Current through Register Vol. 50, No. 9, March 1, 2024
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
304.2-110 authorizes the Commissioner of
Insurance to promulgate administrative regulations necessary for or as an aid
to the effectuation of any provision of the Kentucky Insurance Code as defined
in
KRS
304.1-010.
KRS
304.7-360 requires the Commissioner of
Insurance to promulgate administrative regulations governing the deposit by
insurers of securities with clearing corporations, the Federal Reserve
book-entry system, and with custodian banks. This administrative regulation
establishes provisions to be included in an agreement for the custody of an
insurance company's securities with a custodian bank and qualifications for a
custodian bank.
Section 1.
Definitions.
(1) "Certificated security" is
defined by
KRS
304.7-360(1)(g).
(2) "Clearing corporation" is defined by
KRS
304.7-360(1)(a).
(3) "Commissioner" is defined by
KRS
304.1-050(1).
(4) "Custodian bank" is defined by
KRS
304.7-360(1)(b).
(5) "Custodied securities" means securities
held by the custodian bank, its nominee, a clearing corporation, the Federal
Reserve book-entry system, or in any combination of these entities.
(6) "Direct participant" is defined by
KRS
304.7-360(1)(c).
(7) "Federal reserve book-entry system" is
defined by
KRS
304.7-360(1)(d).
(8) "Member bank" is defined by
KRS
304.7-360(1)(e).
(9) "Security" is defined by
KRS
304.7-360(1)(f).
(10) "Uncertificated security" is defined by
KRS
304.7-360(1)(h).
Section 2. Standards for Custodial
Agreements. Pursuant to
KRS
304.7-360, an insurance company may provide
by agreement for the custody of its securities with a custodian bank meeting
the qualifications set forth in Section 3 of this administrative regulation
which securities may be held by the custodian bank, its nominee, in a clearing
corporation, or in the Federal Reserve book-entry system. Any agreement shall
contain provisions to comply with the following standards:
(1) The agreement shall be in writing and
shall be authorized by a resolution of the Board of Directors or an authorized
committee of the insurance company.
(2) Certificated securities held by the
custodian bank may be held separate from the securities of the custodian bank
and of all its other customers or in a fungible bulk of securities as part of a
Filing of Securities by Issue (FOSBI) arrangement.
(3) Securities held in a fungible bulk by the
custodian bank and securities in a clearing corporation or the Federal Reserve
book-entry system shall be separately identified on the custodian bank's
official records as being owned by the insurance company. The records shall
identify which custodied securities are held by the custodian bank or by its
nominee and which securities are in a clearing corporation or the Federal
Reserve book-entry system. If the securities are in a clearing corporation or
the Federal Reserve book-entry system, the records shall also identify where
the securities are and, if in a clearing corporation, the name of the clearing
corporation or, if held in nominee name, the name of the nominee.
(4) All custodied securities that are
registered shall be registered in the name of:
(a) The insurance company;
(b) A nominee of the insurance
company;
(c) The custodian bank or
its nominee; or
(d) If in a
clearing corporation, the clearing corporation or its nominee.
(5) Custodied securities shall be
held subject to the instructions of the insurance company and shall be
withdrawable upon the demand of the insurance company.
(6) The custodian bank 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.
(7) The custodian bank 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 bank shall be required to furnish 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, but not less frequently than monthly.
(8) During the course of the custodian bank's
regular business hours, any officer or employee of the insurance company, any
independent accountant selected by the insurance company, or any representative
of the commissioner shall be entitled to examine, on the premises of the
custodian bank, the custodian bank's records relating to custodied securities
and the cus-todied securities, but only upon furnishing the custodian bank with
written instructions to that effect from an appropriate officer of the
insurance company or the commissioner.
(9) The custodian bank and its nominee shall
be required to send to the insurance company:
(a) 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
(b) Reports prepared by outside auditors with
respect to the respective systems of internal accounting control of the
custodian bank and its nominee pertaining to custodial record keeping as the
insurance company may reasonably request from time to time.
(10) The custodian bank 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 as filed with various regulatory authorities
and in connection with any audit of the financial statements of the insurance
company.
(11) The custodian bank
shall provide upon request an affidavit with respect to custodied securities on
the form, Custodian Affidavit or in a substantially similar format.
(12) The custodian bank shall be obligated to
indemnify the insurance company for any loss of custodied securities, except
that the custodian bank shall not be obligated to the extent that the loss was
caused by other than the negligence or dishonesty of the custodian
bank.
(13) If there is a loss of
custodied securities for which the custodian bank shall be obligated to
indemnify the insurance company as provided in subsection (12) of this section,
the custodian bank shall promptly replace the securities or the value of the
securities and the value of any loss of rights or privileges resulting from the
loss of securities.
(14) The
agreement may provide that the custodian bank will not be liable for any
failure to take any action required to be taken under the agreement if the
taking of such action is prevented or delayed by war, whether declared or not
and including existing war, 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 beyond its reasonable
control.
(15) If entry in a
clearing corporation or in the Federal Reserve book-entry system is gained
through a direct participant or a member bank, there shall be an agreement
between the custodian and the direct participant or member bank under which the
direct participant or member bank shall be subject to the same liability for
loss of custodied securities as the custodian bank. However, if the direct
participant or member bank shall be subject to regulation under the laws of a
jurisdiction which is different from the jurisdiction the laws of which
regulate the custodian bank, the commissioner may accept a standard of
liability applicable to the direct participant or member bank which is
different from the standard of liability applicable to the custodian
bank.
(16) The agreement shall be
terminable by the insurance company on not more than thirty (30) days'
notice.
Section 3.
Qualifications of Custodian Banks. Any custodian bank selected by an insurance
company to act as custodian under an agreement authorized by
KRS
304.7-360 shall possess the following
qualifications:
(1) Its custodial functions
for the insurance company shall be carried out under its trust
department;
(2) It shall be audited
annually by independent public accountants whose audit report, together with
the related financial statements, and whose report on internal controls are
made available to the insurance company and the commissioner;
(3) It shall be organized under the laws
recognizing that the custodied securities are special deposits rather than
general deposits, remain the specific property of the insurance company, and
shall not be subject to any creditor relationship of the custodian
bank.
(4) It shall maintain blanket
bond coverage relating to its custodial functions with limits equal to or
exceeding those suggested by the American Bankers Association.
(5) Its capital and surplus funds shall equal
or exceed $25,000,000; and
(6) It
shall have demonstrated sufficient experience in handling custodial
accounts.
Section 4.
Incorporation by Reference.
(1) "Custodian
Affidavit", (6/2020), is incorporated by reference.
(2) This material may be inspected, copied,
or obtained, subject to applicable copyright law, at the Kentucky Department of
Insurance, 500 Mero Street, Frankfort, Kentucky 40601, Monday through Friday, 8
a.m. to 4:30 p.m.