The Office of General Counsel issued the following opinion on August 1, 2003, representing the position of the New York State Insurance Department.
Re: "Sweep Accounts" and N.Y. Insurance Law § 1409
Does the 10% limit set forth in N.Y. Ins. Law § 1409 (McKinney 2000) apply in the case of an insurance company that has its checking account funds placed into a "sweep account" by the bank which holds its checking account?
The limit contained in § 1409 would apply.
The sweep account into which the insurers checking account funds will be placed will be invested in government securities.
A "sweep account" is a type of bank account that automatically transfers funds above (or below) a certain level to a higher-interest earning account at the close of each business day. In a sweep program, a bank's computers analyze customer use of checkable deposits. In the event the depositor has excess funds in a checking account, those funds are used to enter into one (or a fraction thereof) or more government security repurchase agreements ("Repos"). Alternatively, the "swept" funds are placed into money market funds. Either method enables the depositor to earn a return overnight on funds that ordinarily would not have generated any interest. The money market funds into which sweep account balances can be placed are generally invested in government securities.
N.Y. Ins. Law § 1409 is a provision aimed at limiting risk to an insurers portfolio by prohibiting the possession of an over-concentration of investment in the securities of any single issuer. The section provides, in pertinent part, as follows:
(a) Except as more specifically provided in this chapter, no domestic insurer shall have more than ten percent of its admitted assets as shown by its last statement on file with the superintendent invested in, or loaned upon, the securities (including for this purpose certificates of deposit, partnership interests and other equity interests) of any one institution.
(b) The restriction of subsection (a) hereof shall not apply to the classes of governmental obligations (including obligations secured by mortgages upon real property guaranteed or insured under the National Housing Act, 12 U.S.C. §§1701-1750) eligible for minimum capital or surplus to policyholder investments pursuant to the provisions of section one thousand four hundred two of this article nor to investments in shares of other insurance companies pursuant to the provisions of section one thousand four hundred eight of this article.
(c) The limitations of investments set forth in this section shall not apply to mortgage-related securities or securities issued or guaranteed by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association; provided, however, that for an insurer maintaining an aggregate investment in excess of seventy percent of its admitted assets as shown by its last statement on file with the superintendent in such securities, the balance of such investments greater than seventy percent thereon shall be limited by and apportioned according to a ratio of one to two respectively, between investment in such securities and investment in government obligations, as that term is defined in paragraph one of subsection (a) of section fourteen hundred four of this chapter.
N. Y. Ins. Law § 1409 (McKinney 2003).
As indicated in the above section, certain governmental and federal mortgage-backed obligations are excluded from the limit contained in the statute.1
Whether or not the limitation contained in § 1409 should apply in this situation entirely depends upon the type of investment into which the "swept" funds are placed. Based upon this offices understanding of the way in which sweep accounts operate, it appears that the statutes limits would apply. First, in the event that the swept funds are used to obtain Repos, the § 1409 limit would apply because Repos, even if collateralized by government securities, are essentially the obligation of the bank and not those of the government or governmental agency.
Second, in the event that the swept funds are placed in a money market fund, the § 1409 limit would apply because such a fund would itself constitute one "institution" under § 1409(a). See Office of General Counsel Opinion (March 11, 1982) (applying N.Y. Ins. Law § 87, the predecessor of current § 1409, and holding that an investment in a mutual fund is subject to the 10% limitation on investments in any one institution). This conclusion is warranted given the fact that under the New York Insurance Law, investments in investment companies2 are in fact regarded as a separate class of investments distinct from the underlying securities held by the investment company. See N.Y. Ins. Law § 1404(a)(10)(McKinney 2000), which provides that the securities of certain investment companies are permissible as reserve investments for non-life insurers.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.
1 The statute specifically excludes from the quantitative limit those obligations referenced under N. Y. Ins. Law § 1402. That section lists the following types investments:
(1) Obligations of the United States or of any agency thereof provided such agency obligations are guaranteed as to principal and interest by the United States.
(2) Direct obligations of this state or of any county, district or municipality thereof.
(3) Direct obligations of any state of the United States.
(4) Obligations secured by first mortgage loans which meet the standards specified in paragraph four of subsection (a) of section one thousand four hundred four of this article on property located in this state.
2 The term "investment company" and "mutual fund" are generally used interchangeably, and refer to investment vehicles organized under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. (2003). Money market funds are a type of mutual fund intended to provide its investors with a reliable stream of income, but no opportunity for capital gains.