The Office of General Counsel issued the following opinion on December 12, 2007 representing the position of the New York State Insurance Department.
RE: Status of Limited Partnership as an Investment Subsidiary
Would the limited partnership described below be regarded as an investment subsidiary under the New York Insurance Law?
No, the limited partnership described below would not be regarded as an investment subsidiary under the New York Insurance Law.
A New York domestic life insurer (“Life Insurer”) has a wholly-owned subsidiary in the money management business (“Investment Advisor”). Investment Advisor intends to form a limited partnership (“LP”). The general partner of LP will be a wholly-owned subsidiary of Investment Advisor. LP will sell limited partnership interests through private placements to unaffiliated investors seeking the money management services of Investment Advisor. It is possible that Life Insurer may also purchase a limited partnership interest in LP, but that Life Insurer’s interest in the LP would not exceed more than twenty-five percent (25%) of the total limited partnership interests in the LP.
LP is being formed for the purpose of attracting funds of unaffiliated third parties for Investment Advisor to manage. If Life Insurer elects to purchase a limited partnership interest in LP, the substantial majority of the assets held in LP and managed by Investment Advisor will remain funds of third parties unaffiliated with Life Insurer.
Article 17 of the New York Insurance Law, which addresses subsidiaries of life insurers, is relevant to this inquiry. An investment subsidiary of a life insurer is specifically defined by N.Y. Ins. Law § 1702 (McKinney 2006) as follows:
[A] Subsidiary… engaged or organized to engage exclusively in the ownership and management of assets (other than equity securities of subsidiaries) authorized as investments for the parent corporation and other investment subsidiaries….
Insurance Law § 1704(d) further provides, in pertinent part, as follows:
Investments made or acquired by investment subsidiaries shall be deemed, for the purposes of this chapter, to be made or acquired directly by the parent corporation … subject to all the provisions and limitations (including quantitative limits) on the making thereof specified in this chapter with respect to investments by the parent corporation.
These provisions clearly contemplate that an investment subsidiary is an entity that holds assets exclusively on behalf of its parent.1 The function of such an entity differs markedly from the situation that the inquirer described. Here, the LP would be formed not to hold assets on the parent’s behalf, but to attract funds from unaffiliated third parties for management by Investment Advisor. In the latter arrangement, even if Life Insurer elects to purchase a 25 percent limited partnership interest in LP, the substantial majority of the assets in LP being managed by Investment Advisor belong to unaffiliated third parties. Thus, the Department would not regard the LP as an investment subsidiary of Life Insurer.
Indeed, taking the approach that LP should be characterized as an investment subsidiary of Life Insurer would mean that many passive investment vehicles would have to be classified as investment subsidiaries of their life insurer investors. This clearly would not be consistent with the purposes of Article 17.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 This Office has previously endorsed this interpretation. See Office of General Counsel (OGC) Opinion No. 02-01-24 (January 23, 2002) (holding that a real estate investment trust (REIT) that held only real property transferred to it by a life insurer constituted an investment subsidiary under Article 17); OGC Opinion No. 01-08-01 (August 2, 2001) (concluding that a special purpose vehicle that functioned solely as the holder of assets transferred to it from its life insurance company parent constituted an investment subsidiary under Article 17).