April 2010


Fifth Third Bank v. Transamerica, Clark Consulting

In April, the magistrate judge in this matter ruled on a number of discovery motions including motions regarding documents both Fifth Third and its regulators refused to disclose to Transamerica and Clark.  After applying a five factor analysis on privilege and finding only two of the five factors favored disclosure in the case, the court denied the defendants’ motion to compel as it related to communication between Fifth Third and the Federal Reserve Bank.  Additionally, the court granted the Federal Reserve Bank’s motion to squash defendants’ subpoenas.  The court noted two significant points: 1) that the privilege belonged to the regulators and 2) as a diversity case, state privilege law applied.  Therefore, disclosure was precluded under Ohio law which contains prohibitions against disclosure of information obtained in the course of an examination of a bank by an authorized regulator.



Update on the Financial Services Reform Bill

The Senate bill, The Wall Street Transparency and Accountability Act of 2010 (S. 3217), will now make its way to the floor for debate after a three-day impasse.  Reportedly, the impasse was due to party-line disagreement on issues like ending financial firms’ bailouts, “Too Big to Fail” provisions, and the bill’s Consumer Financial Protection Bureau. The debate began on April 29 and may last as long as two weeks.  Some commentators are predicting passage of the bill in a manner similar to that of the recently enacted health care bill.  This would involve passage of S. 3217 by the Senate, and, rather than holding a joint Senate-House conference to reconcile the House bill, H.R. 4173, with S. 3217, the House would vote directly on the Senate bill.  If approved, the Senate bill would head to the President for his signature and then become law.



Treasury Report on Charity-Owned Life Insurance

On April 2, the Treasury Department released a report on charity-owned life insurance (ChOLI) as mandated by the Pension Protection Act of 2006. The report analyzes the Federal tax law implications of ChOLI arrangements under existing law and the tax policy issues they present.  In particular, the report identifies potentially significant conflicts with the requirement that a charitable organization be organized and operated exclusively for an exempt purpose, and that comply with a proscription on substantial private benefit.  The report notes that treatment of a charity’s return from participation in a ChOLI arrangement as either exempt investment income or taxable income for an unrelated business is not entirely clear under existing law, but that it arguably may be viewed as unrelated business taxable income in certain circumstances.

The report also recommends adoption of the Administration’s Fiscal Year 2010 and 2011 budget proposals to revise the “transfer-for-value” rule of the Internal Revenue Code section 101(a) to ensure that investors in a ChOLI arrangement – as well as investors in other types of arrangements involving the transfer of life insurance contracts – do not inappropriately benefit from the gross income exclusion for death benefits from a life insurance contract in circumstances where those investors have purchased an ownership interest in the underlying policies.



Trade Associations to Initiate Legal Action over Commission Disclosures

We have been providing updates on the NY Producer Compensation Transparency proposal/rule since December 2009.  On April 19, the Independent Insurance Agents and Brokers of New York (IIABNY) and the Council of Insurance Brokers of Greater New York (CIBGNY) announced that they are working together to commence an Article 78 proceeding to stop the promulgation and adoption of Regulation 194 – Producer Compensation Transparency.  As noted in an IIABNY press release, the trade organizations expect to file legal papers in May, but will continue to communicate with the state Insurance Department on the changes necessary to minimize the regulation’s impact in the event their legal action comes up short.

In a related development, it has been reported that the Association for Advanced Life Underwriting (AALU) board is currently debating whether or not to take legal action against the NY Insurance Department regarding this regulation.  Regulation 194 establishes minimum disclosure requirements relating to the role of insurance producers and the compensation paid to insurance producers.  The regulation is scheduled to take effect on January 1, 2011.