Agencies Propose Technical Corrections and Clarifications to the Advanced Approaches Capital Rules
On November 18, the FRB, FDIC and OCC jointly released a Notice of Proposed Rulemaking (NPR) proposing technical corrections and clarifications related to the Basel III Advanced Approaches rules. The NPR does not appear to have any direct implications for BOLI/COLI risk-weighting.
Among several proposed clarifications, the NPR would amend sections 122 and 131 to clarify requirements associated with qualification requirements and mechanics for calculating RWA of wholesale exposures. The regulators emphasize that these changes are intended to clarify, but not change, existing requirements. As such, institutions that have already exited the parallel run have already demonstrated that they would meet the proposed requirements.
Many of the proposed technical corrections related to internal cross references. The comment period will run for 60 days following the date it is published in the Federal Register.
BB&T v. MassMutual – Update
In 2009, BB&T initiated a lawsuit against MassMutual (the insurance carrier) to recover a portion of losses incurred as a result of an investment allocation in the Falcon Fund (a leveraged, fixed income-only hedge fund). BB&T had acquired a $112.5 million BOLI policy in August 2006 via an IRC § 1035 exchange, and it chose to allocate approximately half of the cash value to the Falcon Fund. BB&T asserts that, among other things, MassMutual failed to monitor and enforce a series of mandatory reallocation events and that such failure(s) resulted in damages ranging between $18 million and $43 million. MassMutual disagrees that any such event took place prior to November 2007 and further asserts that the reallocation events provided Bank of America (the SVP provider) a right to require a liquidation from the Falcon Fund, not an obligation.
The matter is set for a jury trial which was originally scheduled for January 2015. On November 12, 2014, BB&T submitted a motion to amend the pre-trial order. Among other things, it requested a revised trial date in May 2015.
North Carolina Superior Court (Forsyth County) 09 CVS 4007
Additional Guidance under the Codified Economic Substance Doctrine and Related Penalties
On October 9, the IRS released Notice 2014-58 which provides guidance regarding the definition of “transaction” for purposes of applying the codified economic substance doctrine under section 7701(o).
The economic substance doctrine is a judicial doctrine that was codified in section 7701(o) by section 1409 of the Health Care and Education Reconciliation Act of 2010. In general terms, the doctrine disallows tax benefits under subtitle A of the Internal Revenue Code if a transaction that produces those benefits lacks economic substance or a business purpose.
“Transaction” generally includes all the factual elements relevant to the expected tax treatment of any investment, entity, plan, or arrangement, and any or all of the steps that are carried out as part of a plan. Facts and circumstances determine whether a plan’s steps are aggregated or disaggregated when defining a transaction.
Generally, when a plan that generated a tax benefit involves a series of interconnected steps with a common objective, the “transaction” includes all of the steps taken together—an aggregation approach. However, when a series of steps includes a tax-motivated step that is not necessary to achieve a non-tax objective, the IRS may assess only the tax-motivated step (or steps) as the “transaction”—a disaggregation approach.
Unclaimed Life Insurance Benefits – DMF Update
The NAIC has established a working group to develop a new model law to address the issue of unclaimed death benefits. The NAIC continues to press for requirements for insurance carriers to actively monitor the Social Security Death Master File (DMF) in order to identify death benefits that are payable.
In a related development, on November 25, California Insurance Commissioner Dave Jones announced a multi-state settlement agreement with Symetra Life Insurance Company. As part of the settlement, Symetra has agreed to a number of business practice reforms concerning its use of the DMF database. Symetra joins 14 other life insurers that have reached similar settlements.