August 29, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-22-02 & File No. S7-31-02
Securities Exchange Act Releases No. 46084 and No. 46313
Dear Mr. Katz:
This letter is submitted on behalf of the American Council of Life Insurers ("Council"), the Association for Advanced Life Underwriting (AALU) and the National Association of Insurance and Financial Advisors (NAIFA).1 Life insurers provide split-dollar life insurance policies for directors, executive officers, and other officers and employees of issuers ("Issuers") subject to the reporting requirements of the Securities and Exchange Act of 1934 ("1934 Act").2 Some Issuers sponsor split-dollar programs as part of their normal compensation programs.
Life insurance companies, insurance practitioners, and their Issuer clients have fielded concerns that split-dollar life insurance policies could be considered subject to the prohibitions in Section 402(a) of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), codified as new Section 13(k) of the 1934 Act. Section 13(k) prohibits an Issuer from extending credit, or arranging to extend credit, in the form of a personal loan to or for a director or executive officer of the Issuer. We believe that split-dollar life insurance, in both form and substance, is insurance and not an extension of credit within the common meaning of that phrase under Section 11(d) of the 1934 Act and Regulation T of the Board of Governors of the Federal Reserve System adopted pursuant to Section 7 of the 1934 Act.3
In Securities Exchange Act Release No. 46313 (August 6, 2002) (the "Release"), the Commission stated that it was continuing to consider the amendments proposed in Securities Exchange Act Release No. 45742 (April 12, 2002) (the "Insider Proposal") requiring companies to disclose on Form 8-K information about (1) directors' and executive officers' arrangements intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the 1934 Act, and (2) company loans and loan guarantees to directors and executive officers that are not prohibited by Section 402 of Sarbanes-Oxley. The second of these two items is of interest to us.
In evaluating whether split-dollar life insurance policies could be treated as subject to the prohibitions in Section 402(a) of Sarbanes-Oxley, it occurred to us that similar questions could be raised about certain aspects of Item 10(c) in the Insider Proposal as revised by the SEC's August 6, 2002 Release. We assume from that Release that the two insider items that will be added to Form 8-K will be included when the SEC issues final 8-K rules after also considering comments on Release 46084. Accordingly, we are commenting now with reference to both releases.
The Insider Proposal invites comment on the SEC's intention to amend Form 8-K to add, among other things, Item 10(c) that would require disclosure of "each loan of money to a director or executive officer made or guaranteed by the company or by an affiliate of the company." This proposal was published by the Commission in April 2002, long before Sarbanes-Oxley was signed into law.
We believe it is reasonable to assume, however, that the events that motivated the addition of the present version of Section 402 of Sarbanes-Oxley as an amendment when it was being considered in the Senate are subtantially similar, if not identical, to the events that caused the Commission to publish the Insider Proposal in the first instance. Therefore, we do not regard the minor linguistical differences between proposed Item 10(c) and Section 402 of Sarbanes-Oxley to be important or meaningful.
Item 404 of Regulations S-K and S-B currently requires disclosure of any director or executive officer's indebtedness to an Issuer at any time since the beginning of the Issuer's last fiscal year in an amount in excess of $60,000. The Insider Proposal seeks to ensure more prompt reporting about this kind of event. Item 402 of Regulations S-K and S-B, by contrast, requires disclosure of executive compensation, and paragraph (b)(v)(E) thereof describes exactly how the value received by the beneficiary/owner of split-dollar life insurance should be reported under "All Other Compensation."
This treatment of split-dollar life insurance as executive compensation is the result of long-standing Commission interpretations; we are not aware of any instance in which the Commission has treated split-dollar life insurance as a "loan" subject to reporting under Item 404, instead of executive compensation subject to Item 402. We believe it would be very constructive to reconfirm these positions in the adoption release on the Insider Proposal.
Conclusion and Recommendation
Split-dollar life insurance is insurance that is intended by Issuers as compensation and is routinely disclosed as a form of executive compensation ["All Other Compensation"] in response to Item 402 of Regulations S-K and S-B in annual reports and proxy statements pursuant to long-standing Commission interpretation. We do not believe that split-dollar life insurance involves an Issuer in extending credit or arranging for the extension of credit in the form of a personal loan for purposes of Section 402 of Sarbanes-Oxley.
The intent of Section 402 in Sarbanes-Oxley lacks definitive legislative history. As a result, a number of law firm memos are urging caution regarding split-dollar transactions until the scope of Section 402 of Sarbanes-Oxley is determined.4 This creates an untenable dilemma where Issuers may be forced to either risk violating new Item 10(c), or of reporting split-dollar arrangements as loans. A statement from the Commission on this issue would be very worthwhile.
We respectfully request, therefore, that when the Commission completes its consideration of the Insider Proposal, along with the other 8-K proposals in Release 46084, it reconfirm that split-dollar life insurance should continue to be reported as an element of executive compensation pursuant to Item 402(b)(v)(E) ["All Other Compensation"] and not as a "loan" to be disclosed pursuant to Item 404 of the same Regulations or the new 8-K reporting item for permitted loans.
Thank you for your attention to our views. We would be happy to address any questions that you may have concerning our submission.
Carl B. Wilkerson
cc. Alan L. Beller, Director, Division of Corporation Finance
Martin P. Dunn, Deputy Director, Division of Corporation Finance
Paula Dubberly, Chief Counsel, Division of Corporation Finance
Tom Korb, AALU
Morris Goff, NAIFA
|1||The Council is a national trade association with 399 member life insurance companies which account for 76% of the life insurance business in the United States. AALU is comprised of approximately 2,000 expert life insurance practitioners throughout the United States who help individuals, families and businesses construct and implement effective estate, business, retirement and compensation plans. AALU members play a highly significant role in the split dollar marketplace. NAIFA (formerly The National Association of Life Underwriters) is a federation of nearly 1,000 state and local associations representing approximately 75,000 life and health insurance agents and financial advisors doing business throughout the United States.|
|2||For many years, public companies have used life insurance to fulfill a variety of objectives, such as employee benefits, estate tax management in smaller businesses, and executive compensation. Split dollar life insurance arrangements are often used by businesses to provide life insurance protection to employees, with the employer and the employee sharing in the costs and benefits of the policies. These arrangements comply with Treasury regulations, the Internal Revenue Code, and disclosure requirements under the federal securities laws.|
|3||These provisions restrict broker-dealers from arranging for the extension of credit to a brokerage customer by a third party under certain circumstances, such as when the broker-dealer has a potential conflict of interest with the customer or when the credit extended by the third party might violate the Board's margin regulations. The concept of "arranging for the extension of credit" generally has been given the same meaning under Section 11(d) of the 1934 Act and Regulation T.|
|4||Some of the views in these memos reflect an incorrect understanding of fundamental aspects of these arrangements and the established status of this compensation under the federal securities laws.|