AIA Cites Fin'l Svcs. Law Language In Call For Volcker Rule Exemption

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

The American Insurance Association (AIA) said insurers should have a blanket exemption from the "Volcker Rule" based on language contained in the financial services reform legislation passed by Congress.

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

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

The Volcker Rule provision seeks to impose stronger federal oversight on financial services companies that engage in proprietary trading and enter into joint ventures with hedge funds and private equity funds.

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

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

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

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

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

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

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

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

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

The letter also notes that a de minimus exemption from SEC registration for a wholly-owned subsidiary within an affiliated group of insurance companies if that wholly-owned subsidiary is operated for the sole purpose of providing investment advisory services to the members of the affiliated group of insurance companies, and does not hold itself out to the public as an investment adviser.

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

The AIA letter also contends that the exemption extends to foreign insurers that are subsidiaries of U.S.-domiciled holding companies. "Nothing in [the relevant section of the financial services reform legislation] would suggest a different result," the letter says.

The AIA said it supports the position of the American Council of Life Insurers, which is that the Dodd-Frank Act "leads to the conclusion that Congress did not intend for the Volcker Rule provisions to be applied extra-territorially to any extent greater than necessary."

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

"Insurance investment laws and regulations permit insurers to invest in a range of investments, including hedge funds and private equity funds, while imposing quantitative and qualitative limitations as well as reporting requirements," the letter states.