Monthly LRA Update: June 2026

REGULATORY DEVELOPMENTS

Banking Regulators Remove References to Reputation Risk from Interagency Guidance

On June 2 the banking regulators reissued 15 interagency guidance documents to remove references to reputation risk (OCC Bulletin 2026-23) (FDIC FIL-27-2026). The Interagency Statement on the Purchase and Risk Management of Life Insurance (commonly cited as OCC 2004-56) was included in the list of reissued documents.

The updated document still has a marked publication date of December 7, 2004; however, a text box has been added to the top of the document stating that “[i]n June 2026, this document was revised to remove references to reputational risk.” The posted document does not reflect any mark-up, but we have confirmed that the only changes are the removal of reputation risk.

Summary of Changes

• In the section of the document that lists numerous factors that should be included in an annual “risk management review”, all bullets were retained, including those that previously were largely attributable to reputation risk. As examples, below we show the strikethroughs of the original document to the current document:

• Assessment of death benefit amounts relative to employee salaries. Such information helps management to assess the reputation and insurable interest risks associated with disproportionately large death benefits.
• Calculation of the percentage of insured persons still employed by the institution. Larger institutions often find that their policies insure more former employees than current employees. This information can help the institution assess reputation risk.
• Analysis of mortality performance and impact on income. Material gains from death benefits can create reputation risks.
• Peer analysis of BOLI holdings. To address reputation risk, an An institution should compare its BOLI holdings relative to capital to the holdings of its peers to assess whether it is an outlier.

The Reputation Risk section was removed. We observe that this section included an important best practice (emphasis added). “A well-managed institution will take steps to reduce the reputation risk that may arise as a result of its BOLI purchases, including maintaining appropriate documentation evidencing informed consent by the employee, prior to purchasing insurance.” In our view, this documentation remains critical to retain notwithstanding the removal of reputation risk as a supervisory consideration. Of course, 2004-56 pre-dated IRC 101(j)’s federal requirement for affirmative written consent. Banks will likely consider retention of consent documentation as being consistent with tax law compliance.

Basel III Endgame Comment Letters Submitted

As a follow up to our March LRA update, the deadline for comments on the regulators’ proposed updates to capital rules expired on June 18. We submitted comment letters for both the Standardized Proposal and the Category I & II Banks Proposal. Our comment letters focused on the investment fund risk-weight floor. Under current Standardized Approach, a 20% floor applies. Similarly, the proposal for Category I & II Banks included a 20% floor. The floor applies even if a bank calculates its risk-weighted asset amounts using the Full Look Through Approach (which, by definition, risk weights each position in the fund on a pro rata basis).

In our letters, we suggested that this floor is unnecessary. To the extent that a floor may be retained in a final rule, we suggested that at a minimum, it should be reduced to 15%, consistent with the new floor for securitization exposures.

Finally, we suggested that a floor should be applicable at the level of a separate account; not on a fund-by-fund basis.

Other Notable Comment Submissions

• Credit Risk Weights
  • Several commenters suggested that the Standardized Approach risk weight for investment grade corporate exposures should be adjusted to 65% (from the proposed 95% and the current 100%). A 65% RW was proposed in the Category I & II Proposal (subject to certain conditions).
  • Guardian Life, MassMutual, New York Life, and Northwestern Mutual submitted a joint comment letter embracing the 65% risk weight for Category I & II banks and suggesting the same should apply to “exposures to investment grade life insurance companies” under the Standardized Approach (rather than receiving the same RW as all other corporate exposures).
• GSE Exposures
  • Stifel encouraged the regulators to revisit the risk weights for GSE exposures (currently 20%) in light of the fact that high-quality securitizations would receive a 15% risk weight. Stifel suggested that GSEs should be reduced to 15% as well.
• Exposures to depository institutions
  • Some commenters suggested simplifying the proposed requirements to qualify for a 30% risk weight (versus a 40% risk weight) and that any Grade A bank (as defined in the capital rules) should qualify for 30%. Note that this is still an increase relative to the prior 20% risk weight.
  • It was also suggested that the 30% risk weight should be extended to certain broker-dealer and securities firm subsidiaries of bank holding companies.
• Covered Bonds
  • RBC submitted a comment recommending a 10% risk weight for covered bonds, noting their high credit quality and dual recourse nature.

Finally, Newport Group also submitted a comment letter that, similar to ours, addressed the investment fund floor risk weight in the context of BOLI programs.

TAX DEVELOPMENTS

IRS Private Letter Rulings on an Annuity Rider for a Life Insurance Contract

On June 18 the IRS released two Private Letter Rulings (PLR 202625002 and PLR 202625003) regarding the tax treatment of an annuity rider that would be added to a base life insurance contract. Based on the PLR, it appears that the intention of the annuity rider (which would provide a period certain annuity stream) is to pay additional premiums into the life insurance contract.

The IRS affirmed that the annuity rider and life insurance contract would be treated as separate contracts under the code and that no portion of the single premium paid for the annuity rider would be treated as premiums paid under the base life contract.

This could provide interesting product design options for institutional purchasers.