[Federal Register Volume 60, Number 112 (Monday, June 12, 1995)]
[Notices]
[Pages 30906-30907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14323]
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SECURITIES AND EXCHANGE COMMISSION
[Release Nos. 33-7177; 34-35815; IC-21117]
Securities Transactions Settlement
June 6, 1995.
AGENCY: Securites and Exchange Commission.
ACTION: Grant of exemption.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
exempting transactions involving certain insurance contracts from the
scope of Rule 15c6-1.
EFFECTIVE DATE: The exemption from Rule 15c6-1 for insurance contracts
will be effective on June 7, 1995.
FOR FURTHER INFORMATION CONTACT:
Jerry Carpenter, Assistant Director, Christine Sibille, Senior Counsel,
or Cheryl Oler, Attorney, at 202/942-4187, Office of Securities
Processing Regulation, Division of Market Regulation, Securities and
Exchange Commission, 450 Fifth Street, N.W., Mail Stop 5-1, Washington,
D.C. 20549.
SUPPLEMENTARY INFORMATION: On October 6, 1993, the Commission
adopted Rule 15c6-1 \1\ under the Securities Exchange Act of 1934
(``Exchange Act'') which establishes three business days after the
trade date (``T+3'') instead of five business days (``T+5'') as the
standard settlement time frame for most broker-dealer securities
transactions.\2\ Rule 15c6-1 becomes effective June 7, 1995.\3\
\1\ 17 CFR 240.15c6-1 (1994).
\2\ Securities Exchange Act Release No. 33023 (October 6, 1993),
58 FR 52891.
\3\ As adopted, Rule 15c6-1 was to become effective June 1,
1995. In order to provide for an efficient conversion the Commission
changed the effective date to June 7, 1995. Securities Exchange Act
Release No. 34952 (November 9, 1994), 59 FR 59137.
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Rule 15c6-1 covers all securities other than exempted securities,
government securities, municipal securities,\4\ commercial paper,
bankers' acceptances, or commercial bills. The rule contains a specific
exemption for sales of unlisted limited partnership interests and
alternate settlement time frames for certain firm commitment offerings
of new issues.\5\
\4\ Pursuant to Municipal Securities Rulemaking Board rules,
transactions in municipal securities are required to settle by T+3.
Securities Exchange Act Release No. 35427 (February 28, 1995), 60 FR
12798.
\5\ Securities Exchange Act Release No. 35705 (May 11, 1995), 60
FR 26604.
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Certain insurance contracts, including variable annuity contracts
and variable life insurance contracts, have been deemed to be
securities under the Securities Act of 1933 (``Securities Act''),\6\
and other insurance contracts, such as certain fixed dollar annuity
contracts that include a market value adjustment provision, may fall
within the definition of securities under the Exchange Act
(collectively, these contracts are referred to hereinafter as insurance
securities products). Accordingly, as adopted, the scope of Rule 15c6-1
includes purchases and sales of such securities issued by an insurance
company.\7\
\6\ Securities and Exchange Commission v. Variable Annuity Life
Insurance Co. of America, et al., 359 U.S. 65, 79 S.Ct. 618, 3
L.Ed.2d 640 (1959) (variable annuity contracts are ``securities''
which must be registered with the Commission under the Securities
Act); Securities Act Release No. 5360, Securities Exchange Act
Release No. 9972, Investment Co. Act Release No. 7644, Investment
Advisors Act Release No. 359 (January 31, 1973) (a public offering
of variable life insurance contracts involved an offering of
securities required to be registered under the Securities Act).
\7\ Within the context of this order, the definition of an
insurance company is set forth in Section 2(a)(17) of the Investment
Company Act of 1940 (``Investment Company Act''). 15 U.S.C.
Sec. 80a-2(a)(17). An insurance company that sells and distributes
insurance securities products may be acting as a broker and a dealer
as defined in Sections 3(a)(4) and 3(a)(5) of the Exchange Act.
There are, however, certain circumstances in which an insurance
company that issues and distributes insurance securities may not be
required to register with the Commission as a broker-dealer. The
Commission staff, for example, has expressed the view that if an
insurance company establishes a wholly-owned subsidiary to engage in
the offer and sale of insurance securities, and the subsidiary
complies with all applicable rules and regulations, including the
requirement to direct and supervise all persons engaged directly or
indirectly in the offer and sale of securities, it would not
recommend enforcement action to the Commission if the insurance
company itself did not register with the Commission. Securities
Exchange Act Release No. 8389 (August 29, 1968), 33 FR 13005.
Consistent with those specifications, the staff of the Division of
Market Regulation has further expressed circumstances in which an
insurance company may not be required to register as a broker-
dealer. See, e.g., Principal Marketing Services, Inc. (June 2,
1988); Pacific Mutual Life Insurance Company (April 13, 1989);
Allstate Life Insurance Company and Lincoln Benefit Life Company
(September 12, 1988); and Time Insurance Company (October 17, 1989).
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The American Council of Life Insurance (``ACLI'') has requested
that the Commission exempt from Rule 15c6-1 purchases or redemption
transactions of variable annuity contracts, variable life insurance
contracts, and certain fixed dollar annuity contracts.\8\ According to
ACLI, the complex nature and various unique processing requirements
involved in the purchase or sale of insurance securities products
cannot practically be condensed into a T+3 settlement cycle.
\8\ Letters from Robert S. McConnaughey, Senior Counsel, ACLI,
to Brandon Becker, Director, Division of Market Regulation,
Commission (April 18, 1995 and May 17, 1995).
The Commission recognizes that the mechanics of purchases and
redemptions of insurance securities products are distinct from those of
other securities and that, because of the time required to complete
necessary preparations, such transactions typically require more
protracted settlement periods. Specifically, the Commission believes
that compliance with the unique requirements of state and federal law,
as well as of the particular administrative procedures, applicable to
insurance securities products demands additional time beyond the
standard settlement process, and supports an exemption of such
securities from Rule 15c6-1. For example, the Commission notes that the
purchase process for a variable life insurance contract involves the
assessment of insurability of the contract purchaser and the acceptance
of the mortality risk before a contract can be issued for delivery.\9\
Processing of an annuity contract may be protracted by substantial
review to determine that any requirements imposed under the Internal
Revenue Code (``IRC'') or the Employee Retirement Income Security Act
(``ERISA'') are met.
\9\ This assessment is time consuming because it may involve
medical examinations, laboratory tests, and review of medical
records.
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In addition, such insurance securities products are subject to
extensive federal and state regulation on timing of certain
actions.\10\ For example, once processing for a contract is complete,
many states require that the insurer provide the purchaser with the
right to return the contract for any reason within a specified time of
delivery, generally ten days, and to receive a refund of the premium or
the contract's cash value without imposition of surrender charges.\11\
\10\ Insurance companies are regulated primarily by the states
in which they are organized and operate. In addition, federal
regulations govern some aspects of insurance contract issuance
affecting the timing of such transactions. For example, Rule 22c-
1(c) under the Investment Company Act requires that an insurer price
a variable annuity contract within certain time frames.
\11\ E.g., New York Insurance Law Sec. 4240(13) (McKinney
1985). [[Page 30907]]
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Likewise, the redemption or withdrawal process for insurance
securities products often extends beyond the T+3 time frame. With
respect to annuity contracts, the effectiveness of a withdrawal request
may be delayed by the need for additional information or instructions
from the contract owner with respect to the withholding of proceeds or
payments to the Internal Revenue Service. In addition, while the
processing of a withdrawal may take place mechanically through the
insurer's systems, various circumstances may give rise to additional or
preliminary manual processing which can lengthen the withdrawal
process.\12\ Withdrawals also may require insurers' compliance with
applicable IRC provisions or ERISA requirements, as well as various
administrative procedures which are relevant only to insurance
securities products and not to other securities. Such compliance may
demand extra processing time for withdrawals.\13\
\12\ For example, contracts between insurers and contract owners
may contain special rights restriction provisions which limit the
right to effect withdrawals or impose other restrictions originating
from, among other things, a tax lien or divorce decree. Such
contracts usually require manual processing which results in delay
of the actual processing of the withdrawal.
\13\ Variable annuities, for example, can be used to fund a
variety of plans, including tax sheltered annuities, each of which
has its own set of complex tax rules regarding withdrawals. Certain
variable life insurance contracts may become subject to
classification as modified endowment contracts which have taxable
predeath distributions. Consequently, some insurers undertake
additional examination of withdrawal transactions to determine prior
to their completion if the contracts at issue could be classified as
a modified endowment contract. Payment of death benefits on variable
life insurance contracts and on variable annuity contracts
frequently require extended processing time because insurance
companies cannot make payments until they receive and review all
documentation relevant to the claims and in some instances conduct
an investigation of the claims.
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The various administrative processes and the requirements under
state and federal law which pertain to insurance securities products
add complexity and time to the purchase and sale of such securities.
These circumstances support the exemption of such securities from the
scope of Rule 15c6-1.
Furthermore, permitting a longer settlement cycle for transactions
involving insurance securities products does not appear to adversely
affect the market risk concerns which the T+3 settlement cycle seeks to
address. In adopting Rule 15c6-1, the Commission stated that three day
settlement would reduce risk by decreasing the time between trade
execution and settlement during which the value of securities could
deteriorate.\14\ While insurance securities products are securities,
neither the insurance company nor purchaser is subject to the same
settlement risks attendant to the purchase of most securities.
Moreover, insurance securities products are not traded in secondary
market.
\14\ Securities Exchange Act Release No. 33023 (October 6,
1993), 58 FR 52891 [File No. S7-5-93]. The other reasons given by
the Commission for the rule's adoption, coordination between the
derivative and cash markets and encouragement of greater efficiency
in clearing agency and broker-dealer operations, are not applicable
to insurance securities products.
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Likewise, withdrawal or redemption of an insurance securities
product bears less risk to insurers and contract owners. Extensive
state regulations exist to ensure that insurers meet their obligations
to pay withdrawal proceeds to contract owners. Accordingly, an
exemption from Rule 15c6-1 for insurance securities products does not
appear to be inconsistent with the purposes of Rule 15c6-1.
The Commission believes that an exemption is appropriate to provide
issuers with the time needed to settle transactions involving insurance
securities products. Such an exemption should not affect the current
regulatory scheme governing insurance securities products, including
the relevant sections and rules under the Investment Company Act and
the Securities Act pertaining to the purchase and sale of securities
issued by insurance companies. Accordingly, the Commission finds that
such exemption is consistent with the public interest and the
protection of investors.
It is hereby ordered that a contract for the purchase or sale of
any security issued by an insurance company as defined in Section
2(a)(17) of the Investment Company Act of 1940\15\ (``Investment
Company Act'') that is funded by or participates in a ``separate
account'' as defined in Section 2(a)(37) of the Investment Company
Act,\16\ including a ``variable annuity contract'' as defined in Rule
0-1(e)(1) under the Investment Company Act \17\ or a ``variable life
insurance contract'' as defined in Rule 6e-2(c)(1) or Rule 6e-
3(T)(c)(1) under the Investment Company Act,\18\ or any other insurance
contract registered as a security under the Securities Act of 1933,\19\
shall be exempt from the requirements of Rule 15c6-1.\20\ This
exemption is subject to modification or revocation at any time the
Commission determines that such modification or revocation is
consistent with the public interest or the protection of investors.
\15\ 15 U.S.C. 80a-2(a)(17).
\16\ 15 U.S.C. 80a-2(a)(37).
\17\ 17 CFR 270.0-1(e)(1).
\18\ 17 CFR 270.6e-2(c)(1) and 270.6e-3(T)(c)(1).
\19\ 15 U.S.C. 77a-77mm.
\20\ 17 CFR 240.15c6-1 (1994).
For the Commission by the Division of Market Regulation pursuant
to delegated authority.\21\
\21\ 17 CFR 200.30-3(a)(55).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14323 Filed 6-9-95; 8:45 am]
BILLING CODE 8010-01-M