurance Regulation 194 was instituted in response to the NY Insurance Superintendent’s concern that potential conflicts of interest arise in situations where insurance producers receive various forms of incentive compensation from insurers and other third parties.  The Insurance Department’s concern is essentially that a producer may be incented to recommend an insurance policy that, while possibly suitable for the client, may not be the best coverage available for the client.  Insurance Regulation 194 requires producers to provide a “boilerplate” written disclosure to clients regarding the role of the producer and the manner in which the producer will be compensated prior to the sale of an insurance contract.  Should a client request more detailed information about the producer’s compensation, the producer must provide specific information regarding the compensation to be received in connection with the recommended product.  The producer would have to disclose among other things the nature, amount and source of any compensation based in whole or in part on the sale; the pay the producer would have received had the client chosen a different policy; and any material ownership interests between the insurer and the insurance producer’s parent, subsidiary or affiliate.

On May 25, the Independent Insurance Agents & Brokers of New York (IIABNY) and the Council of Insurance Brokers of Greater New York (CIBGNY) filed an Article 78 proceeding to stop the promulgation and adoption of Insurance Regulation 194.  The trade associations argued that the New York Insurance Department did not have the power to establish the regulation and additionally, that the regulation was arbitrary and would impose large, needless compliance costs on producers.  On November 17, Acting Supreme Court Justice Richard Platkin disagreed with and denied all of the petitioners’ claims.  The IIABNY has suggested that they will continue to fight the regulation.  On November 5, the Insurance Department issued Circular Letter No. 18 to set forth the Department’s expectation regarding compliance with Insurance Regulation 194 which is scheduled to take effect on January 1, 2011.

MB Schoen & Associates, Inc. strongly favors full disclosure of all compensation and therefore we support the adoption of Insurance Regulation 194.  We hope that Justice Platkin’s thoughtful analysis and measured reasoning for rejecting all of the petitioner’s claims will discourage protracted resistance by IABNY and CIBGNY.  More importantly, we hope that other states will be heartened by the court’s decision and pursue regulations similar to Insurance Regulation 194.


SEC Proposed New 12b-1 Fee Rules

In our July LRA, we covered the Securities and Exchange Commission’s (SEC’s) unanimous vote to propose measures aimed at improving the regulation of mutual fund distribution fees and providing better disclosure to investors.  The SEC requested comment on the proposed rules and the comment period ended November 5. The SEC posted copies of many of the comments on their website.  A number of investor advocacy groups submitted comments to encourage the SEC to implement the proposed rules regarding the 12b-1 fees and cumulative ongoing fee caps.  According to some of those groups, the fees are misleading to investors, inadequately disclosed and in some cases excessive.  More than 1000 form letters were submitted by life insurance agents, financial advisors and others who oppose the proposed rule.  Objectors of the proposed rule site that the proposed rules will be difficult and expensive to implement and further some investors may be harmed because advisors may provide less services due to the proposed rules.

As stated above, MB Schoen & Associates, Inc. generally supports regulations that encourage or require full-disclosure of compensation; be it insurance agent compensation or securities related broker-dealer compensation and, therefore we support the SEC’s proposed 12b-1fee rules.


Ad Hoc LRA – November, 11 2010

FSOC Volcker Study Comments

As we have covered in earlier LRAs and other communications, Section 619 of the Dodd-Frank Act (The Act) prohibits banking entities from engaging in proprietary trading and from maintaining certain relationships with hedge funds and private equity funds (commonly known as the Volcker Rule).  The Act requires the newly established Financial Stability Oversight Council (FSOC) to study and make recommendations on implementing the Volcker Rule. The federal banking agencies and other agencies must consider the recommendations of the FSOC study in developing and adopting regulations to implement the Volcker Rule.

Our primary area of concern has been the potential for unintended consequences which could arise from overbroad  provisions within Section 619.  Specifically, the definition of hedge funds and private equity funds is overly broad and can be interpreted to encompass a host of investments that are clearly not hedge funds or private equity, including unregistered separate account BOLI (despite legal arguments to the contrary).

On October 6, the FSOC issued a notice and request for comment on to assist the FSOC in conducting the study. The comment period ended on November 5 and over 1600 comments were submitted (the bulk of which were submitted by private citizens).

We are currently reviewing those submissions with commentary related to BOLI, other areas our clients have expressed concern about (e.g., potential extension of Volcker prohibitions to assets held in ERISA plans sponsored by banks) and comments which, while directed towards another concern, might nevertheless impact BOLI (i.e., if ultimately incorporated into regulations, some solutions intended to remedy an unrelated issue, could have either a helpful or detrimental impact on BOLI).

This LRA includes mainly comments submitted by trade associations. We will cover comments submitted by additional entities later this month.  While there are some notable differences between specific observations and corresponding suggested solutions put forth by submitting parties, we are pleased with the unanimous core message in support of the ongoing permissibility of BOLI.

The comments submitted by the following parties are worth highlighting: