Monthly LRA Update

REGULATORY DEVELOPMENTS

Potential Bank Regulatory Response to Signature and Silicon Valley Bank Failures

On March 28 and 29 Michael Barr, Federal Reserve Vice Chair for Supervision, testified in House and Senate committee hearings on the failure of Silicon Valley Bank (Written Testimony). Silicon Valley Bank was a state member bank with the Federal Reserve as its primary federal regulator. Mr. Barr provided a brief recap of the Federal Reserve’s oversight of the bank and concerns it had noted regarding liquidity risk management, among others.

Since the recent bank failures, there has been increased speculation about whether institutions in that size range ($100 billion – $250 billion) should be subjected to heightened regulatory standards. On March 30 the White House released a statement urging the banking regulators and Treasury Department to consider a set of reforms to reduce the risk of future banking crises.

● Reinstate liquidity requirements and enhanced liquidity stress testing;

● Reinstate annual supervisory capital stress testing;

● Reinstate requirements for comprehensive resolution plans;

● Strengthen supervisory tools (including stress testing for interest rates and deposit outflows); and

● Expand long-term debt requirements (which can serve as loss-absorbing buffer to better protect depositors). On March 9 the Congressional Research Service issued a report (Bank Capital Requirements: A Primer and Policy Issues). The report provides an overview of the various risk-based and leverage-based capital requirements and policy considerations associated with properly calibrating capital requirements.

As always, we will continue to monitor bank regulatory developments closely and support clients in properly treating BOLI programs under the rules.

LEGISLATIVE DEVELOPMENTS

Data Privacy Act Passes House Financial Services Committee

On February 28 the Data Privacy Act of 2023 (H.R. 1165) passed the House Financial Services Committee. This bill, sponsored by Patrick McHenry (R-NC), aims to amend the Gramm-Leach-Bliley Act to modernize the protection of nonpublic personal information of individuals with whom financial institutions have customer or consumer relationships. In a statement, Mr. McHenry notes that this bill is the culmination of more than three years of work by Committee Republicans.

At present, it appears that the terms Customer Relationship and Consumer Relationship would be defined by regulators in rulemaking processes set forth under Section 504. Notably, with respect to “any person engaged in providing insurance,” the applicable regulator is the state insurance authority.

The bill also seeks to supersede any state laws that regulate financial institutions with respect to the collection or disclosure of personal information, among others.

The ACLI released a statement thanking the members of the House Financial Services Committee for their work on this bill.

JUDICIAL DEVELOPMENTS

Lincoln National COI Litigation – Proposed Settlement

On March 24 the parties filed a motion for preliminary approval of a proposed class action settlement. The disputes related to Cost of Insurance increases that Lincoln announced in

2016 and 2017. Lincoln agreed to establish a Settlement Fund of up to $117.75 million. Class attorneys’ fees will not exceed 33.3% of the value of all benefits provided by this Settlement.

Lincoln also agreed to a “COI Rate Increase Freeze” for the affected policies whereby Lincoln will not increase COI rates for a five year period.

The proposed settlement excludes several policies that remain subject to individual actions:

● EFG Bank AG, et. al. (No. 2:17-cv-02592-GJP)

● LSH Co, et. al. (No. 2:18-cv-05529-GJP)

● Conestoga Trust and Conestoga Trust Services LLC (No. 2:18-cv-02379-GJP)

● Sarita Kacker (No. 2:22-cv-04302- GJP)

The proposed settlement remains subject to a fairness hearing and other procedural steps.

Dockets:

In Re: Lincoln National COI Litigation Case No.: 2:16-cv-6605-GJP

In Re: Lincoln National 2017 COI Litigation Case No.: 2:17-cv-04150-GJP

TAX DEVELOPMENTS

Biden Budget Proposal

On March 9 the Biden Administration released its budget for Fiscal Year 2024.

Notable business tax provisions include

● Increasing the Corporate Tax Rate from 21% to 28%

● Expand the pro-rata interest expense disallowance for COLI

The provision to expand the pro-rata interest expense disallowance for COLI has been included in several previous budget proposals, including during prior administrations. This year, the topic was not specifically described in the General Explanations document published by the Treasury Department. In prior years, the proposal was always marked to apply prospectively (i.e., only to newly issued policies after an effective date).

With a divided Congress, expectations are low with regard to likelihood of enacting significant tax-related legislation.

OTHER DEVELOPMENTS

Silicon Valley Bank and Signature Bank BOLI Holdings

On March 27 First Citizens BancShares, Inc. announced an agreement with the FDIC to purchase all of the assets and liabilities of Silicon Valley Bridge Bank. It is worth noting that the FDIC did not transfer all of the assets of Silicon Valley Bank into the Bridge Bank. As set forth in the Transfer Agreement, Silicon Valley Bank’s BOLI was retained by the FDIC (see Section 2.03(b)).

The FDIC, as receiver, also retained Signature Bank’s BOLI holdings (see Section 2.03(b) of the Signature Bank Transfer Agreement). On March 20 the FDIC announced that Flagstar Bank agreed to purchase substantially all of the deposits and certain loan portfolios of the Signature Bridge Bank.

Neither of these failed banks owned material amounts of BOLI. As of 12/31/2022, Signature Bank owned ~$66 million ($34 million GA; $32 million SA), and Silicon Valley Bank owned ~$77 million ($54 million GA; $23 million hybrid).