May 18, 2020

NAIC Eliminates Filing Exemption for Principal Protected Notes

On May 14, 2020, the National Association of Insurance Commissioners (NAIC) Valuation of Securities (E) Task Force held a telephonic meeting and adopted the principal protected note (PPN) proposal that had been exposed for comment earlier this year in February.

The PPN definition is designed to capture notes with underlying components where the noteholder obtains a more favorable risk-based capital (RBC) treatment based on the NRSRO rating assigned to the note than if it held the underlying components directly. The notes must also satisfy other criteria to be considered PPNs. When the new provisions go into effect, securities meeting the definition of PPN will need to be filed with the NAIC Securities Valuation Office (SVO) for analysis in order to receive an NAIC designation, instead of being “filing exempt” (i.e., automatically assigned the NAIC designation equivalent to the NRSRO rating on the security).

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