May 2015


Banking Regulators Release Supervisory Guidance for Implementation of SSFA for Securitization Exposures under the Advanced Approaches

On May 18, the Federal Reserve issued Supervisory Guidance for Implementation of the Simplified Supervisory Formula Approach (SSFA) for Securitization Exposures under the Advanced Approaches (“BCC 15-1”). The FRB worked closely with OCC to develop this guidance, which only applies to advanced approach institutions.

Under the advanced approaches, there is a hierarchy of approaches for risk-weighting securitization exposures:

  1. Supervisory Formula Approach (SFA)
  2. SSFA
  3. 1,250%

Relative to the SSFA, the SFA requires the following additional input parameters: the capital against the underlying exposures (KIRB), the effective number of exposures (N), and the exposure-weighted average loss given default (EWALGD). Sourcing these data parameters can be difficult and costly.

BCC 15-1 provides guidance for determining when an institution may use the SSFA rather than the SFA. The determining factors are materiality of securitization exposures with respect to a given asset class and whether an institution is an investing or originating bank.

In general, the guidance requires the SFA if the institution is an “originating bank.” For securitizations in which an institution is an “investing bank,” the bank may consider the materiality of its total securitization exposures to the underlying asset type when determining whether to apply the SFA in the face of data limitations.

The regulators expect banks to perform a careful and well-documented analysis to assess the materiality of securitization exposures to a given asset class based on a variety of factors. If securitization exposures, in the aggregate, are material, a bank is expected to make a good-faith effort to apply the SFA. The regulators note that conservative estimates of parameters can be used in certain instances.

The guidance does not appear to provide any clarification regarding whether investment fund exposures (such as through SA BOLI investment portfolios) are expected to be aggregated with directly owned exposures under the materiality analysis described.



COI Litigation – Fleisher v. Phoenix Life Insurance Co.

Over the past few years, we’ve tracked a number of lawsuits challenging insurers’ discretion to adjust cost of insurance (COI) rates. In December 2013, the Seventh Circuit Court of Appeals affirmed two separate district court rulings in favor of the insurance companies (Norem v. Lincoln Benefit Life and Thao v. Midland National).

In the Norem ruling, the judge included the following analogy:

[N]o one would suppose that a cake recipe “based on” flour, sugar and eggs must be limited only to those ingredients. Thus, neither the dictionary definitions nor the common understanding of the phrase “based on” suggest that [the insurer] is prohibited from considering factors beyond [the enumerated factors of] sex, issue age, policy year and payment class when calculating its COI rates.

In an April 2014 summary judgment ruling in an ongoing case in the Southern District of New York (Fleisher v. Phoenix Life), the judge directly challenged the Norem reasoning:

In the cookbooks I read, recipes are exhaustive lists of all the ingredients needed to bake a cake. … There is nothing in either policy to suggest that the listed factors are merely a starting point for the rate calculation, and that the insurance company is free to add a dollop of Undisclosed Factor A and a dash of Undisclosed Factor B in order to ‘season’ the COI rate to its liking.

It is worth noting that the summary judgment ruling mentioned above was not entirely in the plaintiffs’ favor.

On May 29, the parties filed a motion for preliminary approval of a class action settlement in the amount of $42 million. According to the memorandum in support of the settlement, the amount represents ~70% of the COI overcharges to date. Additionally, the pre-COI increase rates will be restored and guaranteed for five years.

Fleisher v. Phoenix Life Insurance Company No. 11-cv-8405(CM) (S.D. NY)


BB&T v. MassMutual – Update

In 2009, BB&T initiated a lawsuit against MassMutual (the insurance carrier) to recover a portion of losses incurred as a result of an investment allocation in the Falcon Fund (a leveraged, fixed income-only hedge fund). BB&T had acquired a $112.5 million BOLI policy in August 2006 via an IRC § 1035 exchange, and it chose to allocate approximately half of the cash value to the Falcon Fund. BB&T asserts that, among other things, MassMutual failed to monitor and enforce a series of mandatory reallocation events and that such failure resulted in damages ranging between $18 million and $43 million. MassMutual disagrees that any such event took place prior to November 2007 and further asserts that the reallocation events provided Bank of America (the SVP provider) a right to require a liquidation from the Falcon Fund, not an obligation.

The matter was scheduled for a jury trial to commence in May. However, on May 1, BB&T submitted a voluntary dismissal and on the same day commenced a new complaint against MassMutual. On May 15, MassMutual filed a motion asking the court to reject BB&T’s voluntary dismissal, or in the alternative, if the court were to accept the dismissal, to award MassMutual attorneys’ fees for the previous three years.

As of the writing of this update, we were unable to determine if the court had responded to either development. We will continue to monitor this litigation.

North Carolina Superior Court (Forsyth County) 09 CVS 4007


FNB v. Transamerica and Clark Consulting – Update

In this matter, FNB is seeking $2.5 million that it asserts should have been paid by Transamerica upon the surrender of BOLI contracts last year. On February 20, Transamerica and Clark Consulting filed a third-party complaint against JPMorgan Chase Bank, N.A. (“JPMorgan”). In a similar fashion, as the answer to FNB’s complaint, the third party complaint alleges that Transamerica was allowed to deduct the contested amount if JPMorgan decided not to pay it, and that JPMorgan rightfully did not have to pay it because the conditions for payment were not “strictly satisfied.“ However, the third-party complaint also alleges that because FNB’s damages were solely caused by JPMorgan’s decision not to pay the “Bank Enhancement Amount,” if there is liability it should belong to JPMorgan.

On May 15, JPMorgan submitted a motion to dismiss the third-party complaint. Primary arguments put forth by JPMorgan in support of its motion to dismiss include:

  1. Lack of personal jurisdiction in Pennsylvania District Court;
  2. JPMorgan’s only contractual duties related to this matter are to Commonwealth General (an affiliate of Transamerica which is not a party to this case), and Transamerica and Clark have no contract with JPMorgan and therefore no right to indemnification or contribution; and
  3. JPMorgan had no obligation to pay the Bank Enhancement Amount if certain conditions precedent in its agreement with Commonwealth General were not strictly satisfied. JPMorgan notes that the complaint actually pleads that the required conditions were not satisfied.

Finally, JPMorgan notes that if the third-party complaint is not dismissed, it should be transferred to the Southern District of New York.

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



Financial Regulatory Improvement Act of 2015

On May 21, Senator Richard Shelby (R-AL), introduced a committee mark-up of “The Financial Regulatory Improvement Act of 2015.” Among other things, the act would seek to:

  • Exempt banks with less than $10 billion in assets from the Volcker Rule;
  • Require more clarity regarding FSOC SIFI determinations (both for banks and non-banks); and
  • Make various technical corrections to the Dodd-Frank Act.


Finance Committee Update on Bipartisan Tax Working Groups

On May 21, Senate Finance Committee Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) released an update on the committee’s bipartisan tax working groups, saying that they would allow the working groups more time to analyze current tax law and examine policy trade-offs and available reform options within each group’s designated topic areas. A new timeline is expected to be decided soon.