IRS Private Letter Rulings that Business Trust Portfolio Composed of Underlying Funds Satisfies Investor Control Rules
On December 16, the IRS published Private Letter Rulings (PLRs) 201651002 and 201651012. The PLRs are nearly identical, but issued to two separate insurance companies (Y and Z) under a common parent (X). Each insurance company received an affirmative conclusion from the IRS that it, rather than the variable contract holder, would be the owner of the “Portfolio.” In other words, the PLRs sought and received confirmation that the proposed structure did not violate the investor control rules.
The Portfolio is expected to invest substantially all of its assets in a variety of eligible third-party mutual funds or other third-party variable insurance investment options (the “Underlying Funds”). The Underlying Funds will, in turn, invest in U.S. and foreign equity and debt instruments. The Portfolio is managed by a registered investment adviser that is an indirectly wholly owned subsidiary of the insurers’ parent company.
The Portfolio is a newly formed series of a business trust that is a registered, open-end investment company that has elected to be classified as a partnership. Shares of the Portfolio are offered to certain group life insurance company segregated asset accounts to serve as an investment vehicle for variable contracts. Public access to shares of the Portfolio are available exclusively through the purchase of a variable contract. The PLRs note that the variable contract holder will have “no current knowledge of Portfolio’s specific assets,” however, Portfolio holdings will be available on a regular basis. The IRS concluded that the variable contract holders do not have any control over the Portfolio’s investments, including the Portfolio’s investments in the Underlying Funds.
FNB PA vs. Transamerica and Clark Consulting – Update
On December 5, Transamerica and Clark Consulting (the Defendants) filed a motion for summary judgment.
This is an update to the ongoing litigation between First National Bank of Pennsylvania (FNB PA) and Transamerica Life Insurance Company and Clark Consulting that commenced in July 2014. The underlying controversy stems from the surrender proceeds that FNB PA received upon the surrender of a separate account BOLI program that it inherited via the acquisition of a community bank. FNB PA asserts that it should have received the full reported cash surrender value, which included a “Bank Enhancement Amount” pursuant to the stable value agreement. Transamerica asserts that FNB PA is not entitled to the so-called enhancement amount because the policyholder was changed in connection with the community bank acquisition. Additionally, the Defendants assert that FNB PA failed to fulfill a separate requirement that had to be “strictly satisfied” in order to qualify for the payment.
Exhibits filed with the Court included deposition testimony from FNB PA’s Treasurer confirming that FNB PA did not obtain, nor review, the policies’ controlling documents (e.g., policy, PPM, and Stable Value Agreement) in advance of the acquisition. We routinely recommend that our clients perform comprehensive due diligence on acquisition targets’ BOLI holdings, and we have been engaged a number of times to assist in such projects.
FNB PA is expected to file a response in opposition to the motion for summary judgment in early January.
NAIC Fall National Meeting
The NAIC held its fall national meeting December 10–13. One item worth noting is that the Investment Risk-Based Capital (E) Working Group continues its efforts to update the risk-based bond factors for the Life RBC formula. The intention is to expand from six categories to approximately twenty in order to increase the formula’s granularity and risk sensitivity. The ACLI has expressed concern that the contemplated updates may increase overall Life RBC by more than 10% and shift investment incentives from investment grade to below investment grade.
We will continue to monitor this development.