October 2015


Basel Committee Coordination Bulletin – Wholesale and Retail Credit Risk Work Programs

On October 15, the FRB’s Basel Coordination Committee released Bulletin 15-2, Wholesale and Retail Credit Risk Work Programs for Advanced Approaches Rules. The work programs describe supervisory processes for gathering information on retail and wholesale credit risk management and measurement practices at advanced approach institutions. They are intended to implement the principles in sections 122 (Retail) and 131 (Wholesale) of the advanced approaches rule.

The work programs do not establish new requirements or reporting obligations for advanced approach institutions.


OCC Rescinds Outdated Regulatory Capital Bulletins

On October 13, the OCC issued Bulletin 2015-38, which rescinded various OCC and OTS bulletins (“issuances”) related to regulatory capital. The reason for the rescissions is that the bulletins have become outdated or superseded now that the Basel III regulatory capital rule is final.

We note that OCC 2004-56 was not included in the list of rescinded issuances. This is not surprising since OCC 2004-56 provides thorough regulatory guidance for purchasing and owning BOLI. However, it does have a section related to the Risk-Based Capital Treatment of BOLI programs that is not entirely consistent with the Basel III rules.


Basel Committee Chairman’s Remarks Regarding Counterparty Credit RWA

On October 9, Basel Committee Chairman, Mr. Stefan Ingves, spoke at the 2015 IIF Annual Membership Meeting. He provided an update on the post-crisis regulatory framework, which, in addition to a risk-based capital measure, also incorporates: 1) a leverage ratio requirement; 2) a liquidity coverage ratio as a short-term stress metric; 3) a net stable funding ratio requirement; and 4) capital surcharges and countercyclical capital buffer frameworks.

He also spoke about the Basel Committee’s ongoing deliberations with respect to credit risk. He noted that the responses to the recent proposal on revising the standardized approach for credit risk indicate that it was not well received. Commenters either viewed the proposals as too simple to measure risk accurately, or too complex and burdensome. Mr. Ingves indicated that the Basel Committee is well on its way to revising the proposals and believes that the committee is likely to follow the path of simplification rather than increasing complexity. He noted that this is likely to include reintroducing a role for external credit ratings.

Of course, in the U.S., regulators are currently required by law to refrain from using external credit ratings in their regulations.



Nixon v. United States – Update

In August 2013, we reported on litigation in which a group of plaintiffs filed a negligence claim against the U.S. Government alleging that the insured’s employer (the Small Business Administration or “SBA”) failed to properly maintain and/or forward a form designating the plaintiffs as beneficiaries on a life insurance policy, which, in turn, caused them to lose insurance benefits they would have otherwise received. The policy proceeds were instead paid in accordance with a previous beneficiary form.

As a brief reminder of the circumstances, following the insured’s death an updated beneficiary form was found (by the insured’s son, who ultimately received a greater percentage of the proceeds than the updated form reflected) in the personnel files of the local office. At that time, the form was forwarded to the regional SBA office and also transmitted to MetLife along with a note indicating that it had not been received by Human Resources prior to the insured’s death. After receiving these documents, MetLife paid benefits as indicated on the original designation, not the more recent form.

The Government’s attempts to 1) dismiss the matter, 2) add MetLife as a third-party defendant, and 3) prevail via summary judgment have been unsuccessful. The court has now set a bench trial for 3/28/2016.

Citation: Nixon et al. v. U.S. Small Business Administration et al., ND-IL 1:12cv16


Taylor v. NCR Corp – NQDC Plan Lump Sum Termination

On September 23, the District Court (N.D. GA) ruled in favor of an employer in a matter whereby a former executive challenged the employer’s right to terminate an NQDC plan and pay the actuarial present value of the accrued benefit in a lump sum. The former executive asserted that the combination of the federal and state income tax consequences and the use of a 5% discount rate adversely impacted his benefit, resulting in a 52.5% reduction in his monthly pension benefit under the plan.

In dismissing the matter, the Court ruled that various provisions of ERISA did not apply to “top hat plans” like this one. The Court also noted that tax losses do not fall within the relief available to redress a violation of ERISA.

Citation: Taylor v. NCR Corp., (ND-GA) No. 1:14-cv-2217-WSD



Cybersecurity Developments

On October 14, 2015, the Cybersecurity Task Force of the National Association of Insurance Commissioner (NAIC) adopted the Cybersecurity Bill of Rights. The NAIC is not a regulatory agency, and therefore, the Cybersecurity Bill of Rights is not law or regulation; however, the NAIC is made up of state insurance commissioners so its passage may be predictive of future legislative and regulatory action. It does not appear that any state is currently considering adopting this bill as law.

The Cybersecurity Bill of Rights opines that insurance consumers should have various rights with respect to their information being private and protected, and as to what insurance companies, insurance agencies, and insurance agents are required to do if there is a data breach.

On October 27, the Senate passed bill S.754 – Cybersecurity Information Sharing Act of 2015 (CISA). The House passed a different version of this bill in April, so the two bills now need to be reconciled and then approved by the White House before it becomes law.

CISA is designed to allow entities to share “cyber threat indicators” with other entities and the federal government. Proponents of the bill hail it as a necessary step in cybersecurity law. Opponents claim that the bill will place Americans’ personal information in the hands of the government and may make it more at risk.


Senator Warren’s Report on Conflicts of Interest in the Annuity Industry

On October 27, 2015, Senator Elizabeth Warren released a report on Conflicts of Interest in the Annuity Industry. Due to what Senator Warren considers a loop hole in the law, annuity providers are able to give incentives (which the report refers to as “kickbacks”) to agents, which may cause the agents to put their desire for incentives above the interests of their own clients. Specifically, Senator Warren points to the fact that FINRA Rule 2320 only applies to variable insurance contracts, and not fixed annuities. Further, she points out that non-cash compensation is allowed under 2320 so long as it is based on “the total production of associated persons with respect to all variable contract securities distributed by the member.”

Senator Warren’s report includes the following statement (emphasis added):

When companies can offer kickbacks to agents for recommending high-cost financial products, and when those kickbacks are hidden from the customers, the likelihood that consumers will be duped into buying bad products increases sharply.

The report states that this issue is estimated to cost Americans an estimated $17 billion every year. We embrace Senator Warren’s goal of addressing/reducing conflicts of interest. We have long been advocates of full compensation transparency for financial advisors, brokers, and agents (in both the retail and institutional markets).

Warren concludes her report by calling for increased disclosure and new regulations that would protect consumers and eliminate financial conflicts of interest.


FINRA Proposes Rule Change to Establish Margin Requirements for TBAs and Other Agency Transactions

On October 6, FINRA released a proposed rule change to establish margin requirements for the TBA market. FINRA has been working on this project for quite some time (see FINRA Notice 14-02), noting that most trading of agency and GSE MBS takes place in the TBA market, and that it is one of the few markets where a significant portion of activity is unmargined.

The proposed rule was published in the Federal Register on October 20. We will be reaching out to the SA BOLI insurance companies to seek input on the impact of this rule proposal on investment divisions’ guidelines and investment managers’ trading practices.