August 2011


SEC and CFTC Request Comment on Stable Value Contracts

The Dodd-Frank Act provides for comprehensive regulations of swaps and security-based swaps and includes definitions of key terms relating to such regulations. It also requires the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to jointly conduct a study to determine whether stable value contracts fall within the definition of a swap, and if so, whether exempting such contracts from the swap definition is appropriate. The request poses twenty-nine questions covering regulatory issues, market and product structure issues, and compliance issues in the event the commissions concluded that stable value contracts were swaps.  At present, the Dodd-Frank definition of “stable value contracts” only includes those contracts available to ERISA plans, 403(b) plans, 457(b), and similar plans.  However, one of the 29 questions is directed to whether the Dodd-Frank definition encompasses all forms of stable value contracts.

In April, the SEC and CFTC issued proposals to further define “swap,” “security-based swaps,” and “mixed swaps.”  The April proposal provided that insurance products issued by an insurance company or a U.S. government entity would not be considered swaps or security-security based swaps.  Therefore, it is conceivable that stable value contracts will generally be classified as swaps but insurance companies issuing them will be exempt from such treatment.  If this happens, state insurance regulators will continue to be responsible for overseeing risk capital and other considerations attendant to insurance companies issuing stable value contracts.  The comment period ends on September 26, 2011.


Credit Rating Developments

News reports as early as June reported that the Securities and Exchange Commission (SEC) was investigating Standard & Poor’s (S&P) and Moody’s for their role in creating mortgage-bond deals that contributed to the financial crisis.  Since S&P’s downgrade of the long-term sovereign credit rating of the U.S., news reports regarding the investigation of the rating agency have resurfaced.  According to the latest reports, the U.S. Justice Department has joined in on the probe to review whether S&P’s mortgage-bond rating process contained improprieties.

As we have reported to clients individually, insurance companies issuing separate account BOLI have been evaluating which investment guidelines have been or may become affected by the downgrade and are working with money managers, and, where applicable, stable value providers, to institute guideline amendments.  Stable value providers and carriers have generally granted extended relief from guideline required repositioning language.

Reportedly the SEC is investigating possible insider trading violations related to S&P’s downgrade of the U.S. credit rating.  The SEC has asked S&P to disclose which of its employees knew about the downgrade prior to the public announcement.  The Treasury Department claims the downgrade was unwarranted and that S&P made a $2 trillion mistake when calculating the federal deficit over the next ten years.  There has also been a call by some for Congress to conduct hearings on the subject.

These events are also likely to further complicate rule making processes for federal banking regulators.  As we have reported, the OCC has been a vocal proponent of being able to continue using NRSRO credit ratings in certain contexts, including in risk-based capital frameworks, despite Dodd-Frank’s mandate that such rules be revised to use other assessments of credit-worthiness.



Collier v. American Greetings (Update)

An update is expected shortly – after the settlement conference which was 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.


Hunnicutt v. AstraZeneca (Update)

In this matter, the plaintiff is seeking to recover benefits paid under two COLI policies.  The plaintiff alleges that one was purchased by a former employer, Stauffer Management Company (now a separate entity of AstraZeneca PLC) and another policy purchased by ICI Americas, Inc.  On August 8, the parties filed a number of stipulations.  The plaintiff’s first amended complaint added Stauffer Management Company and a number of AstraZeneca entities as defendants.  In the filing, the plaintiff voluntarily dismissed four of AstraZeneca’s related entities (Zeneca Holdings, Inc., AstraZeneca Treasury Limited, AstraZeneca UK Limited, and AstraZeneca Intermediate Holdings Limited).  The two remaining defendants are Stauffer Management Company, LLC and Zeneca, Inc. (as corporate successor to ICI Americas, Inc.).

In return for the dismissals, Stauffer and Zeneca represented and warranted that they were in fact the respective purchasers of the two policies in question and agreed not to assert lack of personal jurisdiction defenses.  The defendants’ remaining defense arguments include the fact the plaintiff’s claims are governed under California law which does not have a private cause of action to recover COLI policy benefits and further that the plaintiff’s current claims are all violations of Oklahoma law which does not apply since neither the policies or contracts were delivered in Oklahoma.  On July 27, the defendants filed a motion to dismiss the plaintiff’s first amended complaint and a motion to certify a question to the Oklahoma Supreme Court.  The defendants’ proposed question is “Under Oklahoma law, does the filing by an insurance company of a generic life insurance policy form with the Oklahoma Insurance Department,… constitute, as a matter of law, the “delivery” in the State of Oklahoma of all insurance policies or contracts which include that form, no matter where the policies or contracts were issued or received?”  The plaintiff’s attorneys have been successful in the past asserting the application of Oklahoma law even in the face of defendants alleging that the life insurance contracts were issued and delivered in states other than Oklahoma (e.g., Tillman v. Camelot Music, Inc., No. 03-5172 (10th Cir. 2005)).  If the defendants get a favorable ruling, it may prove far reaching and important.



NAIC Takes Model Bill On Insurable Interest and § 1035 Exchanges under Advisement

On August 3, the NAIC held a conference call covering various topics including discussion of Director of Regulatory Services Eric Nordman’s March memo regarding the lack of state statutory guidance on insurable interest in the context of § 1035 exchanges.  The memo recommended that state insurable interest laws be amended to allow an employer to exchange BOLI/COLI policies covering both active and inactive employees without having to provide notice or obtain new consent.  Call commenters included representatives from MB Schoen & Associates, the American Counsel of Life Insurers (ACLI), the Association for Advanced Life Underwriting (AALU), and other interested parties.  The topic discussion concluded with members of the NAIC Life Insurance and Annuities Committee voting to take the matter under advisement (i.e., to take no further action at this time).  Minutes from the meeting are expected to be available shortly.