Monthly LRA Update

REGULATORY DEVELOPMENTS

FRB and FDIC Proposed Rule for Large Bank Resolution Requirements

On October 14 the FRB and FDIC released a jointly developed advance notice of proposed rulemaking (ANPR) to enhance regulators’ ability to resolve large banks. In particular, the ANPR solicits public input regarding whether an extra layer of loss-absorbing capacity could improve optionality in resolving a large banking organization, and the costs and benefits of such a requirement.

The term large banking organization refers to banks that have more than $100 billion of total consolidated assets but excludes U.S. GSIBs. These banks correspond to Category II – IV under the FRB’s tiering framework.

• Category II: Banking organizations that have $700 billion or more in average total consolidated assets or $75 billion or more in cross-jurisdictional activity.
• Category III: Banking organizations that have between $250 billion and $700 billion in average total consolidated assets or $75 billion or more in off-balance sheet exposures, nonbank assets, or short-term wholesale funding.
• Category IV: Banking organizations that have between $100 billion and $250 billion in average total consolidated assets.

The comment period closes on December 23, 2022 (60 days from publication in the Federal Register).

SEC Adopts Final Clawback Rules

On October 26 the SEC adopted final rules to implement Section 954 of the Dodd-Frank Act. The final rules direct the national securities exchanges to establish listing standards that require each issuer to develop and implement a policy providing for the recovery, in the event of a required accounting restatement, of incentive-based compensation received by current or former executive officers where that compensation is based on the erroneously reported financial information.

The recovery of incentive-based compensation is triggered if the issuer is required to restate previously issued financial statements to correct errors that are “material” (referred to as “Big R” restatements).

In general, the rules only apply to incentive-based compensation; there is no requirement to recover non-incentive-based compensation such as salaries. The amount of incentive-based compensation subject to recovery is generally any amount by which the gross compensation paid exceeds the amount that would have been paid based on corrected financial statements.

The rules define “executive officer” to mean the issuer’s president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer.

The rules will become effective 60 days after publication in the Federal Register, which has not yet occurred.

Federal Reserve Framework for Supervision of Insurance Organizations

The October 4 Federal Register included final guidance from the Federal Reserve Board (FRB) adopting a new supervisory framework for depository institution holding companies that are significantly engaged in insurance activities (“supervised insurance organizations” or “SIOs”). Based on an FRB memo from 2021, this framework presently applies to the following entities:

• Ameriprise Financial Inc.
• The Auto Club Group
• First American Financial Corporation
• Ohio Farmers Insurance Company
• Teachers Insurance and Annuity Association of America
• United Services Automobile Association

The final guidance is effective November 3, 2022. We do not expect this development to impact the BOLI/COLI market.

JUDICIAL DEVELOPMENTS

Davydov (Et Al.) v. John Hancock – COI Litigation Update

Last month we reported that John Hancock filed a motion for summary judgment in this matter. On October 19 the US District Court Judge denied John Hancock’s motion, noting that the disputes raise genuine issues of material facts.

The judge identified the following genuine disputes:

• Future Expectations Claims
  • John Hancock maintains that it was allowed to base COI rate increases on changes of mortality of beneficiaries and persistence in maintaining policies (two of the five specified factors in the policies). John Hancock also contends that it was permitted to consider profits as an indicator of mortality and persistence changes.
  • Plaintiffs contend that profit was the driving factor, that John Hancock reverse-engineered the rate increases to course-correct the decreased profits that were built into the original pricing assumptions of the policies.
• Nondiscrimination Claims
  • The policies prohibit John Hancock from imposing COI rate increases that discriminate unfairly with any class of lives insured. However, the policies do not define “class,” and there has been no showing of an industry usage that is well settled.

Docket: Davydov (et al.) v. John Hancock Life Insurance Company, Case No. 1:18-cv-09825 (SD – NY)

TAX DEVELOPMENTS

IRS Notice 2022-55 – Qualified Retirement Plan Cost of Living Adjustments

On October 21 the IRS released its annual adjustments for benefits and contributions limits under qualified retirement plans to account for cost of living increases (Notice 2022-55). Given the heightened inflation experienced over the past year, many of the adjustments are significant.

Notable updates include: