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                                  * * * * *