SHARE

April 26, 2022

New York Says Less Than 10% Ownership of an Insurance Company Is Not a Safe Harbor

You've Reached Your
Free Article Limit This Month
Subscribe now to get unlimited access to all Law.com OnPractice content. Your subscription is free.
Subscribe Now

On April 19, 2022, the New York Department of Financial Services (NYDFS) issued Circular Letter No. 5, reminding owners and potential purchasers of shares of insurance companies that acquiring less than 10% of the company's voting securities is not necessarily a safe harbor from requiring regulatory prior approval. Other indicia of control, such as the ability to appoint board members and the terms and conditions of the proposed transaction, can result in NYDFS determining that the person "controls" the insurer and is therefore required to obtain approval before purchasing the shares and gaining such control.

Every state requires prior approval or qualifying for an exemption before any person can obtain control of an insurer domiciled in a particular state. Control is presumed upon, but is not limited to, the direct or indirect acquisition of 10% or more of the voting securities of an insurance company. The National Association of Insurance Commissioners' (NAIC) Insurance Holding Company System Regulatory Model Act (which every state has adopted in similar form) defines control as follows:

The term "control" (including the terms "controlling," "controlled by" and "under common control with") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement services, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten percent (10%) or more of the voting securities of any other person. This presumption may be rebutted by a showing made in the manner provided by [the Act] that control does not exist in fact. The commissioner may determine…that control exists in fact, notwithstanding the absence of a presumption to that effect.

Our experience leads us to believe that the fact NYDFS felt compelled to issue this circular at this time suggests that it may have recently reviewed a number of filings or otherwise became aware that applicants attempted to avoid or limit certain disclosures by using a complex ownership structure that limited ownership to below 10% but allowed the acquirer to obtain effective control over the insurer. Clearly the NYDFS believes that the purpose of the Insurance Holding Company Act is to require a regulatory filing and disclosure upon a change of control, and thus the purpose of the circular is to remind people of that fact and to caution them not to rely on the presumption of control at 10% ownership as a safe harbor or as a hard and fast rule.

New York is not alone in looking at this issue, as we reported in December 2021 when the NAIC's Financial Stability Task Force and Macroprudential Working Group developed a "List of Regulatory Considerations - PE Related and Other," which has since been adopted by the Financial Stability Task Force. Private equity and venture capital investors who would prefer to limit disclosure of certain information should keep this in mind when structuring an insurance transaction in New York and elsewhere.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

More From McDermott Will & Emery

New York City's Wage Transparency Law to Take Effect November 1, 2022

By Christina S. Dumitrescu McDermott Will & Emery May 06 , 2022

On January 15, 2022, the New York City Council enacted Local Law 32 of 2022 (Wage Transparency Law or Law) to amend the New York City Human Rights Law (NYCHRL) to require that most employers include compensation data in their job advertisements. The Law was supposed to take effect on May 15, 2022, however, it faced criticism over a number of ambiguities, including undefined penalties. In response, on April 28, 2022, the New York City Council passed an amendment to the Wage Transparency Law. Among the biggest changes is that employers now have until November 1, 2022—more than six months—to ensure compliance with the Law’s requirements. If Mayor Eric Adams signs the Law, which he is expected to do, New York City will become the second jurisdiction in the country (the first being Colorado) to require employers to include minimum and maximum potential salary amounts for open positions in job postings.

NAIC Continues to Refine Multiyear Work Plan to Expand Scrutiny of Holding Company Act Filings

By Andrea T. Best McDermott Will & Emery May 05 , 2022

In our report published on April 26, 2022, we discussed the New York Department of Financial Services’ (NYDFS) Circular Letter No. 5 in which it reminded the industry that acquiring less than 10% of an insurer’s voting securities does not necessarily mean that the acquirer (1) is not a “controller” and (2) does not have to submit a Form A application to the insurer’s home state or domestic regulator seeking approval for the change of control. This topic is one of several related matters that various committees, task forces and working groups of the National Association of Insurance Commissioners (NAIC) are studying and will continue to study over a multiyear period (the Project).

European Union, United Kingdom Propose New Sanctions Against Russia, Including Ban on Certain Services

By Raminta Dereskeviciute McDermott Will & Emery May 04 , 2022

As Russia continues to escalate its military operations in Ukraine, the European Union (EU) and the United Kingdom (UK) unveiled details of new sanctions against Russia. This alert summarises the proposed restrictions.

More From Insurance

The Friday Five: Five Current ERISA Litigation Highlights - May 2022

By Amy S. Kline Saul Ewing Arnstein & Lehr May 06 , 2022

This month’s Friday Five covers cases relating to a claimant’s second chance when a lawyer misses a court deadline, whether certain voluntary benefits fall within a broader ERISA plan, a court deciding that an insurer was “probably not wrong,” judicial reconsideration to mold the time period for benefits awarded, and an insurer’s duty to consider particular hazards of a claimant’s occupation.

NAIC Continues to Refine Multiyear Work Plan to Expand Scrutiny of Holding Company Act Filings

By Andrea T. Best McDermott Will & Emery May 05 , 2022

In our report published on April 26, 2022, we discussed the New York Department of Financial Services’ (NYDFS) Circular Letter No. 5 in which it reminded the industry that acquiring less than 10% of an insurer’s voting securities does not necessarily mean that the acquirer (1) is not a “controller” and (2) does not have to submit a Form A application to the insurer’s home state or domestic regulator seeking approval for the change of control. This topic is one of several related matters that various committees, task forces and working groups of the National Association of Insurance Commissioners (NAIC) are studying and will continue to study over a multiyear period (the Project).

SEC Announces 2022 Examination Priorities

By Richard M. Cutshall Greenberg Traurig May 05 , 2022

On March 30, 2022, the Securities and Exchange Commission (SEC) Division of Examinations (Division) announced its examination priorities (the Exam Priorities), identifying areas of focus for examinations in 2022. The announcement focuses on five different categories:

Featured Stories
Closeclose
Search
Menu

Working...