Exchange Act Exemption for Securities that are Regulated as Insurance

A Small Entity Compliance Guide¹

Introduction

On January 8, 2009, the Securities and Exchange Commission ("SEC") issued new rule 12h-7, which exempts insurance companies from filing reports under the Securities Exchange Act of 1934 with respect to securities that are registered under the Securities Act of 1933, provided that certain conditions are satisfied, including that the securities are regulated under state insurance law, the issuing insurance company and its financial condition are subject to supervision and examination by a state insurance regulator, and the securities are not publicly traded.

What insurance companies are covered by the exemption?

The Exchange Act exemption applies to an issuer that is a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any state, including the District of Columbia, Puerto Rico, the Virgin Islands, and any other possession of the United States.

What securities are covered by the exemption?

The exemption applies with respect to securities that do not constitute an equity interest in the insurance company issuer and that are either subject to regulation under the insurance laws of the domiciliary state of the insurance company or are guarantees of securities that are subject to regulation under the insurance laws of that jurisdiction. The exemption does not apply with respect to any other securities issued by an insurance company. As a result, if an insurance company issues securities with respect to which the exemption applies, and other securities that do not entitle the insurer to the exemption, the insurer will remain subject to Exchange Act reporting obligations. For example, if an insurer that is a publicly held stock company also issues insurance contracts that are registered securities under the Securities Act, the insurer generally would be required to file Exchange Act reports as a result of being a publicly held stock company. Similarly, if an insurer raises capital through a debt offering, the exemption does not apply with respect to the debt securities.

To what conditions is the exemption subject?

• Regulation of insurer's financial condition: In order to rely on the exemption, an insurer must file an annual statement of its financial condition with, and the insurer must be supervised and its financial condition examined periodically by, the insurance commissioner, bank commissioner, or any agency or any officer performing like functions, of the insurer's domiciliary state.

• Absence of trading interest: The Exchange Act exemption is subject to two conditions intended to insure that there is no trading interest in securities with respect to which the exemption applies:

  • First, the securities may not be listed, traded, or quoted on an exchange, alternative trading system, inter-dealer quotation system, electronic communications network, or any other similar system, network, or publication for trading or quoting.

  • Second, the issuing insurance company must take steps reasonably designed to ensure that a trading market for the securities does not develop. This includes, except to the extent prohibited by the law of any state, including the District of Columbia, Puerto Rico, the Virgin Islands, and any other possession of the United States, or by action of the insurance commissioner, bank commissioner, or any agency or officer performing like functions of any state, requiring written notice to, and acceptance by, the issuer prior to any assignment or other transfer of the securities and reserving the right to refuse assignments or other transfers at any time on a non-discriminatory basis.

• Prospectus disclosure: In order for an insurer to be entitled to the Exchange Act exemption provided by the rule with respect to securities, the prospectus for the securities must contain a statement indicating that the issuer is relying on the exemption provided by rule 12h-7.

Is reliance on the exemption optional?

Reliance on the exemption provided by rule 12h-7 is optional. An insurance company that desires to remain subject to Exchange Act reporting requirements may do so by omitting from its prospectus the required statement indicating that it is relying on the exemption provided by the rule.

What is the effective date of the exemption?

The effective date of rule 12h-7 is May 1, 2009.

Other resources

The adopting release for the exemption provided by rule 12h-7 can be found on the SEC's website at http://www.sec.gov/rules/final/2009/33-8996.pdf.

Contacting the SEC

The SEC's Division of Investment Management is happy to assist small companies with questions regarding the exemption. You can contact the Division's Office of Insurance Products at (202) 551-6795.

¹ This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a "small entity compliance guide" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.

http://www.sec.gov/rules/final/2009/33-8996-secg-12h7.htm