Swiss Re Insurance-Linked Fund Management

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SIFMA seeks revision to covered fund definition of Volcker Rule for insurance-linked securities


Back in February we first wrote about the Volcker Rule which is part of the Dodd Frank Act and SIFMA, the Securities Industry and Financial Markets Association’s attempt to highlight concerns about the way this rule could impact the issuance of insurance-linked securities and catastrophe bonds. Part of the rule, formally known as Section 13 of the Bank Holding Company Act of 1956 (the Volcker Rule), seeks to change the way covered fund transactions and activities are regulated and that could impact ILS issuers.

The concern about the Volcker Rule lies in the way it seeks to restrict the activities of covered funds and under the current wording the definition of covered funds could include insurance-linked securities issuers. At the moment the definition is broad and would encompass all kinds of securities transaction issuers. In a letter sent to a number of U.S. regulatory bodies on the 21st May, SIFMA explains:

The Proposed Rules’ “covered fund” definition, which implements the Volcker Rule’s definition of “hedge fund” and “private equity fund”, broadly encompasses any issuer that would be an investment company under the Investment Company Act of 1940 (“1940 Act”) but for the exemptions contained in Sections 3(c)(1) or 3(c)(7) of that act.

Many issuers of ILS, or other asset backed securities, rely on those exemptions and therefore the concern is that under this rule they could be considered a ‘covered fund’. If indeed a prospective ILS or cat bond sponsor or issuer was characterized in this way and the Volcker Rule passed unchanged it could mean that they are prevented from either sponsoring or owning insurance-linked securities. SIFMA say that they do not believe this was intended by Congress when they passed the Volcker Rule.

So SIFMA have provided a proposal for a modified version of the covered fund definition, which they say would “exclude therefrom issuers of asset-backed and insurance-linked securities that customarily need to rely upon Sections 3(c)(1) or 3(c)(7) for an exemption from the 1940 Act“.

You can read the full letter from SIFMA, including the proposal for a revision to the definition of covered funds, which was sent to the SEC, CFTC, Federal Reserve Board, Comptroller of the Currency and the FDIC here.

The SEC has been considering exempting insurers from the Volcker Rule, as we wrote here, but it’s still unclear what that would mean for a special purpose insurer who issued a cat bond. It seems that SIFMA’s approach to change this definition would be a much better way to resolve this unambiguously for the ILS and cat bond market.

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