(a) In general.—Not later than the date which is 1 year after the date of the enactment of this Act, the Secretary of the Treasury (or the Secretary’s delegate) shall amend the regulation issued by the Department of the Treasury relating to “Income Tax; Diversification Requirements for Variable Annuity, Endowment, and Life Insurance Contracts”, 54 Fed. Reg. 8728 (March 2, 1989), and make any necessary corresponding amendments to other regulations, in order to facilitate the use of exchange-traded funds as investment options under variable contracts within the meaning of section 817(d) of the Internal Revenue Code of 1986, in accordance with subsections (b) and (c) of this section.

(b) Designate certain authorized participants and market makers as eligible investors.—The Secretary of the Treasury (or the Secretary’s delegate) shall amend Treas. Reg. section 1.817–5(f)(3) to provide that satisfaction of the requirements in Treas. Reg. section 1.817–5(f)(2)(i) with respect to an exchange-traded fund shall not be prevented by reason of beneficial interests in such a fund being held by one or more authorized participants or market makers.

(c) Confirm that similarities to other funds are irrelevant.—The Secretary of the Treasury (or the Secretary’s delegate) shall amend Treas. Reg. section 1.817–5(f) to confirm that, for Federal income tax purposes, a regulated investment company, partnership, or trust (including an exchange-traded fund) that satisfies the requirements of Treas. Reg. section 1.817–5(f) (2) and (3) shall not be treated as owned by the holder of a variable contract pursuant to the principles of Rev. Rul. 81–225, 1981–2 C.B. 12, merely because another regulated investment company, partnership, trust, or similar investment vehicle follows the same investment strategy, has the same investment manager, or holds the same investments.

(d) Define relevant terms.—In amending Treas. Reg. section 1.817–5(f)(3) in accordance with subsections (b) and (c) of this section, the Secretary of the Treasury (or the Secretary’s delegate) shall provide definitions consistent with the following:

(1) EXCHANGE-TRADED FUND.—The term “exchange-traded fund” means a regulated investment company, partnership, or trust—

(A) that is registered with the Securities and Exchange Commission as an open-end investment company or a unit investment trust;

(B) the shares of which can be purchased or redeemed directly from the fund only by an authorized participant; and

(C) the shares of which are traded throughout the day on a national stock exchange at market prices that may or may not be the same as the net asset value of the shares.

(2) AUTHORIZED PARTICIPANT.—The term “authorized participant” means a financial institution that is a member or participant of a clearing agency registered under section 17A(b) of the Securities Exchange Act of 1934 that enters into a contractual relationship with an exchange-traded fund pursuant to which the financial institution is permitted to purchase and redeem shares directly from the fund and to sell such shares to third parties, but only if the contractual arrangement or applicable law precludes the financial institution from—

(A) purchasing the shares for its own investment purposes rather than for the exclusive purpose of creating and redeeming such shares on behalf of third parties; and

(B) selling the shares to third parties who are not market makers or otherwise described in Treas. Reg. section 1.817–5(f) (1) and (3).

(3) MARKET MAKER.—The term “market maker” means a financial institution that is a registered broker or dealer under section 15(b) of the Securities Exchange Act of 1934 that maintains liquidity for an exchange-traded fund on a national stock exchange by being always ready to buy and sell shares of such fund on the market, but only if the financial institution is contractually or legally precluded from selling or buying such shares to or from persons who are not authorized participants or otherwise described in Treas. Reg. section 1.817–5(f) (2) and (3).

(e) Effective dates, enforcement, and interpretations.—

(1) EFFECTIVE DATES.—

(A) Subsection (b), and the definitions under subsection (d), shall apply to segregated asset account investments made on or after the date of enactment of this Act.

(B) Subsection (c) shall apply to taxable years beginning after December 31, 1983.

(2) ENFORCEMENT AND INTERPRETATIONS.—Prior to the date that the Secretary of the Treasury (or the Secretary’s delegate) issues final regulations pursuant to this section—

(A) the Secretary (or delegate) shall administer and enforce the law in accordance with this section and the effective dates in paragraph (1) of this subsection; and

(B) taxpayers may rely upon their reasonable good faith interpretations of the preceding subsections of this section.