New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on November 12, 2002, representing the position of the New York State Insurance Department.

Re: Offshore Preferred Shares

Question Presented:

Will the proposed Offshore Preferred Share Offering violate the New York Insurance Law?

Conclusion:

No, the program as described would not violate the New York Insurance Law.

Facts:

A Bermuda-domiciled company (the "Issuer") proposes to issue preferred shares (the "Shares") to nonresident alien high net worth investors (the "Investors") in minimum lots of $100,000. Offshore Investors who purchase the Shares will participate fully in the investment gains and losses of the underlying self-directed investment in approximately two-dozen offshore mutual funds.

The issuer is a Bermuda-domiciled company that will seek recognition as a "Segregated Account Company" in Bermuda. The issuer is a 100% wholly owned subsidiary of a Delaware non-insurance holding company. Capital support to the Issuer will be provided by a Delaware non-insurance holding company in the form of a Capital Maintenance Agreement. Under the Capital Maintenance Agreement, sufficient capital will be invested in the Issuer providing for it to maintain net capital of $5 million. While it is not anticipated that a capital infusion will be necessary, the agreement will ensure that the Issuer is able to meet obligations, including amounts due to an Investor under the special redemption feature, that may not be satisfied from the assets held in the Investor’s segregated account or from the retained earnings of the Issuer.

The Issuer intends to perform the following activities from offshore:

All application and redemption forms and all wires will go through an affiliated management company providing administrative services that is located in Hamilton, Bermuda.

Management team members will be located in Bermuda.

Books and records, stock ledgers, and the audit function will be maintained in Bermuda.

Payment of commissions, third party services and all general company expenses will be made from the Issuer’s Bermuda accounts.

The Issuer intends to perform the activities that would be considered "back office" administrative operations through an arm’s length agreement with its affiliates in states other than New York.

Investors will be issued Shares by the Issuer representing their investment, and thereby become shareholders of the Issuer. Investors have the option to direct their investment into units of two dozen or more different non-U.S. mutual funds ("Units"), none of which are registered under U.S. securities laws. The minimum purchase price for the Preferred shares is $100,000. Shares representing the investment will be issued in "book entry" format only, with the Issuer issuing the confirmation to the Investor. The value of the Shares will be based on the value of underlying shares invested in offshore funds, the Units, less a per diem administrative fee. Proceeds from the sale of the Shares will be deposited into a segregated account to be held until used for the purchase of Units. The issuer will be the registered owner of the offshore mutual fund Units, which will not be available to satisfy issuer obligations other than its obligations under the Shares. One of two leading banks based in Bermuda will act as the Custodian of the Units holding all of such Units solely for the benefit of the Investors to which they relate.

The Investor may, at any time, redeem the Shares at their market value, less applicable charges. Shares are not transferable. The Shares possess the following "special redemption feature": following the death of the Investor, the beneficiary of the account may redeem the Shares for the maximum of: (i) the value of the investment certificate, (ii) the value of the purchase minus redemptions, or (iii) the highest anniversary value prior to the Investor’s death or the Investor’s 81st birthday, subject to certain adjustments. If there is a joint Owner, he or she may take the maximum redemption or continue the Shares at the maximum redemption value. The special redemption will only be paid on the death of the first Joint Owner.

Offshore Investors who purchase Shares from the Issuer will meet the requirements for "qualified purchasers" under the Investment Company Act of 1940. Offshore Investors must also be located outside of the U.S. and may not be citizens or residents of the United States or Bermuda. In the event an Offshore Investor becomes a resident or citizen of the U.S., such investor will be required to cash out, or alternately, the Shares must be placed in a trust outside of the U.S. and managed by a nonresident alien. The Issuer and its agents will obey the Anti-Money Laundering programs of Bermuda, the U.S. and those developed by the appropriate international regulatory bodies. The Issuer will not allow "omnibus accounts" and will only issue Shares to Investors who are natural persons or trusts established for the benefit of a natural person.

The Intermediary is the current broker for the existing accounts of the potential Offshore Investors. The Intermediary will receive an up front commission based on a percentage of the original purchase price of the Shares and an annual asset based trailing commission for continuing client services. Similar to offshore mutual fund sales, Intermediaries will not discuss the Shares specifically with their clients in the U.S. (even if in the U.S. only for temporary purposes).

The Intermediary or the Issuer will send offering documents in a manner consistent with offshore mutual fund practices and all such materials will have a Bermuda return address. The Issuer will pay a commission to intermediaries (which may be an affiliate of a U.S. broker-dealer or bank) for its role as an Intermediary, including back office and generic sales and marketing efforts by persons located in New York, in connection with the Shares. There will be no solicitation of the Shares made from New York.

Analysis:

Based upon the presented facts and this Office’s review of the documents submitted, it appears that the nature of the investment, the identity of the Offshore Investors and the activities of the Intermediary are such that the activities of the parties involved in the offering do not appear to implicate the New York Insurance Law, and, accordingly, do not constitute any violation of it.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.