Monthly LRA Update: May 2023

REGULATORY DEVELOPMENTS

FSOC Proposes Updated Analytic Framework and Guidance on Nonbank Determinations

On April 21 the Financial Stability Oversight Council (FSOC) released a proposed analytic framework for how it assesses financial stability risks and proposed interpretive guidance for how it determines if nonbank financial companies merit enhanced prudential oversight. Treasury Secretary Yellen’s prepared remarks were also published.

One of the notable changes under the new proposed guidance is that FSOC looks to remove language from the current guidance (published in 2019) stating that FSOC would conduct a cost-benefit analysis and an assessment of the likelihood of a firm’s material financial distress prior to making a determination to subject a nonbank financial company to supervision and prudential standards. The FSOC believes that those steps unduly hamper its ability to use the statutory authority Congress granted.

At present, no insurance-related company is designated as a Systemically Important Financial Institution (SIFI). As a brief reminder, in 2013-2014 the FSOC voted to designate the following entities as SIFIs:

● American International Group, Inc.

● General Electric Capital Corporation, Inc.

● Prudential Financial, Inc.

● MetLife, Inc.

Each of these designations were rescinded (aborted in the case of MetLife by settling legal proceedings).

The revised proposed framework and interpretive guidance will be open for comment. We will continue to monitor, primarily for any impact these developments could have on large insurance companies.

TAX DEVELOPMENTS

IRS Revenue Ruling – No Step-up in Basis if a Trust’s Assets Are Not Includible in Gross Estate

On March 29 the IRS released Revenue Ruling 2023-2 concluding that a basis adjustment under IRC § 1014 (i.e., a so-called step-up in basis) does not apply to the assets of a trust on the death of the individual who is the owner of the trust if the trust assets are not includible in the owner’s gross estate.

In the scenario described in the Revenue Ruling, an individual established an irrevocable trust and funded the trust with an asset transfer that was a completed gift for gift tax purposes. The individual retained a power over the trust that caused the individual to be

treated as the owner of the trust for income tax purposes; however, the trust was not includible in the individual’s gross estate.

The primary finding of the IRS in the scenario was that the property acquired or passed from a decedent for purposes of § 1014(a) must fall into one of seven types of property listed in § 1014(b) – and the asset in the scenario set forth did not fall into any of those seven types.

OTHER DEVELOPMENTS

US DOL Reaches Settlement with Prudential Regarding Denied Claims

On April 19 the US Department of Labor announced a settlement with Prudential Insurance Company of America following an investigation which found that Prudential allowed group life insurance plan participants to pay for additional, supplemental coverage, but later denied claims on the grounds that the participants failed to provide evidence of insurability. According to the press release, Prudential denied more than 200 such claims from 2017-2020.

The settlement prohibits Prudential from denying a beneficiary’s claim based on the lack of evidence of insurability when premiums were collected for more than three months. Prudential Financial has advised the department that they will voluntarily reprocess denied claims dating back to June 2019 and provide benefits for the claims previously denied based solely on lack of evidence of insurability.

It does not appear that Prudential was subjected to any fines related to this matter. The full settlement is available here.

First Republic Bank Put into Receivership – JPMorgan Chase to Assume Substantially All Assets

Today (May 1) the FDIC announced that the California Department of Financial Protection and Innovation closed First Republic Bank and appointed FDIC as receiver. The FDIC entered into a purchase and assumption agreement with JPMorgan Chase to assume all of the deposits and substantially all of the assets of First Republic Bank.

We have not located the actual agreements and as of this writing, it is unclear if the agreement with JPMorgan Chase will include or exclude First Republic’s BOLI assets.