November 2013


Senate Finance Committee Proposal to Reform Certain Business Provisions

On November 21, Senate Finance Committee Chairman Max Baucus (D-Mont.) released a legislative proposal to reform certain business tax provisions.  In a related development, the JCT released a document titled Technical Explanation of the Senate Committee on Finance Chairman’s Staff Discussion Draft to Reform Certain Business Provisions.

We are still reviewing the proposal for possible implications and will pass along any relevant findings and observations.



OCC Risk Management Guidance for Third-Party Relationships

On October 30, the OCC released Bulletin 2013-29 regarding Risk Management Guidance for Third-Party Relationships.  The bulletin notes that a bank should adopt risk management processes commensurate with the level of risk and complexity of its third-party relationships.  According to the bulletin, an effective third-party risk management process includes:

  • Plans that outline the bank’s strategy, identify the inherent risks of the activity, and detail how the bank selects, assesses, and oversees the third party;
  • Proper due diligence in selecting a third party;
  • Written contracts that outline the rights and responsibilities of the parties;
  • Ongoing monitoring of the third party’s activities and performance;
  • Contingency plans for terminating the relationship in an effective manner;
  • Clear roles and responsibilities for overseeing and managing the relationship and risk management process;
  • Documentation and reporting that facilitates oversight, accountability, monitoring, and risk management; and
  • Independent reviews that allow bank management to determine that the bank’s process aligns with its strategy and effectively manages risks.

The bulletin also notes a number of common deficiencies.  The OCC has identified instances in which bank management has:

  • Failed to properly assess and understand the risks and direct and indirect costs involved in third-party relationships;
  • Failed to perform adequate due diligence and ongoing monitoring of third-party relationships;
  • Entered into contracts without assessing the adequacy of a third party’s risk management practices;
  • Entered into contracts that incentivize a third party to take risks that are detrimental to the bank or its customers, in order to maximize the third party’s revenues; and
  • Engaged in informal third-party relationships without contracts in place.

This bulletin rescinds OCC Bulletin 2001-47 and OCC Advisory Letter 2000-9.

As a third-party service provider for banks, we have long embraced supervisory guidance of this nature as well as industry best practices relating information security, disaster recovery and compensation transparency.  We welcome the opportunity to discuss this guidance further with any interested parties.


OCC Releases Dodd-Frank Stress Testing Scenarios and Proposed Changes to Dodd-Frank Annual Stress Test Reporting

Scenarios and Reporting Templates

On November 1, the OCC released the economic and financial market scenarios that will be used in the next round of stress tests for large financial institutions.  Section 165(i)(2) of the Dodd-Frank Act requires certain financial companies, including national banks and federal savings associations with total consolidated assets of more than $10 billion, to conduct annual stress tests.  The scenarios include baseline, adverse, and severely adverse scenarios, as described in the OCC’s final rules that implement stress test requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Proposed Changes to Dodd-Frank Annual Stress Test Reporting

In a related development, on November 8, the Federal Register included proposed changes to the “Company-Run Annual Stress Test Reporting Template and Documentation for Covered Institutions with Total Consolidated Assets of $50 Billion or More under the Dodd-Frank Wall Street Reform and Consumer Protection Act.”

In the proposal, the OCC noted that many covered institutions with total consolidated assets of $50 billion or more are required to submit reports using the Comprehensive Capital Analysis and Review (CCAR) reporting form FR Y-14A.  As such, to the extent practical, the OCC is trying to keep its reporting requirements consistent with the Board’s FR Y-14A.

Most of the proposed changes to the Dodd-Frank Annual Stress Test (DFAST) reporting templates relate to the capital and risk-weighted assets schedules and an effort to align them with the Basel III final rule and transition.  In last month’s LRA, we covered the FDIC’s release of DFAST instructions and reporting templates for institutions between $10 billion and $50 billion of total consolidated assets.

The proposal includes the following statement (emphasis added):

Covered institutions are required to complete the General RWA section for all projection quarters until the Standardized Approach becomes the applicable risk-based capital requirement. At that time (January 1, 2014 for Advanced Approaches institutions, January 1, 2015 for all other covered institutions) institutions will be required to report items in the Standardized Approach section.

This statement does not appear to be consistent with the effective dates within the Basel III final rules.  It is our understanding that the Standardized Approach does not become applicable for any institution until 1/1/2015.  We will seek clarification from the regulators on this point.

Comments must be received by December 9, 2013.


BOLI-Related Implementation for Basel III

In November, we were invited to submit BOLI-related questions to the OCC in advance of a BOLI forum hosted by a prominent insurance carrier.  A representative of the OCC delivered a presentation at the BOLI forum which included some important information.

As importantly, the OCC acknowledges the need for the banking regulators to provide additional written clarification on a number of matters relating to BOLI.  The timing of additional clarification is somewhat unclear given, in part, the need to coordinate efforts with other regulatory agencies.

We would welcome the opportunity to discuss these issues further with any interested parties.



Cost of Insurance Litigation – Conseco Class Action

In our August LRA update, we noted that a fairness hearing was scheduled for November in this matter.  On November 8, the settlement was approved.

In a related matter, Conseco is being sued by former policyholders who chose to surrender their contracts prior to the COI increases at the heart of these controversies.  Such policyholders were originally included in the class; however, in December 2011, the Court (Northern District of California) redefined the class in light of a Supreme Court ruling.  The Court held that former policyholders could no longer be included because the monetary relief they sought was not incidental to declaratory judgment of injunctive relief.  In November, the Court dismissed the complaint based on jurisdictional issues; however, it granted the plaintiffs 45 days to amend their complaint.

In Re Conseco v. Burnett and Camp No. C 10-md-02124 SI (No. District of California)



NAIC Separate Account Risk Working Group – Update

On November 13, the NAIC’s Separate Account Risk (E) Working Group (SARWG) held a conference call to consider preliminary actions and recommendations relating to non-variable separate account products.  Following that call, two revised documents were released for comment.  Hybrid BOLI/COLI products are marked for discussion, however a consensus direction is not yet clear.


SEC Releases Study to Congress on Credit Rating Agency Independence

The SEC Staff of the Office of Credit Ratings published a report regarding credit rating agency independence.  Pursuant to Dodd-Frank Section 939C, the report was submitted to the Senate Committee on Banking, Housing, and Urban Affairs, and the House Committee on Financial Services.

The report largely focused on conflicts of interest involving ancillary services provided by NRSROs.  The SEC staff concluded that NRSROs have policies and procedures to manage conflicts of interest, and the staff does not believe it is warranted to recommend changes to the rules relating to an NRSRO providing ancillary services to issuers for which it also provides a rating.