By Thompson                                           H.B. No. 2711
         Substitute the following for H.B. No. 2711:
         By Lewis of Tarrant                               C.S.H.B. No. 2711
                                A BILL TO BE ENTITLED
 1-1                                   AN ACT
 1-2     relating to restrictions on the deposit and investment of funds of
 1-3     a domestic insurance company.
 1-4           BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
 1-5           SECTION 1.  Amend Article 21.39B, Insurance Code, to read as
 1-6     follows:
 1-7           Sec. 1.  Any director, member of a committee, or officer, or
 1-8     any clerk of a domestic company, who is charged with the duty of
 1-9     handling or investing its funds, shall not:
1-10                 (1)  [deposit or] invest such funds, except in the
1-11     corporate name of such company, provided, however, that securities
1-12     kept under a custodial agreement or trust agreement with a bank,
1-13     federal home loan bank, or trust company may be issued in the name
1-14     of a nominee of such bank, federal home loan bank, or trust company
1-15     if such bank, federal home loan bank, or trust company has
1-16     corporate trust powers and is duly authorized to act as a custodian
1-17     or trustee and is organized under the laws of the United States of
1-18     America or any state thereof and either (i) is a member of the
1-19     Federal Reserve System, (ii) is a member of or is eligible to
1-20     receive deposits which are insured by the Federal Deposit Insurance
1-21     Corporation, (iii) maintains an account with a Federal Reserve Bank
1-22     and is subject to supervision and examination by the Board of
1-23     Governors of the Federal Reserve System, or (iv) is subject to
1-24     supervision and examination by the Federal Housing Finance Board;
 2-1                 (2)  deposit such funds except in the corporate name of
 2-2     such company, or in a pooling account with one or more affiliates,
 2-3     or in accordance with a reinsurance agreement;
 2-4                 [(2)] (3)  borrow the funds of such company;
 2-5                 [(3)] (4)  be interested in any way in any loan,
 2-6     pledge, security, or property of such company, except as
 2-7     stockholder; or
 2-8                 [(4)] (5)  take or receive to his own use any fee,
 2-9     brokerage, commission, gift, or other consideration for, or on
2-10     account of, a loan made by or on behalf of such company.
2-11           Sec. 2.  If funds of a domestic company are deposited in a
2-12     pooling account, only the domestic company and its affiliate, as
2-13     defined in Art. 21.49-1 of this code, may hold funds in a pooling
2-14     account.  The accounting and operational records and books of the
2-15     companies must be adequately detailed to identify specific
2-16     insurance policies and policyholders with premium funds received by
2-17     the particular company issuing the insurance.  A reinsurance
2-18     agreement between the domestic company and one or more affiliates
2-19     must specifically authorize the deposit of premium funds to the
2-20     account of the affiliate which is assuming the reinsurance.
2-21           [Sec. 2] Sec. 3.  The State Board of Insurance may promulgate
2-22     such regulations as may be deemed necessary to carry out the
2-23     provisions of this article.
2-24           [Sec. 3] Sec. 4.  The provisions of this article are
2-25     applicable to all domestic insurance companies subject to
2-26     regulation by the Insurance Code, as amended, and any provision of
2-27     exemption or any provision of inapplicability or applicability
 3-1     limiting such regulation in any chapter of the code are not in
 3-2     limitation of the provisions of this article, and in the event of
 3-3     conflict between this article and any other article of the code or
 3-4     in the event of any ambiguity, the provisions of this article shall
 3-5     govern.  As used herein, the term "insurance companies" includes
 3-6     stock companies, reciprocals or inter-insurance exchanges, Lloyds
 3-7     associations, fraternal benefit societies, stipulated premium
 3-8     companies, and mutual companies of all kinds, including state-wide
 3-9     mutual assessment corporations, local mutual aids, burial
3-10     associations, and county mutual insurance companies and farm mutual
3-11     insurance companies and all other organizations, corporations, or
3-12     persons transacting an insurance business, unless such insurance
3-13     companies are by statute specifically, by naming this article,
3-14     exempted from the operation of this article.
3-15           [Sec. 4] Sec. 5.  (a)  A domestic insurance company may
3-16     evidence its ownership of securities either through definitive
3-17     certificates or through uncertificated securities as defined by the
3-18     Business & Commerce Code and as provided by Section 6 of this
3-19     article.  The insurance company may deposit or arrange through its
3-20     agents, brokers, or dealers for the deposit of securities held in
3-21     or purchased for its general account or its separate accounts in
3-22     either a clearing corporation or the Federal Reserve Book Entry
3-23     System.  When securities are deposited with a clearing corporation
3-24     directly or deposited indirectly through a participating custodian
3-25     bank, certificates representing securities of the same class of the
3-26     same issuer may be merged and held in bulk in the name of nominee
3-27     of such clearing corporation with any other securities deposited
 4-1     with such clearing corporation by any person, regardless of the
 4-2     ownership of such securities, and certificates representing
 4-3     securities of small denominations may be merged into one or more
 4-4     certificates of larger denominations.  The records of any agent,
 4-5     broker, dealer, or member banks through which an insurance company
 4-6     holds securities in the Federal Reserve Book Entry System and the
 4-7     record of any custodian banks through which an insurance company
 4-8     holds securities in a clearing corporation shall at all times show
 4-9     that such securities are held for such insurance company and for
4-10     which accounts thereof.  To be eligible to act as a participating
4-11     custodian bank under this subsection, a bank must enter a custodial
4-12     agreement with the insurance company for which it is to act as a
4-13     participating custodian bank.
4-14           (b)  As used in this article, a clearing corporation is:
4-15                 (1)  a corporation defined in Section 8.102(c) of the
4-16     Business & Commerce Code; or
4-17                 (2)  a clearance system that:
4-18                       (A)  is organized or operating under the law of
4-19     one or more foreign countries;
4-20                       (B)  provides for the book entry settlement and
4-21     custody of internationally traded securities; and
4-22                       (C)  has been organized and in operation for a
4-23     period of not less than 15 consecutive years.
4-24           (c)  Whenever an insurance company is required to deposit
4-25     securities as a condition of commencing or continuing to do an
4-26     insurance business in this state, such deposit may be made through
4-27     the use of a clearing corporation or the Federal Reserve Book Entry
 5-1     System.  Securities deposited with a clearing corporation or held
 5-2     in the Federal Reserve Book Entry System and used to meet the
 5-3     deposit requirements under the insurance laws of this state shall
 5-4     be under the control of the commissioner and shall not be withdrawn
 5-5     by the insurance company without the approval of the commissioner.
 5-6     Any insurance company making a deposit in this manner shall provide
 5-7     to the commissioner evidence issued by its custodian or member bank
 5-8     through which such insurance company has deposited securities with
 5-9     a clearing corporation or in the Federal Reserve Book Entry System
5-10     or when making the deposit directly with the clearing corporation
5-11     as a participant, respectively, in order to establish that the
5-12     securities are actually recorded in an account in the name of the
5-13     custodian or direct participant or member bank, and shall also
5-14     provide to the commissioner evidence that the records of the
5-15     custodian, participant, or member bank and clearing corporation
5-16     reflect that such securities are held subject to the order of the
5-17     commissioner.
5-18           (d)  The State Board of Insurance by rule may prescribe a
5-19     reasonable maximum limit on the percentage of a domestic insurance
5-20     company's assets that may be deposited in a clearing corporation as
5-21     defined by Subsection (b)(2) of this section, but the maximum limit
5-22     may not exceed five percent of a company's total assets as
5-23     reflected by its annual statement filed with the State Board of
5-24     Insurance for the year preceding the year for which the limit is
5-25     prescribed.
5-26           (e)  A domestic insurance company may deposit assets in a
5-27     clearing corporation defined by Subsection (b)(2) of this section
 6-1     only if the insurance company:
 6-2                 (1)  is a member of an insurance company holding
 6-3     company system with total assets of at least $5 billion as
 6-4     reflected by annual statements of member companies for the
 6-5     preceding year;
 6-6                 (2)  uses that clearing corporation only as a
 6-7     depository for investments in internationally traded securities;
 6-8                 (3)  has a total investment in those internationally
 6-9     traded securities that does not exceed the company's policyholders'
6-10     surplus; and
6-11                 (4)  does not use those securities deposited with that
6-12     clearing corporation as security for reinsurance.
6-13           Sec. 5.  Repealed by Acts 1997, 75th Leg., ch. 556, Sec. 10,
6-14     eff. Sept. 1, 1997.
6-15           Sec. 6.  The State Board of Insurance shall adopt rules
6-16     authorizing a domestic insurance company to demonstrate ownership
6-17     of an uncertificated security consistent with common practices of
6-18     securities exchanges and markets.  The rules shall establish:
6-19                 (1)  standards for the types of uncertificated
6-20     securities that may be held;
6-21                 (2)  the manner in which ownership of the security may
6-22     be demonstrated; and
6-23                 (3)  adequate financial safeguards relating to the
6-24     ownership of uncertificated securities.
6-25           SECTION 2.  This Act takes effect September 1, 1999.
6-26           SECTION 3.  The importance of this legislation and the
6-27     crowded condition of the calendars in both houses create an
 7-1     emergency and an imperative public necessity that the
 7-2     constitutional rule requiring bills to be read on three several
 7-3     days in each house be suspended and this rule is hereby suspended.