CHAPTER 423.  TRANSACTIONS WITH MONEY AND OTHER ASSETS

SUBCHAPTER A.  GENERAL PROVISIONS

Revised Law

Sec. 423.001.  APPLICABILITY OF CHAPTER.  (a)  This chapter applies to a domestic insurer regulated under this code, including:

     (1)  a stock company;

     (2)  a reciprocal or interinsurance exchange;

     (3)  a Lloyd's plan;

     (4)  a fraternal benefit society;

     (5)  a stipulated premium company;

     (6)  a mutual insurance company of any kind, including:

          (A)  a statewide mutual assessment company;

          (B)  a local mutual aid association;

          (C)  a burial association;

          (D)  a county mutual insurance company; and

          (E)  a farm mutual insurance company; and

     (7)  any other organization or person engaged in the business of insurance.

(b)  A provision of this code limiting the regulation of an insurer under this code does not limit the application of this chapter, except that this chapter does not apply to an insurer that is exempted from its application by another statute that cites this chapter.  (V.T.I.C. Art. 21.39-B, Sec. 4 (part).)

Source Law

Sec. 4.  The provisions of this article are applicable to all domestic insurance companies subject to regulation by the Insurance Code, as amended, and any provision of exemption or any provision of inapplicability or applicability limiting such regulation in any chapter of the code are not in limitation of the provisions of this article, … .  As used herein, the term "insurance companies" includes stock companies, reciprocals or inter-insurance exchanges, Lloyds associations, fraternal benefit societies, stipulated premium companies, and mutual companies of all kinds, including state-wide mutual assessment corporations, local mutual aids, burial associations, and county mutual insurance companies and farm mutual insurance companies and all other organizations, corporations, or persons transacting an insurance business, unless such insurance companies are by statute specifically, by naming this article, exempted from the operation of this article.

Revisor's Note

(1)  Section 4, V.T.I.C. Article 21.39-B, refers to "reciprocals or inter-insurance exchanges," "Lloyds associations," "mutual companies," "state-wide mutual assessment corporations," and "local mutual aids."  The revised law substitutes "reciprocal or interinsurance exchange," "Lloyd's plan," "mutual insurance company," "statewide mutual assessment company," and "local mutual aid association" for those terms, respectively, for consistent use of terminology within this code.

(2)  Section 4, V.T.I.C. Article 21.39-B, refers to "organizations, corporations, or persons."  The revised law omits "corporation" as included within the meaning of "organization."

Revised Law

Sec. 423.002.  AMBIGUITIES AND CONFLICTS WITH OTHER LAW.  This chapter controls to the extent of an ambiguity or a conflict between this chapter and another provision of this code.  (V.T.I.C. Art. 21.39-B, Sec. 4 (part).)

Source Law

Sec. 4.  … and in the event of conflict between this article and any other article of the code or in the event of any ambiguity, the provisions of this article shall govern… .

Revisor's Note

(End of Subchapter)

Section 3, V.T.I.C. Article 21.39-B, authorizes the State Board of Insurance to promulgate regulations necessary to implement the article.  The revised law omits the provision as unnecessary.  Chapter 685, Acts of the 73rd Legislature, Regular Session, 1993, abolished the State Board of Insurance and transferred that board's functions to the commissioner of insurance and the Texas Department of Insurance.  Section 36.001 of this code authorizes the commissioner to adopt any rules necessary to implement this code.  Additionally, under Section 311.005(5), Government Code (Code Construction Act), a rule is defined to include a regulation, and that definition applies to the revised law.  The omitted law reads:

Sec. 3. The State Board of Insurance may promulgate such regulations as may be deemed necessary to carry out the provisions of this article.

[Sections 423.003-423.050 reserved for expansion]

SUBCHAPTER B.  TRANSACTIONS WITH MONEY

Revised Law

Sec. 423.051.  DEPOSIT AND INVESTMENT OF MONEY.  A director, member of a committee, officer, or clerk of a domestic insurer who has the duty to handle or invest the insurer's money may not:

     (1)  invest the money other than in the corporate name of the insurer, except as provided by Section 423.102;

     (2)  deposit the money unless the deposit is:

          (A)  in the corporate name of the insurer;

          (B)  in a pooling account with one or more affiliates, as described by Section 823.003; or

          (C)  in accordance with a reinsurance agreement;

     (3)  borrow the insurer's money;

     (4)  have any interest in a loan, pledge, security, or property of the insurer, except as a stockholder; or

     (5)  take or receive for the individual's use a fee, brokerage, commission, gift, or other consideration for, or on account of, a loan made by or on behalf of the insurer.  (V.T.I.C. Art. 21.39-B, Sec. 1 (part).)

Source Law

Sec. 1. Any director, member of a committee, or officer, or any clerk of a domestic company, who is charged with the duty of handling or investing its funds, shall not:

     (1)  invest such funds, except in the corporate name of such company, … ;

     (2)  deposit such funds except in the corporate name of such company, or in a pooling account with one or more affiliates, or in accordance with a reinsurance agreement;

     (3)  borrow the funds of such company;

     (4)  be interested in any way in any loan, pledge, security, or property of such company, except as stockholder; or

     (5)  take or receive to his own use any fee, brokerage, commission, gift, or other consideration for, or on account of, a loan made by or on behalf of such company.

Revisor's Note

(1)  Section 1, V.T.I.C. Article 21.39-B, refers to an insurer's "funds."  Throughout this chapter, the revised law substitutes "money" for "funds" because, in context, the terms are synonymous and the former is more commonly used.

(2)  Section 1(2), V.T.I.C. Article 21.39-B, refers to "affiliates."  Section 2, V.T.I.C. Article 21.39-B, revised in pertinent part as Section 423.052(a), refers to an insurer's "affiliate, as defined in Article 21.49-1 of this code."  V.T.I.C. Article 21.49-1 was revised in pertinent part in Section 823.003 of this code.  For the convenience of the reader, the revised law adds a cross-reference to Section 823.003 of this code because it is clear from the context that the reference to "affiliates" in Section 1(2) and the reference to an "affiliate" in Section 2 both refer to an affiliate described by Section 823.003 of this code.

Revised Law

Sec. 423.052.  MONEY HELD IN POOLING ACCOUNT.  (a)  Only a domestic insurer and an affiliate, as described by Section 823.003, may hold money in a pooling account.

(b)  The accounting and operating records and books of the insurer and affiliate must be adequately detailed to identify specific insurance policies and policyholders with the money from premiums received by the insurer that issues the policies.  (V.T.I.C. Art. 21.39-B, Sec. 2 (part).)

Source Law

Sec. 2. If funds of a domestic company are deposited in a pooling account, only the domestic company and its affiliate, as defined in Article 21.49-1 of this code, may hold funds in a pooling account.  The accounting and operational records and books of the companies must be adequately detailed to identify specific insurance policies and policyholders with premium funds received by the particular company issuing the insurance. …

Revised Law

Sec. 423.053.  AUTHORITY TO DEPOSIT MONEY IN ACCOUNT OF REINSURER.  A reinsurance agreement between a domestic insurer and an affiliate, as described by Section 823.003, must specifically authorize the deposit of money from premiums to the account of the affiliate that assumes the reinsurance.  (V.T.I.C. Art. 21.39-B, Sec. 2 (part).)

Source Law

Sec. 2. …  A reinsurance agreement between the domestic company and one or more affiliates must specifically authorize the deposit of premium funds to the account of the affiliate which is assuming the reinsurance.

[Sections 423.054-423.100 reserved for expansion]

SUBCHAPTER C.  TRANSACTIONS WITH OTHER ASSETS

Revised Law

Sec. 423.101.  DEFINITION.  In this subchapter, "clearing corporation" means:

     (1)  a clearing corporation as defined by Section 8.102(a), Business & Commerce Code; or

     (2)  a clearance system that:

          (A)  is organized or operating under the laws of at least one foreign country;

          (B)  provides for book-entry settlement and custody of internationally traded securities; and

          (C)  has been organized and in operation for not less than 15 consecutive years.  (V.T.I.C. Art. 21.39-B, Sec. 5(b).)

Source Law

(b)  As used in this article, a clearing corporation is:

     (1)  a corporation defined in Section 8.102(c) of the Business & Commerce Code; or

     (2)  a clearance system that:

          (A)  is organized or operating under the law of one or more foreign countries;

          (B)  provides for the book entry settlement and custody of internationally traded securities; and

          (C)  has been organized and in operation for a period of not less than 15 consecutive years.

Revisor's Note

Section 5(b), V.T.I.C. Article 21.39-B, refers to a clearing corporation defined by "Section 8.102(c) of the Business & Commerce Code."  Section 5(b), V.T.I.C. Article 21.39-B, was added by Chapter 267, Acts of the 68th Legislature, Regular Session, 1983.  At that time, Section 8.102(c), Business & Commerce Code, defined "clearing corporation."  Section 8.102, Business & Commerce Code, was reorganized by Chapter 962, Acts of the 74th Legislature, Regular Session, 1995, and the definition of "clearing corporation" was moved to Section 8.102(a).  The revised law is drafted accordingly.

Revised Law

Sec. 423.102.  DEPOSIT AND HOLDING OF SECURITIES.  (a)  A domestic insurer that has securities held in or purchased for the insurer's general account or separate accounts may deposit the securities or arrange through an agent, broker, or dealer for deposit of the securities with a clearing corporation or in the Federal Reserve book-entry system.

(b)  If securities are deposited directly with a clearing corporation or deposited indirectly through a participating custodian bank, certificates representing securities of the same class of the same issuer may be merged and held in bulk, in the name of a nominee of the clearing corporation, with any other securities deposited with the clearing corporation by any person, regardless of the ownership of the securities.

(c)  Certificates under Subsection (b) that represent securities of small denominations may be merged into one or more certificates of larger denominations.

(d)  The records of an agent, broker, dealer, or member bank through which an insurer holds securities in the Federal Reserve book-entry system and the records of a custodian bank through which an insurer holds securities with a clearing corporation must show that the securities are held for the insurer and show the accounts for which the securities are held.

(e)  A bank must enter into a custodial agreement with an insurer to be eligible to act as a participating custodian bank for the insurer under this section.  (V.T.I.C. Art. 21.39-B, Sec. 5(a) (part).)

Source Law

Sec. 5.  (a)  [A domestic insurance company may …]  The insurance company may deposit or arrange through its agents, brokers, or dealers for the deposit of securities held in or purchased for its general account or its separate accounts in either a clearing corporation or the Federal Reserve Book Entry System.  When securities are deposited with a clearing corporation directly or deposited indirectly through a participating custodian bank, certificates representing securities of the same class of the same issuer may be merged and held in bulk in the name of nominee of such clearing corporation with any other securities deposited with such clearing corporation by any person, regardless of the ownership of such securities, and certificates representing securities of small denominations may be merged into one or more certificates of larger denominations.  The records of any agent, broker, dealer, or member banks through which an insurance company holds securities in the Federal Reserve Book Entry System and the record of any custodian banks through which an insurance company holds securities in a clearing corporation shall at all times show that such securities are held for such insurance company and for which accounts thereof.  To be eligible to act as a participating custodian bank under this subsection, a bank must enter a custodial agreement with the insurance company for which it is to act as a participating custodian bank.

Revisor's Note

Section 5(a), V.T.I.C. Article 21.39-B, states that certain records must "at all times" reflect that certain securities are held for an insurer and reflect the accounts for which the securities are held.  The revised law omits "at all times" as unnecessary because, without an express limitation, a requirement that the records reflect the specified information includes the requirement that the records do so at all times.

Revised Law

Sec. 423.103.  SECURITIES HELD UNDER CUSTODIAL OR TRUST AGREEMENT.  A domestic insurer's securities that are held under a custodial agreement or trust agreement with a bank, Federal Home Loan Bank, or trust company may be issued in the name of a nominee of the bank, Federal Home Loan Bank, or trust company only if the bank, Federal Home Loan Bank, or trust company:

     (1)  has corporate trust powers;

     (2)  is authorized to act as a custodian or trustee;

     (3)  is organized under the laws of the United States or any state of the United States; and

     (4)  meets one of the following requirements:

          (A)  is a member of the Federal Reserve System;

          (B)  is a member of or is eligible to receive deposits that are insured by the Federal Deposit Insurance Corporation;

          (C)  maintains an account with a Federal Reserve Bank and is subject to supervision and examination by the Board of Governors of the Federal Reserve System; or

          (D)  is subject to supervision and examination by the Federal Housing Finance Board.  (V.T.I.C. Art. 21.39-B, Sec. 1 (part).)

Source Law

Sec. 1. [Any director, member of a committee, or officer, or any clerk of a domestic company … shall not … invest such funds …] provided, however, that securities kept under a custodial agreement or trust agreement with a bank, federal home loan bank, or trust company may be issued in the name of a nominee of such bank, federal home loan bank, or trust company if such bank, federal home loan bank, or trust company has corporate trust powers and is duly authorized to act as a custodian or trustee and is organized under the laws of the United States of America or any state thereof and either (i) is a member of the Federal Reserve System, (ii) is a member of or is eligible to receive deposits which are insured by the Federal Deposit Insurance Corporation, (iii) maintains an account with a Federal Reserve Bank and is subject to supervision and examination by the Board of Governors of the Federal Reserve System, or (iv) is subject to supervision and examination by the Federal Housing Finance Board; … .

Revisor's Note

Section 1, V.T.I.C. Article 21.39-B, requires certain banks and trust companies to be "duly authorized" to act as custodians or trustees of securities.  The revised law omits "duly" as unnecessary because a bank or trust company is authorized to act as a custodian only if the bank or trust company is duly authorized.

Revised Law

Sec. 423.104.  PROOF OF OWNERSHIP OF SECURITIES.  (a)  A domestic insurer may demonstrate ownership of a security through a definitive certificate or in accordance with rules adopted under this section.

(b)  The commissioner shall adopt rules under which a domestic insurer may demonstrate ownership of an uncertificated security, as defined by Section 8.102, Business & Commerce Code, consistent with common practices of securities exchanges and markets.  The rules must establish:

     (1)  standards for the types of uncertificated securities the insurer may hold;

     (2)  the manner in which the insurer may demonstrate ownership of the security; and

     (3)  adequate financial safeguards relating to the ownership of uncertificated securities.  (V.T.I.C. Art. 21.39-B, Secs. 5(a) (part), 6.)

Source Law

Sec. 5.  (a)  A domestic insurance company may evidence its ownership of securities either through definitive certificates or through uncertificated securities as defined by the Business & Commerce Code and as provided by Section 6 of this article. …

Sec. 6.  The State Board of Insurance shall adopt rules authorizing a domestic insurance company to demonstrate ownership of an uncertificated security consistent with common practices of securities exchanges and markets.  The rules shall establish:

     (1)  standards for the types of uncertificated securities that may be held;

     (2)  the manner in which ownership of the security may be demonstrated; and

     (3)  adequate financial safeguards relating to the ownership of uncertificated securities.

Revisor's Note

Section 6, V.T.I.C. Article 21.39-B, refers to the State Board of Insurance.  The revised law substitutes "commissioner" for "State Board of Insurance" because, as noted in the End of Subchapter Revisor's Note following Subchapter A of this chapter, the State Board of Insurance was abolished and its powers and duties were transferred to the commissioner of insurance and the Texas Department of Insurance.  Similar changes have been made throughout this chapter.

Revised Law

Sec. 423.105.  MANDATORY DEPOSIT OF SECURITIES; COMMISSIONER CONTROL.  (a)  An insurer that is required to deposit securities as a condition of engaging in the business of insurance in this state may deposit the securities with a clearing corporation or in the Federal Reserve book-entry system.

(b)  Securities under Subsection (a) are under the commissioner's control and may not be withdrawn by the insurer without the commissioner's approval.  (V.T.I.C. Art. 21.39-B, Sec. 5(c) (part).)

Source Law

(c)  Whenever an insurance company is required to deposit securities as a condition of commencing or continuing to do an insurance business in this state, such deposit may be made through the use of a clearing corporation or the Federal Reserve Book Entry System.  Securities deposited with a clearing corporation or held in the Federal Reserve Book Entry System and used to meet the deposit requirements under the insurance laws of this state shall be under the control of the commissioner and shall not be withdrawn by the insurance company without the approval of the commissioner. …

Revised Law

Sec. 423.106.  REQUIRED EVIDENCE FOR SECURITIES.  (a)  An insurer that deposits securities under Section 423.105 shall provide evidence to the commissioner to establish that:

     (1)  the securities are recorded in an account in the name of:

          (A)  the participating custodian bank or member bank through which the insurer deposits the securities with a clearing corporation or in the Federal Reserve book-entry system; or

          (B)  the insurer, if the insurer makes the deposit directly with the clearing corporation as a direct participant; and

     (2)  the records of the participating custodian bank, direct participant, or member bank and of the clearing corporation show that the securities are under the commissioner's control.

(b)  Evidence under Subdivision (a)(1) must be issued, as applicable, by:

     (1)  the participating custodian bank;

     (2)  the member bank; or

     (3)  the insurer, when the insurer makes the deposit directly with the clearing corporation as a direct participant. (V.T.I.C. Art. 21.39-B, Sec. 5(c) (part).)

Source Law

(c)  [Whenever an insurance company is required to deposit securities as a condition of commencing or continuing to do an insurance business in this state, such deposit may be made through the use of a clearing corporation or the Federal Reserve Book Entry System. …]  Any insurance company making a deposit in this manner shall provide to the commissioner evidence issued by its custodian or member bank through which such insurance company has deposited securities with a clearing corporation or in the Federal Reserve Book Entry System or when making the deposit directly with the clearing corporation as a participant, respectively, in order to establish that the securities are actually recorded in an account in the name of the custodian or direct participant or member bank, and shall also provide to the commissioner evidence that the records of the custodian, participant, or member bank and clearing corporation reflect that such securities are held subject to the order of the commissioner.

Revisor's Note

Section 5(c), V.T.I.C. Article 21.39-B, refers to securities "held subject to the order of the commissioner."  The revised law substitutes "under the commissioner's control" for "held subject to the order of the commissioner" for consistency with other terminology used in Section 5(c), revised as Section 423.105(b), to describe the securities.

Revised Law

Sec. 423.107.  ASSETS DEPOSITED WITH CLEARING CORPORATION.  A domestic insurer may deposit assets with a clearing corporation only if:

     (1)  the insurer is a member of an insurance holding company system that has assets of at least $5 billion, as shown by annual statements of member insurers for the preceding year;

     (2)  the insurer uses the clearing corporation only as a depository for investments in internationally traded securities;

     (3)  the insurer's total investment in internationally traded securities under Subdivision (2) does not exceed the insurer's policyholders' surplus; and

     (4)  the insurer does not use securities deposited with the clearing corporation as security for reinsurance.  (V.T.I.C. Art. 21.39-B, Sec. 5(e).)

Source Law

(e)  A domestic insurance company may deposit assets in a clearing corporation defined by Subsection (b)(2) of this section only if the insurance company:

     (1)  is a member of an insurance company holding company system with total assets of at least $5 billion as reflected by annual statements of member companies for the preceding year;

     (2)  uses that clearing corporation only as a depository for investments in internationally traded securities;

     (3)  has a total investment in those internationally traded securities that does not exceed the company's policyholders' surplus; and

     (4)  does not use those securities deposited with that clearing corporation as security for reinsurance.

Revisor's Note

Section 5(e), V.T.I.C. Article 21.39-B, refers to an "insurance company holding company system."  The revised law substitutes "insurance holding company system" for the quoted language for consistent use of terminology with Chapter 823 of this code, which regulates that type of system.

Revised Law

Sec. 423.108.  LIMITATION ON ASSETS DEPOSITED WITH CLEARING CORPORATION.  The commissioner by rule may adopt a reasonable limit on the percentage of a domestic insurer's assets that may be deposited with a clearing corporation.  The limit may not exceed five percent of the insurer's total assets, as shown by the insurer's annual statement filed with the department for the year preceding the year for which the limit is adopted.  (V.T.I.C. Art. 21.39-B, Sec. 5(d).)

Source Law

(d)  The State Board of Insurance by rule may prescribe a reasonable maximum limit on the percentage of a domestic insurance company's assets that may be deposited in a clearing corporation as defined by Subsection (b)(2) of this section, but the maximum limit may not exceed five percent of a company's total assets as reflected by its annual statement filed with the State Board of Insurance for the year preceding the year for which the limit is prescribed.