September 2014


Insurance Capital Standards Legislation

In early September, MetLife received preliminary notification from FSOC that it will be designated as a SIFI.  The insurance industry, including through ACLI and other associations, continues to lobby against FSOC determinations and the implementation of bank-centric capital rules to insurance companies under Dodd Frank.

Legislative proposals titled Insurance Capital Standards Clarification Act of 2014 have been introduced in both the House (HR 4510) and Senate (S 2270).  S2270 passed the Senate on June 3.  The House version (introduced 4/29) has not yet been voted upon.  However, House bill HR 5461 includes the same insurance capital standards provisions (along with a couple of other provisions), and it has passed in the House.

In a related development, on September 30, the FRB announced that it will begin a quantitative impact study (QIS) to evaluate the potential effects of its revised regulatory capital framework on savings and loan holding companies and non-bank financial companies supervised by the FRB that are substantially engaged in insurance underwriting activity.



Agencies Adopt Supplementary Leverage Ratio Final Rule

On September 3, the OCC, FDIC, and FRB adopted a final rule modifying the definition of the denominator of the supplementary leverage ratio in a manner consistent with the recent changes agreed to by the Basel Committee.  Computational changes relate to off-balance sheet items such as credit derivatives, repo-style transactions, and lines of credit.

The final rule also requires institutions to calculate total leverage exposure using daily averages for on-balance sheet items and the average of three month-end calculations for off-balance sheet items.

As a reminder, the supplementary leverage ratio (SLR) requirement is 3%.  It also serves as the basis for the enhanced SLR (eSLR) requirements that apply to the eight largest institutions.  Depository institutions and bank holding companies subject to the eSLR must maintain at least a 6% and 5% SLR, respectively.  In his testimony for Senate Banking Committee, FDIC Chairman Gruenberg stated that recent supervisory estimates indicate that the 6% eSLR is roughly equal to an 8.6% traditional leverage ratio and the 5% eSLR is roughly equal to a 7.2% traditional leverage ratio.

Revisions to the denominator definition will be effective January 1, 2018.


OCC Finalizes Heightened Standards for Large Financial Institutions

On September 2, the OCC released final governance and risk management guidelines for large financial institutions.  The guidelines apply to insured national banks, insured federal savings associations, and insured federal branches of foreign banks with $50 billion or more in average total consolidated assets.

The final guidelines are generally the same as those proposed in January 2014.  The OCC previously noted that it had developed and was largely using the heightened expectations in its supervision of the largest institutions already.

The guidelines consist of three sections:

  1. An Introduction explaining the scope and defining terms;
  2. A section setting forth the minimum standards for the design and implementation of a covered bank’s risk governance framework; and
  3. A section providing minimum standards for the board of directors’ oversight of the risk governance framework.

Institutions with $750 billion or more in average total consolidated assets are expected to comply immediately upon the effective date as published in the Federal Register.  Institutions between $100 billion and $750 billion in consolidated assets should comply within six months of the effective date. Institutions with assets from $50 billion to $100 billion should comply within 18 months of the effective date.


Agencies Finalize Liquidity Coverage Ratio Rule

On September 3, the OCC, FDIC, and FRB finalized the liquidity coverage ratio (LCR) rule.  The underlying concept of the rule is that covered institutions must hold high-quality liquid assets (HQLA) in an amount that exceeds projected net cash outflows during a 30-day stress period.

The LCR will apply to banking organizations with more than $250 billion in assets or more than $10 billion in on-balance sheet foreign exposure.  It will also apply to subsidiary institutions with at least $10 billion in assets.  A modified LCR will be applicable to institutions between $50 billion and $250 billion in assets.  Covered institutions are required to be fully compliant by January 1, 2017.



FNB v. Transamerica and Clark Consulting – Update

As we’ve reported in the last two LRA updates, First National Bank of PA (FNB) filed a complaint against Transamerica (the insurance carrier) and Clark Consulting (the broker) to recover $2.5 million in connection with the surrender of a separate account BOLI program.  Last month, we reported that Transamerica and Clark Consulting filed a motion to dismiss the matter.

FNB Response to Motion to Dismiss

On September 11, FNB filed a response to the motion to dismiss.  FNB asserts that the representation at the heart of the controversy (that “the Policies are not, and have not been previously, owned by an entity other than the Policyowner on or prior to the Immunization Termination Date”) was true and correct by operation of law.  FNB argues that controlling law continues the existence of Park View (the original bank purchaser) in FNB and deems Park View and FNB to be the same corporation.

FNB also questioned the validity of the unexecuted stable value agreements that Transamerica alleged to be part of an integrated agreement, and argued that Transamerica is improperly seeking to enforce third-party contracts against FNB, to which FNB was not a third-party beneficiary.

Transamerica and Clark Reply Memorandum

On September 25, Transamerica and Clark Consulting filed an additional reply memorandum in further support of their motion to dismiss this complaint.  Among other things, the reply memorandum further addressed FNB’s assertions that it was the same policyholder and that it did not have third-party beneficiary rights.  The Defendants assert that the applicable law cited by FNB only applies to bank mergers fully within a single state (not the case in this instance).  Further, they suggest that even if FNB’s representation were true, the remedy would be to sue JPMC for its refusal to pay the Bank Enhancement Amount.  The Defendants note that a “boilerplate provision that there are no third-party beneficiaries” is not dispositive under New York law.

Transamerica and Clark Consulting also reattached a copy of the Customer Service Change Form that was used to record the ownership change from Park View to FNB, noting that the prior copy submitted by FNB was blurry and difficult to read.  Inexplicably, the Defendants also attached a case census, which included each insured employee’s name.

Personally identifying information is almost universally understood to be highly sensitive and confidential.  One is therefore left to wonder whether the Defendants’ public disclosure of sensitive information (i.e., in an uncensored format) is indicative of severe incautiousness or spite.  We are interested to see if FNB will take issue with the disclosure.

FNB Sur-reply to Defendants’ Reply Memorandum

On September 30, FNB filed a sur-reply to Defendants’ reply memorandum that was filed on September 25.  FNB reiterated its contention that the March 2014 policy values report reflected the Cash Surrender Value to which the bank is entitled.  FNB also contends that the cited law (12 U.S.C. § 215a(e)) does, in fact, apply to FNB’s acquisition of Park View, and, as a matter of law, FNB and Park View are deemed to be the same corporation.

Case Reference: First National Bank of Pennsylvania v. Transamerica Life Insurance Company & Clark Consulting No. 2:14-cv-01007-CB (W.D. PA)



IRS Audits of Deferred Compensation Plans for Compliance with 409A

At least two large audit firms have reported that the IRS has commenced an audit program related to deferred compensation programs’ compliance with Section 409A.  The initial program involves plans sponsored by approximately fifty large employers and will reportedly focus on deferrals made by the ten highest paid employees.  The IRS has indicated that this initial audit program will be used to test the level of compliance in practice and to evaluate the IRS’s audit techniques in this area.

Failure to comply with Section 409A requirements can have severe implications for plan participants (e.g., 20% penalty of the value of the deferred compensation).



Senate Banking Hearing – Wall Street Reform

On September 9, the Senate Committee on Banking, Housing and Urban Affairs held a hearing on the financial regulatory system.  Witnesses included representatives from the FRB (Mr. Tarullo), FDIC (Mr. Gruenberg), OCC (Mr. Curry), CFPB (Mr. Cordray), SEC (Ms. White), and CFTC (Mr. Massad).

The hearing addressed a wide variety of topics, including: capital rules, risk retention rules, Volcker implementation, SIFIs, FSOC, living wills and orderly liquidation, swap/OTC margining, and supervision of banks.

An archive webcast and each panelist’s testimony are available on the Committee’s website (see link above).


Basel Committee Developments

Press Release Recapping Recent Meeting in China

On September 25, the Basel Committee released a press release providing updates on the progress of various post-crisis reforms that were discussed at a recent meeting in Tianjin, China.  The press release briefly addressed the following topics:

  • Global Systemically Important Banks (G-SIBs): An updated list of G-SIBs based on 2013 year-end data was discussed and will be published in the coming weeks.
  • Endorsement of the Net Stable Funding Ratio: The Committee endorsed the final details of Basel III’s net stable funding ratio.
  • Corporate Governance Guidance: The Committee is revising its 2010 principles and will soon publish revisions for consultation.
  • Finalizing Securitization Standards: The Committee reviewed progress towards finalizing revisions to the Basel framework’s securitization standard, which is expected to be published by year-end.
  • Consistency of Bank Capital Ratios: The Committee is seeking to address the issue of excessive variability of risk-weighted assets.  (See opening remarks from Committee Chairman Stefan Ingves below.)

Opening Remarks – Focus on RWA Variability and Complexity

In his opening speech on September 25, Basel Committee Chairman Stefan Ingves discussed (among other topics) the ongoing issue of reliability and comparability of risk-based capital ratios.  He noted that the Basel Committee continues to observe significant variations in RWA that are not explained by underlying differences in the riskiness of banks’ portfolios.  Below is an excerpt from his speech identifying what actions the Committee is taking with respect to this topic.

The steps the Committee has taken, and plans to take, to address excessive variation in risk-weighted assets include:

  • The introduction of capital floors and benchmarks, and greater restrictions on the scope of banks’ internal risk estimates. In this regard, there is recognition that not all risk parameters are suitable for modelling;
  • Providing clarity on aspects of the Basel framework that are ambiguous, and reducing areas for national discretion;
  • Strengthening the disclosure requirements relating to risk-weighted assets by amending Pillar 3 of the Basel framework; and
  • Ensuring consistent implementation of Committee standards and monitoring outcomes of risk-weighted asset variability.

His remarks also acknowledge the ongoing philosophical debate about whether an ideal regulatory framework should be more simple (perhaps less apt to be arbitraged), or whether it should be more complex and risk-sensitive (perhaps rewarding and/or better aligning risk management).

Basel III Monitoring Report as of December 31, 2013

On September 11, the Basel Committee released an updated Basel III Monitoring Report.  A total of 227 banks participated in the current study, including 13 U.S. institutions.  The results of the monitoring exercise assume that the final Basel III package is fully in force (i.e., it does account for transitional rules) based on data as of December 31, 2013.

Data in this report show that most large internationally active banks now meet the Basel III risk-based capital minimum requirements, and capital shortfalls have been further reduced relative to the target levels.

The 53-page report includes a number of different graphs and tables assessing regulatory capital and liquidity positions.


DMF Certification Process Update

An interim process had been established by the National Technical Information Service (NTIS) to grant temporary Death Master File (DMF) certifications consistent with Section 203 of last year’s Budget Act.  That process expired on September 30.  The NTIS will be unable to accept certifications until it receives OMB clearance.  OMB clearance cannot be granted until the entire rulemaking process is complete.

The comment period for the DMF Subscriber Certification Form expires on October 21, 2014.  The NTIS estimates an additional 45 business days to complete the process.

We have confirmed with each of our significant carriers that they have submitted and been approved for access through the temporary process.