US Regulatory Update
Tax Reform Act
On 22 December, President Trump signed into law the Tax Cuts and Jobs Act, H.R. 1, which Congress passed on 20 December 2017. The bill makes numerous amendments to the Internal Revenue Code for both individuals and businesses. Insurance-related provisions of the Tax Act include, among others:
- Section 13517, Computation of Life Insurance Tax Reserves: The amount of life insurance reserves shall be the greater of: (i) “the net surrender value of such contract”; or (ii) 92.81 percent of statutory reserves. Reserves are restated as of 1 January 2018 and an eight-year spread period is provided for taking the resulting reductions into income.
- Section 13519, Capitalization of Certain Policy Acquisition Expenses: The bill amends the requirements for deferred acquisition costs (“DAC”) by: (i) extending the amortization period to 180 months; and (ii) increasing capitalization rates for annuity, group life, and other specified insurance contracts to 2.09%, 2.45%, and 9.2%, respectively. Existing DAC balances will be amortized on the existing schedule of 1.75%, 2.05%, and 7.7%, respectively.
- Section 13002, Reduction in Dividend Received Deductions (“DRD”) to Reflect Lower Corporate Income Taxes: This section reduces the DRD from 70% to 50%.
- Section 13515, Modification of Proration Rules for Property and Casualty Insurance Companies: This section increases the proration percentage to 25% to maintain an effective tax rate of 5.25%.
- Section 13523, Modification of Discounting Rules for Property and Casualty Insurance Companies: This section requires that the annual rate of interest used to discount unpaid losses be “determined on the basis of the [24-month] corporate bond yield curve” and repeals the “historical payment pattern election.”
- Section 13302, Modification of Net Operating Loss (“NOL”) Deduction: This section eliminates the ability of life insurance companies to carry back NOLs up to three years and allows the use of carry overs indefinitely.
- Section 14501, Restriction on Insurance Business Exception to Passive Foreign Investment Company Rules: This section defines “qualifying insurance corporation” as a corporation that would be treated as an insurance company under tax law if it is domestic and “the applicable insurance liabilities . . . constitute more than 25 percent of its total assets” for purposes of being exempted from treatment as a Passive Foreign Investment Company.
On 22 December, the SEC published staff guidance to assist in the timely public disclosure of the accounting impacts of the Tax Cuts and Jobs Act. Specifically, the staff of the SEC’s Office of the Chief Accountant and the Division of Corporation Finance published: (i) Staff Accounting Bulletin No. 118, which “expresses views of the staff regarding application of U.S. GAAP when preparing an initial accounting of the income tax effects of the Act”; and (ii) Compliance and Disclosure Interpretation 110.02, which “expresses views of the staff regarding the applicability of Item 2.06 of Form 8-K with respect to reporting the impact of a change in tax rate or tax laws pursuant to the Act.”
On 22 December, a continuing resolution to fund the government through 19 January 2018, H.R. 1370, was signed into law. The resolution extended the current Continuing Appropriations Act of 2018 (Division D of Public Law 115-56), as amended by H.J.Res. 123 (a continuing resolution passed on 8 December 2017), which expired on 22 December 2017. In addition to ensuring that the government will be funded through 19 January 2018, the resolution provided funding changes and extended the authorization of the National Flood Insurance Program through 19 January 2018.
Corporate Governance Reform and Transparency Act of 2017
On 20 December, The U.S. House of Representative passed, by a vote of 238-182, H.R. 4015, the Corporate Governance Reform and Transparency Act of 2017. The bill would, among other things: (i) require “proxy advisory firms” to register with the SEC; (ii) establish certain standards for operation of proxy advisory firms; (iii) require proxy advisory firms to report annually to the SEC on actions it took for the calendar year; and (iv) require the SEC to publish an annual public report identifying registration applicants for the calendar year and “specify[ing] the views of the Commission on the state of competition, transparency, policies and methodologies, and conflicts of interest among proxy advisory firms.”
Confirmation of Preston Rutledge as Assistant Secretary of Labor
On 21 December, the U.S. Senate confirmed by unanimous consent Preston Rutledge as the Assistant Secretary of Labor. In his position, Mr. Rutledge will, among other things, head the Department of Labor’s (“DOL”) Employee Benefits Security Administration (“EBSA”), which has responsibility for the development of the DOL’s Fiduciary Duty Rule.
Court Rules for Class-Action Suit Against Stock Exchanges to Proceed
On 19 December, the U.S. Court of Appeals for the Second Circuit vacated a 2015 ruling by the U.S. District Court for the Southern District of New York, in which the District Court dismissed a lawsuit brought by, among others, the City of Providence, Rhode Island. The lawsuit alleges that Barclays and U.S. stock exchanges – including the New York Stock Exchange and Nasdaq Inc. – defrauded investors. The suit claims that Barclays and the exchanges created a “two-tiered system” that favored high-frequency traders through the use of private trading venues known as “dark pools.” The case is being sent back to the federal district court to proceed.
SIFI & FINANCIAL STABILITY
House Approves Bill to Remove $50 Billion Asset Threshold
On 18 December, the U.S. House Committee on Financial Services passed, by a vote of 288-130, H.R. 3312, the Systemic Risk Designation Improvement Act of 2017. The bill, which passed with bipartisan support, eliminates the Dodd-Frank Act’s statutory $50 billion total consolidated assets threshold to automatically label a bank-holding company as a systemically important financial institution (“SIFI”) subject to enhanced regulatory standards. The Act would replace this threshold with an activities-based approach through which the Federal Reserve would determine whether a particular bank-holding company is “a global systemically important bank holding company,” which, as explained in the release, would include “an analysis of the actual risk presented by a bank holding company to the financial system.” Pending legislation in the Senate proposes raising the $50 billion threshold to $250 billion, rather than eliminating it altogether.
OFR Releases Working Paper on Potential Risks Regarding High Investor Concentration in Hedge Funds
On December 15, the Office of Financial Research (“OFR”) released a working paper examining potential risks regarding “high investor concentration” in hedge funds (i.e., when “only a few investors own a substantial portion of a hedge fund’s net asset value”), particularly with respect to “inflows and outflows of assets based on liquidity shocks to its investors,” which are “independent of the hedge fund’s fundamentals like past performance or portfolio holdings.” The working paper concludes that while hedge funds with high investor concentration are more likely to experience more unexpected and volatile flows compared to hedge funds with low investor concentration, they also “hold more cash [and] liquid assets . . . to account for the higher likelihood of large outflows” such that “there is no significant difference in the probability of quarterly outflows exceeding cash” between hedge funds with high investor concentration and those with low investor concentration. The authors find that hedge funds with high investor concentrations have to pay a “liquidity premium and generate lower risk-adjusted returns.”
SEC & SECURITIES
Appointment of Hester Peirce and Robert Jackson as SEC Commissioners
On 21 December, the U.S. Senate confirmed by unanimous consent Hester Peirce and Robert Jackson to be SEC commissioners. Prior to their confirmation, both nominees sent letters, available here and here, to Sen. Tammy Baldwin (D-WI), responding to her 29 November 2017 letters, available here and here, requesting their “views on several matters before the Commission,” including those relating to: (i) “activist hedge funds and the Brokaw Act”; (ii) stock buybacks; and (iii) “executive pay rules.” In their responses, both nominees supported, among other things, the completion of rulemakings mandated by the Dodd-Frank Act.
CFTC & DERIVATIVES
Comments of CFTC Commissioner Brian Quintenz in the CFTC Podcast
On 22 December, CFTC Commissioner Brian Quintenz appeared in an episode of the CFTC’s podcasts to discuss his priorities for the Commission in 2018 and going forward, including matters relating to: (i) risk; (ii) FinTech; and (iii) international harmonization.
- Risk: Commissioner Quintenz emphasized the importance of ensuring that the Commission is “properly assessing risk and estimating risk so that it can narrowly target its rules to risk” and criticized the Commission for issuing numerous “one-size-fits-all” rules that “have had negative impacts in the space its regulates.”
- FinTech: Commissioner Quintenz laid out the agenda of the CFTC’s Technology Advisory Committee, which he sponsors, for 2018 and going forward. The Committee intends to work on: (i) understanding the “true risks in a mostly automated algorithmic trading environment”; (ii) understanding “how are incentives aligned across the government and the business community to prevent . . . flash crashes” and other incidents; (iii) determining the “appropriate role for regulation”; (iv) identifying the “appropriate governance over the use of types of [trading] strategies”; and (v) examining distributed ledger technology and blockchain.
- International Harmonization: Commissioner Quintenz stated that the “swaps market is a global market . . . [that] evolved outside the scope of regional regulation” and the Commission must ensure that its “rules are harmonized abroad.” Commissioner Quintenz commended CFTC Chairman J. Christopher Giancarlo for the work he has done in this space, but warned that this area requires “constant attention and constant focus” and that “this is a good time to revisit a lot of those rules.”
UPCOMING EVENTS AND DEADLINES
- 23 January 2018: CFTC Technology Advisory Committee public meeting to discuss: (i) “the scope, plan, and approach for the Committee’s efforts in 2018”; (ii) “topics and issues involving financial technology in CFTC regulated markets”; and (iii) “work streams and/or subcommittee groups that can help generate actionable recommendations to the Commission on select issues.”
- 28 January 2018: comments are due on FINRA’s request for comment on the effectiveness and efficiency of its rule on payments for market making.