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Regulation and Compliance > Federal Regulation > SEC

SEC Remarks Suggest UIT Victory

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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.

That is, he says, the principal executive and financial officers will have to certify that they have reviewed the reports and that based on his or her knowledge, the reports do not contain any untrue statements of material fact or omit to state a material fact.

However, Wilkerson says, his expectation is that UIT separate accounts will not come under the third requirement, which is a certification that the financial statements fairly present in all material respects the financial condition of the issuer.

In addition, he says, he expects that certain other certification requirements in the Sarbanes-Oxley Act, involving assurances that the certifying officers are responsible for establishing and maintaining disclosure controls and procedures and other internal controls, will not apply to UIT separate accounts.

This will not be known for certain, however, until the SEC publishes its final rule.

In addition, the SEC decided to develop a new form designed to better implement the intent of Section 302 of the Sarbanes-Oxley Act.

This new form, which will be called Form N-CSR for Certified Shareholder Report, would consist of a copy of any required shareholder report, information regarding the companys disclosure controls and procedures and the certifications required by Section 302.

In other news, the American Association of Health Plans is applauding a decision by the Bush administration to expand the number of health plans available under the Medicare+Choice program.

“The administration is taking a significant step toward creating a 21st century Medicare program that gives seniors access to affordable benefits and choices that currently are widely available in the private marketplace,” says Karen Ignagni, president of the AAHP, based in Washington.

Under a new demonstration project announced last week by the Department of Health and Human Services, some 33 new health plans using the preferred provider organization model will be available to beneficiaries in 23 states.

Previously, PPO style coverage was not available to Medicare beneficiaries, HHS notes, even though it is a popular type of coverage in the private market.

“This program gives seniors new options for their Medicare coverage similar to that available in the private insurance market,” HHS Secretary Tommy G. Thompson says.

The administrations goal, he says, is to give seniors additional and better Medicare options.

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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