To direct the Secretary of the Treasury to modify certain regulations relating to insurance-dedicated exchange-traded funds.

I 116TH CONGRESS 2D SESSION H. R. 6732 To direct the Secretary of the Treasury to modify certain regulations relating to insurance-dedicated exchange-traded funds. IN THE HOUSE OF REPRESENTATIVES MAY 5, 2020 Mr. WENSTRUP introduced the following bill; which was referred to the Committee on Ways and Means A BILL To direct the Secretary of the Treasury to modify certain regulations relating to insurance-dedicated exchange- traded funds. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. INSURANCE-DEDICATED EXCHANGE-TRADED 3 FUNDS. 4 (a) IN GENERAL.—Not later than the date which is 5 1 year after the date of the enactment of this Act, the 6 Secretary of the Treasury (or the Secretary’s delegate) 7 shall amend the regulation issued by the Department of 8 the Treasury relating to ‘‘Income Tax; Diversification Re- 9 quirements for Variable Annuity, Endowment, and Life 10 VerDate Sep 11 2014 02:28 May 16, 2020 Jkt 099200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H6732.IH H6732 kjohnson on DSK79L0C42PROD with BILLS 2 •HR 6732 IH Insurance Contracts’’, 54 Fed. Reg. 8728 (March 2, 1 1989), and make any necessary corresponding amend- 2 ments to other regulations, in order to facilitate the use 3 of exchange-traded funds as investment options under 4 variable contracts within the meaning of section 817(d) 5 of the Internal Revenue Code of 1986, in accordance with 6 subsections (b) and (c) of this section. 7 (b) DESIGNATE CERTAIN AUTHORIZED PARTICI- 8 PANTS AND MARKET MAKERS AS ELIGIBLE INVESTORS.— 9 The Secretary of the Treasury (or the Secretary’s dele- 10 gate) shall amend Treas. Reg. section 1.817–5(f)(3) to 11 provide that satisfaction of the requirements in Treas. 12 Reg. section 1.817–5(f)(2)(i) with respect to an exchange- 13 traded fund shall not be prevented by reason of beneficial 14 interests in such a fund being held by one or more author- 15 ized participants or market makers. 16 (c) CONFIRM THAT SIMILARITIES TO OTHER FUNDS 17 ARE IRRELEVANT.—The Secretary of the Treasury (or 18 the Secretary’s delegate) shall amend Treas. Reg. section 19 1.817–5(f) to confirm that, for Federal income tax pur- 20 poses, a regulated investment company, partnership, or 21 trust (including an exchange-traded fund) that satisfies 22 the requirements of Treas. Reg. section 1.817–5(f) (2) 23 and (3) shall not be treated as owned by the holder of 24 a variable contract pursuant to the principles of Rev. Rul. 25 VerDate Sep 11 2014 02:28 May 16, 2020 Jkt 099200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H6732.IH H6732 kjohnson on DSK79L0C42PROD with BILLS 3 •HR 6732 IH 81–225, 1981–2 C.B. 12, merely because another regu- 1 lated investment company, partnership, trust, or similar 2 investment vehicle follows the same investment strategy, 3 has the same investment manager, or holds the same in- 4 vestments. 5 (d) DEFINE RELEVANT TERMS.—In amending 6 Treas. Reg. section 1.817–5(f)(3) in accordance with sub- 7 sections (b) and (c) of this section, the Secretary of the 8 Treasury (or the Secretary’s delegate) shall provide defini- 9 tions consistent with the following: 10 (1) EXCHANGE-TRADED FUND.—The term ‘‘ex- 11 change-traded fund’’ means a regulated investment 12 company, partnership, or trust— 13 (A) that is registered with the Securities 14 and Exchange Commission as an open-end in- 15 vestment company or a unit investment trust; 16 (B) the shares of which can be purchased 17 or redeemed directly from the fund only by an 18 authorized participant; and 19 (C) the shares of which are traded 20 throughout the day on a national stock ex- 21 change at market prices that may or may not 22 be the same as the net asset value of the 23 shares. 24 VerDate Sep 11 2014 02:28 May 16, 2020 Jkt 099200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H6732.IH H6732 kjohnson on DSK79L0C42PROD with BILLS 4 •HR 6732 IH (2) AUTHORIZED PARTICIPANT.—The term 1 ‘‘authorized participant’’ means a financial institu- 2 tion that is a member or participant of a clearing 3 agency registered under section 17A(b) of the Secu- 4 rities Exchange Act of 1934 that enters into a con- 5 tractual relationship with an exchange-traded fund 6 pursuant to which the financial institution is per- 7 mitted to purchase and redeem shares directly from 8 the fund and to sell such shares to third parties, but 9 only if the contractual arrangement or applicable law 10 precludes the financial institution from— 11 (A) purchasing the shares for its own in- 12 vestment purposes rather than for the exclusive 13 purpose of creating and redeeming such shares 14 on behalf of third parties; and 15 (B) selling the shares to third parties who 16 are not market makers or otherwise described 17 in Treas. Reg. section 1.817–5(f) (1) and (3). 18 (3) MARKET MAKER.—The term ‘‘market 19 maker’’ means a financial institution that is a reg- 20 istered broker or dealer under section 15(b) of the 21 Securities Exchange Act of 1934 that maintains li- 22 quidity for an exchange-traded fund on a national 23 stock exchange by being always ready to buy and sell 24 shares of such fund on the market, but only if the 25 VerDate Sep 11 2014 23:11 May 19, 2020 Jkt 099200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H6732.IH H6732 kjohnson on DSK79L0C42PROD with BILLS 5 •HR 6732 IH financial institution is contractually or legally pre- 1 cluded from selling or buying such shares to or from 2 persons who are not authorized participants or oth- 3 erwise described in Treas. Reg. section 1.817–5(f) 4 (2) and (3). 5 (e) EFFECTIVE DATES, ENFORCEMENT, AND INTER- 6 PRETATIONS.— 7 (1) EFFECTIVE DATES.— 8 (A) Subsection (b), and the definitions 9 under subsection (d), shall apply to segregated 10 asset account investments made on or after the 11 date of enactment of this Act. 12 (B) Subsection (c) shall apply to taxable 13 years beginning after December 31, 1983. 14 (2) ENFORCEMENT AND INTERPRETATIONS.— 15 Prior to the date that the Secretary of the Treasury 16 (or the Secretary’s delegate) issues final regulations 17 pursuant to this section— 18 (A) the Secretary (or delegate) shall ad- 19 minister and enforce the law in accordance with 20 this section and the effective dates in paragraph 21 (1) of this subsection; and 22 VerDate Sep 11 2014 23:11 May 19, 2020 Jkt 099200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H6732.IH H6732 kjohnson on DSK79L0C42PROD with BILLS 6 •HR 6732 IH (B) taxpayers may rely upon their reason- 1 able good faith interpretations of the preceding 2 subsections of this section. 3 Æ VerDate Sep 11 2014 02:28 May 16, 2020 Jkt 099200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6301 E:\BILLS\H6732.IH H6732 kjohnson on DSK79L0C42PROD with BILLS