Trade Association Troubled by Hedge Fund Reinsurance Regs

We appreciate the opportunity to comment on the proposed rules submitted by the Internal Revenue Service. The SCIC is troubled with the language included within the proposed regulations that attempts to define "active conduct" as excluding the officers and employees of related entities and independent contractors. Many of our member companies utilize independent contractors to assist with the management and day-to-day operations of their foreign insurance business. Perhaps most troublesome is that the proposed definition of "active conduct" does not provide clarity as to the rationale for excluding these persons from determining whether active conduct is present but rather presents questions as to what sort of conduct is permitted and to what extent certain functions may be outsourced to independent contractors,

As stated by the Captive Insurance Companies Association in its May 6 letter in response to the notice published in the Federal Register, the current language found in the proposed regulations "would impose an inappropriate standard that, if applied more broadly in the future, would be unfair and completely contrary to the manner in which thousands of captive insurers operate," including many captive insurance companies of SCIC member companies. Moreover, to do so would be contrary to existing IRS guidance on the issue resulting in serious ramifications for SCIC member companies doing business today in accordance with this past IRS guidance which clearly authorizes the outsourcing of certain functions of an insurance company. See Rev. Rul. 2002-89, 2002-2 C.B. 984.

For the reasons stated herein, the Service Contract Industry Council is opposed to the adoption of the proposed rules published by the Service as they are currently drafted.