September 2015


Operational Requirements for Securitizations under Basel III – Update

The Basel III rules require significant operational requirements for securitization exposures, including exposures arising indirectly through investment fund structures. Failure to satisfy the operational requirements can result in a 1250% risk-weight, irrespective of the value that might arise from the SSFA or Gross Up computations.

Among other things, the rules require banks to conduct comprehensive assessments ranging from structural features, to collateral data, to trading data, like bid-ask spreads and trading volume, in advance of acquiring the exposure, and to document any exposure within three days of acquiring it.

As we noted in April, banking regulators released a series of Frequently Asked Questions that addressed a couple topics relevant to BOLI programs. Of note, they directly referenced the need to comply with these requirements; however, they also indicated that banks can rely on investment managers to satisfy these requirements provided that the banking organization has a process to assess and manage the risk of using a third party.

Over the past few months, Keith Muncy (the BOLI program manager at Wells Fargo) has led an effort, along with input from other peer institutions, to create a certification form that each manager will be asked to complete quarterly for each investment portfolio. Attached is an email from Keith describing the draft certification and supporting documentation. As noted in Keith’s email, the goal is for managers to begin providing these certifications as of 2015-Q4. We will be reaching out to carriers in the coming weeks to help coordinate for our clients’ accounts.



BB&T v MassMutual – Update

This matter was first initiated by BB&T in 2009 in an attempt to recover losses allegedly incurred as a result of an investment allocation in the Falcon Fund (a leveraged, fixed income–only hedge fund) within a MassMutual separate account policy.

As we reported in our May 2015 LRA Update, BB&T voluntarily dismissed the complaint (“BB&T 1”) and refiled a new, substantially similar complaint (“BB&T 2”). MassMutual moved the court to reject the dismissal or to award attorneys’ fees for a period of time in BB&T 1. MassMutual also filed a motion to dismiss BB&T 2.

On August 19, the court held a hearing on these motions and, on August 21, issued an order staying all activity in these cases pending the resolution of the motions that are before the court.



JCT Description of Certain Revenue Provisions Contained in President’s Fiscal Year 2016 Budget Proposal

On September 29, the Joint Committee on Taxation released a report describing certain provisions of the President’s Fiscal Year 2016 Budget Proposal (which was submitted to Congress on February 2, 2015). The introduction notes that many of the provisions in the 2016 budget proposal were substantially similar to those in prior years. Therefore, in this document the JCT only described new or materially modified provisions. For recurring provisions, the report references a historical document for the description. Accordingly, the following proposals have been marked as substantially unchanged from prior years:

  • Expansion of the Pro Rata Interest Expense Disallowance for COLI;
  • Expanded Information Reporting for Private Separate Accounts; and
  • Modify Rules that Apply to Sales of Life Insurance Contracts.

Two insurance-related proposals had substantive analysis in this year’s report:

  1. Modify the Proration Rules for Life Insurance Company General and Separate Accounts; and
  2. Conform the Net Operating Loss Rules of Life Insurance Companies to Those of Other Corporations.

We confirmed that the projected financial impact of the life insurance reforms were unchanged from the JCT analysis released in March 2015.



Financial Services Committee Hearing on Domestic Insurance Regulatory Standards

On September 29, the House Financial Services Committee held a hearing titled “The Impact of Domestic Regulatory Standards on the U.S. Insurance Market.” Witnesses included Michael McRaith (Director, Federal Insurance Office), Tom Sullivan (Federal Reserve), John Huff (NAIC), and Ray Woodall (Independent Member of FSOC).

Among other things, the Federal Reserve testified about its efforts to develop capital standards for insurance holding companies that own an insured bank or thrift, as well as insurance holding companies designated by FSOC as Systemically Important Financial Institutions (SIFIs). The Federal Reserve noted that it does not have a timetable for releasing its insurance capital standards.

The committee also discussed matters relating to FSOC SIFI designations and global insurance supervision at length.


Rhode Island Supreme Court Decides that a Variable Annuity with a Guaranteed Death Benefit Does Not Require an Insurable Interest

The Rhode Island Supreme Court (RI SC) recently provided an opinion in response to two questions that were certified by the US Court of Appeals for the First Circuit. The RI SC was asked to consider:

  1. Whether an “annuity is infirm for want of an insurable interest” when “the owner and beneficiary of an annuity with a death benefit is a stranger to the annuitant.”
  2. Whether “a clause in an annuity that purports to make the annuity incontestable from the date of its issuance precludes the maintenance of an action based on the lack of an insurable interest.”

The RI SC concluded the first question in the negative and the second question in the affirmative.

As background to the underlying controversy, an investor purchased variable annuities with guaranteed death benefits and named terminally ill individuals as the annuitants. He would then choose speculative investment options within the variable annuity, and the return would be the greater of a 5% annual return on premiums or the highest market value of the policy at a specified anniversary date.

Western Reserve Life Assurance Co. of Ohio v. ADM Associates, LLC, 793 F.3d 168 (1st Cir. 2015)