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Ref #2015-49
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Explicitly Excluding ETFs from SCA Guidance
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
Questions have been received on whether the ownership percentage in an exchange-traded fund (ETF) could
result with the investment being within scope of SSAP No. 97—Investments in Subsidiary, Affiliated and
Controlled Entities (SSAP No. 97). This agenda item proposes clarifying guidance to SSAP No. 97 to clarify
that ownership of an ETF or a mutual fund would not result with the investment creating control of an
underlying entity (ownership of an SCA). ETFs are comprised of a portfolio of securities, generally to track
indices, but possibly to achieve a specified investment objective using an active investment strategy.
Regardless if following an active investment strategy, even if a reporting entity was to own all of the creation
units of an ETF, the reporting entity is not perceived to have “control” of the underlying companies
represented in the ETF’s portfolio of securities.
Although staff does not believe it is feasible under SEC regulations to structure an ETF to give a holder
control of any of the companies whose securities are represented in the ETF, in the event that such a design
could exist, control could be determined based on whether the reporting entity (through its holding company
structure) has possession, directly or indirectly, to direct or cause the direction of the management and
policies of the underlying company. Guidance has not been proposed to reflect this possibility, but rather a
specific request has been included in the recommendation below to receive industry input on whether such
structures are possible.
Further information regarding ETF’s is available on the SEC website. However, the following aspects have
been included from the SEC Investor Bulletin: Exchange-Traded Funds (ETFs) –
http://www.sec.gov/investor/alerts/etfs.pdf:
Regulatory requirements include:

As investment companies, ETFs are subject to the regulatory requirements of the federal securities
laws as well as certain exemptions that are necessary for ETFs to operate under those laws. Together,
the federal securities laws and the relevant exemptions apply requirements that are designed to protect
investors from various risks and conflicts associated with investing in ETFs.

For example, ETFs, like mutual funds, are subject to statutory limitations on their use of leverage and
transactions with affiliates. ETFs also are subject to specific reporting requirements and disclosure
obligations relating to investment objectives, risks, expenses, and other information in their
registration statements and periodic reports.
Existing Authoritative Literature:
SSAP No. 97—Investments in Subsidiary, Controlled or Affiliated Entities
© 2015 National Association of Insurance Commissioners 1
Ref #2015-49
1.
This statement establishes statutory accounting principles for investments in subsidiaries,
controlled and affiliated entities, hereinafter referred to as SCA entities.
2.
This statement supersedes the conclusions reached in SSAP No. 88—Investments in
Subsidiary, Controlled, and Affiliated Entities (SSAP No. 88).
SUMMARY CONCLUSION
Definitions
3.
Parent and subsidiary are defined as follows:
a.
Parent—An entity that directly or indirectly owns and controls the reporting entity;
b.
Subsidiary—An entity that is, directly or indirectly, owned and controlled by the
reporting entity.
4.
An affiliate is defined as an entity that is within the holding company system or a party that,
directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under
common control with the reporting entity. An affiliate includes a parent or subsidiary and may
also include partnerships, joint ventures, and limited liability companies as defined in SSAP
No. 48—Joint Ventures, Partnerships and Limited Liability Companies (SSAP No. 48). Those
entities are accounted for under the guidance provided in SSAP No. 48, which requires an
equity method for all such investments.
5.
Control is defined as the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of the investee, whether through the (a) ownership
of voting securities, (b) by contract other than a commercial contract for goods or
nonmanagement services, (c) by common management, or (d) otherwise. Control shall be
presumed to exist if a reporting entity and its affiliates directly or indirectly, own, control, hold
with the power to vote, or hold proxies representing 10% or more of the voting interests of the
entity.
6.
Control as defined in paragraph 5 shall be measured at the holding company level. For
example, if one member of an affiliated group has a 5% interest in an entity and a second
member of the group has an 8% interest in the same entity, the total interest is 13% and
therefore each member of the affiliated group shall be presumed to have control. This
presumption will stand until rebutted by an evaluation of all the facts and circumstances
relating to the investment based on the criteria in FASB Interpretation No. 35, Criteria for
Applying the Equity Method of Accounting for Investments in Common Stock, an Interpretation
of APB Opinion No. 18. The corollary is required to demonstrate control when a reporting
entity owns less than 10% of the voting securities of an investee. The insurer shall maintain
documents substantiating its determination for review by the domiciliary commissioner.
Examples of situations where the presumption of control may be in doubt include the following:
7.
a.
Any limited partner investment in a limited partnership, unless the limited partner is
affiliated with the general partner.
b.
An entity where the insurer owns less than 50% of an entity and there is an unaffiliated
individual or group of investors who own a controlling interest.
c.
An entity where the insurer has given up participating rights as a shareholder to the
investee.
Investments in SCA entities meet the definition of assets as defined in SSAP No. 4—Assets
and Nonadmitted Assets and are admitted assets to the extent they conform to the
requirements of this statement.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
© 2015 National Association of Insurance Commissioners 2
Ref #2015-49
Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:
None
Recommendation:
It is recommended that the Working Group move this item to the nonsubstantive active listing and
expose proposed revisions to SSAP No. 97 to clarify that ownership of an ETF or a mutual fund does
not represent ownership in an underlying entity subject to reporting within scope of SSAP No. 97
unless ownership of the ETF actually results in “control” with the power to direct or cause the
direction of management of an underlying company. This guidance clarifies that ETFs and mutual funds
are comprised of portfolios of securities, subject to the regulatory requirements of the federal securities laws.
Investments in ETFs and mutual funds shall be reported in accordance with the underlying SSAP that governs
the ETF or mutual fund investment (e.g., SSAP No. 30, or if qualifying for bond or preferred stock reporting SSAP No. 26 or SSAP No. 32).
With this exposure, staff specifically requests industry input on whether it would be possible for
ownership in an ETF or mutual fund to result with the reporting entity having possession, directly or
indirectly, of the power to direct or cause the direction of the management and policies of an
underlying company whose securities are included in the portfolio of securities held within the ETF or
mutual fund.
Proposed Revisions to SSAP No. 97:
5. Control is defined as the possession, directly or indirectly, of the power to direct or cause the direction
of the management and policies of the investee, whether through the (a) ownership of voting
securities, (b) by contract other than a commercial contract for goods or nonmanagement services,
(c) by common management, or (d) otherwise. Control shall be presumed to exist if a reporting entity
and its affiliates directly or indirectly, own, control, hold with the power to vote, or hold proxies
representing 10% or more of the voting interests of the entity1
New Footnote 1: Investments in an exchange-traded fund (ETF) or a mutual fund (as defined by the SEC), does not reflect
ownership in an underlying entity, regardless of the ownership percentage the reporting entity (or the holding company group) has of
the ETF or mutual fund unless ownership of the ETF actually results in “control” with the power to direct or cause the direction of
management of an underlying company. ETFs and mutual funds are comprised of portfolios of securities, subject to the regulatory
requirements of the federal securities laws. ETFs and mutual funds held by a reporting entity shall be reported as common stock,
unless the ETF qualifies for bond or preferred stock treatment per the Purposes and Procedures Manual of the NAIC Investment
Analysis Office. Reporting entities are not required to verify that SCAs (subject to SSAP No. 97) are represented in the portfolio of
securities held in ETFs or mutual funds or to adjust the value of SCAs as a result of investments in ETFs or mutual funds.
Staff Review Completed by:
Julie Gann – October 2015
Status:
On November 19, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing exposed nonsubstantive revisions to SSAP No. 97, as illustrated above, to clarify
that ownership in an ETF or mutual fund does not represent ownership in an underlying entity within the
scope of SSAP No. 97, unless ownership of the ETF actually represents control per SSAP No. 97.
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© 2015 National Association of Insurance Commissioners 3