1-1 By: Duncan S.B. No. 1111 1-2 (In the Senate - Filed March 11, 1997; March 13, 1997, read 1-3 first time and referred to Committee on Economic Development; 1-4 April 18, 1997, reported adversely, with favorable Committee 1-5 Substitute by the following vote: Yeas 7, Nays 0; April 18, 1997, 1-6 sent to printer.) 1-7 COMMITTEE SUBSTITUTE FOR S.B. No. 1111 By: Duncan 1-8 A BILL TO BE ENTITLED 1-9 AN ACT 1-10 relating to the investment authority of certain insurers. 1-11 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-12 SECTION 1. Chapter 2, Insurance Code, is amended by adding 1-13 Article 2.10-5 to read as follows: 1-14 Art. 2.10-5. INVESTMENT AUTHORITY 1-15 Sec. 1. DEFINITIONS. In this article: 1-16 (1) "Business entity" means a corporation, limited 1-17 liability company, association, partnership, joint stock company, 1-18 joint venture, mutual fund trust, or other similar form of business 1-19 organization, whether organized as for-profit or not-for-profit. 1-20 (2) "Class one money market mutual fund" means a 1-21 mutual fund that at all times qualifies for investment using the 1-22 bond class one reserve factor described by the purposes and 1-23 procedures of the securities valuation office. 1-24 (3) "Government money market mutual fund" means a 1-25 money market mutual fund that at all times: 1-26 (A) invests only in obligations issued, 1-27 guaranteed, or insured by the United States or collateralized 1-28 repurchase agreements composed of those obligations; and 1-29 (B) is qualified for investment without a 1-30 reserve under the purposes and procedures publication of the 1-31 securities valuation office or any successor publication. 1-32 (4) "Money market mutual fund" means a mutual fund 1-33 that qualifies under 17 C.F.R. Part. 270.2a-7, as authorized by the 1-34 Investment Company Act of 1940 (15 U.S.C. Sections 80a-1 et seq.), 1-35 as amended. 1-36 (5) "Obligation" means: 1-37 (A) a bond, note, debenture, trust certificate 1-38 (including an equipment certificate), or production payment; 1-39 (B) a negotiable bank certificate of deposit, 1-40 bankers' acceptance, credit tenant loan, or other loan secured by 1-41 financing net leases; or 1-42 (C) any other evidence of indebtedness for the 1-43 payment of money or participation certificates or other evidences 1-44 of an interest in an obligation described by this subdivision, 1-45 whether constituting a general obligation of the issuer or payable 1-46 only out of certain revenues or certain funds pledged or otherwise 1-47 dedicated for payment. 1-48 (6) "Qualified bank" means a national bank, state 1-49 bank, or trust company that at all times is adequately capitalized 1-50 as determined by the standards adopted by the United States banking 1-51 regulators and that is either regulated by state banking laws or a 1-52 member of the Federal Reserve System. 1-53 (7) "Repurchase transaction" means a transaction in 1-54 which an insurer purchases securities from a business entity that 1-55 is obligated to repurchase the purchased securities or equivalent 1-56 securities from the insurer at a specified price, either within a 1-57 specified period or on demand. 1-58 (8) "Reverse repurchase transaction" means a 1-59 transaction in which an insurer sells securities to a business 1-60 entity and is obligated to repurchase the securities sold or 1-61 equivalent securities from the business entity at a specified 1-62 price, either within a specified period or on demand. 1-63 (9) "Securities lending transaction" means a 1-64 transaction in which securities are loaned by an insurer to a 2-1 business entity that is obligated to return the loaned securities 2-2 or equivalent securities to the insurer, either within a specified 2-3 period or on demand. 2-4 (10) "Securities valuation office" means the 2-5 Securities Valuation Office of the National Association of 2-6 Insurance Commissioners. 2-7 Sec. 2. AUTHORITY TO INVEST. An insurer may acquire 2-8 investments and participate in an investment pool that is qualified 2-9 under Section 5 of this article and the investments of which are 2-10 limited to investments authorized for a short-term investment pool 2-11 under Section 3 of this article or for an authorized investment 2-12 pool under Section 4 of this article. 2-13 Sec. 3. SHORT-TERM INVESTMENT POOLS. (a) A short-term 2-14 investment pool may contain only: 2-15 (1) except as provided by Subsection (b) of this 2-16 section, obligations that are rated one or two by the securities 2-17 valuation office or that have a rating equivalent to a securities 2-18 valuation office rating of one or two made by a statistical rating 2-19 organization that is nationally recognized and recognized by the 2-20 securities valuation office and that have a remaining maturity of: 2-21 (A) 397 days or less or a put that entitles the 2-22 holder to receive the principal amount of the obligation and that 2-23 may be exercised through maturity at specified intervals not 2-24 exceeding 397 days; or 2-25 (B) three years or less and a floating interest 2-26 rate that resets not less frequently than quarterly on the basis of 2-27 a current short-term index acceptable under Subsection (c) of this 2-28 section and is not subject to a maximum limit, if the obligations 2-29 do not have an interest rate that varies inversely to market 2-30 interest rate changes; 2-31 (2) government money market mutual funds or class one 2-32 money market mutual funds; or 2-33 (3) securities lending, repurchase, and reverse 2-34 repurchase transactions that meet the requirements imposed under 2-35 Article 2.10-3 of this code. 2-36 (b) In the absence of a one or two rating or equivalent 2-37 rating, the issuer of an obligation under Subsection (a)(1) of this 2-38 section must have outstanding obligations rated one or two by the 2-39 securities valuation office or that have a rating equivalent to a 2-40 securities valuation office rating of one or two made by a 2-41 nationally recognized statistical rating organization recognized by 2-42 the securities valuation office. 2-43 (c) For purposes of this section, a current short-term index 2-44 is: 2-45 (1) a federal funds rate; 2-46 (2) the prime rate; 2-47 (3) the rate for treasury bills; 2-48 (4) the London InterBank Offered Rate; or 2-49 (5) the rate for commercial paper. 2-50 Sec. 4. AUTHORIZED INVESTMENT POOLS. Authorized investment 2-51 pools are limited to investments that a participating insurer is 2-52 authorized to acquire by other articles of this code. The 2-53 insurer's total of proportionate ownership interest in any one 2-54 authorized investment held by an authorized investment pool, and 2-55 direct investments in the same authorized investment, may not 2-56 exceed the limit provided by the applicable authorizing article. 2-57 In addition to that limitation, an insurer is also subject to the 2-58 overall limitations contained in Section 6(c) of this article. 2-59 Sec. 5. QUALIFICATIONS FOR AN INVESTMENT POOL. (a) To be 2-60 qualified, an investment pool must comply with the requirements 2-61 established under this section. 2-62 (b) The investment pool may not: 2-63 (1) acquire securities issued, assumed, guaranteed, or 2-64 insured by the investing insurer or an affiliate of the investing 2-65 insurer; 2-66 (2) borrow or incur an indebtedness for borrowed 2-67 money, except for securities lending and reverse repurchase 2-68 transactions that meet the requirements of this article; or 2-69 (3) permit the aggregate value of securities then 3-1 loaned or sold to, purchased from, or invested in any one business 3-2 entity under this section to exceed 10 percent of the total assets 3-3 of the investment pool. 3-4 (c) The investment pool shall have a written pooling 3-5 agreement. 3-6 (d) The pooling agreement must designate a pool manager. 3-7 The pool manager must be organized under the laws of the United 3-8 States or a state and must be: 3-9 (1) the investing insurer, an affiliated insurer, or a 3-10 business entity affiliated with the insurer; 3-11 (2) a qualified bank; 3-12 (3) a business entity registered under the Investment 3-13 Advisers Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.), as amended; 3-14 (4) if a reciprocal insurer or interinsurance 3-15 exchange, its attorney-in-fact; or 3-16 (5) if a United States branch of an alien insurer, its 3-17 United States manager or an affiliate or subsidiary of its United 3-18 States manager. 3-19 (e) The pool manager shall compile and maintain: 3-20 (1) detailed accounting records that set forth: 3-21 (A) the cash receipts and disbursements 3-22 reflecting each pool participant's proportionate investment in the 3-23 investment pool; and 3-24 (B) a complete description of all underlying 3-25 assets of the investment pool, including the amount, interest rate, 3-26 and maturity date, if any, of each of those assets and other 3-27 appropriate designations; and 3-28 (2) other records that, on a daily basis, allow third 3-29 parties to verify each pool participant's investment in the 3-30 investment pool. 3-31 (f) The pool manager shall maintain the assets of the 3-32 investment pool in one or more accounts, in the name of or on 3-33 behalf of the investment pool, under a custody agreement with a 3-34 qualified bank. The custody agreement must: 3-35 (1) state and recognize the claims and rights of each 3-36 participant; 3-37 (2) acknowledge that the underlying assets of the 3-38 investment pool are held solely for the benefit of each participant 3-39 in proportion to the aggregate amount of its investments in the 3-40 investment pool; and 3-41 (3) contain an agreement that the underlying assets of 3-42 the investment pool may not be commingled with the general assets 3-43 of the custodian qualified bank or any other person. 3-44 (g) The pooling agreement for the investment pool must also 3-45 provide that: 3-46 (1) 100 percent of the ownership interests in the 3-47 investment pool must at all times be held by: 3-48 (A) an insurer and its affiliated insurers; 3-49 (B) in the case of an investment pool investing 3-50 solely in investments permitted under Section 3 of this article, 3-51 the insurer and its subsidiaries and affiliates or any pension or 3-52 profit-sharing plan of the insurer, its subsidiaries, and 3-53 affiliates; or 3-54 (C) in the case of a United States branch of an 3-55 alien insurer, affiliates or subsidiaries of its United States 3-56 manager; 3-57 (2) the underlying assets of the investment pool may 3-58 not be commingled with the general assets of the pool manager or 3-59 any other person; 3-60 (3) each participant owns an undivided interest in the 3-61 underlying assets of the investment pool in proportion to the 3-62 aggregate amount of each pool participant's interest in the 3-63 investment pool and the underlying assets of the investment pool 3-64 are held solely for the benefit of each participant; and 3-65 (4) a pool participant or, in the event of the pool 3-66 participant's insolvency, bankruptcy, or receivership, its trustee, 3-67 receiver, conservator, or other successor-in-interest may withdraw 3-68 all or any portion of its investment from the pool under the terms 3-69 of the pooling agreement. 4-1 Sec. 6. ADDITIONAL REQUIREMENTS; LIMITATIONS. (a) An 4-2 investment pool must be a business entity. 4-3 (b) A transaction between the pool and a participant in the 4-4 pool is not subject to Section 4, Article 21.49-1 of this code, 4-5 except that, before entering into a pool, an insurer subject to 4-6 Article 21.49-1 of this code shall file the notice required under 4-7 Section 4(d)(2), Article 21.49-1 of this code. Investment 4-8 activities of the pool and transactions between pools and 4-9 participants shall be reported annually in the registration 4-10 statement required by Section 3, Article 21.49-1 of this code. 4-11 (c) An insurer shall not acquire an investment in an 4-12 investment pool under this section if, as a result of and after 4-13 giving effect to that investment, the aggregate amount of 4-14 investments then held by the insurer under this article: 4-15 (1) in any one investment pool would exceed 10 percent 4-16 of its admitted assets; 4-17 (2) in all investment pools investing in investments 4-18 permitted under Section 4 of this article would exceed 25 percent 4-19 of its admitted assets; or 4-20 (3) in all investment pools would exceed 35 percent of 4-21 its admitted assets. 4-22 (d) A pool participant must be able to make withdrawals on 4-23 demand without penalty or other assessment on any business day, and 4-24 settlement of funds must occur within a reasonable and customary 4-25 period after a withdrawal not to exceed five business days. 4-26 (e) The pooling agreement must provide that the pool manager 4-27 shall make a distribution to a pool participant, at the discretion 4-28 of the pool manager: 4-29 (1) in cash the fair market value at the time of the 4-30 distribution of the participant's pro rata share of each underlying 4-31 asset of the investment pool; 4-32 (2) in kind a pro rata share of each underlying asset; 4-33 or 4-34 (3) in a combination of cash and in-kind distributions 4-35 a pro rata share in each underlying asset. 4-36 (f) A distribution under Subsection (e) of this section is 4-37 computed in each case after subtracting all applicable fees and 4-38 expenses of the investment pool. 4-39 (g) The pool manager must make the records of the investment 4-40 pool available for inspection by the commissioner. 4-41 SECTION 2. The importance of this legislation and the 4-42 crowded condition of the calendars in both houses create an 4-43 emergency and an imperative public necessity that the 4-44 constitutional rule requiring bills to be read on three several 4-45 days in each house be suspended, and this rule is hereby suspended. 4-46 * * * * *