April 2012


FSOC Adopts Rules to Identify SIFI Nonbank Financial Companies

On April 3, the Financial Stability Oversight Council (FSOC) adopted final rules and interpretative guidance for determining systemically important nonbank financial companies.  Nonbank financial companies include financial guarantors, insurance companies, asset management companies, private equity firms, and hedge funds among others.  Dodd-Frank Section 113 authorizes the FSOC to subject a nonbank financial company to supervision by the Board of Governors and prudential standards if the FSOC determines (1) material financial distress at the nonbank financial company could pose a threat to the U.S., or (2) the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company could pose a threat to the financial stability of the U.S.  The guidance, which is substantially the same as the proposed guidance released in October 2011, describes the three-stage review process the FSOC will use to designate systemically important financial institutions (SIFIs).

In Stage 1, the FSOC intends to apply six quantitative thresholds to a broad group of nonbank financial companies.  A nonbank financial company will be evaluated in Stage 2 if it has $50 billion in total consolidated assets and meets any one of the other thresholds.  In Stage 2, the FSOC intends to conduct a robust analysis of the potential threat posed by each of those nonbank financial companies through existing public and regulatory sources, including information possessed by the company’s primary financial regulatory agency or home country supervisor.  During the Stage 3 review, the FSOC will analyze the nonbank financial company on information obtained directly from the company.  The FSOC will provide every nonbank financial company that will be reviewed in Stage 3 a notice of consideration and an opportunity to submit written material to contest the FSOC’s consideration for a proposed determination.

While the rules state that the FSOC will consult with an entity’s primary regulator, it is still unclear how much influence those regulators will have in the FSOC’s determination.  In an April comment letter, the National Association of Insurance Commissioners (NAIC) wrote to the Federal Reserve to encourage them “to impose policies that will strongly discourage a non-bank systemically important financial institution from engaging in activities that resulted in their designation as a SIFI.  In particular, enhanced prudential standards applied to insurance groups that have been identified as SIFIs should be aimed at returning them to non-SIFI status, thus avoiding a market perception that some insurance companies are safer than others.”  It is widely suspected that large insurance carriers such as Hartford, Prudential and MetLife, will be evaluated for the SIFI designation.  Reportedly, Hartford Financial Services Group issued a statement that it does not breach any of the Stage 1 financial tests included in the FSOC’s release for SIFI consideration.


FRB Clarifies Financial Activities Under Dodd-Frank Title I

On April 2, the Federal Reserve Board (FRB) requested comment on a proposed amendment to clarify the activities that are financial for determining whether a company is “predominately engaged in financial activities.”  Under Title 1 of Dodd-Frank, a company generally can be designated for Board supervision by the Financial Stability Oversight Council (FSOC) only if 85 percent or more of the company’s revenues or assets are related to activities that are financial in nature under the Bank Holding Company Act (BHC Act).  Some commenters to the February 2011 proposed rulemaking suggested that a firm that organizes, sponsors, and manages a mutual fund should not be considered to be engaged in a financial activity if the firm owns or controls more than a given percentage of the fund because a financial holding company may not own or control more than that amount of the fund.

The proposed amendment makes clear that any activity referenced in section 4(k) of the BHC Act will be considered to be a financial activity without regard to the safety and soundness conditions that are included in that section.  The concern was that defining financial activities for the purpose of Title I to include all of the conditions would enable some companies that are predominantly engaged in financial activities to avoid consideration for designation by the FSOC.  The FRB also issued an appendix with a list of the activities that would be considered to be financial activities as of April 2, 2012.  The comment period ends on May 25, 2012.


Volcker Rule Conformance Period Clarified

On April 19, the Federal Reserve Board approved a statement clarifying that an entity covered by section 619 of Dodd-Frank (Volcker Rule), has the full two-year period provided by the statute to fully conform its activities and investments, unless the Board extends the conformance period.  The Board’s conformance rule provides entities covered by the Volcker Rule a period of two years after the statutory effective date, which would be until July 21, 2014.  The Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (the agencies) plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Board’s conformance rule and the attached statement.  The agencies have invited public comment on a proposal to implement the Volcker Rule, but have not adopted a final rule.


OCC Proposes new STIF Requirements

On April 9, the Office of the Comptroller of the Currency published a notice of proposed rulemaking that would revise the requirements imposed on banks pursuant to the short-term investment fund (STIF) rule.  A STIF is a type of collective investment fund (CIF).  Like a CIF, a STIF operates pursuant to a plan that governs the bank’s management and administration of the fund.  Contingent upon a STIF plan including certain requirements for admissions to and withdrawals from the fund, a bank may value its assets on an amortized cost basis, rather than marking them to market (which is the required valuation method for other CIFs).  The proposed rule would revise and add to the existing requirements.  Under the proposal, a STIF would be required to:

  • Operate with a primary objective of a stable net asset value (NAV) of $1.00 per participating interest;
  • Have a dollar-weighted average portfolio maturity of 60 days (revised down from 90 days);
  • Have a dollar-weighted average portfolio life maturity of 120 days;
  • Adopt shadow pricing procedures—one that reflects the value of a fund’s assets at amortized cost and another that reflects the market value of the fund’s assets—and calculate the difference at least on a weekly basis;
  • Adopt procedures for stress testing the STIF’s ability to maintain a stable NAV and report adverse stress testing results to the managing bank’s senior risk management;
  • Use mark-to-market value accounting, instead of amortized cost accounting, if the market value of the portfolio falls below a NAV of $0.995 per participating interest; and
  • Various other requirements.

The proposed rule would apply directly to national banks and federal branches of foreign banks as well as indirectly to federal savings associations.  The comment period ends on June 8, 2012.



COLI Notice and Consent PLR

On April 27, the Internal Revenue Service released a private letter ruling on the topic of notice and consent requirements for certain employer-owned life insurance contracts.  Section 101(j)(4) specifies that its notice and consent requirements are met if, before the issuance of the insurance contract, the employee (A) is notified in writing that the applicable policyholder intends to insure the employee’s life and the maximum face amount for which the employee could be insured at the time the contract was issued, (B) provides written consent to being insured under the contract and that such coverage may continue after the insured terminates employment, and (C) is informed in writing that an applicable policyholder will be a beneficiary of any proceeds payable upon the death of the employee.

In this matter, the taxpayer did not obtain separate documentation (e.g., a form or forms) covering the notice and consent requirements of Section 101(j)(4) until after the policies were issued.  Prior to the policies being issued, the taxpayer did enter into an agreement with each insured that stated that the taxpayer will obtain life insurance on the life of each shareholder and that the taxpayer will be the owner and beneficiary of such life insurance.  Each shareholder also completed an insurance application which indicated that the taxpayer was to be the owner and beneficiary, and disclosed the amount of coverage being obtained.  The taxpayer requested a ruling that the Service will not challenge the application of section 101(j) because the taxpayer made a good faith effort to comply with 101(j)(4).  The Service ruled that considering all of the taxpayer’s documentation as a whole, all of the 101(j)(4) requirements were met before the issuance of the contracts, because the agreement and application together addressed each of the 101(j)(4) requirements.



Baker v. American Greetings

American Greetings recently had a new COLI class action lawsuit filed against them in the Northern District of Ohio, where American Greetings is headquartered.  The plaintiff, Theresa Baker (Baker), is representing the estate of a former American Greetings’ employee.  The complaint asserts claims of misappropriation of name and identity, breach of fiduciary duty and unjust enrichment.  In June 2011, Baker filed a motion to intervene in the Collier v. American Greetings class action which is ongoing in the Northern District of Oklahoma.  In January 2012, Baker withdrew the motion to intervene in Collier and filed this separate action in Ohio.  American Greetings filed a motion to transfer Collier to the Northern District of Ohio arguing that the Baker and Collier claims are virtually identical and cover essentially the same proposed class of insureds.  Both plaintiffs are represented by McClanahan Myers Espey.

Case numbers: Collier v. American Greetings Corp., No. 10-cv-00625 (N.D. Okla.); Baker v. American Greetings Corp., No. 12-cv-00065 (N.D. Ohio).



MetLife Resolves Multi-State Exams Related to DMF Usage

On April 23, MetLife issued a statement regarding its resolution of multi-state examination related to unclaimed property and the company’s use of the Social Security Death Master File (DMF).  MetLife did not admit any liability, but agreed to pay the sum of $40 million for the examination, compliance and monitoring costs incurred by the participating states associated with the multi-state exam.  The agreement was led by six states: California, Florida, Illinois, New Hampshire, North Dakota and Pennsylvania; it will become effective with the signature of 14 additional states.  The exam will remain open for five years at which time MetLife will be given a final review.

MetLife also agreed to offer “industrial” policyholders (generally insureds over the age of 90 without a social security number or birth date associated with the policies) an option to receive the value of their life insurance policy sooner than provided for in the policy.  According to MetLife, the total insurance in force for these policies is approximately $438 million.  The company expects that $188 million will be paid out in 2012, with the remainder paid out over the next 17 years.  It is also speculated that MetLife may have to pay up to $200 million to state unclaimed property funds as a result of the new beneficiary payment requirements.