By Van de Putte                                       H.B. No. 1680

         75R7056 PB-F                           

                                A BILL TO BE ENTITLED

 1-1                                   AN ACT

 1-2     relating to the investment authority of certain insurers.

 1-3           BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

 1-4           SECTION 1.  Chapter 2, Insurance Code, is amended by adding

 1-5     Article 2.10-5 to read as follows:

 1-6           Art. 2.10-5.  INVESTMENT AUTHORITY

 1-7           Sec. 1.  DEFINITIONS.  In this article:

 1-8                 (1)  "Business entity" means a corporation, limited

 1-9     liability company, association, partnership, joint stock company,

1-10     joint venture, mutual fund trust, or other similar form of business

1-11     organization, whether organized as for-profit or not-for-profit.

1-12                 (2)  "Class one money market mutual fund" means a

1-13     mutual fund that at all times qualifies for investment using the

1-14     bond class one reserve factor described by the purposes and

1-15     procedures publication of the securities valuation office.

1-16                 (3)  "Government money market mutual fund" means a

1-17     money market mutual fund that at all times:

1-18                       (A)  invests only in obligations issued,

1-19     guaranteed, or insured by the United States or collateralized

1-20     repurchase agreements composed of those obligations; and

1-21                       (B)  is qualified for investment without a

1-22     reserve under the purposes and procedures publication of the

1-23     securities valuation office or any successor publication.

1-24                 (4)  "Money market mutual fund" means a mutual fund

 2-1     that qualifies under 17 C.F.R. Part 270.2a-7, as authorized by the

 2-2     Investment Company Act of 1940 (15 U.S.C.  Section 80a-1 et seq.),

 2-3     as amended.

 2-4                 (5)  "Obligation" means:

 2-5                       (A)  a bond, note, debenture, trust certificate,

 2-6     including an equipment certificate, or production payment;

 2-7                       (B)  a negotiable bank certificate of deposit,

 2-8     bankers' acceptance, credit tenant loan, or other loan secured by

 2-9     financing net leases; or

2-10                       (C)  any other evidence of indebtedness for the

2-11     payment of money, or participation certificates or other evidences

2-12     of an interest in an obligation described by this subdivision,

2-13     whether constituting a general obligation of the issuer or payable

2-14     only out of certain revenues or certain funds pledged or otherwise

2-15     dedicated for payment.

2-16                 (6)  "Qualified bank" means a national bank, state

2-17     bank, or trust company that at all times is adequately capitalized

2-18     as determined by the standards adopted by the United States banking

2-19     regulators and that is either regulated by state banking laws or is

2-20     a member of the Federal Reserve System.

2-21                 (7)  "Repurchase transaction" means a transaction in

2-22     which an insurer purchases securities from a business entity that

2-23     is obligated to repurchase the purchased securities or equivalent

2-24     securities from the insurer at a specified price, either within a

2-25     specified period or on demand.

2-26                 (8)  "Reverse repurchase transaction" means a

2-27     transaction in which an insurer sells securities to a business

 3-1     entity and is obligated to repurchase the securities sold or

 3-2     equivalent securities from the business entity at a specified

 3-3     price, either within a specified period or on demand.

 3-4                 (9)  "Securities lending transaction" means a

 3-5     transaction in which securities are loaned by an insurer to a

 3-6     business entity that is obligated to return the loaned securities

 3-7     or equivalent securities to the insurer, either within a specified

 3-8     period or on demand.

 3-9                 (10)  "Securities valuation office" means the

3-10     Securities Valuation Office of the National Association of

3-11     Insurance Commissioners.

3-12           Sec. 2.  AUTHORITY TO INVEST.  An insurer may acquire

3-13     investments and participate in an investment pool that is qualified

3-14     under Section 5 of this article and the investments of which are

3-15     limited to investments authorized for a short-term investment pool

3-16     under Section 3 of this article or for another investment pool

3-17     under Section 4 of this article.

3-18           Sec. 3.  SHORT-TERM INVESTMENT POOLS.  (a)  A short-term

3-19     investment pool may contain only:

3-20                 (1)  except as provided by Subsection (b) of this

3-21     section, obligations that are rated one or two by the securities

3-22     valuation office or that have a rating equivalent to a securities

3-23     valuation office rating of one or two made by a statistical rating

3-24     organization that is nationally recognized and recognized by the

3-25     securities valuation office, and that have a remaining maturity of:

3-26                       (A)  397 days or less or a put that entitles the

3-27     holder to receive the principal amount of the obligation and that

 4-1     may be exercised through maturity at specified intervals not

 4-2     exceeding 397 days; or

 4-3                       (B)  three years or less and a floating interest

 4-4     rate that resets not less frequently than quarterly on the basis of

 4-5     a current short-term index acceptable under Subsection (c) of this

 4-6     section and is not subject to a maximum limit, if the obligations

 4-7     do not have an interest rate that varies inversely to market

 4-8     interest rate changes;

 4-9                 (2)  government money market mutual funds or class one

4-10     money market mutual funds; or

4-11                 (3)  securities lending, repurchase transactions, and

4-12     reverse repurchase transactions that meet the requirements imposed

4-13     under Article 2.10-3 of this code.

4-14           (b)  In the absence of a one or two rating or equivalent

4-15     rating, the issuer of an obligation under Subsection (a)(1) of this

4-16     section must have outstanding obligations rated one or two by the

4-17     securities valuation office or that have a rating equivalent to a

4-18     securities valuation office rating of one or two made by a

4-19     nationally recognized statistical rating organization recognized by

4-20     the securities valuation office.

4-21           (c)  For purposes of this section, a current short-term index

4-22     is:

4-23                 (1)  a federal funds rate;

4-24                 (2)  the prime rate;

4-25                 (3)  the rate for treasury bills;

4-26                 (4)  the London InterBank Offered Rate; or

4-27                 (5)  the rate for commercial paper.

 5-1           Sec. 4.  OTHER INVESTMENT POOLS.  Other investment pools are

 5-2     limited to investments that an insurer is authorized to acquire

 5-3     other than under this article, if the insurer's proportionate

 5-4     interest in the amount of those investments does not exceed the

 5-5     applicable limits established under this article.

 5-6           Sec. 5.  QUALIFICATIONS FOR INVESTMENT POOL.  (a)  To be

 5-7     qualified, an investment pool must comply with the requirements

 5-8     established under this section.

 5-9           (b)  The investment pool may not:

5-10                 (1)  acquire securities issued, assumed, guaranteed, or

5-11     insured by the insurer or an affiliate of the investing insurer;

5-12                 (2)  borrow or incur an indebtedness for borrowed

5-13     money, except for securities lending and reverse repurchase

5-14     transactions that meet the requirements of this article; or

5-15                 (3)  permit the aggregate value of securities loaned or

5-16     sold to, purchased from, or invested in any one business entity to

5-17     exceed 10 percent of the total assets of the investment pool.

5-18           (c)  The investment pool must have a written pooling

5-19     agreement.

5-20           (d)  The pooling agreement must designate a pool manager.

5-21     The pool manager must be organized under the laws of the United

5-22     States or a state, and must be:

5-23                 (1)  the investing insurer, an affiliated insurer, or a

5-24     business entity affiliated with the investing insurer;

5-25                 (2)  a qualified bank; or

5-26                 (3)  a business entity:

5-27                       (A)  registered under the Investment Advisors Act

 6-1     of 1940 (15 U.S.C. Section 80a-1 et seq.), as amended;

 6-2                       (B)  if a reciprocal insurer or interinsurance

 6-3     exchange, its attorney-in-fact; or

 6-4                       (C)  if a United States branch of an alien

 6-5     insurer, its United States manager or an affiliate or subsidiary of

 6-6     its United States manager.

 6-7           (e)  The pool manager shall compile and maintain:

 6-8                 (1)  detailed accounting records that set forth:

 6-9                       (A)  the cash receipts and disbursements

6-10     reflecting each pool participant's proportionate investment in the

6-11     investment pool; and

6-12                       (B)  a complete description of all underlying

6-13     assets of the investment pool, including the amount, interest rate,

6-14     and maturity date, if any, of each of those assets and other

6-15     appropriate information; and

6-16                 (2)  other records that, on a daily basis, allow third

6-17     parties to verify each pool participant's investment in the

6-18     investment pool.

6-19           (f)  The pool manager shall maintain the assets of the

6-20     investment pool in one or more accounts, in the name of or on

6-21     behalf of the investment pool, under a custody agreement with a

6-22     qualified bank.  The custody agreement must:

6-23                 (1)  state and recognize the claims and rights of each

6-24     participant;

6-25                 (2)  acknowledge that the underlying assets of the

6-26     investment pool are held solely for the benefit of each participant

6-27     in proportion to the aggregate amount of its investments in the

 7-1     investment pool; and

 7-2                 (3)  contain an agreement that the underlying assets of

 7-3     the investment pool may not be commingled with the general assets

 7-4     of the custodian qualified bank or any other person.

 7-5           (g)  The pooling agreement for the investment pool must also

 7-6     provide that:

 7-7                 (1)  100 percent of the interest in the investment pool

 7-8     must at all times be held by:

 7-9                       (A)  an insurer and its affiliated insurers;

7-10                       (B)  in the case of an investment pool investing

7-11     solely in investments permitted under Section 3 of this article,

7-12     the insurer and its subsidiaries and affiliates, or any pension or

7-13     profit-sharing plan of the insurer, its subsidiaries, and

7-14     affiliates; or

7-15                       (C)  in the case of a United States branch of an

7-16     alien insurer, affiliates or subsidiaries of its United States

7-17     manager;

7-18                 (2)  the underlying assets of the investment pool may

7-19     not be commingled with the general assets of the pool manager or

7-20     any other person;

7-21                 (3)  each participant owns an undivided interest in the

7-22     underlying assets of the investment pool in proportion to the

7-23     aggregate amount of each pool participant's interest in the

7-24     investment pool and the underlying assets of the investment pool

7-25     are held solely for the benefit of each participant; and

7-26                 (4)  a pool participant or, in the event of the pool

7-27     participant's insolvency, bankruptcy, or receivership, its trustee,

 8-1     receiver, conservator, or other successor-in-interest, may withdraw

 8-2     all or any portion of its investment from the pool under the terms

 8-3     of the pooling agreement.

 8-4           Sec. 6.  ADDITIONAL REQUIREMENTS; LIMITATIONS.  (a)  An

 8-5     investment pool must be a business entity.

 8-6           (b)  A transaction between the pool and a participant in the

 8-7     pool is not subject to Section 4, Article 21.49-1, of this code,

 8-8     except that, before entering into a pool, an insurer subject to

 8-9     Article 21.49-1 shall file the notice required under Section

8-10     4(d)(2), Article 21.49-1, of this code.  Investment activities of

8-11     the pool and transactions between pools and participants shall be

8-12     reported annually in the registration statement required by Section

8-13     3, Article 21.49-1, of this code.

8-14           (c)  An insurer may not acquire an investment in an

8-15     investment pool under this section if, as a result of and after

8-16     giving effect to that investment, the aggregate amount of

8-17     investments then held by the insurer under this article:

8-18                 (1)  in any one investment pool would exceed 10 percent

8-19     of its admitted assets;

8-20                 (2)  in all investment pools investing in investments

8-21     permitted under Section 4 of this article would exceed 25 percent

8-22     of its admitted assets; or

8-23                 (3)  in all investment pools would exceed 35 percent of

8-24     its admitted assets.

8-25           (d)  A pool participant must be able to make withdrawals on

8-26     demand without penalty or other assessment on any business day, and

8-27     settlement of funds must occur within a reasonable and customary

 9-1     period after a withdrawal not to exceed five business days.

 9-2           (e)  The pooling agreement must provide that the pool manager

 9-3     shall make a distribution to a pool participant, at the discretion

 9-4     of the pool manager, either:

 9-5                 (1)  in cash, the fair market value at the time of the

 9-6     distribution of the participant's pro rata share of each underlying

 9-7     asset of the investment pool;

 9-8                 (2)  in kind, a pro rata share of each underlying

 9-9     asset; or

9-10                 (3)  in a combination of cash and in kind

9-11     distributions, a pro rata share in each underlying asset.

9-12           (f)  A distribution under Subsection (e) is computed in each

9-13     case after subtracting all applicable fees and expenses of the

9-14     investment pool.

9-15           (g)  The pool manager shall make the records of the

9-16     investment pool available for inspection by the commissioner.

9-17           SECTION 2.  This Act takes effect September 1, 1997.

9-18           SECTION 3.  The importance of this legislation and the

9-19     crowded condition of the calendars in both houses create an

9-20     emergency and an imperative public necessity that the

9-21     constitutional rule requiring bills to be read on three several

9-22     days in each house be suspended, and this rule is hereby suspended.

9-23                          COMMITTEE AMENDMENT NO. 1

9-24           Amend H.B. 1680 as follows:

9-25           1.  Delete Sec. 4 on lines 1 through 5, page 5, and

9-26     substitute in lieu thereof the following:

9-27           Sec. 4.  AUTHORIZED INVESTMENT POOLS.  Authorized investment

 10-1    pools are limited to investments that a participating insurer is

 10-2    authorized to acquire by other articles of this Code.  The

 10-3    insurer's total of proportionate ownership interests in any one

 10-4    authorized investment held by an authorized investment pool, and

 10-5    direct investments in the same authorized investment, may not

 10-6    exceed the limit provided by the applicable authorizing article.

 10-7    In addition to that limitation, an insurer is also subject to the

 10-8    overall limitations contained in Section 6(c) of this article.

 10-9          2.  Add the word "investing" before the first use of the word

10-10    "insurer" on line 11, page 5.

10-11          3.  Add the language on line 27, page 5, and line 1, page 6,

10-12    to Sec. 5(d)(3) on line 26, page 5.  In addition, delete the colon

10-13    after the word "entity" on line 26, page 5, and delete "(A)" on

10-14    line 27, page 5.

10-15          4.  Redesignate "(B)" on line 2, page 6, and "(C)" on line 4,

10-16    page 6, as "(4)" and "(5)" respectively.

10-17          5.  Delete the word "information" on line 15, page 6, and

10-18    substitute in lieu thereof the word "designations".

10-19          6.  Delete the word "interest" on line 7, page 7, and

10-20    substitute in lieu thereof the words "ownership interests".

10-21                                                       Lewis of Tarrant