16 April 2010

Ulips are securities - the US Supreme Court thinks so too

Indian Corporate Law has a post explaining in legal terms why SEBI's order on Ulips is wrong and cites some international law. Without getting into each point (I have too many posts already on the issue by now, so will need to resist:) ), here is my take on the issue from a more technical legal perspective, though briefly put.

A) S. 2 (h) of SCR Act defines securities broadly and inclusively. It does not exclude anything from the term. So whether or not a product is a mutual fund or collective investment scheme or neither, it can be a security.

B) There is no exclusion of insurance products from the definition. So a product can certainly be both. There is nothing perverse in having more than one regulator regulating a product - witness the dual and treble regulation of currency futures and gold futures.

C) In the US, where the definition of securities is narrower viz. it excludes insurance products specifically; the US Supreme Court has specifically held almost identical products be be securities. The ruling is a great exposition of the law distinguishing between what is insurance and what is not. See it here in all its glory: SEC v. United Benefit Life Insurance 387 U.S. 202 (1967), excerpted below:

Contracts such as the "Flexible Fund" offer important competition to mutual funds, see Johnson, The Variable Annuity— Insurance, Investment, or Both?, 48 Geo. L. J. 641, and are pitched to the same consumer interest in growth through professionally managed investment. It seems eminently fair that a purchaser of such a plan be afforded the same advantages of disclosure which inure to a mutual fund purchaser under § 5 of the Securities Act. "At the state level the Uniform Securities Act makes 212 explicit what seems to be the view of the great majority of blue sky administrators to the effect that variable annuities are securities . . . ." 1 Loss, Securities Regulation 499.

EC v. United Benefit Life Insurance 387 U.S. 202 (1967)

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