New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on December 14, 2004, representing the position of the New York State Insurance Department.

Re: Reinsurance Intermediary Fiduciary Accounts

Questions Presented:

1. May a reinsurance intermediary invest fiduciary funds into a money market mutual fund that is limited to investments that are rated Moody’s Aaa and Standard & Poor’s AAA-m?

2. May a reinsurance intermediary invest fiduciary funds into a money market mutual fund that is limited to investments that are guaranteed U.S. Treasury Obligations?

Facts:

The Insurance Department has identified certain types of bank accounts as acceptable for fiduciary fund deposits provided these deposits meet the criteria set forth in both N.Y. Ins. Law § 2120 (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, Part 32 (Regulation 98). Such accounts may be interest-bearing. Acceptable bank accounts include checking, savings and bank money market accounts as well as non-negotiable bank certificates of deposit. The Department has taken the position that all funds must be protected under federal deposit insurance limits, possibly requiring that several accounts be opened at one appropriate bank or that accounts be opened at several appropriate banks to receive full federal deposit insurance protection. (See Opinion Letter dated June 9, 1992).

Conclusions:

1. Since the funds would not be protected under federal deposit insurance limits, a reinsurance intermediary may not invest fiduciary funds into a money market mutual fund that is limited to investments that are rated Moody’s Aaa and Standard & Poor’s AAA-m.

2. Although the funds invested would be guaranteed by the U.S. Treasury at limits that would exceed federal deposit insurance limits, a reinsurance intermediary may not invest fiduciary funds into a money market mutual fund that is limited to investments that are guaranteed U.S. Treasury Obligations because these investments are not subject to full federal deposit insurance protection and do not constitute bank accounts as defined by the Insurance Law and regulations.

Analysis:

N.Y. Ins. Law § 2120 (b) & (c) (West, WESTLAW through L.2004, c. 527 legislation) state:

(b) Every reinsurance intermediary acting as such in this state shall be responsible, in a fiduciary capacity for all funds received or collected in such capacity, and shall not, without the express consent of his or its principal or principals, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity.

(c) This section shall not require any such agent, broker or reinsurance intermediary to maintain a separate bank deposit for the funds of each such principal, if and as long as the funds so held for each such principal are reasonably ascertainable from the books of account and records of such agent, broker or reinsurance intermediary, as the case may be.

N.Y. Comp. Codes R. & Regs. tit. 11, § 32.3(a)(1) (2002) (Regulation 98) states:

A reinsurance intermediary shall deposit funds received in one or more appropriately identified accounts in a bank or banks duly authorized to do business in this State, from which no withdrawals shall be made except as hereinafter specified (any such account is hereinafter referred to as "a premium and loss account"). A licensed nonresident reinsurance intermediary may use a bank not authorized to do business in this State, provided such bank is a member of the Federal Reserve System.

The Department has previously opined on where agents and brokers may keep their premium accounts in accordance with the restrictions imposed by N.Y. Comp. Codes R. & Regs. tit. 11 § 20.3(b)(1) (2001) (Regulation 29) which provides:

An agent or broker who does not make immediate remittance to insurers and assureds of such funds shall deposit them in one or more appropriately identified accounts in a bank or banks duly authorized to do business in this State, from which no withdrawals shall be made except as hereinafter specified (any such account is hereinafter referred to as "a premium account").

The Department has previously concluded that the reference to "identified accounts in a bank or banks duly authorized to do business in this State" should be construed to include any financial institution that functions under the jurisdiction of governmental departments and agencies and is authorized to do business in this State. These institutions include state and national banks, savings banks and state and federal savings and loan associations. It was noted that it would be incumbent upon the licensee to ascertain from the selected depository or other appropriate source whether or not it would accept and maintain the type of accounts in question. The Department has also opined that the financial institution must be located in this State and that all premium monies must be protected under federal insurance limits. (See Opinion Letter dated October 23, 2000).

The pertinent language in N.Y. Comp. Codes R. & Regs. tit. 11, § 20.3(b)(1) (2001) (Regulation 29) is identical to the language in N.Y. Comp. Codes R. & Regs. tit. 11, § 32.3(a)(1) (filed 1982) (Regulation 98). Consequently, the New York State Insurance Department has interpreted the language as it pertains to agents and brokers to also pertain to licensed reinsurance intermediaries.

The Insurance Department has identified certain types of bank accounts as acceptable for fiduciary fund deposits provided these deposits meet the criteria set forth in both N.Y. Ins. Law § 2120 (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, Part 32 (Regulation 98). Such accounts may be interest-bearing. Acceptable bank accounts include checking, savings and bank money market accounts as well as non-negotiable bank certificates of deposit. The Department has previously taken the position that all funds must be protected under federal deposit insurance limits, possibly requiring that several accounts be opened at one appropriate bank or that accounts be opened at several appropriate banks to receive full federal deposit insurance protection. (See Opinion Letter dated June 9, 1992).

Money market accounts placed with an acceptable bank under the Regulation are appropriate bank accounts for fiduciary funds. Bank certificates of deposit are acceptable accounts if the CD is placed with a bank duly authorized to do business in this State or, if the reinsurance intermediary is a licensed non-resident, with a Federal Reserve System bank. The CD must be made payable only to the premium account of the licensed reinsurance intermediary, it must not be generally negotiable, and it must bear a maturity date that will permit timely remittance to the principals (in this case, the ceding or assuming insurers).

The Department has previously taken the position that repurchase agreements backed by U.S. Government securities are unacceptable for deposit of reinsurance intermediary fiduciary funds under Regulation 98. The Department has not found sufficient grounds under either the Insurance Law or the Regulation to approve use of repurchase agreements for maintaining fiduciary funds. Nor has evidence been submitted to the Department that under federal or state banking law and regulations repurchase agreements are the equivalent of bank accounts. Thus, reinsurance intermediary fiduciary funds may not be deposited in such accounts.

Among the types of accounts the Department has previously found unacceptable for investment of fiduciary funds are those holding U.S. Treasury Bills, accounts at brokerage firms, short term obligations of federal or quasi-federal agencies, and non-bank money market accounts or other mutual funds. Such investments do not constitute bank accounts.

Therefore, a reinsurance intermediary may not invest fiduciary funds into a money market mutual fund that is limited to investments that are rated Moody’s Aaa and Standard & Poor’s AAA-m because the funds would not be protected under federal deposit insurance limits. In addition, a reinsurance intermediary may not invest fiduciary funds into a money market mutual fund that is limited to investments that are guaranteed U.S. Treasury Obligations because these investments are not subject to full federal deposit insurance protection and such investments do not constitute bank accounts as defined by the Insurance Law and regulations.

For further information you may contact Special Counsel Athan Shinas at the Albany Office.