The Office of General Counsel issued the following opinion on September 13, 2006 representing the position of the New York State Insurance Department.
Re: Funding Agreement Backed Securitization Program
1. Is Office of General Counsel Opinion 02-08-17 (August 19, 2002) still valid?
2. Would the issuance by a special purpose vehicle ("SPV") of an equity security that confers no measure of control over the SPV to an affiliate of a funding agreement issuer alter the Departments conclusions contained in O.G.C. Opinion 02-08-17?
1. Yes, OGC Opinion 02-08-17 remains valid.
2. No, the issuance by a special purpose vehicle ("SPV") of an equity security that confers no measure of control over the SPV to an affiliate of a funding agreement issuer would not alter the Departments conclusions contained in O.G.C. Opinion 02-08-17.
At issue is a proposed structuring a funding agreement backed securitization transaction (hereinafter, the "Program") that is virtually identical to that described in Office of General Counsel Opinion 02-08-17 (August 19, 2002) but for the fact that an affiliate of the funding agreement issuer will be the holder of the nominal beneficial interest in the Special Purpose Vehicle ("SPV") issuer.
In Office of General Counsel Opinion 02-08-17, the Department reached several conclusions regarding the conduct of a funding agreement securitization. Specifically, under the facts presented in the inquiry therein, it was determined that:
1. The securities were not funding agreements or insurance or annuity contracts under New York law;
2. Neither the SPV nor the insurers were 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 the offer or sale of the securities to New York investors;
3. None of the securities firms selling the securities were (a) aiding and abetting the unauthorized sale in New York of contracts governed by the New York Insurance Law, or (b) selling such contracts in New York;
4. No initial purchaser of the securities domiciled in, a resident of or conducting business in New York was 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 applied 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 applied to the securities firms or the investors involved in the transaction.
The circumstances of the proposed transaction (hereinafter, the "Program") differ from that at issue in Opinion 02-08-17 only to the extent that a beneficial interest in the SPV will be held by an affiliate of the insurance company issuer of the funding agreement (hereinafter, the "Affiliate").
Securitization transactions require the establishment of an SPV or other type of special purpose entity. The SPV serves as the issuer of the securities to be sold. In the case of domestic securitization transactions the formation of the SPV is governed by state law; often that of Delaware, as in the instant case. Under the applicable Delaware law, the formation of a Delaware statutory business trust cannot be completed until the SPV receives a capital contribution in exchange for the issuance of a beneficial interest. This beneficial interest can be (and most typically is) issued for a nominal value (e.g., for $15). For the existing transactions completed prior to the Program, the Delaware statutory trusts have issued beneficial interests to a variety of entities, including administrative organizations, charities, investment banks, and trustees. In no case has any such entity gained control over the SPV by virtue of its ownership of the beneficial interest.
The beneficial interest will confer upon the Affiliate the following: (i) a right to receive payments with respect to the beneficial interest that is subordinate to the rights of the SPVs other security holders; and (ii) duties relating to fulfilling certain ministerial administrative tasks in connection with the SPV, such as record keeping and filing of statutorily required documentation. The beneficial interest will not confer any measure of "control" over the SPV as that term is defined1 in the New York Insurance Law. In this connection, the following features apply:
1. The SPVs activities will be specifically enumerated and delineated by the provisions of its organic trust agreement, and the publicly offered securities issued by the SPV will be governed by a separate indenture relating thereto;
2. The Affiliate will have no power to affect the operation of the SPV (apart from ministerial duties as noted above) or the rights of the SPVs other security holders;
3. An unrelated trustee will conduct the substantive affairs of the SPV in accordance with the SPVs governing trust agreement;
4. Once the SPV has issued securities to the public, the Affiliate will have no ability to amend the SPVs trust agreement (apart from certain limited matters, such as the curing of ambiguities or the preservation of the SPVs tax classification);
5. The Affiliate will have no power to amend the indenture governing the SPVs publicly issued securities; and
6. The trust agreement governing the SPV will explicitly restrain the ability of the SPV security holders (including the Affiliate) from controlling in any manner the administration, operation or management of the SPV.
Given that the Affiliate will not exercise any control over the SPV, it is suggested that the operation of the Program (and the activities of the parties thereto), under the analysis set forth in OGC Opinion 02-08-17, should not be subject to the New York Insurance Law. This conclusion is said to be warranted because the Program will contain the following three characteristics:
1. The purchasers of the SPVs securities will have no privity of contract with the insurance company issuing the funding agreement;
2. There is no guarantee of the SPVs securities by the insurance company issuing the funding agreement or any other entity; and
3. The SPVs securities would not be represented to prospective investors as a type of insurance contract or product.
These three features were central to the conclusion in OGC Opinion 02-08-17. Accordingly, assuming these three elements are satisfied and that all of the other features of the Program are consistent with the transaction addressed in OGC Opinion 02-08-17, the amendment of the Program as proposed would not change the Departments characterization of such a transaction.
Finally, this letter is limited to pronouncements on the New York Insurance Law. Determinations as to SEC regulations or state laws governing business organizations are beyond the purview of this office.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.
1 N.Y. Ins. Law § 107(a)(16) (McKinney 2000) defines control as ... the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an institution, whether through the ownership of voting securities, by contract or otherwise.