1-1     By:  Thompson (Senate Sponsor - Carona)               H.B. No. 2711
 1-2           (In the Senate - Received from the House May 3, 1999;
 1-3     May 3, 1999, read first time and referred to Committee on Economic
 1-4     Development; May 14, 1999, reported favorably by the following
 1-5     vote:  Yeas 5, Nays 0; May 14, 1999, sent to printer.)
 1-6                            A BILL TO BE ENTITLED
 1-7                                   AN ACT
 1-8     relating to restrictions on the deposit and investment of funds of
 1-9     a domestic insurance company.
1-10           BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-11           SECTION 1.  Article 21.39-B, Insurance Code, is amended to
1-12     read as follows:
1-13           Art. 21.39-B.  RESTRICTION ON TRANSACTIONS WITH FUNDS AND
1-14     ASSETS
1-15           Sec. 1.  Any director, member of a committee, or officer, or
1-16     any clerk of a domestic company, who is charged with the duty of
1-17     handling or investing its funds, shall not:
1-18                 (1)  [deposit or] invest such funds, except in the
1-19     corporate name of such company, provided, however, that securities
1-20     kept under a custodial agreement or trust agreement with a bank,
1-21     federal home loan bank, or trust company may be issued in the name
1-22     of a nominee of such bank, federal home loan bank, or trust company
1-23     if such bank, federal home loan bank, or trust company has
1-24     corporate trust powers and is duly authorized to act as a custodian
1-25     or trustee and is organized under the laws of the United States of
1-26     America or any state thereof and either (i) is a member of the
1-27     Federal Reserve System, (ii) is a member of or is eligible to
1-28     receive deposits which are insured by the Federal Deposit Insurance
1-29     Corporation, (iii) maintains an account with a Federal Reserve Bank
1-30     and is subject to supervision and examination by the Board of
1-31     Governors of the Federal Reserve System, or (iv) is subject to
1-32     supervision and examination by the Federal Housing Finance Board;
1-33                 (2)  deposit such funds except in the corporate name of
1-34     such company, or in a pooling account with one or more affiliates,
1-35     or in accordance with a reinsurance agreement;
1-36                 (3) [(2)]  borrow the funds of such company;
1-37                 (4) [(3)]  be interested in any way in any loan,
1-38     pledge, security, or property of such company, except as
1-39     stockholder; or
1-40                 (5) [(4)]  take or receive to his own use any fee,
1-41     brokerage, commission, gift, or other consideration for, or on
1-42     account of, a loan made by or on behalf of such company.
1-43           Sec. 2.  If funds of a domestic company are deposited in a
1-44     pooling account, only the domestic company and its affiliate, as
1-45     defined in Article 21.49-1 of this code, may hold funds in a
1-46     pooling account.  The accounting and operational records and books
1-47     of the companies must be adequately detailed to identify specific
1-48     insurance policies and policyholders with premium funds received by
1-49     the particular company issuing the insurance.  A reinsurance
1-50     agreement between the domestic company and one or more affiliates
1-51     must specifically authorize the deposit of premium funds to the
1-52     account of the affiliate which is assuming the reinsurance.
1-53           Sec. 3 [Sec. 2].  The State Board of Insurance may promulgate
1-54     such regulations as may be deemed necessary to carry out the
1-55     provisions of this article.
1-56           Sec. 4 [Sec. 3].  The provisions of this article are
1-57     applicable to all domestic insurance companies subject to
1-58     regulation by the Insurance Code, as amended, and any provision of
1-59     exemption or any provision of inapplicability or applicability
1-60     limiting such regulation in any chapter of the code are not in
1-61     limitation of the provisions of this article, and in the event of
1-62     conflict between this article and any other article of the code or
1-63     in the event of any ambiguity, the provisions of this article shall
1-64     govern.  As used herein, the term "insurance companies" includes
 2-1     stock companies, reciprocals or inter-insurance exchanges, Lloyds
 2-2     associations, fraternal benefit societies, stipulated premium
 2-3     companies, and mutual companies of all kinds, including state-wide
 2-4     mutual assessment corporations, local mutual aids, burial
 2-5     associations, and county mutual insurance companies and farm mutual
 2-6     insurance companies and all other organizations, corporations, or
 2-7     persons transacting an insurance business, unless such insurance
 2-8     companies are by statute specifically, by naming this article,
 2-9     exempted from the operation of this article.
2-10           Sec. 5 [Sec. 4].  (a)  A domestic insurance company may
2-11     evidence its ownership of securities either through definitive
2-12     certificates or through uncertificated securities as defined by the
2-13     Business & Commerce Code and as provided by Section 6 of this
2-14     article.  The insurance company may deposit or arrange through its
2-15     agents, brokers, or dealers for the deposit of securities held in
2-16     or purchased for its general account or its separate accounts in
2-17     either a clearing corporation or the Federal Reserve Book Entry
2-18     System.  When securities are deposited with a clearing corporation
2-19     directly or deposited indirectly through a participating custodian
2-20     bank, certificates representing securities of the same class of the
2-21     same issuer may be merged and held in bulk in the name of nominee
2-22     of such clearing corporation with any other securities deposited
2-23     with such clearing corporation by any person, regardless of the
2-24     ownership of such securities, and certificates representing
2-25     securities of small denominations may be merged into one or more
2-26     certificates of larger denominations.  The records of any agent,
2-27     broker, dealer, or member banks through which an insurance company
2-28     holds securities in the Federal Reserve Book Entry System and the
2-29     record of any custodian banks through which an insurance company
2-30     holds securities in a clearing corporation shall at all times show
2-31     that such securities are held for such insurance company and for
2-32     which accounts thereof.  To be eligible to act as a participating
2-33     custodian bank under this subsection, a bank must enter a custodial
2-34     agreement with the insurance company for which it is to act as a
2-35     participating custodian bank.
2-36           (b)  As used in this article, a clearing corporation is:
2-37                 (1)  a corporation defined in Section 8.102(c) of the
2-38     Business & Commerce Code; or
2-39                 (2)  a clearance system that:
2-40                       (A)  is organized or operating under the law of
2-41     one or more foreign countries;
2-42                       (B)  provides for the book entry settlement and
2-43     custody of internationally traded securities; and
2-44                       (C)  has been organized and in operation for a
2-45     period of not less than 15 consecutive years.
2-46           (c)  Whenever an insurance company is required to deposit
2-47     securities as a condition of commencing or continuing to do an
2-48     insurance business in this state, such deposit may be made through
2-49     the use of a clearing corporation or the Federal Reserve Book Entry
2-50     System.  Securities deposited with a clearing corporation or held
2-51     in the Federal Reserve Book Entry System and used to meet the
2-52     deposit requirements under the insurance laws of this state shall
2-53     be under the control of the commissioner and shall not be withdrawn
2-54     by the insurance company without the approval of the commissioner.
2-55     Any insurance company making a deposit in this manner shall provide
2-56     to the commissioner evidence issued by its custodian or member bank
2-57     through which such insurance company has deposited securities with
2-58     a clearing corporation or in the Federal Reserve Book Entry System
2-59     or when making the deposit directly with the clearing corporation
2-60     as a participant, respectively, in order to establish that the
2-61     securities are actually recorded in an account in the name of the
2-62     custodian or direct participant or member bank, and shall also
2-63     provide to the commissioner evidence that the records of the
2-64     custodian, participant, or member bank and clearing corporation
2-65     reflect that such securities are held subject to the order of the
2-66     commissioner.
2-67           (d)  The State Board of Insurance by rule may prescribe a
2-68     reasonable maximum limit on the percentage of a domestic insurance
2-69     company's assets that may be deposited in a clearing corporation as
 3-1     defined by Subsection (b)(2) of this section, but the maximum limit
 3-2     may not exceed five percent of a company's total assets as
 3-3     reflected by its annual statement filed with the State Board of
 3-4     Insurance for the year preceding the year for which the limit is
 3-5     prescribed.
 3-6           (e)  A domestic insurance company may deposit assets in a
 3-7     clearing corporation defined by Subsection (b)(2) of this section
 3-8     only if the insurance company:
 3-9                 (1)  is a member of an insurance company holding
3-10     company system with total assets of at least $5 billion as
3-11     reflected by annual statements of member companies for the
3-12     preceding year;
3-13                 (2)  uses that clearing corporation only as a
3-14     depository for investments in internationally traded securities;
3-15                 (3)  has a total investment in those internationally
3-16     traded securities that does not exceed the company's policyholders'
3-17     surplus; and
3-18                 (4)  does not use those securities deposited with that
3-19     clearing corporation as security for reinsurance.
3-20           Sec. 6.  The State Board of Insurance shall adopt rules
3-21     authorizing a domestic insurance company to demonstrate ownership
3-22     of an uncertificated security consistent with common practices of
3-23     securities exchanges and markets.  The rules shall establish:
3-24                 (1)  standards for the types of uncertificated
3-25     securities that may be held;
3-26                 (2)  the manner in which ownership of the security may
3-27     be demonstrated; and
3-28                 (3)  adequate financial safeguards relating to the
3-29     ownership of uncertificated securities.
3-30           SECTION 2.  This Act takes effect September 1, 1999.
3-31           SECTION 3.  The importance of this legislation and the
3-32     crowded condition of the calendars in both houses create an
3-33     emergency and an imperative public necessity that the
3-34     constitutional rule requiring bills to be read on three several
3-35     days in each house be suspended, and this rule is hereby suspended.
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