State insurance regulators on Friday said they oppose an industry-favored plan to halt the classification of hybrid securities until a task force can fully examine how they should be treated.

The Bond Market Association, a trade group for Wall Street bond brokers and dealers, asked regulators this week to halt the classification, allowing insurers to continue reporting hybrids as bonds or preferred stock based on existing guidelines. For details, see [ID:nN17323207].

But a working group of the National Association of Insurance Commissioners said during a conference call that it favors reaching an interim solution by September, and that it is uncomfortable with the industry's approach.

Halting classification "just doesn't seem appropriate," one working group member said.

"Everybody's not going to be completely happy," said Lou Felice, chairman of the hybrid working group.

Instead, the group seemed to favor some form of notching hybrid securities.

The NAIC unnerved the hybrid market earlier this year when it classified some securities as equity rather than debt, raising costs for insurers holding them.

Hybrid securities were designed to receive the favorable tax treatment of debt, but to be counted mostly as equity by rating agencies. But insurers have long worried that regulators will treat such securities as equity, which would make them costlier to hold.

While the NAIC group did not formally remove the option of halting classification from the table, it encouraged market participants to submit their own proposals.

The group is now seeking industry's views on two additional ways of notching hybrid securities. It will issue these alternatives on August 24, giving market participants until August 31 to submit comment.

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