9 be preempted by virtue of the McCarran-Ferguson Act, while two other courts have invalidated such laws. A fifth case has 10 sanctioned a theory that allows a tender offer to commence conditioned on the ultimate approval by the insurance commissioner 11 of the transfer of control of the company. Neither the Supreme Court nor any Circuit Court of Appeals has spoken on these questions. The recent report of the SEC Advisory Committee on Tender Offers recognized that federal takeover regulation should not preempt substantive state regulation of regulated industries such as insurance. However the Advisory Committee also suggested that such state regulation be procedurally compatible with the 1934 This result will be difficult to achieve without substantially impairing the authority of insurance commissioners to review and approve tender offers for insurance companies pursuant to the Model Act. Such an approach preserves SEC procedures but jeopardizes the protection of policyholders. Act. 12 9 John Alden Life Insurance Company v. Woods, Case No. 81-1418 (D. Idaho, Dec. 19, 1981): Professional Investors Life Insurance Company Inc. v. Roussel, 528 Fed. Supp. 391 (D. Kansas, 1981). 10 National City Lines, Inc. v. LLC Corporation. 524 Fed. Supp. 906 (W. D. Missouri, 1981); Gunter v. AGO International B.V., (1981 Transfer Binder) Fed. Sec. L. Rep. (CCH) Parag. 98,460 (N. D. Florida, 1981). 11 Sun Life Group Inc. v. Standard Life Insurance Company of Indiana, (1979-1980 Transfer Binder) Fed. Sec. L. Rep. (CCH) Parag. 97,314 (S. D. Indiana, 1980). 12 Advisory Committee on Tender Offers, Report of Recommendations (July 8, 1983) at 60. During the 15 year history of state regulation of tender offers for insurance companies, many acquisitions have been successfully consummated. The state regulatory system operates effectively in this area and is necessary in order to protect the unique interests of policyholders. The insurance relationship is unique. Unlike other commercial transactions in which goods and services are bought and sold on the basis of fixed costs. the insurance contract is basically a promise by an insurer to its insured. The true cost of that promise cannot, at the outset, be determined with certainty, but can be projected. For this reason, states require insurers to maintain reserves sufficient to meet future anticipated liabilities. In other words, a substantial portion of the assets of insurers are funds held against long-term obligations. Nearly all states have recognized that insurers, unlike other purveyors of goods and services, occupy a special relationship with their insureds. Insurers are held to owe a duty of good faith and fair dealing beyond the simple requirements of the insurance contract. This duty requires an insurer in handling claims to hold its insured's interest at least on a par with its own. The breach of this duty can subject an insurer to compensatory and punitive damages in tort. Accordingly, there must be no question about the ability of insurance companies to fulfill their obligations to policyholders and claimants in the decades ahead. It was in contemplation of this direct and substantial public interest that Congress decreed in 1945 that the states should regulate the business of insurance. The Model Act's takeover provisions are designed to ensure that persons who propose to acquire insurers have financial strength and stability, managerial competence, and good faith intentions to maintain investment and business policies that will not compromise the reliability and integrity of insurance contracts held by the insurer's policyholders. As stated in National Securities, these concerns are at the "core of the business of insurance. The state insurance holding company 14 13 acts are designed to protect the significant and unique interests of policyholders. In contrast, SEC regulations are concerned with the interests of securityholders. In summary, both Congress and the Supreme Court have recognized the importance of state regulation of the business of insurance. The Supreme Court has noted that the focus of the business of insurance is on the relationship between insurance and policyholder. The NAIC Model Act protects policyholders by requiring review and approval by the insurance commissioner of the financial strength and integrity of those who would assume control 13 One of the most significant features of today's securities market is the activity of arbitrageurs. One commentator has noted that arbitrage activity can have a material effect on the transfer of control of the target merely as a by-product of an unsuccessful takeover bid. Thus pre-commencement review may serve to limit such activity so as not to change inalterably the nature of the target insurer's shareholder base. See, Keefer, Insurance Takeover Laws: The Case Against Preemption 1 Journal of Insurance Regulation 157 (December, 1982). 14 393 U.S. at 453. of an insurer through a merger or other acquisition of stock. Pre-commencement review by the commissioner is the most meaningful review available. The state insurance holding company acts have operated effectively for 15 years, long before the promulgation of Rule 14d-2. We submit that in deference to such state insurance regulation, the requirements for filings and precommencement review by state insurance regulators should not be deemed to trigger the commencement of the tender offer for purposes of the 1934 Act. The SEC should reinterpret Rule 14d-2 so that it does not preempt legitimate state regulation of insurance company acquisitions. Such an approach would restore harmony between the federal and state systems of regulation of tender offers for insurance companies and protect the rights of policyholders. We appreciate the opportunity to express our views to the Subcommittee. We would be happy to expand on our position if the Subcommittee would find it helpful. We request that this statement be included in any record the Subcommittee compiles in its review of tender offer regulation. WLL: mam Sincerely. William L. Larsen Chairman, Subcommittee on Telecommunications, U.S. House of Representatives Washington, DC 20515 Dear Congressman Wirth: The Committee on Securities Regulation of the Association of the Bar of the City of New York is pleased to respond to your request for comments on the adequacy of current federal regulation of tender offers. The focus of our comments is the Report of Recommendations (the "Report") of the Advisory Committee on Tender Offers (the "Advisory Committee") transmitted to the Securities and Exchange Commission ("Commission") on July 8, 1983.* I. Economics of Takeovers and their Regulation The Report indicates that the Advisory Committee was unable to conclude that "takeovers are either per se beneficial or detrimental to the economy or the securities markets in general, or to issuers or their shareholders, specifically". Accordingly, the Advisory Committee recommends reliance upon the capital markets as the ultimate regulator of takeovers, with a neutral regulatory process that neither promotes nor deters takeovers. In the absence of any compelling evidence that the economic impact of takeovers is either positive or negative, we endorse a neutral regulatory process. This does not mean, however, that we endorse many of the Report's recommendations (discussed more fully below), especially those which would substantially alter the regulatory * For ease of reference, our comments are set forth under |