Ref #2015-45
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: ETF Reporting in Investment Schedules
Check (applicable entity):
P/C Life Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
During the September 24, 2015 conference call of the SAPWG regarding the investment classification project, NAIC staff was directed to proceed with drafting reporting changes for SVO-designated bond ETFs. It was noted that separately reporting these SVO-designated bond ETFs would allow regulator analysts and examiners to easily identify these investments. NAIC staff was directed to draft revisions presenting two options to allow for regulator discussion before selecting a particular method:
1. New Category (Line Number) Change on Schedule-D – Part 1
2. New Schedule D – Part 1, Section 1.
This agenda item presents both reporting changes for Working Group consideration. It is noted that either change would ultimately require referral to the Blanks (E) Working Group; therefore upon the Working Group agreeing to revisions, they would be submitted to the Blanks (E) Working Group for adoption into the annual statement forms and instructions. It is anticipated that the effective date for these changes would be January 1, 2017 to allow the change to be reflected at the start of the reporting year.
Staff Note – To allow for consideration of the proposed options, preliminary proposed revisions have been prepared to showcase the options to the Working Group. Upon receiving direction on which approach is preferred, a thorough review of the instructions will be conducted to verify all instances in which revisions are necessary. For purposes of the original discussion, the focus has been on Schedule D.
These reporting revisions will be conducted outside of the investment classification project, but could be subsequently impacted by the decisions reached during the investment classification project. (Also, the reporting of SVO-designated ETFs as preferred stock will be subsequently considered.)
Existing Authoritative Literature:
· SSAP No. 26—Bonds
· Investment Schedule Reporting Instructions (Annual and Quarterly)
· Purposes and Procedures Manual of the NAIC Investment Analysis Office
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): The SAPWG is discussing the accounting and reporting of various investments, including SVO-designated bond ETFs as part of the investment classification project.
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 two options proposing revisions to the reporting of SVO-designated bond ETFs. Upon the Working Group agreeing to revisions, the revisions would be submitted to the Blanks (E) Working Group for adoption into the annual statement forms and instructions. It is anticipated that the effective date for these changes would be January 1, 2017 to allow the change to be reflected at the start of the reporting year.
Staff Review Completed by:
Julie Gann – October 2015
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Fall\NM Exposures\15-45 - ETF Reporting.docx
Option 1 – New Category / Line Number on Schedule D – Part 1
This option proposes the inclusion of a new category / line number on Schedule D – Part 1.
· By using a new line number, the ETFs will continue to be reported in the same schedule, but could be separately aggregated and reviewed.
· With this approach, the ETFs will still be subject to the same reporting columns as “bonds” therefore, questions / issues with regards to completing the schedules for ETFs with continue. (For example, questions on what to report in various columns, including par value, interest rate, effective rate of interest, stated contractual maturity date, etc.)
· With this option, it still may be hard to determine whether reporting entities are correctly reporting the NAIC designation. As identified in the 2014 review of the SVO-designated bond ETFs, 71 ETF investments (by 23 companies) were incorrectly reported with an “FE” designation. (55 reported as 1FE, 13 reported as 2FE, and 3 reported as 4FE.) Under the guidelines of the Purposes and Procedures Manual of the NAIC Investment Analysis Office, the concept for an “FE” designation does not apply to ETFs. The ETF bond-like determination requires an assessment by the SVO of the composition of the fund’s portfolio both for the purposes of ascertaining that bond flows would be produced (bond-like determination) and the quality level of the cash flow that would be produced (designation of the bond like instrument).
Option 2 – New Schedule D – Part 1, Section 1
This option proposes the inclusion of a new schedule, which would roll into the total of Schedule D-Part 1, to separately report the SVO-Approved ETFs.
· By using a new schedule, the ETFs can easily be identified and reviewed.
· With this approach, the reported information can be tailored for the SVO-approved ETFs. The proposal only includes columns that are relevant to SVO-designated ETFs (and class-one Bond mutual funds). As discussion continues, revisions can be made to tailor the information collected in the columns to represent decisions made by the Working Group.
· With the separate reporting option, it should be easier to determine whether reporting entities are correctly reporting the ETF pursuant to SSAP No. 26 and the P&P Manual. For example, the instructions can specifically identify that the FE designated is not permitted, and potentially include cross-checks to the approved list of securities designated by the SVO. (As noted above, in the 2014 review of the SVO-designated bond ETFs, 71 ETF investments (by 23 companies) were incorrectly reported with an “FE” designation.)
Status:
On November 19, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the nonsubstantive active listing and exposed two options (shown in Appendix A) to modify the reporting of SVO bond-designated ETFs and Class-1 bond mutual funds:
· Option 1 – This option retains the detail of the SVO-designated ETFs and Class-1 Bond Mutual Funds within Schedule D – Part 1, but proposes new subcategories (line-numbers) to group these items together.
· Option 2 – This option retains the total of the SVO-designated ETFs and Class-1 Bond Mutual Funds within Schedule D-Part 1, but the detail of these investments is proposed to be moved to a new Schedule D – Part 1 – Section 1. With this approach, the columns that are not applicable to these investments (e.g., par, interest rate, etc.) would be removed from the schedule. For the exposure, duplicate detail from Schedule D-Part 1 is shown, with the columns that are proposed to be deleted are shown as tracked-change deletions. All other columns are intended to remain the same unless subsequent decisions are made to revise the valuation or reporting of these investments.
In exposing the proposed options, it was noted that the proposed revisions intend to show the two options in order to get comments on the preferred approach. The proposed revisions are limited to the “Investment Schedules General Instructions” and the reporting instructions for “Schedule D.” Once the Working Group provides direction on which option is preferred, a thorough review of the Blanks Reporting Instructions will occur to ensure corresponding revisions throughout the blanks reporting instructions and publications.
© 2015 National Association of Insurance Commissioners 2
Ref #2015-45
Appendix A – Option 1
Appendix A Option 1 - Proposed Revisions to Separately Report these Securities (and Class One Bond Mutual Funds) in Schedule D:
INVESTMENT SCHEDULES GENERAL INSTRUCTIONS
(Applies to all investment schedules)
(Note – Only Applicable Excerpts Included)
General Classifications Bonds Only:
Refer to SSAP No. 26, Bonds; SSAP No. 43R, Loan-backed and Structured Securities; and SSAP No. 97, Investments in Subsidiary, Controlled and Affiliated Entities, for additional guidance.
Industrial and Miscellaneous (Unaffiliated):
This category includes all non-governmental issues that do not qualify for some other category in Schedule D, Part 1, including privatized (non-government ownership) utility companies, Class One Bond Mutual Fund as listed in Part Six, Section 2(h) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office and Exchange Traded Funds listed in Part Six, Section 2(i) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office. Include Public Utilities.
SVO-Designated Securities:
This category includes all Class One Bond Mutual Fund as listed in Part Six, Section 2(h) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office and Exchange Traded Funds listed in Part Six, Section 2(i) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office.
SCHEDULE D – PART 1
LONG‑TERM BONDS OWNED DECEMBER 31 OF CURRENT YEAR
Bonds are to be grouped as listed below and each category arranged alphabetically (securities included in U.S. States, Territories and Possessions; U.S. Political Subdivisions of States, Territories and Possessions; and U.S. Special Revenue and Special Assessment Obligations and all Non‑Guaranteed Obligations of Agencies and Authorities of Governments and Their Political Subdivisions should be listed with a state abbreviation in the column provided for electronic data capture).
Refer to SSAP No. 23, Foreign Currency Transactions and Translations, for accounting guidance related to foreign currency transactions and translations.
If a reporting entity has any detail lines reported for any of the following required categories or subcategories described in the Investment Schedules General Instructions, it shall report the subtotal amount of the corresponding category or subcategory, with the specified subtotal line number appearing in the same manner and location as the pre‑printed total or grand total line and number:
NOTE: See the Investment Schedules General Instructions for the following:
· Category definitions for bonds and stocks.
· Foreign column code list and matrix for determining code.
· Code column list of codes and definitions for securities not under the exclusive control of the reporting entity.
· Flow chart for determining the NAIC designation for structured securities.
· List of stock exchange names and abbreviations.
Category Line Number
Bonds:
U.S. Governments
Issuer Obligations 0199999
Residential Mortgage-Backed Securities 0299999
Commercial Mortgage-Backed Securities 0399999
Other Loan-Backed and Structured Securities 0499999
Subtotals – U.S. Governments 0599999
All Other Governments
Issuer Obligations 0699999
Residential Mortgage-Backed Securities 0799999
Commercial Mortgage-Backed Securities 0899999
Other Loan-Backed and Structured Securities 0999999
Subtotals – All Other Governments 1099999
U.S. States, Territories and Possessions (Direct and Guaranteed)
Issuer Obligations 1199999
Residential Mortgage-Backed Securities 1299999
Commercial Mortgage-Backed Securities 1399999
Other Loan-Backed and Structured Securities 1499999
Subtotals – U.S. States, Territories and Possessions (Direct and Guaranteed) 1799999
U.S. Political Subdivisions of States, Territories and Possessions (Direct and Guaranteed)
Issuer Obligations 1899999
Residential Mortgage-Backed Securities 1999999
Commercial Mortgage-Backed Securities 2099999
Other Loan-Backed and Structured Securities 2199999
Subtotals – U.S. Political Subdivisions of States, Territories and Possessions
(Direct and Guaranteed) 2499999
U.S. Special Revenue and Special Assessment Obligations and all Non‑Guaranteed
Obligations of Agencies and Authorities of Governments and Their Political Subdivisions
Issuer Obligations 2599999
Residential Mortgage-Backed Securities 2699999
Commercial Mortgage-Backed Securities 2799999
Other Loan-Backed and Structured Securities 2899999
Subtotals – U.S. Special Revenue and Special Assessment Obligations and
all Non‑Guaranteed Obligations of Agencies and Authorities of Governments
and Their Political Subdivisions 3199999
Industrial and Miscellaneous (Unaffiliated)
Issuer Obligations 3299999
Residential Mortgage-Backed Securities 3399999
Commercial Mortgage-Backed Securities 3499999
Other Loan-Backed and Structured Securities 3599999
Subtotals – Industrial and Miscellaneous (Unaffiliated) 3899999
Hybrid Securities
Issuer Obligations 4299999
Residential Mortgage-Backed Securities 4399999
Commercial Mortgage-Backed Securities 4499999
Other Loan-Backed and Structured Securities 4599999
Subtotals – Hybrid Securities 4899999
Parent, Subsidiaries and Affiliates
Issuer Obligations 4999999
Residential Mortgage-Backed Securities 5099999
Commercial Mortgage-Backed Securities 5199999
Other Loan-Backed and Structured Securities 5299999
Subtotals – Parent, Subsidiaries and Affiliates 5599999
SVO-Designated Securities
ETFs Approved for Reporting as a Schedule D Bond 5899999
Class One Bond Mutual Funds Approved for Reporting as a Schedule D Bond 5999999
Subtotals – SVO-Designated Securities 6099999
Total Bonds
Subtotals – Issuer Obligations 7799999
Subtotals – Residential Mortgage-Backed Securities 7899999
Subtotals – Commercial Mortgage-Backed Securities 7999999
Subtotals – Other Loan-Backed and Structured Securities 8099999
Subtotal – SVO-Designated Securities 8199999
Subtotals – Total Bonds 8399999
List all bonds and certificates of deposit owned December 31, of current year, except bonds and certificates of deposit in banks or other similar financial institutions with maturity dates or repurchase dates under repurchase agreements of one year or less from the acquisition date. Exclude cash equivalents as described in SSAP No. 2, Cash, Drafts, and Short-term Investments, with original maturities of three months or less.
Staff Note: With the exception to refer to SSAP No. 26 instead of using actual cost, there are no proposed revisions to the Schedule D-Part 1 Column Instructions. However, the columns that provide specific instruction for the SVO-Designated ETFs have been highlighted for Working Group review:
The security identifier reported (Column 1 for CUSIP, CINS, PPN or Column 33 for ISIN) must be the same as the identifier used when filing securities with the NAIC pursuant to the Purposes and Procedures Manual of the NAIC Investment Analysis Office instructions.
Column 1 – CUSIP Identification
CUSIP numbers for all purchased publicly issued securities are available from the broker’s confirmation or the certificate. For private placement securities, the NAIC has created a special number called a PPN to be assigned by the Standard and Poor’s CUSIP Bureau. For foreign securities, use a CINS that is assigned by the Standard and Poor’s CUSIP Bureau: www.cusip.com/cusip/index.htm.
If no valid CUSIP, CINS or PPN number exists then report a valid ISIN (Column 33) security number. The CUSIP field should be zero-filled.
Column 2 – Description
Give a complete and accurate description of all bonds owned. As appropriate, the reporting entity is encouraged to use the same entry as for Column 32, Issue.
For Class One Bond Mutual Funds and Exchange-Traded Funds, enter the complete name of the fund. As appropriate, the reporting entity is encouraged to use the same entry as for Column 31, Issuer.
For Certificate of Deposit Account Registry Service (CDARs) or other similar services that have a maturity of greater than one year, individually list the various banking institutions that are financially responsible for honoring certificates of deposit. As appropriate, the name of the name of the banking institutions should follow from the registry of the Federal Financial Institutions Examination Council (FFEIC) (www.ffiec.gov/nicpubweb/nicweb/SearchForm.aspx).
For CDOs (Collateralized Debt Obligations) or CLOs (Collateralized Loan Obligations), indicate what the CDO/CLO collateral is, such as high-yield bonds, corporate loans, etc. If the collateral is of mixed type, indicate “Mix,” in addition to the largest type of collateral in the mix. If the collateral is derived synthetically, indicate “synthetic.”