To allow insurers to utilize modern systems for holding and transferring securities without physical delivery of securities certificates.

 

DEPARTMENT OF FINANCIAL SERVICES
OIR – Insurance Regulation

RULE NO: RULE TITLE
69O-143.041: Definitions
69O-143.042: Custody Agreement; Requirements
PURPOSE AND EFFECT: To allow insurers to utilize modern systems for holding and transferring securities without physical delivery of securities certificates.
SUMMARY: To allow insurers to utilize modern systems for holding and transferring securities without physical delivery of securities certificates.
SUMMARY OF STATEMENT OF ESTIMATED REGULATORY COSTS: No Statement of Estimated Regulatory Cost was prepared.
Any person who wishes to provide information regarding a statement of estimated regulatory costs, or provide a proposal for a lower cost regulatory alternative must do so in writing within 21 days of this notice.
SPECIFIC AUTHORITY: 624.308(1), 628.511(4) FS.
LAW IMPLEMENTED: 624.307(1), 625.55, 628.511 FS.
IF REQUESTED WITHIN 21 DAYS OF THE DATE OF THIS NOTICE, A HEARING WILL BE HELD AT THE DATE,TIME AND PLACE SHOWN BELOW(IF NOT REQUESTED, THIS HEARING WILL NOT BE HELD):
DATE AND TIME: November 7, 2007, 1:30 p.m.
PLACE: Room 142, Larson Building, 200 East Gaines Street, Tallahassee, Florida
Pursuant to the provisions of the Americans with Disabilities Act, any person requiring special accommodations to participate in this workshop/meeting is asked to advise the agency at least 5 days before the workshop/meeting by contacting: Steve Szypula, Office of Insurance Regulation, E-mail [e-mail]. If you are hearing or speech impaired, please contact the agency using the Florida Relay Service, 1(800)955-8771 (TDD) or 1(800)955-8770 (Voice).
THE PERSON TO BE CONTACTED REGARDING THE PROPOSED RULE IS: Steve Szypula, Office of Insurance Regulation, E-mail [e-mail].

THE FULL TEXT OF THE PROPOSED RULE IS:

 

69O-143.041 Definitions.

For the purpose of this chapter, the following definitions shall apply:

(1) “Agent” shall mean a national bank, state bank, or trust company or broker/dealer which maintains an account in its name in a clearing corporation or which is a member of the Federal Reserve System and through which a custodian participates in a clearing corporation, including the Treasure/Reserve Automated Debt Entry Securities System (TRADES) or Treasury Direct System the Federal Reserve book-entry system, except that with respect to securities issued by institutions organized or existing under the laws of any foreign country or securities used to meet the deposit requirements pursuant to the laws of a foreign country as a condition of doing business therein, “agent” may include a corporation which is organized or existing under the laws of any foreign country and which is legally qualified under such laws to accept custody of securities.

(2) “Custodian” shall mean:

(a) Aa national bank, state bank, or trust company which shall has at all times during which it acts as a custodian pursuant to this chapter be no less than adequately capitalized as determined by the standards adopted by United States banking regulators and that aggregate capital, surplus and undivided profits of not less than $500,000 and which is regulated by either state banking laws or is a member of the Federal Reserve System and which is legally qualified to accept custody of securities in accordance with the standards set forth below, except that with respect to securities issued by institutions organized or existing under the laws of any foreign country, or securities used to meet the deposit requirements pursuant to the laws of a foreign country as a condition of doing business therein, “custodian” may include a bank, or trust company incorporated or organized under the laws of a country other than the United States that is regulated as such by that country’s government or an agency thereof that shall at all times during which it acts as a custodian pursuant to this chapter be no less than adequately capitalized as determined by the standards adopted by international banking authorities and that is legally qualified to accept custody of securities; or similar institution which has at all times aggregate capital, surplus and undivided profits of not less than the equivalent of $500,000 and which is legally qualified to accept custody of securities.

(b) A broker/dealer that shall be registered with and subject to jurisdiction of the Securities and Exchange Commission, maintains membership in the Securities Investor Protection Corporation, and has a tangible net worth equal to or greater than two hundred fifty million dollars ($250,000,000).

(3) “Clearing Corporation” means a clearing corporation as defined in Section 678.1021, F.S. Clearing Corporation also includes “Treasury/Reserve Automated Debt Entry Securities System (TRADES)” and “Treasury Direct” book-entry securities systems established pursuant to 31 U.S.C. Section 3100 et seq., 12 U.S.C. pt. 391 and 5 U.S.C. pt. 301.

(4) “Custodied securities” means securities held by the custodian or its agent or in a clearing corporation, including the Treasury/Reserve Automated Debt Entry Securities System (TRADES) or Treasury Direct systems.

(5) “Tangible net worth” means shareholders equity, less intangible assets, as reported in the broker/dealer’s most recent Annual or Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (S.E.C. Form 10-K) filed with the Securities and Exchange Commission.

(6) “Treasury/Reserve Automated Debt Entry Securities Systems (TRADES)” and “Treasury Direct” mean the book entry securities systems established pursuant to 31 U.S.C. Section 3100 et seq., 12 U.S.C. pt. 391 and 5 U.S.C. pt. 301.  The operation of TRADES and Treasury Direct are subject to 31 C.F.R. pt 357 et seq.

(7) “Security” has the same meaning as that defined in Section 8-102(a)(15) of the Uniform Commercial Code.

(8) “Securities” has the same meaning as that defined in Section 8-102(a)(15) of the Uniform Commercial Code.

Specific Authority 624.308(1), 628.511(4) FS. Law Implemented 624.307(1), 628.511 FS. History–New 2-7-85, Formerly 4-66.01, 4-66.001, 4-143.041, Amended________.

 

69O-143.042 Custody Agreement; Requirements.

(1) A domestic insurance company may, by written agreement with a custodian, provide for the custody of its securities with that a custodian., The securities that are the subject of the agreement which securities may be held by the custodian or its agent or in a clearing corporation. or in the Federal Reserve book-entry system. Securities so held, whether held by the custodian or its agent or in a clearing corporation or in the Federal Reserve book-entry system, are referred to herein as “custodied securities.” However, securities which are used to meet the deposit requirements of Section 624.411, F.S., shall only be placed in the custody of a Florida institution which has been approved by the Office of Insurance Regulation for the purpose and under custodial arrangements likewise approved by it.

(2) Any such agreement shall be in writing and shall be authorized by a resolution of the Board of Directors of the insurance company or of an authorized committee thereof. The terms of the agreement shall comply with the following:

(a) Certificated Ssecurities’ certificates held by the custodian shall be held either separate from the securities certificates of the custodian and of all of its other customers or in a fungible bulk of securities as part of a Filing of Securities by Issue (FOSBI) arrangement.

(b) Securities held indirectly in a fungible bulk by the custodian and securities in a clearing corporation or in the Federal Reserve book-entry system shall be separately identified on the custodian’s official records as being owned by the insurance company. Said records shall identify which custodied securities are held by the custodian or by its agent and which securities are in a clearing corporation or in the Federal Reserve book-entry system. If the securities are in a clearing corporation or in the Federal Reserve book-entry system, said records shall also identify where the securities are and if in a clearing corporation, the name of the clearing corporation and if through an agent, the name of the agent.

(c) All custodied securities that are registered shall be registered in the name of the company or in the name of a nominee of the company or in the name of the custodian or its nominee or, if in a clearing corporation, in the name of the clearing corporation or its nominee.

(d) Custodied securities shall be held subject to the instructions of the insurance company and shall be withdrawable upon the demand of the insurance company, except that custodied securities used to meet the deposit requirements set forth in Section 624.411, F.S., shall, to the extent required by that section, be under the control of the Office Director and shall not be withdrawn by the insurance company without the approval of the Office Director.

(e) The custodian shall arrange for execution of transactions in custodied securities in accordance with the insurance company’s instructions and shall not exercise discretionary authority to effect transactions in custodied securities except in such limited or special circumstances as the insurance company may authorize.

(e)(f) The custodian shall be required to send or cause to be sent to the insurance company a confirmation of all transfers of custodied securities to or from the account of the insurance company. In addition, the custodian shall be required to furnish no less than monthly the insurance company with reports of holdings of custodied securities at such times and containing such information as may be reasonably requested by the insurance company. The custodian’s trust committee’s annual report of its review of the insurer’s trust accounts shall also be provided to the insurance company. Reports and verifications may be transmitted in electronic or paper form.

(f)(g) During the course of the custodian’s regular business hours, any officer or employee of the insurance company, any independent accountant selected by the insurance company and any representative of an appropriate regulatory body shall be entitled to examine, on the premises of the custodian, the custodian’s records relating to custodied securities, but only upon furnishing the custodian with written instructions to that effect from an appropriate officer of the insurance company.

(g)(h) The custodian and its agents shall be required to send to the insurance company all reports which they receive from a clearing corporation or the Federal Reserve book-entry system on their respective systems of internal accounting control and reports prepared by outside auditors on the custodians or its agent’s internal accounting control of custodied securities that the insurance company may reasonably request.

(h)(i) The custodian shall maintain records sufficient to determine and verify information relating to custodied securities that may be reported in the insurance company’s Annual Statement and supporting Schedules and information required in any audit of the financial statements of the insurance company.

(i)(j) The custodian shall provide, upon written request from the Office Insurance Director or from an appropriate officer of the insurance company, the appropriate affidavits, on Forms OIR-A1D0-341 (A), (B), or (C) or substantially similar forms with respect to custodied securities. Forms OIR-A1D0-341 (A), (B) and (C), entitled “Custodian Affidavit,” are hereby incorporated by reference. These forms shall become effective on the effective date of these rules and may be obtained from the Office of Insurance Regulation, Larson Building, Tallahassee, Florida.

(j) A national bank, state bank or trust company shall secure and maintain insurance protection in an adequate amount covering the bank’s or trust company’s duties and activities as custodian for the insurer’s assets, and shall state in the custody agreement that protection is in compliance with the requirements of the custodian’s banking regulator. A broker/dealer shall secure and maintain insurance protection for each insurance company’s custodied securities in excess of that provided by the Securities Investor Protection Corporation in an amount equal to or greater than the market value of each respective insurance company’s custodied securities.

(k) The custodian shall be obligated to indemnify the insurance company for any loss of custodied securities occasioned by the negligence or dishonesty of the custodian’s officers or employees, or burglary, robbery, holdup, theft or mysterious disappearance, including loss by damage or destruction.

(l) In the event that there is a loss of custodied securities for which the custodian shall be obligated to indemnify the insurance company as provided in paragraph (k) above, the custodian shall promptly replace the securities or the value thereof and the value of any loss of rights or privileges resulting from said loss of securities.

(m) The agreement may provide that the custodian will not be liable for any failure to take any action required to be taken under the agreement in the event and to the extent that the taking of such action is prevented or delayed by war (whether declared or not and including existing wars), revolution, insurrection, riot, civil commotion, act of God, accident, fire, explosion, stoppage of labor, strikes or other differences with employees, laws, regulations, orders or other acts of any governmental authority, or any other cause whatever beyond its reasonable control.

(n) In the event that the custodian gains entry in a clearing corporation or in the Federal Reserve book-entry system through an agent, there shall be an agreement between the custodian and the agent under which the agent shall be subject to the same liability for loss of custodied securities as the custodian, provided, however, that, if the agent shall be subject to regulation under the laws of a jurisdiction which is different from the jurisdiction the laws of which regulate the custodian, the Director may accept a standard of liability applicable to the agent which is different from the standard of liability applicable to the custodian.

(o) The custodian shall provide written notification to the Office if the custodial agreement with the insurer has been terminated or if 100% of the account assets in any one custody account have been withdrawn. This notification shall be remitted to the Office within three (3) business days of the receipt by the custodian of the insurer’s written notice of termination or within three (3) business days of the withdrawal of 100% of the account assets agreement must be terminable by the insurance company on not more than thirty (30) days’ notice.

(3)(a) Nothing in this rule shall prevent an insurance company from depositing securities with another insurance company with which the depositing insurance company is affiliated, provided that the securities are deposited pursuant to a written agreement authorized by the board of directors of the depositing insurance company or an authorized committee thereof and that the receiving insurance company is organized under the laws of one of the states of the United States of America or of the District of Columbia.  If the respective states of domicile of the depositing and receiving insurance companies are not the same, the depositing insurance company shall have given notice of the deposit to the insurance commissioner in the state of its domicile and the insurance commissioner shall not have objected to it within thirty (3) days of the receipt of the notice.

(b) The terms of any such agreement shall comply with the following:

1. The insurance company receiving the deposit shall maintain records adequate to identify and verify the securities belonging to the depositing insurance company.

2. The receiving insurance company shall allow representatives of an appropriate regulatory body to examine records relating to securities held subject to the agreement.

3. The depositing insurance company may authorize the receiving insurance company:

a. To hold the securities of the depositing insurance company in bulk, in certificates issued in the name of the receiving insurance company or its nominee, and to commingle them with securities owned by other affiliates of the receiving insurance company, and

b. To provide for the securities to be held by a custodian, including the custodian of securities of the receiving insurance company or in a clearing corporation.

Specific Authority 624.308(1), 628.511(4) FS. Law Implemented 624.307(1), 625.55, 628.511 FS. History–New 2-7-85, Formerly 4-66.02, 4-66.00, 4-143.042, Amended_________.

 

NAME OF PERSON ORIGINATING PROPOSED RULE: Steve Szypula, Property and Casualty Financial Oversight, Office of Insurance Regulation
NAME OF SUPERVISOR OR PERSON WHO APPROVED THE PROPOSED RULE: Tom Streukens, Deputy Commissioner, Office of Insurance Regulation
DATE PROPOSED RULE APPROVED BY AGENCY HEAD: September 19, 2007
DATE NOTICE OF PROPOSED RULE DEVELOPMENT PUBLISHED IN FAW: April 21, 2006