Monthly LRA Update

TAX DEVELOPMENTS

Tax Legislation – Update

Progressive and Moderate democrats in Congress continue to negotiate partisan social spending and tax legislation called the Build Back Better Act. According to the latest reports, the size of the legislation has been reduced from $3.5 trillion to a reported target of $1.75 trillion.

On October 28 the White House released an updated framework for the Act. The tax related proposals have shifted. The plan no longer calls for an increase in the corporate tax rate from 21% to 26.5%.

The White House is now proposing a new corporate minimum tax regime. It is described as follows (emphasis added):

In 2019, the largest corporations in the United States paid just 8 percent in taxes, and many paid nothing at all. President Biden believes this is fundamentally unfair. The Build Back Better framework will impose a 15% minimum tax on the corporate profits that large corporations—with over $1 billion in profits—report to shareholders.  This means that if a large corporation says it’s profitable, then it can’t avoid paying its tax bill. The framework also includes a 1% surcharge on corporate stock buybacks, which corporate executives too often use to enrich themselves rather than investing in workers and growing the economy.

According to press reports, the White House estimates that the tax proposals will raise ~$2 trillion over ten years.

The House again postponed its vote on the bipartisan infrastructure legislation on October 28 because the progressive caucus has expressed an unwillingness to pass it without further commitment within the Democratic party on the Build Back Better Act.

The latest press reports suggest that the House is targeting votes on both bills on Tuesday (11/2).

JUDICIAL DEVELOPMENTS

John Hancock COI Litigation

On October 21 Plaintiffs counsel submitted a letter to the court (Southern District of NY), disclosing that the parties reached an agreement in principle to settle the class action litigation (Leonard, et al. v. John Hancock Life Insurance Company (U.S.A.). We have been monitoring this litigation but had not previously addressed it in an LRA Update.

In March, the Plaintiffs filed a Second Amended Class Action Complaint, alleging that John Hancock improperly increased cost of insurance (COI) charges for certain universal life policies issued between 2003 and 2010. According to the complaint, the COI provisions of the policies were as follows (emphasis added):

The charge for the Net Amount at Risk … will be based on our expectations of future mortality, persistency, investment earnings, expense experience, capital and reserve requirements, and tax assumptions. We review our cost of insurance rates from time to time, and may redetermine cost of Insurance rates at that time on a basis that does not discriminate unfairly within any class of lives insured.

Or:

The applied monthly rates will be based on our expectations of future investment earnings, persistency, mortality, expense and reinsurance costs and future tax, reserve, and capital requirements…. They will be reviewed at least once every 5 policy years. Any change in applied monthly rates will be made on a uniform basis for insureds of the same sex, issue age, and premium class, including smoker status, and whose policies have been in force for the same length of time.

Unlike the litigation we covered in 37 Besen Parkway, the COI provisions in this matter provided John Hancock with discretion to base COI rates on various factors in addition to “expectations of future mortality” experience.

Details of the settlement in Leonard v. Hancock have not been released yet. The parties will be submitting the stipulation of settlement and a motion for preliminary approval of the settlement by early December.

Docket: Leonard, et al. v. John Hancock Life. Ins. Co. of New York and John Hancock Life Insurance Company (U.S.A.), No. 18-cv-4994-AKH

REGULATORY DEVELOPMENTS

Proposed Interagency Guidance on Third-Party Relationships – Comments Submitted

The comment period on the banking regulators’ proposed Interagency Guidance on Third-Party Relationships: Risk Management expired on October 18. We reviewed several of the comments submitted (including those submitted by SIFMA and the Bank Policy Institute) and identified the following themes that may be noteworthy. We did not observe any comments that specifically related to the BOLI/COLI industry.

Scope of “Business Arrangement”

Commenters expressed a view that the proposed definition of “business arrangement” was overly broad. The Bank Policy Institute (BPI) recommended that the definition be revised to mean “any mutual understanding or agreement between a banking organization and a third-party entity by which the entity is required or commits to provide ongoing goods or services to or for the banking organization pursuant to a written contract” (emphasis added).

The BPI observed that it is the written contract that provides a banking organization with the legal authority to direct the third party to comply with obligations. However, we have observed instances where banks fail to have an enforceable contract with BOLI service providers, or where contracts lack specificity for proper enforcement. We think entering into appropriately enforceable contracts is an important aspect of sound third-party risk management.

In this regard, we think SIFMA’s suggestion sets a clearer expectation. SIFMA recommended that the definition be revised to cover the following relationships (emphasis added):

1. Those that in the ordinary course would be covered by a written contract; and
2. Those pursuant to which a banking organization, on a continuous basis, receives services or through which a banking organization works with a third party to provide the banking organization’s services to customers.

Subcontractors

Several commenters suggested revisions to expectations for overseeing subcontractors of a third-party service provider. For example, Wells Fargo commented that “Banking organizations do not have contractual privity with subcontractors and have limited access to them.” Wells Fargo recommended that the guidance related to subcontractor risk management be focused on the materiality of the subcontractor and the information obtained regarding the third party’s ability to manage its subcontractors.

The BPI pointed to existing FAQ 11 as being more appropriately scoped. It recommended that “…the final guidance should reflect a more realistic, limited expectation that banking organizations assess a third party’s third-party risk management program…”

SIFMA suggested that the requirements related to subcontractors should be limited to “fourth” parties that either process or have access to a banking organization’s client, employee, or business sensitive data, or that perform a service related to a “critical activity.” SIFMA also recommended that banks should not be expected to undertake a vendor risk assessment unless there was a direct relationship with the subcontractor; instead, risks arising from subcontractors should be handled through the bank’s third-party relationship.