Life insurers appear to have won a major victory with the apparent decision by the Securities and Exchange Commission not to extend some of the requirements of a recently enacted corporate governance bill to variable contract separate accounts organized as unit investment trusts.
Although the industry is still waiting for written confirmation of the decision, Carl B. Wilkerson, chief counsel for securities and litigation with the American Council of Life Insurers, Washington, says that based on oral comments made by SEC staff during an open SEC meeting last week, he expects this will be the outcome.
The issue involves the Sarbanes-Oxley Act of 2002, which was signed into law on July 30 by President Bush. Section 302 of the Act requires the SEC to develop rules that require public companies to certify certain aspects of annual or quarterly reports filed with the SEC.
Specifically, a companys principal executive and financial officers must certify that: (1) he or she has reviewed the report, (2) based on his or her knowledge, the report does not contain an untrue statement of material fact or omission of material fact, and (3) based on his or her knowledge, the financial statements and other financial material in the report are fair in all material respects.
The third requirement particularly concerned ACLI with respect to UIT separate accounts. In a letter to the SEC, Wilkerson says that certification of UIT separate accounts would be functionally impractical because mutual funds are the core assets.
In essence, Wilkerson says, any putative signatory to the UIT certification would be verifying the financials of the underlying mutual funds, which are separate and independent from the separate account.
“The UIT is not in a position to make representations concerning the financials of the underlying funds in its portfolio,” Wilkerson writes.
“It is neither necessary nor appropriate to require the separate account UIT to make a Section 302 certification about underlying mutual fund financials,” he says.
Moreover, he says, nothing in the legislative history of the Sarbanes-Oxley Act can be construed to suggest that the Section 302 certifications apply to UIT separate accounts.
The legislative history, Wilkerson says, states that the certifications will provide informational value to securities traded in the secondary market.
“Variable contracts are not traded in the secondary market,” he notes.
During the SEC meeting last week, it appears that UIT separate accounts will come under the first two certification requirements, Wilkerson says.