loma 357 module 4

Investment function compliance

"Auditors review an insurer's investment function to ensure that its investment professionals comply with: -A company's corporate policies and its code of conduct—Investment industry standards for ethics and professional conduct, such as those promoted by the CFA Institute -The laws and regulations pertaining to the insurance industry and to investing activities for every applicable jurisdiction -The guidelines and restrictions detailed in each portfolio's IPS"

standing committee

"Boards of directors typically delegate ongoing oversight of particular insurance company functions—such as the investment function—to permanent board committees"

Misappropriation of funds

"Broadly, theft is the unlawful taking of money or property, while fraud involves obtaining an unauthorized benefit—such as money or property—by deception. For instance, misappropriation of funds is a fraud that occurs when an individual authorized to handle a customer's funds illegally alters documents or electronic files to divert funds for personal use, even if the use is on a temporary basis."

Capital Adequacy

"In evaluating an insurer's capital adequacy, insurance regulators in the United States apply risk capital charges, which effectively reduce the value of the company's assets according to each asset's risk factor. The purpose of risk capital charges is to acknowledge that investments are inherently risky, and that these assets can suffer losses. Riskier assets incur higher risk charges; insurers holding assets with higher risk charges need to hold higher amounts of capital to satisfy regulators." Regulators assign lower risk charges to investments in securities with the best NAIC ratings, and higher risk charges to investments in securities with the worst NAIC ratings.////////////actual risk capital charges for an insurer are subject to change over time as the insurers investments change

Soft Dollar Arrangements

"Investment professionals often purchase research and other services from brokerage firms. If they pay for such services directly, they are said to use HARD dollars. However, they can also pay for brokerage services through SOFT dollars, which are considerations an investment professional or company earns with a particular broker-dealer as a result of executing commission-generating trades through that broker-dealer. Thus, a soft-dollar arrangement is a situation in which an investment professional directs client trades to a broker-dealer in exchange for receiving soft dollars, which the professional uses to obtain products or services—often research services—from the broker-dealer." "To determine whether a soft-dollar arrangement is appropriate, an investment professional might consider the following questions: Do the brokerage services that the investment professional purchased with soft dollars assist in her investment decision-making process? Has the investment professional disclosed his soft-dollar practices to his clients prior to participating in the soft-dollar arrangement? "One of the main problems with soft-dollar arrangements is the lack of transparency for clients. Because soft dollars are incorporated into trade expenses, clients may not be aware of their true transaction costs. As you know, higher costs reduce the returns a portfolio earns from its investments." "Some investment professionals prefer to use hard dollars to pay for brokerage services because of the regulatory and ethical complexities regarding soft-dollar use. In addition, some prefer to use hard dollars because of customers' negative perception of soft-dollar arrangements."

prospectus

"One aspect of registering a security involves filing a prospectus, which communicates critical information to current and potential investors. Each year, the security's issuer must provide investors with a current prospectus.

Investment Committee

"One standing committee, usually called the investment committee, assists the board in carrying out governance duties over the company's investments. These duties include: -Reviewing and approving investment policies and procedures -Reviewing the strategic asset allocations of company portfolios -Supervising investment performance and operations -Ensuring compliance with applicable laws -Reviewing and approving major contracts with external providers of investment-related services"

financial services regulation concerns a company's....

"Securities activities. Securities laws address (1) the issuance, offering, and sale of financial securities, (2) financial reporting and other conduct of securities issuers, (3) arrangements for the establishment and administration of securities exchanges, (4) securities transactions, and (5) penalties for regulatory violations. Securities laws generally apply to life insurers that offer variable life insurance and variable annuities, as well as the separate accounts supporting those products. In addition, securities laws apply to publicly traded companies, which include many insurance companies. Investment advisory activities. Securities laws pertaining to investment advisory services address individuals and companies that offer recommendations about investing in securities. For regulatory purposes, certain insurance products—such as variable life insurance and variable annuities—are considered securities. Thus, an insurance company employee or financial professional who sells variable insurance products to customers is subject to securities laws regarding investment advice. Insurance activities. Insurance laws address the formation, licensing, operation, conduct, transfer of ownership, and orderly termination of insurance companies. In addition, such laws address the issuance, sale, and administration of insurance contracts by specifying the rights and duties of insurance companies and insurance customers. Banking activities. Banking laws address the formation, licensing, operation, conduct, and orderly termination of[...]"

Investment Regulations

"State insurance regulations affect the general accounts of insurance companies by (1) setting limits on investment risk taking, (2) requiring companies to hold specific investment reserves, and (3) placing restrictions on general account holdings."

Investment Reserves IVR and AVR

"The Asset Valuation Reserve (AVR) minimizes the effects of both realized and unrealized gains and losses on an insurer's invested assets when those gains and losses are related to the credit quality of the assets or fluctuations in the prices of equity securities. The Interest Maintenance Reserve (IMR) helps absorb realized gains and losses on an insurer's interest-bearing assets when those gains or losses are caused by changes in market interest rates rather than changes in the credit quality of the assets. AVR and IMR are liabilities, they are noncontractual reserves that apply only under statutory financial reporting standards and concern only general account assets. Together, the AVR and IMR serve to reduce an insurance company's exposure to gains and losses arising from fluctuations in the market values of its assets. these investment reserves generally provide a cushion from the full effects of market value fluctuations. AVR is intended to smooth out short-term fluctuations in an insurer's surplus due to the changing valuations of invested assets. Under the AVR, the required reserve amount differs depending on the type of asset. For example, common stocks generally require a higher reserve amount than investment-grade bonds. In contrast to the AVR, the IMR applies only to the realized gains and losses on fixed-income investments. The IMR aims to reduce the short-term effects on an insurer's reported surplus by spreading out the gains and losses due to market interest-rate changes over the expected remaining life of the sold assets.//////////////////////'/the AVR applies when gains and losses are related to changes in credit quality or equity price fluctuations

CFA institute code of ethics

"The CFA Institute Code of Ethics Members of the CFA Institute (including CFA charterholders) and candidates for the CFA designation ("Members and Candidates") must: Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets. Place the integrity of the investment profession and the interests of clients above their own personal interests. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. Promote the integrity and viability of the global capital markets for the ultimate benefit of society. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals."

Solvency 2

"The EIOPA was responsible for implementing Solvency II. Solvency II is a European-sponsored solvency standard for insurance companies designed to support solvency testing and solvency supervision in the public interest. Solvency II, which took effect in 2016, is also known as the EU Directive on the Taking-Up and Pursuit of the Business of Insurance and Reinsurance. Solvency II introduced risk-based capital requirements, which influenced the asset allocation decisions of many insurers in the EU. For example, Solvency II's capital charges on asset-backed securities (ABSs) prompted many insurers to reduce their ABS holdings. In contrast, other asset types received more favorable treatment. For instance, Solvency II generally incentivizes investment in infrastructure."

Investments of insurers model acts

"The Investments of Insurers Model Act (Defined Limits Version), also known as the pigeonhole version, specifies the types of assets that insurers are permitted to treat as admitted assets and imposes quantitative limitations on the amount of each type of asset an insurer may treat as admitted assets. SPECIFIC AND NARROW The Investments of Insurers Model Act (Defined Standards Version), also known as the prudent person version, specifies that, with respect to an insurer's investments, the insurer's board of directors shall exercise the judgment that persons of reasonable prudence would use in similar circumstances." BROADER AND does not specify categories of securities and issuers that are acceptable to regulators.

SRO (Self-Regulatory Organization)

"The SEC has delegated much of the authority for registering securities market participants to certain self-regulatory organizations (SROs), which are nongovernmental organizations that exercise regulatory authority over an industry or profession

Conflict of interest behaviors

"Three types of behaviors that represent conflicts of interest are (1) receiving particular forms of compensation, (2) self-dealing, and (3) engaging in soft-dollar arrangements."

Fee-based compensation

"To reduce the incentive to recommend unnecessary investment transactions, some investment advisors receive fee-based compensation instead of being compensated for product sales. Typically, a fee-based advisor is paid based on services performed for a client, the amount of client assets under management, or both."

Sec two questions

"Two questions determine whether SEC regulations apply to an insurer: -Is the insurer a stock company? All publicly traded stock companies—including stock insurers—are subject to SEC regulation. A stock insurer is owned by the people and organizations that own shares of the company's stock. In contrast, a mutual insurer is owned by its policyowners, and a fraternal insurer, also known as a fraternal benefit society, is formed to provide social and insurance benefits to its members. SEC regulations do not apply to mutual and fraternal insurers based solely on their ownership structure. -Does the insurer sell variable products? Variable insurance products—such as variable annuities and variable life insurance—are subject to SEC regulation because they are considered securities, and the separate accounts that support such products are regulated as investment companies. Therefore, mutual insurers and fraternal insurers that sell variable products are subject to SEC regulation, even though they are not publicly traded stock companies."

Generally Accepted Accounting Principles (GAAP)

"Under SEC standards, financial reports must conform to generally accepted accounting principles (GAAP), which are a set of financial accounting standards, conventions, and rules that all publicly traded companies must follow when summarizing transactions and preparing their financial statements. "insurers that are subject to SEC reporting standards typically produce two sets of financial statements: GAAP-compliant reports filed with the SEC, and SAP-compliant reports for state insurance regulators." "asset valuations under SAP are more conservative than those under GAAP. For instance, under SAP, the value of a nonadmitted asset is reported at NO value on the Assets page of an insurer's Annual Statement but its FULL value is reported on a GAAP-based financial statement.

Trust

"a legal arrangement that is (1) created at the direction of an individual or entity and (2) designed to allow one party, the trustee, to hold specified property belonging to the trust's creator for the benefit of trust beneficiaries."

Investment policy

"a statement that an insurer's board establishes to outline a set of formal rules and guidelines for investing. The corporate investment policy communicates the board's priorities for the management of corporate assets to the investment committee and, more broadly, to the investment function.

Proxy

"a written authorization given by one person, such as a shareholder, to another person, who is thereby enabled to act on behalf of the first person"

Code of conduct

"also known as a code of business conduct or a code of ethics, formally states its values and its expectations for how its employees should behave in the course of business. A corporate code of conduct typically illustrates situations that employees might encounter in their work environment and helps employees evaluate the appropriateness of various responses to a given situation. For instance, a company can place a limit on the maximum monetary value of gifts that its employees are allowed to accept from customers and business partners to prevent inappropriate influence."

Prohibited Securities List

"also known as a restricted securities list—which is a list of securities that specified company employees, due to their job responsibilities, are prohibited from buying or selling for either their personal accounts or any accounts they control. By monitoring the securities transactions of certain employees involved in investment activities, companies can ensure that their employees are adhering to trading policies and procedures."

Corporate culture

"also known as an organizational culture—that comprises the attitudes, values, perceptions, beliefs, and experiences shared by a company's employees and instilled in new employees when they join the company. A company's board and its senior directors shape the corporate culture by (1) communicating the company's values and (2) setting examples through their actions." "Companies can build a culture of ethical behavior by Developing a corporate code of conduct Providing ethics education and training Structuring incentives to reward ethical conduct Monitoring for compliance with policies and procedures"

Risk based capital for insurers model act

"an NAIC model law, establishes the risk-based capital ratio requirements that insurers must meet and that enable state insurance departments to identify potentially impaired insurers."

Collusion

"an agreement between two or more people to defraud another person of his rights. In the context of investing, collusion generally gives market participants an unfair advantage by discouraging competition." Some types of collusive practices in financial markets are: -Coordinating prices, trades, or trade reports with other institutions -Directing or requesting other institutions to alter a price -Threatening, harassing, coercing, intimidating, or otherwise attempting to improperly influence the activities of other institutions"

Audit

"an examination of a company's records and operations to evaluate the accuracy of the records and the effectiveness of the company's operational policies and procedures."

CFA Institute Board of Governors

"an international organization that promotes a global set of investment industry standards for ethics and professional conduct. In addition, the CFA Institute offers education programs, such as the Chartered Financial Analyst (CFA®) designation."

IOSCO (International Organization of Securities Commissions)

"an international self-regulatory organization for the securities industry that develops international standards for securities regulation. One of the IOSCO's notable achievements is its Multilateral Memorandum of Understanding (MMoU), which is a document with standard language that provides assurance that a company's interests can be protected after it invests across a national boundary.

Fair dealing

"an investment professional shouldn't favor one client over another—regardless of the (1) size of a client's portfolio, (2) amount of revenue the client's portfolio generates, or (3) quality of the investment professional's personal relationship with the client." fair dealing does not require treating all client accounts equally. For example, investment professionals can offer premium services—such as access to specialized alternative investment strategies—to a client as long as all clients are aware of the different service levels and have an opportunity to purchase the additional services offered.

Audit Committee

"assists a company's board of directors in overseeing the internal audit function, independent external auditors, financial reporting practices, and internal controls. The internal audit function typically presents results directly to the audit committee. Because the audit staff must maintain a high degree of independence and objectivity, their function is separate from those of the departments they examine."

Proxy statement

"describes the matters submitted for a vote in corporate meetings held for the election of directors and the approval of other corporate actions. The proxy statement materials must: -Be filed with the SEC prior to the solicitation of shareholder votes -Disclose all important facts concerning the issues on which shareholders are asked to vote

Financial audit

"evaluates whether an insurer's financial information, financial statements, and source documents comply with accounting standards and are a fair and consistent depiction of the company's financial condition and performance."

Risk Policy

"explains the principles it will follow for managing risk, outlines the process for managing risk, specifies the authority and responsibility for risk management, and establishes risk reporting and risk controls. For instance, the corporate risk policy establishes clear guidelines for the company's risk appetite and risk tolerance. In addition, the board clarifies the company's risk tolerance by including corporate risk limits.

EU (European Union)

"influential governing and lawmaking confederation of member nations with provision for oversight of the European Union financial system." "The EU maintains agencies that oversee financial activities, including the: -European Securities and Markets Authority, which supervises securities markets in the EU -European Insurance and Occupational Pensions Authority (EIOPA), which supervises insurance and pension activities to protect the interests of insurance policyowners and pension plan members and beneficiaries"

Compliance Committee

"may handle a variety of corporate issues such as corporate privacy policies, data security and usage policies, market conduct, and general compliance. In addition, the board often charges the compliance committee with developing the employee code of conduct."

Performance audit

"measures and evaluates an insurer's progress toward achieving management objectives for a particular function or goal and typically includes recommendations for process improvement."

Self dealing transaction

"occurs when an investment professional's purchase of an investment for a client portfolio directly or indirectly benefits the investment professional's company rather than the client. The potential for self-dealing increases when the company has an undisclosed financial interest in the investment being made." "Self-dealing practices can adversely affect a client's investments. The investments selected by self-dealing could underperform relative to comparable investments managed by other companies. In addition, the self-dealt investments may have higher fees than comparable investments, resulting in added costs that reduce the client's portfolio returns."

Investment Advisers Act of 1940

"regulates the activities of individuals and companies that are compensated for advising others about investments in securities.

Restrictions on general accounts

"regulations typically limit the amount of international bonds that insurers can own. U.S. regulators usually limit investment in bonds issued by foreign entities to about 20% of an insurer's total assets. State insurance regulators also prohibit insurers from investing more than a stated percentage—typically 10% to 20%—of their admitted assets in common stocks.

FINRA (Financial Industry Regulatory Authority)

"sets rules stipulating how member companies and registered individuals must conduct securities transaction business. In addition to FINRA, securities exchanges are SROs empowered by the SEC to supervise the securities industry. FINRA licenses, investigates, and regulates securities firms and their representatives doing business in the United States. Brokers, dealers, and individuals who sell securities—or are actively involved in a member's security business—must register with FINRA and abide by its rules."

Front running

"specific type of insider trading that involves the unethical trade of a security by an investment professional based on advance knowledge of large pending client orders of the same security. Front running usually involves pending trades for amounts that can move markets—such as a purchase of 10,000 shares of a particular security. Through front running, the investment professional is able to personally profit from the security's likely price movement."/////A portfolio manager purchased a stock for his personal account prior to a large anticipated purchase of the same stock by an account that he manages for a client

Duration policy

"specifies a numerical target for a company's duration gap value and a numerical range of acceptable values around the target value. value of a duration gap indicates the size of the mismatch between the asset duration and the liability duration.) Insurer investment portfolios take duration policies into account. For example, if a portfolio segment's duration gap value is outside the acceptable range, the portfolio manager needs to adjust investments until the segment complies with the duration policy."

Audit policy

"states a company's process for systematically examining, testing, and evaluating the company's compliance with one or more specified sets of standards. In other words, the corporate audit policy describes the company's control framework for conducting audits—including audits of the ALM and investment functions."

Liquidity policy

"states the minimum monetary amount of cash and near-cash assets an insurance company must hold over a specified time period to support its liabilities. In effect, a liquidity policy limits the amount of illiquid assets that investment portfolios can hold." Type of ALM

Commoditization

"the process by which a product reaches a point in its development where it has no features that differentiate it from competitive products other than price. Because many financial services customers don't recognize the differences between similar products, a company can distinguish itself based on its reputation for quality and fairness. Thus, ethical standards can help companies attract and retain customers.

insider trading

"the prohibited act of buying or selling a company's securities based on knowledge of material nonpublic information, also called inside information or insider information. Such information—examples include a company's financial performance, business plans, or legal struggles—can significantly affect the market value of a company's securities. Therefore, insider trading enables individuals to unfairly take advantage of and profit from possessing material nonpublic information." "An individual does not have to benefit directly from material nonpublic information to commit an insider trading violation. Sharing such information can also qualify as a violation of insider trading rules."/////////// One control procedure that companies can follow is a review of employee and proprietary trading activities. Such activities are checked against a prohibited securities list also known as a restricted securities list, which is a list of securities that specified companies employees, due to their job responsibilities, are prohibited from buying or selling for either personal accounts or any accounts they control.

Corporate governance

"the responsibility and authority of a company's board of directors to direct the organization to properly fulfill its missions on behalf of the company's legitimate stakeholders in a legal and fiscally responsible manner. A good system of corporate governance enables a company to gain and keep the trust of its stakeholders—customers, regulators, employees, owners, vendors, and others. Typically, a corporate governance framework includes: -Plans, policies, and processes designed to accomplish the company's missions -Control mechanisms for detecting illegal or unethical activities and identifying inefficient uses of the company's resources"

Late trading

"type of illegal preferential treatment given to some investors who are allowed to trade securities—typically open-end mutual funds—after a stock market closes using that day's closing prices. Late trading enables certain investors to use the day's closing prices to conduct transactions, which are, in turn, based on information that became available only after the market's close. (1) an open-end mutual fund's share price is determined by calculating the fund's net asset value (NAV), and (2) a fund's NAV is calculated once per trading day, after the market closes. An investor who wants to receive a particular day's NAV on her trade has a limited window of time to place her trade to qualify for that NAV. However, late trading grants an investor a particular day's NAV even if the trade is placed after the qualifying window. In the United States, late trading is illegal because the investor is using information that was not available when markets were open to gain an unfair advantage over other participants in the market."

Compliance audit

"verifies that an insurer's actions adhere to applicable laws and regulatory requirements and to the company's own policies and procedures."

FINRA Rule 2111

(Suitability Rule) requires members and registered individuals to have reasonable grounds for recommending investment products to customers based on an understanding of certain facts about the customer, including his financial situation, tax status, and investment objectives. Thus, a registered individual must believe an investment is suitable for a particular customer before making a recommendation to invest." "FINRA conducts periodic inspections of all brokers and dealers. Examiners review their records, sales practices, and financial condition." "Insurance company separate accounts are required to be registered as securities with the SEC. Therefore, insurance company employees and financial professionals who sell products supported by separate accounts—such as variable life insurance and variable annuity products—must also register with FINRA."

FSOC (Financial Stability Oversight Council)

- identifies emerging risks in the financial system and coordinates regulatory responses to any systemic threats - identifies systemically important financial institutions, whose failure could threaten the countries financial stability

Disclosures

-A general description of the investment professional's decision-making process -Details regarding specific portfolio management activities, such as trade execution and proxy voting -Explanations for deviations from a portfolio's strategic asset allocation, such as instances of tactical asset allocation decisions -Methodologies for asset valuation and performance reporting -Breakdowns of management fees and other portfolio costs -Significant changes in personnel, such as a change in portfolio managers -Potential conflicts of interest, such as any soft-dollar arrangements -Existence of pending lawsuits or regulatory actions"

Auditing ALM function

-Evaluating the degree of the match between assets and liabilities -Reviewing the cash-flow analysis of current and projected future product obligations -Reviewing cash-flow testing practices and verifying that testing incorporates an appropriate set of economic scenarios -Reviewing the company's investment segmentation plan -Verifying that investment transactions are being assigned to the appropriate segments -Reviewing the investment strategy for the general account and each product segment -Testing relevant reports—such as the investment activity report—for accuracy -Verifying that all in-force products are analyzed for interest-rate sensitivity -Reviewing the models and the modeling assumptions used for ALM analysis"

State laws ; solvency and market conduct

-Solvency laws, which are designed to ensure that insurance companies are financially able to meet their debts and to pay policy benefits when they come due; solvency laws typically pertain to an insurer's capital and surplus amounts -Market conduct laws, which are designed to ensure that insurance companies conduct their business fairly and ethically; market conduct laws typically pertain to the marketing, sales, and distribution of insurance products"

Investment professional responsibility

-Treating clients and client portfolios fairly -Regularly disclosing relevant information to clients -Protecting the privacy and confidentiality of their clients -Properly handling client funds and safeguarding client assets"

Asset types

Admitted. An admitted asset's full value can be reported on the Assets page of an insurance company's Annual Statement. Typically, admitted assets are liquid; examples include cash and most invested assets, such as stocks and bonds. Partially admitted. Only a portion of a partially admitted asset's monetary value is reported on the Assets page of the Annual Statement. For example, some investments are allowable under statutory guidelines but have values that exceed statutory limits. For reporting, their values would be reduced to the amounts that fit within the limits. Nonadmitted. A nonadmitted asset is an asset for which no value can be reported on the Assets page of the Annual Statement. Therefore, such an asset may not be applied to support an insurer's required reserves. Examples of nonadmitted assets include furniture and office equipment. In addition, any investments that are not allowed as admitted assets under statutory guidelines are reported as nonadmitted assets.

Statutory accounting principles (SAP)

An insurance company's Annual Statement must comply with statutory accounting principles (SAP), which are accounting standards that all life insurers in the United States must follow when preparing specified financial reports that they submit to state insurance regulators. insurers in the United States are not allowed to report the full value of certain general account investments on the ASSETS page of the Annual Statement

Board of directors

An insurer's board of directors establishes corporate policies that (1) guide business practices and (2) support internal controls to anticipate and prevent problems. Two types of corporate policies that affect the investment function are investment policies and risk policies." "Boards of directors typically delegate ongoing oversight of particular insurance company functions—such as the investment function—to permanent board committees known as standing committees." The following statement(s) can correctly be made about the role of the company's board of directors: -The board of directors typically delegates governance duties over the company's investments to a standing committee, usually known as the investment committee. -The board of directors is responsible for determining the nature and extent of the risks the company is willing to take in achieving its strategic objectives.

Annual Statement

Each year, a document that presents information about an insurer's operations and financial performance, with an emphasis on demonstrating the insurer's solvency. The insurer files the Annual Statement with the NAIC and all the state insurance departments with which it is licensed.

CFPB (Consumer Financial Protection Bureau)

Regulatory agency charged with overseeing financial products and services offered to consumers. Protects consumers from unfair, deceptive, and abusive practices arising from within the financial sector

Functional regulatory systems

Fiduciary duty standards: A fiduciary is an individual or entity that holds a special position of trust or confidence when handling the affairs of another and that must put the other's interest above the fiduciary's own interests. In many jurisdictions, investment professionals have a fiduciary duty—the obligation to act in the best interest of a particular party—with regard to certain types of clients and end users of investment services. Suitability requirements: A suitability requirement imposes a duty on financial professionals or financial services companies to have reasonable grounds on which to believe that a specific product is suitable for a customer's needs. Suitability requirements typically require a financial professional to have a basic understanding of a customer's financial situation and investment objectives and constraints before making product recommendations. Disclosure requirements: Regulatory entities typically require financial professionals and financial services companies to make specific types of disclosures. An example of a required disclosure is a mutual fund prospectus. The disclosure of relevant information to investors and potential investors encourages transparency and trust. Customer privacy protections: Nonpublic personal information is information about a customer that a financial services company collects in connection with providing a financial product or service

Valuation of assets and liabilities

Life insurance companies that conduct business in the United States generally value their assets under the guidance of the NAIC Accounting Practices and Procedures Manual and the Purposes and Procedures Manual of the NAIC Investment Analysis Office. In valuing assets that are not actively traded, U.S. life insurers also consult various resources provided by the NAIC. For example: -The NAIC's SVO provides valuation of securities owned by state-regulated insurance companies -The NAIC offers an Automated Valuation Service (AVS), which provides access to the Valuation of Securities (VOS) database, from which an insurer can quickly price its securities" The goal of the SVO is to set consistent valuations and ratings for investments of insurance companies. For state regulatory purposes, companies must use valuations no less conservative than those provided by the SVO. If SVO data is unavailable, companies must exercise good judgment in arriving at appropriately conservative valuations for securities.

FIO (Federal Insurance Office)

Monitors the insurance industry and helps the FSOC to identify systemically risky insurers

SVO securities valuation office

NAIC's Securities Valuation Office (SVO) provides certain types of insurance company investments with -Ratings. The SVO assigns designations of bonds and other fixed-income investments. Designations range from NAIC 1, which represents the best rating, to NAIC 6, which represents the worst rating. -Valuations: The SVO assigns unit prices to fixed-income investments. Such valuations are particularly useful for insurer investments that are not actively traded, such as private placement bonds."

Blue Sky Laws

State securities laws are known informally as blue sky laws. These laws are intended to protect the investing public against fraudulent or speculative investment schemes. The laws earned their collective nickname early in the 20th century because the fraudulent investments they aim to prevent were considered to have as much value as a piece of blue sky.

OFR- office of financial research

Supports the FSOC by collecting financial data, performing research and analysis, and developing risk measurement tools

Uniform Law Commission

The Uniform Securities Act was created by the Uniform Law Commission, which provides states with nonpartisan, model legislation that brings clarity and stability to critical areas of state statutory law.

Trust Indenture Act of 1939

applies to bonds and other debt securities and imposes certain requirements on the issuer before the securities can be sold publicly. The issuer must establish a trust for the benefit of the owner

Risk capital charges

The purpose of risk capital charges is to acknowledge that investments are inherently risky, and that these assets can suffer losses. Risk your assets incur higher risk charges; therefore insurance holding assets with higher risk charges need to hold higher amounts of capital to satisfy regulators. actual risk capital charges are subject to change over time because they are based on the specific assets that an insurer holds at a given time. Risk your assets require the insured to hold more capital to meet RBC requirements. Therefore the insured has an incentive to invest in less risky assets.

Solvency Regulation

To ensure their ability to determine whether assets are sufficient, insurance regulators generally -Require companies to hold minimum amounts of capital based on specified standards Specify required approaches to asset valuation and financial reporting"///////solvency laws are designed to ensure that insurance companies are financially able to meet their dad and to pay policy benefits when they come due. Market conduct laws are designed to make sure that insurance companies conduct their business fairly and ethically; these laws typically pertain to the marketing, sales and distribution of insurance products

Investment advisor

a company or individual licensed appropriately to provide advice to investors about the value of securities or the advisability of buying and selling securities in exchange for compensation. individuals or companies that have at least $100 million of assets under management must register with the SEC as investment advisors "Advisors who manage less than $100 million typically register with an individual state's securities regulator.

McCarran-Ferguson Act (1945)

a federal law under which the U.S. Congress left insurance regulation to the state governments. Under the law, Congress retains the right to enact federal insurance legislation if it decides that state regulation is inadequate.

Uniform Securities Act

a long-standing model law designed to provide a pattern for state legislators to follow in crafting state securities laws.

Trust indenture

also known as a trust deed, is a formal agreement that establishes a trust and forms the relationship between a trustee and a trust beneficiary. The indenture states the (1) limits of the trustee's authority (2) conditions governing the trustee's actions in handling the trust's assets. The Trust Indenture Act of 1939 requires a trust indenture to contain certain provisions —Certain debt securities, such as municipal bonds and private placement bonds, are exempt from the requirements of the act. Despite being exempt, however, such securities are often issued by means of trust indentures.

Dodd-Frank Act

designed to (1) promote the financial stability of the United States, (2) improve accountability and transparency in the financial system, and (3) protect consumers from abusive financial services practices." addresses the systemic risk—the risk that an adverse event significantly impairs the financial system—that such institutions pose.

RBC (risk-based capital)

determine the minimum capital level for an insurer based on that insurer's size and risk profile, as identified by a risk-weighted formula. "State insurance regulators apply ( higher) risk capital charges to riskier assets than assets that are less risky. Risk capital charges are one aspect of (solvency) regulation."

NAIC

develops model laws and regulations that states use as guidelines for creating their insurance laws. In this way, the NAIC promotes uniformity among state insurance laws.

SEC (Securities and Exchange Commission) 1934

enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets "the SEC is authorized to govern public purchases and sales of securities, whether through a securities exchange or over the counter. A security must be registered with the SEC before it is advertised or offered for sale to the public./////////////. The SEC is the primary authority for administrating and enforcing US securities laws. SEC regulation applies to companies that issue securities to support their business operations and companies that sell such securities to the investing public. The SEC also has the authority to set the accounting and reporting methods that public companies use. The SEC has delegated much of the authority for registering securities market participants to certain SRO's, such as the financial industry regulatory authority

The Securities Exchange Act of 1934

established the Securities and Exchange Commission (SEC) and specified rules for the orderly conduct of public transactions in securities and through securities exchanges. The act sets additional requirements for participants in the U.S. securities industry, including requirements governing -The registration of securities and market participants -Corporate reporting and controls -Transactions by individuals possessing material nonpublic information—also called inside (or insider) information—which is company information that has not been communicated to the general public and that a reasonable investor would consider important in making an investment decision about the company -Tender offer disclosures; a tender offer is an offer made by a prospective buyer to all current shareholders of a particular publicly traded security to purchase their shares at a specified price during a specified time -The filing of proxy statements, which we discuss below

Model Law

is a sample law designed to serve as the basis for similar laws enacted by each state.

CFTC (Commodity Futures Trading Commission)

is an independent federal agency that regulates the futures and options markets. The CFTC's regulations are intended to promote transparency and protect market participants from fraud, manipulation, and other abusive practices. "The SEC and CFTC split or share jurisdiction over swaps, depending on the type of swap involved in a transaction."

Trading ahead of research

is an unethical activity that occurs when, prior to the release of a research report, the trading operation of an investment management firm uses nonpublic information in a research report as a basis for increasing or decreasing its inventory position in a particular security.

Functional regulation

is the principle that a single regulatory body should oversee similar financial activities, regardless of which type of financial institution engages in the activity. With a functional regulation framework, a company that performs multiple functions is likely to be subject to regulations from multiple regulatory entities."

Reserves

liabilities that represent the amounts of money that the insurer expects to need to meet current and future contractual obligations.

Securities Act of 1933/ securities law

regulates publicly traded companies in the United States. The act has two primary objectives: - To ensure that investors in public companies have access to financial and other significant information about securities offered for sale to the public - To prohibit misrepresentation, deceit, and fraud in the sale of securities///////////////////. Securities laws address the issuance, offering, and sale of financial securities; financial reporting and other conduct of securities issue or's; arrangements for the establishment and administration of securities exchanges; securities transaction; penalties for regulatory violations.//////Insurance laws address the formation, licensing, conduct, operation, transfer of ownership, orderly termination of insurance companies, and the issuance, sale and administration of insurance contracts,///////banking laws typically require banks to hold enough capital to meet their obligations and set limits on interest charges

Investment Company Act of 1940

regulates the organization of investment companies. In the context of this act, an investment company is an entity that issues securities and engages primarily in investing, reinvesting, and trading in securities. Examples of investment companies include mutual funds, unit investment trusts (UITs), exchange-traded funds (ETFs), and insurance company separate accounts The Investment Company Act of 1940 requires investment companies to: -Register with the SEC before conducting business -Disclose their financial condition and investment policies to investors (1) when their shares are initially sold and (2) on a regular basis thereafter -Disclose certain information about a fund and its investment objectives, as well as about the investment company's structure and operations -Follow rules that address the safekeeping and proper valuation of a fund's assets -Comply with restrictions on transactions among subsidiaries and other affiliated organizations -Manage a fund's leverage—its use of borrowing to enhance its potential investment return—so as to avoid exceeding acceptable limits, as specified by the act

Prudential regulation

the primary focus of insurance regulations throughout the world. In most countries, regulatory authorities: -Impose minimum capital requirements as a prerequisite to an insurer obtaining a license to conduct an insurance business—Monitor and assess the solvency of all licensed insurers on an ongoing basis -Maintain continuing minimum capital requirements for insurers -Place some restrictions on insurers' investment holdings Two such entities that affect the investment activities of insurance companies are the International Organisation of Securities Commissions (IOSCO) and the European Union.