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Industry Battles Senators On Including Split Dollar Under Sarbanes-Oxley Act

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Two leaders of a Congressional panel investigating corporate scandals are asking the Securities and Exchange Commission not to grant any exemptions to a recently enacted law barring insider loan transactions, including split-dollar life insurance.

The industry has mounted a counterattack in a letter to the SEC.

Sens. Carl Levin, D-Mich., and Susan M. Collins, R-Maine–who are, respectively, chairman and ranking Republican on the Permanent Subcommittee on Investigations–are urging the SEC to resist efforts to weaken the legislation, known as the Sarbanes-Oxley Act.

In their letter to SEC Chairman Harvey L. Pitt, Levin and Collins say that opponents of the Sarbanes-Oxley Act are seeking exemptions for certain purposes, including the purchase of insurance.

“But the legislative history provides no basis for creating these exemptions or otherwise weakening the provision,” they say.

“To the contrary,” Levin and Collins say, “the statutory prohibition makes it clear that publicly-traded companies are not supposed to be using company funds to provide personal financing to company directors or officers for any reason.”

The issue revolves around revelations that Kenneth Lay, former chairman of Enron, benefitted from a variety of insider loans, including a large split-dollar life insurance policy.

The Sarbanes-Oxley Act was enacted into law in the wake of Enron and other corporate scandals as a means of upgrading corporate governance. One provision of the Act barred corporate loans to inside executives.

The life insurance industry insists that the prohibition should not apply to split- dollar, which the industry says is intended as compensation, not a loan, and routinely disclosed in annual reports and proxy statements.

In a letter to the SEC, Carl Wilkerson, chief counsel for securities with the American Council of Life Insurers, asks to “reconfirm” that split-dollar life insurance should be treated as executive compensation and not as a loan.

The letter was submitted on behalf of ACLI, the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors.

The letter says split-dollar life insurance, in both form and substance, is insurance and not an extension of credit within the common meaning of that phrase.

Indeed, the letter continues, the treatment of split-dollar life insurance as executive compensation is the result of long-standing SEC interpretations.

The letters adds that ACLI, AALU and NAIFA are not aware of any situations where the SEC has treated split-dollar as a loan.

The letter asks the SEC to reconfirm this position in its Securities Exchange Act release regarding Sarbanes-Oxley.

In other tax news, the life insurance industry is engaged in a major lobbying effort seeking to sidetrack an attempt to tax businesses on the proceeds their receive on most corporate-owned life insurance policies.

Jack Dolan, an ACLI spokesman, says that as of last Wednesday evening, some 25,000 communications were sent by ACLI companies to members of the Senate, focusing on Senate Finance Committee members, and registering their opposition to language expected to be proposed by Sen. Jeff Bingaman, D-N.M.

Agent groups have also sent tens of thousands of communications to the Senate, although the exact numbers were not available at press time.

Bingaman says he intends to introduce an amendment to the Small Business and Farm Economic Recovery Act that would tax businesses on the proceeds from COLI policies if a covered individual dies more than one year after leaving employment.

This treatment would not apply to proceeds used to buy back any equity interest in a business, such as in a partnership arrangement.

If enacted into law, the new tax treatment would be retroactive, applying to all policies two years after the date of enactment.

The Finance Committee originally scheduled consideration of the Bingaman amendment for Sept. 19. However, that session was postponed and has not been rescheduled as of press time.

Finally, a group of health, business and labor associations have sent a joint letter to members of Congress asking them to nullify a Third Circuit Court of Appeals decision which, the group says, theatens retiree health benefits.

The Third Circuit decision, which was handed down in 2000 in the case of Erie County Retirees Assn. v. Erie County, said that providing a higher level of benefits to pre-65 retirees than to Medicare eligible retirees violates the Age Discrimination in Employment Act.

The associations say the case is wrongly decided. They want Congress to clarify that it is permissible for an employer to provide health benefits during the gap between retirement and Medicare eligibility without incurring liability.

If not clarified, the groups say, many employer-provided retiree health benefits could be decreased or eliminated.

Groups signing the letter include the ERISA Industry Committee, the American Association of Health Plans, the AFL-CIO and the American Benefits Council, all of Washington.

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 30, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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