July 2011


Senate Hearing on 1st Anniversary of the Dodd-Frank Act

On July 21, the Dodd-Frank Act reached its first anniversary and the banking regulators and the SEC testified about the impact of the financial crisis on the economy, how Dodd-Frank has improved the financial regulatory framework, and how the legislation will help prevent or mitigate another crisis.  Dodd-Frank required 73 studies and 400 new rules.  As of July 22, only 51 of those rules have been finalized, 29 rules have been proposed, while deadlines have been missed on 130 others, and another 190 rules have future deadlines (according to a Davis Polk & Wardell LLP Dodd-Frank Progress Report).

The Government Accountability Office issued a report on 11 agencies’ estimates of resources for implementing Dodd-Frank in years 2010, 2011, and 2012.  New funding resources related to Dodd-Frank responsibilities during the years 2011-2012 ranged from a low of $0 for the Federal Trade Commission (FTC) to a high of around $329 million for the Consumer Financial Protection Bureau (CFPB).  Funding resources to implement Dodd-Frank accounted for at least 25 percent of the agency’s total budget increase at 9 of the 11 agencies in the most recent year for which data was available.  The agencies are relying on a variety of sources to fund the implementation costs for the new provisions, including assessments and revenues, appropriations, offsetting collections, and transfers from other agencies.  Six of the 11 agencies reported that their funding would be fully or partly met by assessments imposed on regulated institutions or revenues from their operations. Three others reported that they would have to rely at least partly on appropriations.  The SEC said it would use offsets, and the CFTB would use transfers from the Federal Reserve to fully fund its activities.


House Hearing on the Use of Credit Ratings Post Dodd-Frank

On July 27, the House Financial Services Committee held a hearing on the oversight of credit rating agencies post Dodd-Frank.  Section 939A of Dodd-Frank directs federal regulators both to remove references to and requirements of reliance on credit ratings from their regulations and to substitute in their place new standards of creditworthiness that the regulators determine to be appropriate.  OCC Senior Deputy Comptroller David Wilson testified about some of the difficulties the OCC and other regulators face with requirements of 939A.  Difficulties include developing alternatives to credit ratings that do not add undue regulatory burdens and still appropriately measure credit risk, that provide for timely and accurate updates as the quality of a particular asset deteriorates or improves, and that are transparent and replicable so that banks of varying size and complexity can arrive at the same assessment for similar assets. He also commented on the fact that U.S. regulators cannot conform their capital standards to established international standards (e.g., Basel II Revisions and Enhancements) if section 939A precludes any reference to or reliance on credit ratings.


Insurance Oversight Hearing

On July 28, the House Financial Services Committee held a hearing on insurance oversight.  Missouri Insurance Department head John Huff gave his insight on behalf of the NAIC and as a non-voting member of the Financial Stability Oversight Council (FSOC).  Huff again expressed his desire to be able to share insurance related matters before the FSOC with other state insurance regulators.  He offered that the collaboration could take place through a smaller group of designated regulators, who represent the needs of different regions and markets in the country.  Huff did not refer to the Federal Advisory Committee on Insurance which the Treasury announced back in May.  The American Council of Life Insurers spoke to what they perceive to be a gap in the representation of U.S. national interest in international insurance and financial services forums despite a strong state-based insurance regulatory system.  Also the ACLI expressed concern about the FIO’s ability to fully function due to a lack of adequate staffing and budget.

Among the issues that are of most importance to life insurers are the use of derivatives to hedge portfolio risks, the Volcker Rule, holding company regulation by the Federal Reserve for those insurance enterprises that control a bank or thrift, a harmonized standard of care for broker-dealers and investment advisors, and the FSOC’s process for identifying systemically important financial institutions (SIFIs).  Related, the International Association of Insurance Supervisors (IAIS) is currently in the process of developing a methodology for identifying insurers that may be global systemically important financial institutions (GSIFIs).


FSOC Annual Report

Dodd-Frank requires the Financial Stability Oversight Council to file an annual report with Congress outlining the Council’s activities, significant financial market and regulatory developments, potential emerging threats to domestic financial stability and its determinations and recommendations made under Dodd-Frank.  The report included an update on the development of systemic risk measures and models and other aspects of the monitoring process to be used to prevent the failure of any firm that would constitute a systemic risk to the financial system.  The report noted that profitability has returned to the many financial institutions and that the financial system is less leveraged than it was before the financial crisis.  Also regarding insurance the report found that insurance companies, with some notable exceptions, generally withstood the financial crisis and have since strengthened their balance sheets.  The report mentioned that only 28 of approximately 8,000 insurers became insolvent in 2008 and 2009, and those insurers are being resolved pursuant to applicable state law.


Final OTS Integration into the OCC

All the functions of the Office of Thrift Supervision were transferred on July 21, 2011.  The OCC assumed responsibility for the ongoing examination, supervision, and regulations of federal savings associations.  The Dodd-Frank Act preserves the federal savings association charter going forward, and it retains the Home Owners’ Loan Act, the primary statute governing the charter.  The OTS’s regulations relating to federal savings also remain in effect until modified or superseded by the OCC.  Dodd-Frank transfers all functions of the OTS relating to state savings associations to the FDIC and all functions relating to the supervision of any savings and loan holding company to the FRB. The OCC also issued final rules pertaining to preemption and visitorial powers.



Atkinson v. Wal-mart Stores (Update)

The federal district judge has granted preliminary approval of class settlement action.  The settlement class consists of 233 individuals and the settlement amount is $2.02 million.  From that settlement amount, one-third will go to plaintiffs’ counsel and the two named plaintiffs will each receive a $10 thousand compensatory award.  This matter began in Florida state court in March 2008.  In May 2009, Wal-Mart Stores gained a favorable decision from the Middle District of Florida court which dismissed the matter, ruling that the plaintiffs lacked standing to recover damages; however, the plaintiffs appealed to the 11th Circuit.  The appellate court certified a question to the Florida Supreme Court to determine whether a July 2008 statute amendment allowing an insured party to sue for benefits wrongly obtained by a third party could be applied retroactively.  The 11th Circuit case will be closed and the question will be left unanswered.  The fairness hearing is scheduled for September 8, 2011 and a final approval will be granted after.


Collier v. American Greetings (Update)

The parties have filed and have been granted a joint motion for a settlement conference.  The settlement conference is scheduled for August 30, 2011.  American Greetings is one of the employers related to the Havenstrite v. Hartford matter which settled last year.  The matter against AstraZeneca, another Havenstrite employer, is ongoing.



IRS Modifies Guidance on Partial Exchanges of Annuity Contracts

On June 28, 2011, the Internal Revenue Service (IRS) issued Rev. Proc. 2011-38, which sets forth modified guidance with respect to the federal income tax treatment of “partial exchanges” of annuity contracts under Sections 72 and 1035 of the Internal Revenue Code.  Rev. Proc. 2011-38 provides that a direct transfer of a portion of the cash surrender value of an existing annuity contract for a second annuity contract will be treated as a tax-free exchange under section 1035 if no amount, received as an annuity for a period of 10 years or more or during one or more lives, is received under either the existing annuity contract or the second annuity contract during the 180 days beginning on the date of the transfer (in the case of a new contract, the date the contract is placed in-force). Rev. Proc. 2011-38 is effective for transfers that are completed on or after October 24, 2011.  We are reviewing potential implications for partial exchanges of life insurance policies and will comment further in a future LRA.


NY Ins Dept Directs Insurers to Use DMF to Pay Unpaid Death Benefits

On July 5, the New York Insurance Department announced that all life insurers licensed to do business in that state are to report on how many death benefits they have not paid because they did not use the official government list of deaths to promptly identify when policyholders died.  The Department is requiring the 172 life insurers and fraternal benefits societies licensed in New York to use the available data to find where payments are due, locate beneficiaries, make payments, and report on the results beginning September 2011 and continuing for six months.  As covered in our May LRA, a number of states have been reviewing life insurers’ death claim payment practices.  The alleged practices of some life insurers include their use of the U.S. Social Security Administration’s Death Master File (DMF), an up-to-date list of recent deaths, to promptly stop annuity payments once a contract holder dies.  However, many insurers do not use the same DMF information to determine if any death benefit payments are due under life insurance policies, annuity contracts, or retained asset accounts.  A number of states have launched examinations and hearings on the matter and the National Association of Insurance Commissioners (NAIC) has formed a special task force to coordinate regulatory investigations.  We note that most BOLI/COLI underwriting insurers we deal with have, in recent years, become more willing to rely on DMF (along with an affidavit) to process claims when certified death certificates are unavailable (e.g., in states where certificates are only given to the deceased’s relatives).  Nevertheless, this development may ultimately help to facilitate timely claims processing by more insurers.