The Office of General Counsel issued the following opinion on August 19, 2002, representing the position of the New York State Insurance Department.
Re: Funding Agreement Backed Securitization Program
In connection with the proposed transaction described in the inquirers letter, the inquirer requested confirmation of the following points:
1. The Securities will not be considered to be funding agreements or insurance or annuity contracts under New York law;
2. If the Securities are offered to or purchased by Investors in New York, neither the SPV nor the Insurers will be considered to be issuing funding agreements or insurance or annuity contracts or otherwise engaging in the business of insurance in New York as a result of such offer or sale of the Securities;
3. None of the Securities Firms that sell the Securities initially or in the secondary market will be considered, as a result of such sales, to be (a) aiding and abetting the unauthorized sale in New York or contracts governed by the New York Insurance Law, or (b) selling such contracts in New York.
4. No Initial Purchaser which is domiciled in, a resident of or conducting business in New York will be considered to be acting as an insurance agent or broker or otherwise engaging in the business of insurance as a result of selling or otherwise transferring the Funding Agreements or the rights thereunder to the SPV; and
5. No provision of the New York Insurance Law or Regulations applies to the SPV, or any Initial Purchaser(s) or any other aspect of a Transaction, other than with respect to the initial issuance of Funding Agreements by the Insurers, and no provision of the New York Insurance Law or Regulations applies to the Securities Firms or the Investors.
Assuming the facts given in the inquirers letter, each of the points set forth above are accurate.
The inquiry described a transaction that may be summarized as follows:
An insurance company ("Insurer") issues one or more Funding Agreements to a Special Purpose Vehicle ("SPV") which is generally organized as a trust or LLC. The Funding Agreements will essentially back certain securities ("Securities") that are to be issued by the SPV.
The SPV will be a business trust, a limited liability company or another type of a single purpose entity organized and operated as a separate, legally valid and recognizable entity within or outside of the United States. The SPV will not be authorized as an insurance company in any jurisdiction in the United States or any foreign jurisdiction. The Securities issued by the SPV will be sold through ABC Co. and/or one or more other investment banks or securities firms (the "Securities Firms") to various investors in and/or outside of the United States ("Investors"). The Securities will not be marketed as or otherwise represented to be an insurance policy or contract of insurance or an interest therein nor will the Securities be filed as insurance forms or contracts with the insurance regulatory authority of any jurisdiction in the United States or any foreign jurisdiction.
The Funding Agreements will provide for one or more periodic payments by the issuing Insurers to the holder thereof (i.e., the SPV), based on an agreed-upon schedule or other mechanism that will not be tied to a mortality or morbidity contingency. Payments under any Funding Agreement may be fixed or variable (including based on a specified index or referenced underlying interest), and an issuing Insurers obligation under a Funding Agreement may be the obligation of such Insurers general account or may be allocated to a separate account, as may be permitted or required by such Insurers domiciliary jurisdiction.
In any particular Transaction, the Funding Agreements may be initially purchased by and issued directly to the SPV or, alternatively, may be initially purchased by and issued to one or more of the Securities Firms or another person or entity not otherwise a party to such Transaction [the "Initial Purchaser(s)"] and subsequently transferred to the SPV. Each direct purchaser of a Funding Agreement, whether the SPV or an Initial Purchaser, will satisfy any requirements that may be imposed by the laws of an issuing Insurers domiciliary jurisdiction or other applicable jurisdiction with respect to the initial sale of Funding Agreements by insurers.
The SPV will use the proceeds from the sale of the Securities to purchase or otherwise fund the transfer to the SPV of the Funding Agreements (or the rights thereto or interests therein) from the Insurers or the Initial Purchaser(s), as the case may be.1
The SPVs payment obligations under the Securities will be secured or backed by the Funding Agreements and any other assets of the SPV (including any rights under a Swap Agreement). The Securities may be denominated in U.S. dollars or in some other currency and will be issued in denominations less than the face amount of any of the Funding Agreements held by the SPV. The Securities will have fixed or variable rate coupons, or will be issued without coupons, and may provide for periodic interest payment or amortization of any original issue discount.
It is anticipated that the SPVs aggregate obligations with respect to the Securities issued in a Transaction generally will be less than the aggregate amount paid to the SPV under the Funding Agreements, with the difference being used to fund certain other obligations of the SPV. In certain other Transactions, however, the terms and financial attributes of the Securities may be identical to those of the underlying Funding Agreement, although the denomination of the Securities will be significantly less than the face amount of the Funding Agreement. In these instances, certain obligations of the SPV may be funded by the Insurers, directly or pursuant to indemnity or expense reimbursement agreements or otherwise.
Payments with respect to the Securities will be the sole obligation of the SPV and will not be directly guaranteed by the Insurers or any other person. Investors in the Securities will have no rights with respect to or recourse against the Insurers as to payments with respect to the Securities. In the event of non-payment of the Securities by the SPV, the sole enforcement right of the Investors will be against the SPV and its assets.
The Funding Agreements and all other assets of the SPV (the "Trust Estate") will be held in trust by an independent trustee or indenture trustee, domiciled in a U.S. or a foreign jurisdiction (the "Trustee"). The Trust Estate will either secure or back the various payments due from the SPV to the Investors under the terms of the Securities. In the event of a default by the SPV under the Securities, the Trustee will be required to take specified remedial actions on behalf of the investors, including selling or otherwise liquidating the Trust Estate. In no event, however, will the Investors have direct recourse against any person other than the SPV or as to any assets other than the Trust Estate, as a result of the SPVs default under the terms of the Securities.
The Securities may be sold (i) in the United States, pursuant to Rule 144A, Regulation D or another applicable exemption under the Securities Act of 1933 (the 1933 Act"), or pursuant to a registered public offering under Section 6 of the 1933 Act, or (ii) outside of the United States, pursuant to Regulation S under the 1933 Act and applicable non-U.S. securities laws. The Securities sold in the United States may be sold to Investors who might reside in, among other places, New York. In all events, sales and any resales of the Securities will be governed by applicable federal and state securities laws. Securities sold pursuant to a registered public offering, will comply with the applicable requirements of the 1934 Act.
The Securities will be represented, referred to, marketed and offered to Investors and potential investors as securities issued solely by the SPV. They will not be represented, marketed, referred to or offered to Investors or potential Investors as a type of insurance or annuity contract, Funding Agreement or other obligation of an insurance company. It will be disclosed to each Investor that the sole sources of payment under the Securities will be the SPV and its assets.
The Securities will not be considered exempted securities under Section 3(s)(8) of the 1933 Act, which generally exempts insurance contracts and policies from the application of federal securities laws. In addition, the SPV will not qualify for the exemption under Section 3(a)(3) of the Investment Company Act of 1940 (the "1940 Act"), which generally exempts insurance companies from the application of the 1940 Act.
The term funding agreement is not defined in the Insurance Law. However, the Department has historically viewed an unallocated guaranteed investment contract that does not provide for annuity purchases by or on behalf of plan participants, to be a funding agreement. Pursuant to N.Y. Ins. Law Section 3222(a)(McKinney 2000), the issuance of a funding agreement in New York by an authorized insurer constitutes doing an insurance business. N.Y. Ins. Law Section 3222(b)(McKinney 2000) enumerates the eligible holders of funding agreements. In particular, N.Y. Ins. Law Section 3222(b)(v)(McKinney 2000) permits an authorized insurer to issue a funding agreement to fund any program of an institution which has assets in excess of $25 million.
Thus, assuming that ABC Co. or the SPV is a N.Y. Ins. Law Section 3222(b)(v) entity, an authorized insurer may issue the funding agreement to either one. The Department will not look beyond that transaction to focus on the role or activities of ABC Co. or the SPV in its sale of securities to institutional buyers.
Where an unauthorized insurer issues a funding agreement for delivery outside of the state of New York to ABC Co., or an affiliate of ABC Co. or the SPV, the insurer must comply with the laws of its state of domicile. New York Insurance Law is not implicated in these circumstances and, assuming that all the applicable laws are complied with, the Department will not look beyond the initial transaction at the role of ABC Co. or its affiliate or the SPV in the sale of the securities.
Moreover, the securities are not insurance contracts because there is no obligation on the part of the SPV to "confer benefit of pecuniary value on the purchasers upon the happening of a fortuitous event in which the purchaser has, or is expected to have, a pecuniary interest which will be adversely effected by the event 2. Securities are unlike insurance contracts because the purchasers of securities commit their resources in order to achieve investment returns. The investment transaction is complete upon purchase, payment by the security holder, and delivery of the security to the purchaser by the issuer. An insurance contract on the other hand involves an ongoing undertaking to deliver a benefit of some kind in the future upon the happening of an event, which may or may not happen. Since the securities do not meet the definition of insurance contract under the New York Insurance Law, ABC Co. or any other securities dealer, does not have to be licensed by this Department to sell the securities in New York.
The Department has often opined on the permissibility of securitizations of funding agreement/guaranteed investment contracts similar to the type described in the inquiry. In previous instances, these securitizations took the form of private placement issuances which were governed according to the exemptions contained in Regulation D or Regulation S of the Securities Act of 1933. In the instant case, the proposed issuance of securities may be a public issuance in accordance with the general requirements of the Securities Act of 1933.
In an analysis of the securitization of a funding agreement or guaranteed investment contract transaction, the following factors are relevant in determining the applicability of the New York Insurance Law. First, the purchasers of the securities issued by the SPV must have no privity of contract with the insurance company issuing the funding agreement. Second, there must be no guarantee of the SPVs securities by the insurer or any other entity, i.e., the SPV must be the sole source of payment on the securities. Finally, the securities of the SPV must not be represented to prospective investors as a type of insurance contract or product.
The nature of the investor or the type of security (i.e., a public issuance as opposed to a private placement) is irrelevant to the determination of the applicability of the Insurance Law.
In light of the above, the points made in the inquiry are accurate.
For further information, you may contact Supervising Attorney Michael Campanelli at the New York City office.
1It is anticipated that the dollar amount of securities sold by SPV in a Transaction will give the SPV sufficient assets to qualify as a party eligible to purchase Funding Agreements directly from an insurer in those jurisdictions which permit Funding Agreements to be issued to fund a program of any institution which has more than $25 million in assets. In such jurisdictions, the SPV would be the direct purchaser of the Funding Agreements, or any Initial Purchaser would qualify as an eligible purchaser of Funding Agreements, either as an institution with more than $25 million in assets or otherwise.
2N.Y. Ins. Law Section 1101(a)(1)(McKinney 1985) defines an insurance contract as, "(a)ny agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event."