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.
3-36 * * * * *