December 2010


Joint Agency Proposal to Set Risk-Based Capital Floor

The federal banking agencies are seeking comment on their interagency proposal to implement certain provisions of Section 171 of the Dodd-Frank Act, commonly known as the Collins Amendment.  Section 171 provides that the capital requirements generally applicable to insured banks will serve as a floor for other capital requirements the agencies establish. The advanced approaches of Basel II can result in lower risk-based capital requirements than the general risk-based capital rules that usually apply to insured banks.  The proposed rule replaces the transitional floors in the advanced approaches rule with permanent risk-based capital floors equal to the capital requirements computed using the agencies’ general risk-based capital rules.  This means that large bank holding companies will be subject to the same capital requirements as their subsidiary banks.

Those nonbank financial entities found to be “systemically” important to the US economy would also be covered under the Collins Amendment.  The Financial Stability Oversight Council has yet to designate any nonbank financial companies to be supervised by the Federal Reserve Board (FRB).  The notice acknowledges that the FRB may be supervising some companies for the first time and that it expects cases in which it will need to evaluate the risk-based capital treatment of specific exposures not typically held by depository institutions.  The proposed rule would also amend the general risk-based capital requirements to allow covered institutions to use the bank holding company capital rules for such assets to permit a suitable capital requirement for low-risk nonbank assets. Small bank holding companies (those with assets less than $500 million) are exempt from Section 171. The comment period ends February 28, 2011.


Dodd-Frank and Executive Compensation

The Dodd-Frank Act requires regulators to limit executive compensation to minimize excessive risk taking.  Deferring aspects of compensation in the form of deferred stock or other compensation spread out over time may satisfy this requirement. The Federal Reserve, Securities and Exchange Commission (SEC), and other federal banking agencies are currently under pressure and discussing rules to implement concerning bonus structures.  The regulators are expected to issue proposed rules in January 2011 and final rules by April 2011.  On December 17, 2010, the U.K. Financial Services Authority approved rules restricting guaranteed bonuses and up-front cash payments for financial firms.  Likewise, European Union (EU) regulators have also approved laws to curb excessive risk taking.  The EU rules allow covered individuals to receive about 25% of their bonuses in immediate cash payouts and require the rest to be deferred or held in shares for a minimum of three years.


SEC Requests Comment on Credit Rating Standardization Study

The SEC is requesting comments to help inform its study pursuant to Section 939(h) of the Dodd-Frank Act on the feasibility and desirability of (1) standardizing credit ratings terminology so that all credit rating agencies issue credit ratings using identical terms; (2) standardizing the market stress conditions under which ratings are evaluated; (3) requiring a quantitative correspondence between credit ratings and a range of default probabilities and loss expectations under standardized conditions of economic stress; and (4) standardizing credit rating terminology across asset classes so that named ratings correspond to a standard range of default probabilities and expected losses independent of asset class and issuing entity. The comment period ends February 7, 2011.


Volcker Rule Date Reminder

The Financial Stability Oversight Council’s study and recommendations regarding implementation of the Volcker Rule is required by January 21, 2011.  On the same day, the FRB must issue its final regulations regarding the Volcker Rule’s conformance periods.  The comment period on the FRB’s proposed rules ended January 10, 2011.  Given the potential impact of the Volcker Rule on unregistered variable BOLI and insurer general account holdings, we are tracking this issue with interest.



FASB and IASB Update Regarding Fair Value Accounting

On November 29, 2010, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued their progress report on the convergence of accounting standards to create a single set of high-quality global accounting standards.  The joint project to achieve convergence on the definition of fair value and to provide common implementation guidance has been identified as a high-priority project.  It is expected that final, converged requirements will be published in the first quarter of 2011. Other priority projects, including those on financial instruments, are scheduled for completion by June 2011.



H.R. 130 – BOLI/COLI Disclosure

On January 5, 2011, Rep. Gene Green (D-TX) filed his latest version of the “Life Insurance Employee Notification Act.”  Like the 2009 bill (discussed below), H.R. 130 would require employers to send a written notification to every employee covered under an employer-owned policy from January 1, 1985 forward.  The notice would include a statement that the employer carries a policy on the life on the insured, the carrier name, benefit amount and the beneficiary.


NY S262 and A9439 – 50% Franchise Tax on BOLI/COLI Benefits

State Senator Diaz (D) and Assemblyman Crespo (D) have filed S262 and A9439, respectively.  Both bills propose to add to the NY tax law Section 182-b, which would impose a 50% franchise tax on the gross proceeds of any benefits received from life insurance policies an employer has obtained on its employees and/or retirees.  As written, it would apply to any company that does business in NY, maintains an office in NY, or owns or leases corporate property in NY.  Both Diaz and Crespo introduced bills with similar language in the last session and neither gained much momentum.  S262 as currently written would be effective for tax years beginning January 1, 2013, and A9439 as currently written would be effective for tax years beginning January 1, 2011.  We are in communication with several carriers with significant BOLI/COLI business in NY and they have assured us they are diligently working to diffuse the bills.


IN SB 160 – Limits Amount Payable under BOLI/COLI to Insured’s Annual Salary

Indiana State Senator Frank Mrvan (D) has pre-filed IN SB 160.  The bill would amend the state insurable interest statute to limit the amounts payable under a COLI/BOLI or disability policy to the amount of the insured’s annual salary.  As currently written, the bill would become effective July 1, 2011.  The bill also updates Indiana law to require employee consent for an employer to purchase life or disability insurance on the employee.  Under current Indiana law, an employer is required to send notice to an employee if the employer intends to purchase life or disability insurance.  Of course, this second aspect of the proposed change is moot since employers must comply with the COLI Best Practices Act’s notice and consent requirements outlined in IRC Section 101(j).


Expired Bills From the Last Congressional Session

H.R. 251 Life Insurance Employee Notification Act of 2009.  Introduced in 2009 by Rep. Gene Green (D-TX), the bill would have required employers to send written notification to past and present covered BOLI/COLI employees.  Rep. Green has unsuccessfully introduced similar legislation on no less than four occasions between 2002 and 2007.

H.R. 3669 Employer Owned Life Insurance Limitation Act.  Introduced in 2009 by Rep. Luis Gutierrez (D-IL), the bill sought to prohibit employers from purchasing life insurance on rank-and-file employees by prohibiting employers from carrying life insurance on the lives of employees with salaries of less than $1M.  Rep. Gutierrez was apparently inspired to draft the bill after watching Michael Moore’s film, Capitalism: A Love Story.

IA HSB 620.  Introduced in 2010 by Rep. Janet Peterson (D), the bill would have required an equivalent insurance policy naming the insured’s dependents as beneficiaries for each employer-owned life insurance contract issued.



BB&T v. Pacific Life Ins. Co.

BB&T charged Pacific Life Insurance Company with breach of contract, breach of fiduciary duty, breach of duty of best execution, and breach of duty of good faith and fair dealing in a complaint concerning an exchange of life insurance policies under IRC § 1035.  The planned exchange and parties’ dispute occurred in the fall of 2008, when the stock market experienced significant declines.  The dispute and various other circumstances caused a delay in the transaction, during which time the cash surrender value of the policy declined ~$260k.  The court entered a proposed judgment finding that the effective date of a surrender request is the date of receipt, even if that request is incomplete at the time.  If this ruling becomes the final judgment, then BB&T would be entitled to damages, which it argues constitute the ~$260 loss plus 8% interest.


Lawsuits Status Updates

Atkinson v. Wal-Mart Stores.  In a 1999 decision, a federal district court judge dismissed a lawsuit against Wal-Mart Stores that claimed Wal-Mart did not have an insurable interest.  In that decision, the court applied Florida insurable interest laws as written in 2000 and found that the plaintiffs did not have standing to bring an action on insurable interest.  In July 2008, the Florida legislature amended Florida’s insurable interest statute to provide that an insured or his or her personal representative may sue for benefits paid under an insurance contract procured by a party lacking an insurable interest.  The Atkinson plaintiffs filed an appeal in the 11th Circuit and the appellate court filed a certified question to the Florida Supreme Court to determine whether the Florida amendment should be applied retroactively.  Oral arguments were held May 3, 2010, and on January 5, 2011, the parties filed a joint motion to stay the proceedings pending settlement approval.  We will follow up with any disclosed settlement terms/amounts if and when that information becomes available.


BB&T v. MassMutual, Clark Consulting.  In May 2009, BB&T BOLI Plan Trust filed a lawsuit against the defendants seeking damages in connection with ~$55M invested in a hedge fund subaccount called Falcon Strategies, LLC (the same fund was at the heart of the Fifth Third lawsuit which settled last year).  MassMutual and Clark filed motions to dismiss, and of seven actions brought by BB&T only three survived (negligent misrepresentation, fraud, and breach of contract).  Recently, out-of-state subpoenas have been issued for testimony and documents from the involved stable value protection provider (BofA), the Falcon Fund investment manager (Citigroup Alternative Investments), and a second fund’s investment manager (BlackRock Financial Management).  The matter is scheduled for pre-trial deadlines up to June 28, 2011.


Baker v. Dow Chemical.  Dow Chemical won a partial summary judgment debunking claims by three of four estate representatives alleging that Dow did not have insurable interest, fraud and unjust enrichment, and misappropriation in connection with the Dow COLI plan that obtained employee consent.  The August 31, 2010, opinion was positive for BOLI/COLI plans that obtain written, affirmative employee consent.  The matter continues as it relates to one additional plaintiff.  A pre-trial conference was set for September 22, 2010, but no additional dates are available at this time.


Jones v. Bridgestone Americas.  Filed on April 14, 2010, this suit is being brought by a surviving spouse of a deceased employee of Firestone Tire & Rubber Company who was employed from 1975-1989.  The Bridgestone Corporation acquired Firestone in 1988 and Bridgestone Americas is now the successor in interest to Bridgestone Corporation. The suit claims that Bridgestone was unjustly enriched because it never had an insurable interest in the life of the employee and that Bridgestone fraudulently concealed the existence of the life insurance proceeds, among other claims.  The matter also includes class-action allegations.  In its answer, Bridgestone Americas denied the allegations and affirmatively stated that it does not maintain and has never maintained COLI policies on its employees.  Discovery in this matter is scheduled to be completed by January 28, 2011, and it has a docket call for May 27, 2011.


2010 BOLI/COLI-Related Settlements

Fifth Third v. Transamerica, Clark Consulting. Fifth Third sued the defendants to recover $323M in losses incurred as a result of BOLI investments in a hedge fund subaccount known as the Falcon Fund.  The matter settled on August 3, 2010.  The bank received $152M and incurred $25M in legal expenses, for a net gain of $127M.

Havenstrite v. Hartford Life Ins. Co. Plaintiff class members were suing Hartford for misappropriation of their personal information in connection with COLI/BOLI policies allegedly issued without employee notice or consent.  This matter settled on September 27, 2010.  The Settlement Class was estimated to be 186 members.  The Settlement Fund was $539k, of which each class member is entitled to $1,800 after fees and costs, the named plaintiffs were awarded a $5k compensatory payment, and $180k went to plaintiffs’ attorneys’ fees and expenses.

Johnson v. Amegy Bank.  In this case, the plaintiff was a widow who alleged that, although her husband provided written consent to his employer (Southwest Bank of Texas), her husband did not have the mental capacity to provide valid consent.  This matter settled on January 7, 2010, for an undisclosed amount.  This case was featured in a Michael Moore film and received wide- ranging media coverage.

Richard v. Wal-Mart Stores / Wing v. Wal-Mart Stores.  Both matters alleged that Wal-Mart did not have an insurable interest and alleged claims of unjust enrichment.  The Richard matter was dismissed in Louisiana district court, but that dismissal was reversed by the Fifth Circuit on February 11, 2009.  Some time thereafter, Richard and Wing were consolidated.  The matter settled on September 9, 2010. The Settlement Class consisted of approximately 89 estates and the Settlement Trust amount is $4.853M.  From that Settlement Trust, the plaintiffs’ attorneys will receive $1.618M and the named plaintiffs will receive $5k. A formula sets forth how the remainder of the settlement funds will be distributed based on the ratio between the face amount of a policy and the face amounts of the aggregate of potential claimants deemed as hourly and/or management associates.



Annual Filing Requirements – IRS Form 8925

IRC § 6039I and IRS Form 8925 require that every applicable policyholder owning one or more employer-owned life insurance contracts issued after August 17, 2006 (or issued before then, but materially changed thereafter), provide certain information regarding its applicable BOLI/COLI holdings.  Form 8925 is filed by attaching it to the policyholder’s income tax return for each tax year during which the policyholder has applicable employer-owned life insurance contracts in force.


NY Compensation Disclosure Effective, Trade Groups Still Fighting

The NY Producer Compensation Transparency Rule (Insurance Regulation 194) went into effect January 1, 2011.  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 regulation survived its first legal challenge by three licensed producers and two producer trade groups.  On December 22, 2010, the Independent Insurance Agents & Brokers of New York (IIABNY) and the Council of Insurance Brokers of Greater New York (CIBGNY) filed a notice of appeal with the state appellate court in Albany.  The notice preserves the groups’ right to file a formal notice of appeal later.  The groups issued press releases stating that they were going to take the next several months to build the strongest possible case for the appellate court.  Producers are still required to comply with Regulation 194 until and unless the regulation is overturned by the courts.

MB Schoen & Associates, Inc. strongly favors full disclosure of all compensation and therefore we support the adoption of Insurance Regulation 194.  More importantly, we hope that other states will pursue regulations similar to Insurance Regulation 194.


New York Governor Plans to Merge Banking, Insurance Regulators

New York Governor Andrew Cuomo delivered his first State of the State address on January 5, 2011.  In that address, he outlined his action plan to transform New York State’s government and economy.  One action he noted was his plan to introduce legislation creating a new Department of Financial Regulation.  The newly formed department will merge the Insurance Department, Banking Department, and Consumer Protection Board.  This is in line with his plan to eliminate at least 20% of the total number of agencies, authorities, and other government bodies.  To achieve that objective, Cuomo has issued an executive order to establish the Spending and Government Efficiency (SAGE) Commission.  It is expected that the Commission will begin deliberations by January 7, 2011, and will report recommendations on agency and authority reorganization to the governor by May 1, 2011.


New IRS Priority Guidance Plan Published

On December 7, 2010, the Treasury published its latest priority plan.  The plan lists 310 projects that are scheduled for attention and, presumably, completion by June 2011.  The projects of greatest interest to our readers include guidance on (1) tax-free exchange of life insurance contracts subject to § 264(f) (regarding interest expense allocable to unborrowed policy cash values); (2) treatment of age 100 maturity under § 7702 based on comments to Notice 2009-47; and (3) § 7702 definition of cash surrender value.


Obama Proposed 2012 Budget

The 2009 and 2010 budget proposals and Treasury Greenbooks included a COLI proposal that would expand pro rata interest expense disallowance for COLI contracts covering employees, directors, and officers, leaving only 20% shareholders exempt.  To date, no legislation has been introduced to implement the proposal and we will continue to monitor developments.  On December 28, 2010, the administration announced that the FY 2012 budget proposals will be pushed back from Monday, February 7, to some time the following week.  Given the extension of the Bush tax cuts and President Obama’s recent announcements regarding the need for an overhaul of the federal Tax Code, we would not be surprised to see this proposal, or more severe proposals, emerge from the administration in connection with broader tax reform sometime in 2011.