Statutory Accounting Principles Working Group Maintenance Agenda Submission Form (стр. 1 )

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 recommendedthat 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.

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 allClass 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).