NAIFA GovWatch

House and Senate Activity Continues on Insurance Regulation, Systemic Risk, AIG, and Deferred Compensation

Issue: Financial Services Regulatory Reform/Tax

Date: March 18, 2009

Action Taken: Three hearings of interest to NAIFA members have been held on Capitol Hill this week. The hearings took place as members of NAIFA’s state and local association leadership team held more than 200 meetings with Members of Congress, including meetings with the leadership of the House and Senate tax-writing committees and the leadership of financial services and banking committees.

In a statement by NAIFA President Cliff Wilson, CLU, ChFC, LUTCF, CLF, “75 million American families turn to the life insurance industry to protect their financial future with annuities, life insurance, long-term care and disability insurance. With the turmoil in the financial industry these past several months, now is the time for us to educate Congress about the risk shifting nature of insurance products, their importance to families and businesses, and the role the industry plays in U.S. capital formation. We also want to make sure Congress understands the vital role agents play in working with small businesses and individuals in acquiring the right health insurance coverage and other employee benefits.” Wilson also commented that, “As Congress considers how to restructure the regulatory landscape to address the problems that led to the market crisis, we want them to be mindful of how any regulatory shifts will impact the thousands of main street agents across the country who deliver these key products and services to the American public.”

Hearings:

Insurance

On March 17, 2009, the Senate Banking Committee (Chairman Dodd, D-CT) held a hearing to examine the insurance industry, its regulation, and pending federal legislation impacting the industry. In the hearing, state regulators and insurance companies disagreed over whether lawmakers should create an optional federal charter -- a proposal supported by NAIFA provided that several principles are met. Overall, key lawmakers did not indicate that they opposed or supported a federal charter, except Sen. Richard Shelby, ranking member of the committee, who indicated that he was supportive of an optional federal charter. To view the hearing summary click here. To read about NAIFA’s principles of support for an optional federal charter click here.

Systemic Risk

On March 17, 2009, the full House Financial Services Committee (Chairman Frank, D-MA) held a hearing entitled “Perspectives on Regulation of Systemic Risk in the Financial Services Industry.” The crux of the debate stemmed from the creation of an entity to serve as the government’s “Systemic Risk Regulator” and whether that entity should be the Federal Reserve (“Fed”). The hearing began with Chairman Frank noting that government regulation of financial markets must evolve with the times. He cited the era of trust-busting (circa late 19th century) and even New Deal regulation as events where the government must regulate commensurate with the times. He also firmly believes in securitizing bad mortgages as a way of cleansing toxic assets from the financial system. Most notably, Chairman Frank indicated he would try to introduce legislation to create a systemic risk regulator after Congress returns from its Easter recess in April. To view the hearing summary click here.

AIG

Today the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises (Chairman Kanjorski, D-PA) held a hearing to examine how American International Group (AIG) found itself mired in financial difficulties, why government assistance was necessary, what sort of financial position AIG is in now, and where it may stand in the future.

Several days prior to the hearing, AIG announced that it had awarded some $165 million in retention bonuses to its employees, drawing outrage from both the American public and members of Congress. While the hearing had been scheduled far in advance of these bonuses being awarded, it became a major focus of the hearing for the day. To view a summary of today’s hearing click here.

AIG and Implications for Deferred Compensation

The uproar in the general public and press (and therefore in Congress) over “retention” bonuses paid to AIG Financial Products division employees is leading to development of legislation in Congress to “get the money back” primarily through an excise tax on the recipients’ bonuses as well as their employers. While the current “bonus recovery” approach is focused ONLY on the 300 or so financial institutions that have received infusions of cash form the federal government under the Troubled Assets Relief Program (TARP), NAIFA is concerned that elements of a plan being developed by the Senate Finance Committee limiting the use of deferred compensation arrangements could be easily applied to all publically traded corporations if Congress decided to go in that direction. The Senate Finance Committee attempted to legislate severe restriction in the use of deferred compensation two years ago. That attempt failed.

Following is an outline of the deferred compensation pieces of the plan. Please note that this is an outline. Details are not available.

There would be a $1 million limit on nonqualified deferred compensation, meaning that a taxpayer cannot defer more than $1 million in a 12 month period.
$1 million limit would be indexed for inflation
If the $1 million limit is violated, compensation deferred under all nonqualified deferred compensation plans covering the taxpayer (including compensation deferred in previous years) would be taxable and such deferred amounts would be subject to a 20% penalty tax and interest payment
Interest and earnings on compensation deferred during the 12 month period would not be counted against the $1 million limit, so long as the earnings are based on a “market rate” of return.
In general, a “market rate” of return would mean a predetermined actual investment (which may include book value and a reasonable fixed rate of return)
The Department of Treasury would be given the authority to define a “market rate” of return
Provisions apply to all TARP recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac
Applies to all compensation deferred after date of enactment and continuing through the period during which the company retains TARP funds

The House of Representatives is also furiously working on legislation aimed at recovering the retention bonuses paid to AIG Financial Product employees, but details (or even an outline) are not know at this time. Nonetheless, House leaders have announced their intention have the legislation before the House tomorrow for a vote.

Next Steps: NAIFA will continue to provide you the latest breaking information on insurance regulation, systemic risk regulation, and any tax related implications. For more information, please visit the NAIFA’s website at www.naifa.org/advocacy.

NAIFA Staff Contact: For additional information on insurance regulation and systemic risk, please contact Jill Edwards at jilledwards@naifa.org. For more information on deferred compensation, please contact Michael Kerley at mkerley@naifa.org.

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