Second Tranche of TARP Funds will be Released to Treasury
While there was an attempt to block the second tranche of TARP funds, it was not successful and the Treasury will have access to the funds. On Tuesday, January 13, 2009, a group of Republican Senators, led by David Vitter (R-LA) introduced a resolution of disapproval (S.J. Res. 5) to block the Treasury Department’s access to the second $350 billion tranche for the TARP. On January 15, 2009, the Senate voted against the resolution in a slim 42 to 52 vote in favor of allowing the Treasury to access the money. In an entirely symbolic vote on January 22, 2009, the House voted on a similar resolution (H.J. Res. 3) to deny the Treasury’s access to the remaining TARP funds by a yay-nay vote of 270 to 155. The House vote does not override the Senate vote.
Several high-profile insurance carriers, including The Hartford Financial Services Group, Lincoln National and Genworth Financial continue to await decisions from the Treasury with respect to their TARP applications. Hartford Financial Services Group and Lincoln National have received confirmation of approvals of their recent acquisitions of thrift organizations, a first step toward becoming eligible for TARP funding.
On January 9, 2009, House Financial Services Committee Chairman Barney Frank (D-Mass) introduced H.R. 384, the TARP Reform and Accountability Act of 2009. It passed the House on January 21, 2009 and now faces an uncertain future in the Senate. Already becoming known as TARP II, this legislation is designed to enhance restrictions and reporting requirements placed on institutions receiving funds under the provisions of the EESA, increase foreclosure mitigation efforts, and clarify the Treasury Secretary’s authority to assist automotive manufacturers, municipalities and consumer credit providers. Specifically it would 1) require an institution receiving TARP assistance to report quarterly on the precise use of the assistance; 2) require that TARP assistance provided after the enactment of the Act include an agreement between the recipient and the appropriate federal regulator regarding the manner in which the funds will be used and benchmarks that the recipient is required to meet in using the assistance; 3) prohibit the use of TARP assistance for mergers or consolidations unless the Treasury Secretary determines it will reduce risk to the taxpayer or the transaction could have been consummated without TARP assistance; 4) restrict incentives for senior executives that increase risk-taking, requiring recovery of bonus or incentive pay based on materially inaccurate statements, prohibit golden parachute payments during the period in which TARP assistance is outstanding and prohibit bonus or incentive pay to the 25 highest compensated individuals during which TARP assistance is outstanding; 5) permit the Treasury Secretary to designate an observer to attend the meetings of the board of directors of any assisted institution; 6) provide a safe harbor from liability for servicers that engage in loan modifications; and 7) permanently increase federal deposit insurance coverage for banks and credit unions from $100,000 to $250,000 (the EESA temporarily increased FDIC coverage to $250,000, but that provision is set to expire on December 31, 2009).
Newly confirmed Treasury Secretary, Tim Geitner, has announced several measures he is implementing to increase the transparency and disclosure of the existing TARP program.
H.R. 251 – Life Insurance Employee Notification Act
On January 7, 2009, House Representative Gene Green (Texas) introduced the “Life Insurance Employee Notification Act”. The Act’s cited purpose is to prevent the nondisclosure of employer-owned life insurance coverage of employees as an unfair trade practice under the Federal Trade Commission Act. If passed, employers would have to provide written notice to all covered individuals that contains the following information: 1) a statement that the employer carries an employer-owned life insurance policy on the life of the employee; 2) the identity of the insurance carrier of the policy; 3) the benefit amount of the policy; and 4) the name of the beneficiary of the policy. Employers would have to provide the written notice within 30 days of the policy purchase date. The Act is also retroactive and would require employers to provide the same written notice to former employees covered by an insurance policy for any length of time from January 1, 1985 (within one year of the Act’s enactment) and existing covered employees (within 90 days of enactment). Representative Green has unsuccessfully attempted to get similar legislation passed on four separate occasions between 2002 and 2007. Leading COLI/BOLI carriers do not believe it is more likely to garner significant support at present but are closely monitoring developments.
Houston Lawyers – Possible BOLI Class Action Lawsuits
Attorneys from The Clearman Law Firm (Houston, TX) announced a nationwide investigation of banks that have purchased “secret” life insurance policies. According to their press release, the firm is investigating banks that insure the lives of employees without their knowledge or consent. Clearman has previously litigated high profile cases against COLI owners including Mayo, v. Hartford Life Insurance Company, et. al., 354 F.3d 400 (5th Cir. 2004), Tillman v. Camelot Music, Inc., 408 F.3d 1300 (10th Cir. 2005) and Lewis v. Wal-Mart Stores, Inc., No. 02-CV-944-EA (M) (N.D. Okla. Dec. 18, 2002). The press release indicates that a possible litigation track Clearman will be pursuing involves misappropriation of employee identities (providing names, Social Security numbers, etc. to insurance companies without knowledge or permission). Clearman asserted similar claims in an action against Hartford Life Insurance Company and other defendants, but the U.S. District Court for the Southern District of Texas granted the defendants’ Motion to Dismiss and on appeal the Fifth Circuit Court affirmed the district court’s judgment (see Meadows v. Hartford Life Insurance Company, et. al, 492 F.3d 634 (5th Cir. 2007)).
NAIC Conducts Public Hearing Regarding ACLI Capital Plan
As discussed in previous LRAs, the American Council of Life Insurers (ACLI) submitted insurer capital and surplus relief recommendations to the National Association of Insurance Commissioners (NAIC) for consideration in November 2008. The NAIC formed the Capital and Surplus Relief Working group to review the ACLI’s proposal. In addition to a public comment period that ended December 26, 2008, the Working Group, in response to adverse public reaction, scheduled and held a public hearing to gather additional comments and information on January 27, 2009 in Washington, D.C. According to the ACLI, their suggested changes would free up approximately $25-30 billion in capital due to overly conservative reserving, accounting and investment stands that ultimately impact risk-based capital requirements. The ACLI had requested the NAIC take action on the changes no later than January 16, 2009 and that they be made effective December 31, 2008 for 2008 reporting purposes. On January 29, the NAIC announced that its executive committee members voted 16-1 against the ACLI capital relief program. Committee members did note that some of the ACLI’s proposals had merit and further review in 2009 is likely. Individual states may still adopt some or all of ACLI’s recommendations. Given that Connecticut was the only assenting vote on the committee, we will track capital related developments within the state in the coming months.
Government Accountability Office Tax Shelter Report
The US Government Accountability Office (GAO) recently issued an international taxation report which outlined large U.S. corporations and federal contractors with subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions. Senators Byron Dorgan (D-ND) and Calvin Levin (D-MI) requested the updated report as part of their continuing effort to impose tighter controls on corporations’ use of offshore tax havens to reduce their U.S. taxes. In the report the GAO, acknowledged that the existence of a subsidiary in a jurisdiction listed as a tax haven or financial privacy jurisdiction did not signify that a corporation or contractor established that subsidiary for the purpose of reducing its tax burden. Further, the GAO did not attempt to determine the corporations or contractors motive in having subsidiaries in these jurisdictions. One criticism of the report by the IRS was that there was no agreed-upon definition of tax havens or list of jurisdictions. For its research, the GAO used a combination of 3 lists that had similar descriptions for tax havens or financial privacy jurisdictions. A number of insurers were cited in the report including Prudential Financial, Hartford Financial Services Group and MetLife, Inc.