By: Duncan S.B. No. 1111 A BILL TO BE ENTITLED AN ACT 1-1 relating to the investment authority of certain insurers. 1-2 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-3 SECTION 1. Chapter 2, Insurance Code, is amended by adding 1-4 Article 2.10-5 to read as follows: 1-5 Art. 2.10-5. INVESTMENT AUTHORITY 1-6 Sec. 1. DEFINITIONS. In this article: 1-7 (1) "Business entity" means a corporation, limited 1-8 liability company, association, partnership, joint stock company, 1-9 joint venture, mutual fund trust, or other similar form of business 1-10 organization, whether organized as for-profit or not-for-profit. 1-11 (2) "Class one money market mutual fund" means a 1-12 mutual fund that at all times qualifies for investment using the 1-13 bond class one reserve factor described by the purposes and 1-14 procedures of the securities valuation office. 1-15 (3) "Government money market mutual fund" means a 1-16 money market mutual fund that at all times: 1-17 (A) invests only in obligations issued, 1-18 guaranteed, or insured by the United States or collateralized 1-19 repurchase agreements composed of those obligations; and 1-20 (B) is qualified for investment without a 1-21 reserve under the purposes and procedures publication of the 1-22 securities valuation office or any successor publication. 1-23 (4) "Money market mutual fund" means a mutual fund 1-24 that qualifies under 17 C.F.R. Part. 270.2a-7, as authorized by the 2-1 Investment Company Act of 1940 (15 U.S.C. Sections 80a-1 et seq.), 2-2 as amended. 2-3 (5) "Obligation" means: 2-4 (A) a bond, note, debenture, trust certificate 2-5 (including an equipment certificate), or production payment; 2-6 (B) a negotiable bank certificate of deposit, 2-7 bankers' acceptance, credit tenant loan, or other loan secured by 2-8 financing net leases; or 2-9 (C) any other evidence of indebtedness for the 2-10 payment of money or participation certificates or other evidences 2-11 of an interest in an obligation described by this subdivision, 2-12 whether constituting a general obligation of the issuer or payable 2-13 only out of certain revenues or certain funds pledged or otherwise 2-14 dedicated for payment. 2-15 (6) "Qualified bank" means a national bank, state 2-16 bank, or trust company that at all times is adequately capitalized 2-17 as determined by the standards adopted by the United States banking 2-18 regulators and that is either regulated by state banking laws or a 2-19 member of the Federal Reserve System. 2-20 (7) "Repurchase transaction" means a transaction in 2-21 which an insurer purchases securities from a business entity that 2-22 is obligated to repurchase the purchased securities or equivalent 2-23 securities from the insurer at a specified price, either within a 2-24 specified period or on demand. 2-25 (8) "Reverse repurchase transaction" means a 2-26 transaction in which an insurer sells securities to a business 2-27 entity and is obligated to repurchase the securities sold or 3-1 equivalent securities from the business entity at a specified 3-2 price, either within a specified period or on demand. 3-3 (9) "Securities lending transaction" means a 3-4 transaction in which securities are loaned by an insurer to a 3-5 business entity that is obligated to return the loaned securities 3-6 or equivalent securities to the insurer, either within a specified 3-7 period or on demand. 3-8 (10) "Securities valuation office" means the 3-9 Securities Valuation Office of the National Association of 3-10 Insurance Commissioners. 3-11 Sec. 2. AUTHORITY TO INVEST. An insurer may acquire 3-12 investments and participate in an investment pool that is qualified 3-13 under Section 5 of this article and the investments of which are 3-14 limited to investments authorized for a short-term investment pool 3-15 under Section 3 of this article or for an authorized investment 3-16 pool under Section 4 of this article. 3-17 Sec. 3. SHORT-TERM INVESTMENT POOLS. (a) A short-term 3-18 investment pool may contain only: 3-19 (1) except as provided by Subsection (b) of this 3-20 section, obligations that are rated one or two by the securities 3-21 valuation office or that have a rating equivalent to a securities 3-22 valuation office rating of one or two made by a statistical rating 3-23 organization that is nationally recognized and recognized by the 3-24 securities valuation office and that have a remaining maturity of: 3-25 (A) 397 days or less or a put that entitles the 3-26 holder to receive the principal amount of the obligation and that 3-27 may be exercised through maturity at specified intervals not 4-1 exceeding 397 days; or 4-2 (B) three years or less and a floating interest 4-3 rate that resets not less frequently than quarterly on the basis of 4-4 a current short-term index acceptable under Subsection (c) of this 4-5 section and is not subject to a maximum limit, if the obligations 4-6 do not have an interest rate that varies inversely to market 4-7 interest rate changes; 4-8 (2) government money market mutual funds or class one 4-9 money market mutual funds; or 4-10 (3) securities lending, repurchase, and reverse 4-11 repurchase transactions that meet the requirements imposed under 4-12 Article 2.10-3 of this code. 4-13 (b) In the absence of a one or two rating or equivalent 4-14 rating, the issuer of an obligation under Subsection (a)(1) of this 4-15 section must have outstanding obligations rated one or two by the 4-16 securities valuation office or that have a rating equivalent to a 4-17 securities valuation office rating of one or two made by a 4-18 nationally recognized statistical rating organization recognized by 4-19 the securities valuation office. 4-20 (c) For purposes of this section, a current short-term index 4-21 is: 4-22 (1) a federal funds rate; 4-23 (2) the prime rate; 4-24 (3) the rate for treasury bills; 4-25 (4) the London InterBank Offered Rate; or 4-26 (5) the rate for commercial paper. 4-27 Sec. 4. AUTHORIZED INVESTMENT POOLS. Authorized investment 5-1 pools are limited to investments that a participating insurer is 5-2 authorized to acquire by other articles of this code. The 5-3 insurer's total of proportionate ownership interest in any one 5-4 authorized investment held by an authorized investment pool, and 5-5 direct investments in the same authorized investment, may not 5-6 exceed the limit provided by the applicable authorizing article. 5-7 In addition to that limitation, an insurer is also subject to the 5-8 overall limitations contained in Section 6(c) of this article. 5-9 Sec. 5. QUALIFICATIONS FOR AN INVESTMENT POOL. (a) To be 5-10 qualified, an investment pool must comply with the requirements 5-11 established under this section. 5-12 (b) The investment pool may not: 5-13 (1) acquire securities issued, assumed, guaranteed, or 5-14 insured by the investing insurer or an affiliate of the investing 5-15 insurer; 5-16 (2) borrow or incur an indebtedness for borrowed 5-17 money, except for securities lending and reverse repurchase 5-18 transactions that meet the requirements of this article; or 5-19 (3) permit the aggregate value of securities then 5-20 loaned or sold to, purchased from, or invested in any one business 5-21 entity under this section to exceed 10 percent of the total assets 5-22 of the investment pool. 5-23 (c) The investment pool shall have a written pooling 5-24 agreement. 5-25 (d) The pooling agreement must designate a pool manager. 5-26 The pool manager must be organized under the laws of the United 5-27 States or a state and must be: 6-1 (1) the investing insurer, an affiliated insurer, or a 6-2 business entity affiliated with the insurer; 6-3 (2) a qualified bank; 6-4 (3) a business entity registered under the Investment 6-5 Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.), as amended; 6-6 (4) if a reciprocal insurer or interinsurance 6-7 exchange, its attorney-in-fact; or 6-8 (5) if a United States branch of an alien insurer, its 6-9 United States manager or an affiliate or subsidiary of its United 6-10 States manager. 6-11 (e) The pool manager shall compile and maintain: 6-12 (1) detailed accounting records that set forth: 6-13 (A) the cash receipts and disbursements 6-14 reflecting each pool participant's proportionate investment in the 6-15 investment pool; and 6-16 (B) a complete description of all underlying 6-17 assets of the investment pool, including the amount, interest rate, 6-18 and maturity date, if any, of each of those assets and other 6-19 appropriate designations; and 6-20 (2) other records that, on a daily basis, allow third 6-21 parties to verify each pool participant's investment in the 6-22 investment pool. 6-23 (f) The pool manager shall maintain the assets of the 6-24 investment pool in one or more accounts, in the name of or on 6-25 behalf of the investment pool, under a custody agreement with a 6-26 qualified bank. The custody agreement must: 6-27 (1) state and recognize the claims and rights of each 7-1 participant; 7-2 (2) acknowledge that the underlying assets of the 7-3 investment pool are held solely for the benefit of each participant 7-4 in proportion to the aggregate amount of its investments in the 7-5 investment pool; and 7-6 (3) contain an agreement that the underlying assets of 7-7 the investment pool may not be commingled with the general assets 7-8 of the custodian qualified bank or any other person. 7-9 (g) The pooling agreement for the investment pool must also 7-10 provide that: 7-11 (1) 100 percent of the ownership interests in the 7-12 investment pool must at all times be held by: 7-13 (A) an insurer and its affiliated insurers; 7-14 (B) in the case of an investment pool investing 7-15 solely in investments permitted under Section 3 of this article, 7-16 the insurer and its subsidiaries and affiliates or any pension or 7-17 profit-sharing plan of the insurer, its subsidiaries, and 7-18 affiliates; or 7-19 (C) in the case of a United States branch of an 7-20 alien insurer, affiliates or subsidiaries of its United States 7-21 manager; 7-22 (2) the underlying assets of the investment pool may 7-23 not be commingled with the general assets of the pool manager or 7-24 any other person; 7-25 (3) each participant owns an undivided interest in the 7-26 underlying assets of the investment pool in proportion to the 7-27 aggregate amount of each pool participant's interest in the 8-1 investment pool and the underlying assets of the investment pool 8-2 are held solely for the benefit of each participant; and 8-3 (4) a pool participant or, in the event of the pool 8-4 participant's insolvency, bankruptcy, or receivership, its trustee, 8-5 receiver, conservator, or other successor-in-interest may withdraw 8-6 all or any portion of its investment from the pool under the terms 8-7 of the pooling agreement. 8-8 Sec. 6. ADDITIONAL REQUIREMENTS; LIMITATIONS. (a) An 8-9 investment pool must be a business entity. 8-10 (b) A transaction between the pool and a participant in the 8-11 pool is not subject to Section 4, Article 21.49-1 of this code, 8-12 except that, before entering into a pool, an insurer subject to 8-13 Article 21.49-1 of this code shall file the notice required under 8-14 Section 4(d)(2), Article 21.49-1 of this code. Investment 8-15 activities of the pool and transactions between pools and 8-16 participants shall be reported annually in the registration 8-17 statement required by Section 3, Article 21.49-1 of this code. 8-18 (c) An insurer shall not acquire an investment in an 8-19 investment pool under this section if, as a result of and after 8-20 giving effect to that investment, the aggregate amount of 8-21 investments then held by the insurer under this article: 8-22 (1) in any one investment pool would exceed 10 percent 8-23 of its admitted assets; 8-24 (2) in all investment pools investing in investments 8-25 permitted under Section 4 of this article would exceed 25 percent 8-26 of its admitted assets; or 8-27 (3) in all investment pools would exceed 35 percent of 9-1 its admitted assets. 9-2 (d) A pool participant must be able to make withdrawals on 9-3 demand without penalty or other assessment on any business day, and 9-4 settlement of funds must occur within a reasonable and customary 9-5 period after a withdrawal not to exceed five business days. 9-6 (e) The pooling agreement must provide that the pool manager 9-7 shall make a distribution to a pool participant, at the discretion 9-8 of the pool manager: 9-9 (1) in cash the fair market value at the time of the 9-10 distribution of the participant's pro rata share of each underlying 9-11 asset of the investment pool; 9-12 (2) in kind a pro rata share of each underlying asset; 9-13 or 9-14 (3) in a combination of cash and in-kind distributions 9-15 a pro rata share in each underlying asset. 9-16 (f) A distribution under Subsection (e) of this section is 9-17 computed in each case after subtracting all applicable fees and 9-18 expenses of the investment pool. 9-19 (g) The pool manager must make the records of the investment 9-20 pool available for inspection by the commissioner. 9-21 SECTION 2. The importance of this legislation and the 9-22 crowded condition of the calendars in both houses create an 9-23 emergency and an imperative public necessity that the 9-24 constitutional rule requiring bills to be read on three several 9-25 days in each house be suspended, and this rule is hereby suspended.