Under 26 CFR 1.817-5, a segregated account is adequately diversified only if:
(A) No more than 55 percent of the value of the total assets of the account is represented by any one investment;
(B) No more than 70 percent of the value of the total assets of the account is represented by any two investments;
(C) No more than 80 percent of the value of the total assets of the account is represented by any three investments; and
(D) No more than 90 percent of the value of the total assets of the account is represented by any four investments.
Note that IRC 817(h) includes a special rule for investments in United States obligations that states “To the extent that any segregated asset account… is invested in securities issued by the United States Treasury, the investments made by such account shall be treated as adequately diversified…”
Notice 2016-32 states that Treasury and the IRS intend to amend 1.817-5 to allow variable contracts to invest in Government MMFs. The notice allows taxpayers to rely on an alternative diversification requirement:
A segregated asset account within the meaning of § 1.817-5(e) is adequately diversified for purposes of section 817(h) if—
(1) No policyholder has investor control; and
(a) The account itself is a government MMF under Rule 2a–7(a)(14); or
(b) The account invests all of its assets in an “investment company, partnership, or trust” as defined in § 1.817-5(f)(1) that satisfies the criteria of § 1.817-5(f)(2) and qualifies as a government MMF under Rule 2a–7(a)(14).
In order to qualify as a government MMF under Rule 2a–7(a)(14) the fund must be a “money market fund that invests 99.5 percent or more of its total assets in cash, government securities, and/or repurchase agreements that are collateralized fully.”
We have been reporting on the litigation arising from Transamerica’s COI rate increases for its retail universal life insurance policies. There are several updates this month. At least six class actions have been filed on this issue to date; we have included a table of these below.
Transamerica, in opposing a motion for preliminary injunction in the Kriegman case, argues that the policy language unambiguously allows it to adjust the COI, which it refers to as the Monthly Deduction Rate (“MDR”):
The terms of the Policies themselves do not limit Transamerica’s ability to adjust the MDR at levels that do not exceed the guaranteed maximum. The Policies state:
Monthly Deduction Rates – We will determine the monthly deduction rate for each policy year at the beginning of that year. We will use the insured’s age as of that policy year.
A Table of Annualized Guaranteed Monthly Deduction Rates is in the policy data. We may use rates lower than these annualized guaranteed monthly deduction rates. We will never use higher rates.
…. Thus, the clear and unambiguous terms of the Policies afford Transamerica discretion to adjust the MDR, subject to the Policies’ maximum guaranteed rates.”
The fundamental issue is that Transamerica claims to have unfettered discretion to adjust its COI up to the maximum guaranteed rates, while the plaintiffs claim that the COI must be fettered by the factors in the policy.
The most recent complaint, Lyons v Transamerica, again neglects to specifically address policy language; however, it does include an actual policy as an exhibit. The policy language appears to be substantively the same as what Transamerica disclosed in Kriegman.
The plaintiffs in Lyons also attached and referenced Transamerica’s interrogatories on non-guaranteed elements for 2011, 2012, 2013, and 2014. They note that, according to the interrogatories, Transamerica expressed no indication of any need to increase the Monthly Deduction Rates due to any adverse change in mortality rates.
Additionally, in May, Transamerica filed motions to consolidate several (but not all) of these complaints in the Northern District of Iowa (Feller, Kriegman, and Thompson). Interestingly, the Class Action complaints filed outside of the California Central District have been voluntarily dismissed by the plaintiffs.
|Jurisdiction and Status
|DCD Partners v. Transamerica
|Open, California Central District
|Feller v. Transamerica
|Open, California Central District
|White v. Transamerica
|Open, California Central District
|Lyons v. Transamerica
|Open, California Central District
|Kriegman v. Transamerica
|Dismissed (5/23/2016), Florida Southern District
|Thompson v. Transamerica
|Dismissed, California Southern District
On May 6, 2016, the SEC approved a proposed joint rule, together with the OCC, FRB, FDIC, and other regulatory agencies, to implement section 956 of the Dodd-Frank Act that prohibits covered financial institutions from encouraging inappropriate risks (a) through compensation, or (b) that lead to financial loss to the institution. The rule revises a prior proposed rule that was published in April 2011.
The proposed rule applies to an executive officer, employee, director, or principal shareholder who receives incentive-based compensation at a financial institution with assets of $1 billion or more. Senior executive officers and significant risk-takers are covered persons who may have the ability to expose a covered institution to significant risk through their positions or actions. For these covered people, covered institutions must defer a percentage of qualifying incentive-based compensation and long-term incentive plan compensation. The deferral requirements are based on the classification of the covered employee, the size of the covered institution, and the type of compensation. The deferrals range from 40% for 1 year to 60% for 4 years. The rule also requires the deferred compensation to be subject to downward adjustments, forfeitures, and clawbacks.
The deferment of payment in most cases will be subject to the requirements of 409A of the IRC. This means that covered institutions’ deferred compensation plans will need to be revisited and possibly revised.
Finally, the rule requires specific corporate governance to manage and comply with the requirement of the rule. This includes creating a compensation committee of directors who are not senior executive officers, extensive record keeping, and implementing risk management.
On May 3, 2016, the FRB, FDIC, and OCC published a joint press release proposing a Net Stable Funding Ratio (NSFR) Rule.
The proposal would require institutions subject to the rule to maintain sufficient levels of stable funding, thereby reducing liquidity risk in the banking system. While the Liquidity Coverage Ratio (LCR) addresses liquidity needs over a 30-day period of stress; the NSFR attempts to address liquidity needs over a one-year period.
The NSFR is targeted to become effective on January 1, 2018. Comments on the proposed rule can be submitted through August 5, 2016.
Today (June 3), the FRB released a rule proposal for capital standards that could apply to systemically important insurance companies (e.g., SIFIs) and to insurance companies that own a bank or thrift. The proposal outlines two approaches: a consolidated approach and a building-block approach.
The consolidated approach would apply to SIFIs. Under this approach, an insurance firm’s assets and insurance liabilities are categorized into risk segments and then risk factors are applied to each segment at the consolidated level to generate a minimum ratio of required capital. Presently, this approach is contemplated for AIG and Prudential Financial.
The building-block approach would apply to insurance companies that own a bank or thrift (currently there are 12 entities in this category). The building-block approach would aggregate existing capital requirements across a firm’s different legal entities to arrive at a combined, group-level capital requirement, subject to adjustments to reflect the Board’s supervisory objectives.
Comments on this proposal are due by August 2, 2016.
On June 1, 2016, the National Technical Information Service (NTIS) published a final rule titled Certification Program for Access to the Death Master File. This final rule amends 15 CFR 1110. The rule becomes effective November 28, 2016.
The amendments have two main points. First, they require each applicant requesting access to the DMF to demonstrate that they have “a legitimate fraud prevention interest or a legitimate business purpose pursuant to a law, governmental rule, regulation, or fiduciary duty.” Second, they require that the application include a “written attestation from an Accredited Conformity Assessment Body” that the applicant has “systems, facilities, and procedures in place to safeguard the accessed information, and experience in maintaining the confidentiality, security, and appropriate use of accessed information, pursuant to requirements similar to the requirements of section 6103(p)(4) of the Internal Revenue Code of 1986.”
The rule also requires any Certified Person to agree to be audited by NTIS, or, at the request of NTIS, by an Accredited Conformity Assessment Body. The life insurance industry had submitted comments requesting exclusion from the audit requirements because it is an independently regulated industry. Notably, in the comments on the final rule, NTIS stated that its intent is “that applicants and Certified Persons should not incur the burden or expense of a DMF-specific audit when they have already had, or will have, an appropriate independent assessment or audit performed for other purposes.”
The Senate Committee on Finance continues to actively discuss business tax reform. On May 24, 2016, the Committee held a hearing on the disparate tax treatment of corporate debt and equity. The committee members and witnesses focused on the tax incentives that favor debt financing relative to equity financing; in particular, the fact that interest on debt financing is tax deductible whereas dividends paid to equity owners are not tax deductible. The hearing included testimony regarding ways that the disparate treatment could be eliminated, including a shareholder credit for corporate taxes paid and a dividend deduction.
The Joint Committee on Taxation prepared a report for the Finance Committee describing the tax treatment of corporate debt and equity for both issuers and investors. While not the central point or area of focus, the report includes a section describing tax rules meant to address tax arbitrage in the case of borrowing to fund untaxed income (including interest expense disallowance associated with insurance products).