Proposed Rule 12h-7 would provide insurers with a conditional exemption from the periodic reporting requirements of the Exchange Act with respect to its securities that are registered under the Securities Act and that are either subject to state insurance regulation of the insurer’s domiciliary state or are guarantees of securities subject to such regulation. The proposed exemption would cover existing types of insurance contracts, including fixed index annuities, contracts with market value adjustment features, contracts that provide certain guarantees in connection with assets held in the investor’s mutual fund, brokerage, or investment advisory accounts, as well as other contracts that are developed in the future that are registered under the Securities Act. The proposed exemption would not apply, however, to other types of securities, such as common stock, that constitute an equity interest in the insurer.
Reliance on proposed Rule 12h-7 would be subject to compliance with the following conditions: the insurer must be a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any state; the insurer must file an annual statement of its financial condition with, and the insurer must be supervised and its financial condition periodically examined by, the insurance regulator of the insurer’s domiciliary state; the securities with respect to which the exemption is claimed may not be listed, traded, or quoted on any exchange, alternative trading system, inter-dealer quotation system, electronic communications network, or any other similar system, network, or publication for trading or quoting; and the insurer must take steps “reasonably designed” to ensure that a trading market for the securities does not develop.
The SEC based the proposed exemption on two factors, including (1) the nature and extent of the activities of insurance company issuers, and their income and assets, and, in particular, the regulation of these activities and assets under state insurance law; and (2) the absence of trading interest in the securities.
Industry Comment Letters
Proposed Rule 12h-7 generally has been viewed as a positive development. Supporters of the proposed exemption include not only members of the insurance industry, but also the ICI. There appears to be little disagreement with the SEC’s view that, in light of state insurance regulation, the imposition of Exchange Act reporting as a general matter may be unnecessary and may result in duplication of state insurance regulation that is burdensome. Notably, in addition to relieving insurers of duplicative regulation, Proposed Rule 12h-7 would exclude insurers eligible to rely on it from the requirements of the Sarbanes-Oxley Act of 2002 to the extent they would be subject to it by reason of the registration of the subject annuities.