Recent Changes to Vermont Law
Editor's Note: P. Bruce Wright is a senior counsel and Saren Goldner is a partner in the Tax Department of Eversheds Sutherland (US) LLP located in the New York office. Ray Ramirez is a partner in the Capital Markets and Investments Department of Eversheds Sutherland (US) LLP located in the Washington, DC, office.
Vermont law affecting captives was recently amended to specifically recognize that captives "may accept or transfer risk by means of a parametric contract," notwithstanding, the statute clarifies that such a parametric contract "is not an insurance contract." Presumably, this is the case, even if it is in the form of an insurance contract. The amendment defines a parametric contract as one that requires a "payment on the occurrence of one or more specified triggering events without proof of loss or obligation to indemnify." The amendment also requires that the contract comply with all state and federal laws. As such, it may be important for captives to consider whether a parametric contract is a "swap" for purposes of the Commodity Exchange Act.
In light of the significant role that derivatives played in the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which amended the Commodity Exchange Act to create a new regulatory regime for derivatives. Central to the regime is the term "swap," which is broadly defined (despite refinement by regulation) and includes agreements that call for a payment from one party to another upon the occurrence of a specified event. Based on this, a parametric contract that is not "insurance" may be a swap. Swaps are subject to myriad compliance obligations, including (among other things) reporting, recordkeeping, and, potentially, clearing and margining. In addition, persons trading swaps must meet minimum sophistication requirements and can be required to register with the Commodity Futures Trading Commission ("CFTC") in certain instances. Given this, market participants should take care to determine whether, if a parametric contract is not an insurance contract, such contract is a swap. Such a determination will require an analysis of all relevant facts and circumstances.1
Another part of the recently enacted legislation added the Vermont Insurance Data Security Law, which imposes new cyber-security requirements on licensees of the Insurance Department. Licensees include any person "licensed, authorized to operate, or registered or required to be licensed, authorized or registered pursuant to the insurance laws of Vermont."
Although the statute specifically excludes captive insurance companies, it apparently covers management companies and, potentially, accountants and actuaries providing services to captives in the state. It is notable that those complying with the requirements imposed by New York on insurers and licensees that were enacted several years ago will be deemed to be in compliance with the new rules.
- CFTC regulations, adopted jointly with the Securities and Exchange Commission, afford an "insurance safe harbor" that per se excludes traditional insurance products, issued by US licensed insurance companies, from the swap definition. Whether a product qualifies for the insurance safe harbor requires an analysis of all relevant facts and circumstances. Given the Vermont law's characterization of parametric contracts as not insurance contracts, and the characteristics of such products generally, parametric contracts written by companies subject to this Vermont insurance law would not appear to satisfy the insurance safe harbor.