BILL REQ. #:  H-4400.1 

Read first time 01/21/08.   Referred to Committee on Insurance, Financial Services & Consumer Protection.

     AN ACT Relating to safeguarding securities owned by insurers; amending RCW 48.13.450, 48.13.455, 48.13.460, 48.13.465, 48.13.475, and 48.13.490; and adding a new section to chapter 48.13 RCW.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

Sec. 1   RCW 48.13.450 and 2000 c 221 s 1 are each amended to read as follows:
     The definitions in this section apply throughout RCW 48.13.450 through 48.13.475 unless the context clearly requires otherwise.
     (1) "Agent" means a national bank, state bank, trust company, or broker/dealer that maintains an account in its name in a clearing corporation or that is a member of the federal reserve system and through which a custodian participates in a clearing corporation, including the treasury/reserve automated debt entry securities system (TRADES) or treasury direct systems; except that with respect to securities issued by institutions organized or existing under the laws of a foreign country or securities used to meet the deposit requirements pursuant to laws of a foreign country as a condition of doing business therein, "agent" may include a corporation that is organized or existing under the laws of a foreign country and that is legally qualified under those laws to accept custody of securities.
     (2) "Broker/dealer" means a broker or dealer as defined in RCW 62A.8-102(1)(c), that is registered with and subject to the 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.
     (((2))) (3) "Clearing corporation" means a ((depository)) corporation ((which maintains a book entry accounting system and which meets the requirements of)) as defined in RCW 62A.8-102(1)(e) that is organized for the purpose of effecting transactions in securities by computerized book-entry, 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, "clearing corporation" may include a corporation that is organized or existing under the laws of any foreign country and is legally qualified under such laws to effect transactions in securities by computerized book-entry. "Clearing corporation" also includes treasury/reserve automated debt entry securities system and treasury direct book-entry securities systems established pursuant to 31 U.S.C. Sec. 3100 et seq., 12 U.S.C. pt. 391, and 5 U.S.C. pt. 301.
     (((3))) (4) "Commissioner" means the insurance commissioner of the state of Washington.
     (((4) "Federal reserve book-entry securities system" means the computerized systems sponsored by the United States department of the treasury and certain agencies and instrumentalities of the United States for holding and transferring securities of the United States government and such agencies and instrumentalities, respectively, and managed by the federal reserve system for participating financial institutions.
     (5) "Participating financial institution" means a depositary financial institution such as a national bank, state bank, savings and loan, credit union, or trust company that is:
     (a) Authorized to participate in the federal reserve book-entry system; and
     (b) Licensed by the United States or the banking authorities in its state of domicile and is regularly examined by the licensing authority.
     (6) "Qualified)) (5) "Custodian" means ((either a participating financial institution or a clearing corporation, or both. A qualified custodian does not include a broker)):
     (a) A national bank, state bank, or trust company that shall, at all times acting as a custodian, be no less than adequately capitalized as determined by the standards adopted by United States banking regulators and that is regulated by either state banking laws or is a member of the federal reserve system and that is legally qualified to accept custody of securities; except that with respect to securities issued by institutions organized or existing under the laws of a foreign country, or securities used to meet the deposit requirements pursuant to 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 acting as a custodian be no less than adequately capitalized as determined by the standards adopted by the international banking authorities and legally qualified to accept custody of securities; or
     (b) A broker/dealer.
     (6) "Custodied securities" means securities held by the custodian or its agent or in a clearing corporation, including the treasury/reserve automated debt equity securities system (TRADES) or treasury direct systems.
     (7) "Securities" means instruments as defined in RCW 62A.8-102(1)(o).
     (8) "Securities certificate" has the same meaning as in RCW 62A.8-102(1)(d).
     (9) "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.
     (10) "Treasury/reserve automated debt entry securities system" ("TRADES") and "treasury direct" mean book-entry securities systems established pursuant to 31 U.S.C. Sec. 3100 et seq., 12 U.S.C. pt. 391, and 5 U.S.C. pt. 301, with the operation of TRADES and treasury direct subject to 31 C.F.R. pt. 357 et seq.

Sec. 2   RCW 48.13.455 and 2000 c 221 s 2 are each amended to read as follows:
     Notwithstanding any other provision of law, a domestic insurance company may deposit or arrange for the deposit of securities held in or purchased for its general account and its separate accounts in a clearing corporation ((or the federal reserve book-entry securities system)). When securities are deposited with a clearing corporation, securities certificates representing securities of the same class of the same issuer may be merged and held in bulk in the name of the 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 securities certificates representing securities of small denominations may be merged into one or more certificates of larger denominations. The records of any ((participating financial institution)) custodian through which an insurance company holds securities ((in the federal reserve book-entry securities system, and the records 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. Ownership of, and other interests in, such securities may be transferred by bookkeeping entry on the books of such clearing corporation ((or in the federal reserve book-entry securities system)) without((, in either case,)) physical delivery of securities certificates representing such securities.

Sec. 3   RCW 48.13.460 and 2000 c 221 s 3 are each amended to read as follows:
     The following are the only authorized methods of holding securities:
     (1) A domestic insurance company may hold securities in definitive certificates;
     (2) A domestic insurance company may, pursuant to an agreement, designate a ((participating financial institution or institutions as its)) custodian through which it can transact and maintain book-entry securities on behalf of the insurance company; or
     (3) A domestic insurance company may, pursuant to an agreement, participate in depository systems of clearing corporations directly or through a custodian ((bank)).

Sec. 4   RCW 48.13.465 and 2000 c 221 s 4 are each amended to read as follows:
     A domestic insurance company using the methods of holding securities under RCW 48.13.460 (2) or (3) is required to receive a confirmation from:
     (1) The ((participating financial institution or the qualified)) custodian whenever securities are received or surrendered pursuant to the domestic insurance company's instructions to a securities broker; or
     (2) The securities broker provided that the domestic insurance company has given the ((participating financial institution or qualified)) custodian and the securities broker matching instructions authorizing the transaction, which have been confirmed by the ((participating financial institution or qualified)) custodian prior to surrendering funds or securities to conduct the transaction.

Sec. 5   RCW 48.13.475 and 2000 c 221 s 6 are each amended to read as follows:
     (1) Notwithstanding the maintenance of securities with a ((qualified)) custodian pursuant to agreement, if the commissioner:
     (a) Has reasonable cause to believe that the domestic insurer:
     (i) Is conducting its business and affairs in such a manner as to threaten to render it insolvent;
     (ii) Is in a hazardous condition or is conducting its business and affairs in a manner that is hazardous to its policyholders, creditors, or the public; or
     (iii) Has committed or is committing or has engaged or is engaging in any act that would constitute grounds for rendering it subject to rehabilitation or liquidation proceedings; or
     (b) Determines that irreparable loss and injury to the property and business of the domestic insurer has occurred or may occur unless the commissioner acts immediately;
then the commissioner may, without hearing, order the insurer and the ((qualified)) custodian promptly to effect the transfer of the securities to another ((qualified)) custodian approved by the commissioner. Upon receipt of the order, the ((qualified)) custodian shall promptly effect the transfer of the securities. Notwithstanding the pendency of any hearing or request for hearing, the order shall be complied with by those persons subject to that order. Any challenge to the validity of the order shall be made under chapter 48.04 RCW, however, the stay of action provisions of RCW 48.04.020 do not apply. It is the responsibility of both the insurer and the ((qualified)) custodian to oversee that compliance with the order is completed as expeditiously as possible. Upon receipt of an order, there shall be no trading of the securities without specific instructions from the commissioner until the securities are received by the new ((qualified)) custodian, except to the extent trading transactions are in process on the day the order is received by the insurer and the failure to complete the trade may result in loss to the insurer's account. Issuance of an order does not affect the ((qualified)) custodian's liabilities with regard to the securities that are the subject of the order.
     (2) No person other than the insurer has standing at the hearing by the commissioner or for any judicial review of the order.

Sec. 6   RCW 48.13.490 and 2000 c 221 s 7 are each amended to read as follows:
     The commissioner may adopt rules ((to implement and administer RCW 48.13.450 through 48.13.475)) governing the deposit by insurance companies of securities with clearing corporations, including establishing standards for national banks, state banks, trust companies, and brokers/dealers to qualify as custodians for insurance company securities.

NEW SECTION.  Sec. 7   A new section is added to chapter 48.13 RCW to read as follows:
     (1) An insurance company may, by written agreement with a custodian, provide for the custody of its securities with that custodian. The securities that are the subject of the agreement may be held by the custodian or its agent or in a clearing corporation.
     (2) The 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 of the board. The terms of the agreement shall comply with the following:
     (a) Securities certificates held by the custodian shall be held separate from the securities certificates of the custodian and all of its customers;
     (b) Securities held indirectly by the custodian and securities in a clearing corporation shall be separately identified on the custodian's official records as being owned by the insurance company. The records shall identify which securities are held by the custodian or by its agent and which securities are in a clearing corporation. If the securities are in a clearing corporation, the records shall also identify where the securities are and the name of the clearing corporation; and if the securities are held by an agent, the records shall also identify 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 the 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 custodied securities used to meet the deposit requirements;
     (e) 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. Confirmation of all transfers shall be provided to the insurance company in hard copy or electronic format. In addition, the custodian shall be required to furnish, no less than monthly, the insurance company with reports of various holdings of custodied securities at times and containing information reasonably requested by the insurance company. The custodian's trust committee's annual reports of its review of the insurer trust accounts shall also be provided to the insurer. Reports and verifications may be transmitted in electronic or paper format;
     (f) During the course of the custodian's regular business hours, an officer or employee of the insurance company, an independent accountant selected by the insurance company, and a representative of an appropriate regulatory body shall be entitled to examine, on the premise of the custodian, the custodian's records relating to the custodied securities, but only upon furnishing the custodian with written instructions to that effect from an appropriate officer of the insurance company;
     (g) The custodian and its agents shall be required to send to the insurance company:
     (i) All reports that they receive from a clearing corporation on their respective systems of internal accounting control; and
     (ii) Reports prepared by outside auditors on the custodians or its agents internal accounting control of custodied securities that the insurance company may reasonably request;
     (h) 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 an audit of the financial statements of the insurance company;
     (i) The custodian shall provide, upon written request from an appropriate officer of the insurance company, the appropriate affidavits;
     (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 the 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. The commissioner may determine whether the type of insurance is appropriate and whether the amount of coverage is adequate;
     (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 agents, 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 (k) of this subsection, the custodian shall promptly replace the securities of the value thereof and the value of any loss of rights or privileges resulting from the loss of securities;
     (m) The custodian will not be liable for a failure to take an action required under the agreement in the event and to the extent that the taking of the action is prevented or delayed by war (whether declared or not, including existing wars), revolution, insurrection, riot, civil commotion, accident, fire, explosion, labor stoppage and strikes, laws, regulations, orders, or other acts of any governmental authority, which are beyond its reasonable control;
     (n) In the event that the custodian gains entry in a clearing corporation 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. However, if the agent is subject to regulation under the laws of a jurisdiction that are different from the laws of the jurisdiction that regulates the custodian, the commissioner may accept a standard of liability applicable to the agent that is different from the standard of liability applicable to the custodian;
     (o) The custodian shall provide written notification to the office of the insurance commissioner if the custodial agreement with the insurer has been terminated or if one hundred percent of the account assets in any one custody account have been withdrawn. This notification shall be remitted to the commissioner within three business days of the withdrawal of one hundred percent of the account assets.