On November 26, House Ways and Means Committee Chairman Kevin Brady released a tax bill that included various retirement and other savings enhancements, legislation to redesign the IRS, and temporary tax relief for victims of certain natural disasters. The package also addresses tax extenders and includes some technical corrections to the Tax Cuts and Jobs Act.
Of note, the draft legislation did not include any provisions to clarify or amend the reportable policy sales definition under IRC §101(a) that was added by the Tax Cuts and Jobs Act.
We checked with various insurance carriers on the status of efforts related to this issue and were advised that the AALU continues to work on the bluebook and broader technical legislation in seeking solutions to the issue.
We continue to monitor the IRS for developments in providing implementation guidance on this topic as the next steps from IRS Notice 2018-41. Such guidance remains on the IRS’ Priority Guidance Plan.
On November 21, the federal banking agencies jointly issued a notice of proposed rulemaking (NPR) which would provide for an optional, simplified measure of capital adequacy for qualifying community banking organizations. The NPR is consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Under this NPR, community banking organizations with less than $10 billion in total consolidated assets would be permitted to elect to be subject to a single community bank leverage ratio (CBLR) to test for capital adequacy. The CBLR must be greater than 9%.
Various regulatory bodies continue to deliberate what constitutes an appropriate standard of broker / agent conduct (e.g., suitability, best interest, fiduciary, etc.) with regard to various investments and insurance contracts. Here are a few brief updates on this evolving area.
Brokers and Agents Challenge NY Best Interest Standard
On November 16, the Big I NY (formerly IIABNY) and the Professional Insurance Agents of New York (PIANY) jointly filed a lawsuit challenging the “best interest” standard adopted under NY Regulation 187, which is set to become effective August 1, 2019. In its press release, Big I NY states:
This new standard is extremely troubling and would significantly alter the agent/broker-customer relationship. The amended regulation would require agents and brokers to obtain detailed financial and risk information about their customers, and then recommend a specific policy based on that data—similar to the way financial investment products are offered. This would overturn decades of well-established case law which holds agents and brokers have no duty to recommend, and consequently significantly increase the risk of E&O lawsuits.
In the petition, the plaintiffs argue that the new regulation is “undefined, subjective and contradicts other law” and that it “improperly creates a continuing duty on the insurance agent or insurance broker even after the contract of insurance is issued.”
NJ Pre-Proposes Fiduciary Duty Rule
On October 15, the New Jersey Division of Consumer Affairs published a Notice of Pre-Proposal, indicating that it is considering issuing amendments to its rules to require that broker-dealers, agents, investment advisers, and investment adviser representatives be subject to a fiduciary duty.
The statement provides a brief background of recent developments in the area, including SEC/FINRA work on a best interest standard and the DOL’s fiduciary rule, and notes that in light of these Federal developments, investors remain without adequate protection from broker-dealers who, under the suitability standard, are permitted to consider their own interests ahead of their client’s interests when making investment recommendations.
The NJ Bureau of Securities held two informal conferences on this topic in November. Comments on this pre-proposal are due by December 14.
NAIC Deliberations on a Best Interest Standard
Additionally, as we have previously reported, the NAIC Annuity Suitability (A) Working Group continues deliberations on a “best interest” standard for annuities. On November 19, the group released an amended version of the Suitability in Annuity Transactions Model Regulation #275. The model regulation includes a stated purpose to “require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that are suitable, in the consumer’s interest and result in transactions involving annuity products so that the insurance needs and financial objectives of consumer at the time of the transaction are appropriately addressed.”
The working group also noted the ongoing work being done by the SEC on its best interest standard and noted that, at the present time, the NAIC standard was going to intentionally refrain from using the term “best interest.”
Comments on the draft have been requested and should be submitted before February 15, 2019.
As a follow-up to the NAIC Statutory Accounting Principles (E) Working Group’s recent amendments to SSAP No. 21, paragraph 6, the working group recently proposed instructions for insurance companies with respect to the narrative disclosure requirements for ICOLI holdings that are required for 12/31/2018 statutory filings.
As a recap, the NAIC previously adopted the following disclosure requirement for insurance companies that own variable life insurance policies:
Disclosure is required of the amount of the cash surrender value that is within an investment vehicle by investment category (e.g., bonds, common stock, joint ventures, derivatives, etc.).
The working group held its fall meeting on November 15, and in the agenda materials, NAIC staff suggested providing the following example for insurance companies to refer to in completing the required disclosure:
The Company is the owner and beneficiary of life insurance policies included in [name of Assets line] at their cash surrender values pursuant to SSAP No. 21, paragraph 6. At December 31, 2018, the cash surrender value in an investment vehicle is $_____, and is allocated into the following categories: x% bonds, x% stocks, x% mortgage loans, x% real estate, x% cash and short-investments, x% derivatives and x% other invested assets.
It is worth noting that the disclosure requirement will apply regardless of whether the NAIC sets forth the above example. In the absence of a specific example, each reporting entity would use the format they believe is appropriate to satisfy the disclosure requirement.
On September 19, California Assembly Bill 2634 was signed into law. This bill requires that an insurer provide a summary notice to a policyholder of a flexible premium life insurance policy whenever the policy is subject to an adverse change in nonguaranteed elements. The bill defines “adverse change” to mean:
A change to the current scale of nonguaranteed elements that increases or may increase a charge, or reduces or may reduce a benefit to the policy owner, other than a change in a credited interest rate or an index account parameter based entirely on charges in the insurer’s expected investment income or hedging costs.
The bill will impose these notification requirements related to changes that would take effect on or after July 1, 2019, and as notice is required to be provided 90 days prior to a change, notifications would be required as early as April 1, 2019.
Furthermore, the bill will require that an insurer produce and provide an illustration with respect to any adverse changes to nonguaranteed elements scheduled to be effective July 1, 2020 or later.
On November 9, the IRS publicly released PLR 107228-17, which was issued with regard to the liquidation proceedings of a certain insolvent long-term care insurer. While the facts of this particular insolvency are not applicable to BOLI, understanding how the IRS reacts to insurer insolvencies in general may be helpful.
It is worth noting that the restructuring and liquidation process included a step to split in-force policies between a “covered” and an “uncovered” benefit portion. Among the holdings set forth in this private letter ruling, the IRS affirmed that any Court-approved Policy restructuring would not modify the Policy’s issue date for purposes of § 7702B or be treated as a material change or an exchange of property (thus not result in taxable disposition under § 1001); and that the Owner’s adjusted basis under § 1011 would remain the same immediately after the restructuring as it was prior to such transaction.