NU Online News Service, Nov. 10, 3:47 p.m.EST

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The American Insurance Association (AIA) said insurers shouldhave a blanket exemption from the "Volcker Rule" based on languagecontained in the financial services reform legislation passed byCongress.

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The AIA's position was voiced in a comment letter to officialsof the Financial Stability Oversight Council (FSOC).

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The FSOC is asking for comment on how it should craft a study onhow the Volcker Rule provision of the Dodd-Frank Wall Street Reformand Consumer Protection Act should be implemented.

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The Volcker Rule provision seeks to impose stronger federaloversight on financial services companies that engage inproprietary trading and enter into joint ventures with hedge fundsand private equity funds.

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The AIA letter was signed by J. Stephen Zielezienski, AIA seniorvice president and general counsel.

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The provision AIA cited "explicitly includes" an exception fortrading done "by a regulated insurance company directly engaged inthe business of insurance for the general account of the company,"the AIA letter says.

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This exemption also extends to trading "by any affiliate of suchregulated insurance company, provided that such activities by anyaffiliate are solely for the general account of the regulatedinsurance company," AIA added.

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As a result, the AIA letter states that while property andcasualty insurers do not invest "in any significant way in hedgefunds, those investments are lawful and regulated."

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The letter said the FSOC study "should make clear that [p&c]insurers may–and should–be allowed to continue to make suchinvestments as long as they are consistent with the [p&c]business model and comply with insurance investment laws."

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The letter says that existing insurance investment laws alsopermit insurance companies to form and invest through investmentsubsidiaries, and state insurance regulators have the ability toexamine the investment activities of such subsidiaries.

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Therefore, the letter says, "Any definition of 'a permittedactivity of an insurance company' should, by its terms, acknowledgethat [p&c] insurers are empowered to continue their existinginvestment activities as permitted and regulated under insuranceinvestment laws."

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The letter adds that many insurance and reinsurance groups ofcompanies also have established subsidiary investment advisers thatonly manage the assets of the insurance companies and theiraffiliated companies within the holding company structure.

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The AIA contended, "This arrangement is much more efficient formanaging excess funds of the group than setting up separateinvestment divisions within each affiliate."

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The letter also notes that a de minimus exemption from SECregistration for a wholly-owned subsidiary within an affiliatedgroup of insurance companies if that wholly-owned subsidiary isoperated for the sole purpose of providing investment advisoryservices to the members of the affiliated group of insurancecompanies, and does not hold itself out to the public as aninvestment adviser.

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Moreover, regardless of the registration issue, the FSOC studyshould contain language saying that the implementation of theVolcker Rule should exempt insurance company subsidiaries,regardless of the SEC's conclusion on registration.

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The AIA letter also contends that the exemption extends toforeign insurers that are subsidiaries of U.S.-domiciled holdingcompanies. "Nothing in [the relevant section of the financialservices reform legislation] would suggest a different result," theletter says.

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The AIA said it supports the position of the American Council ofLife Insurers, which is that the Dodd-Frank Act "leads to theconclusion that Congress did not intend for the Volcker Ruleprovisions to be applied extra-territorially to any extent greaterthan necessary."

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At the same time, the AIA said that exemption under the VolckerRule does not mean that such activity is unregulated.

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"Insurance investment laws and regulations permit insurers toinvest in a range of investments, including hedge funds and privateequity funds, while imposing quantitative and qualitativelimitations as well as reporting requirements," the letterstates.

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