The Office of General Counsel issued the following opinion on July 28, 2003, representing the position of the New York State Insurance Department.

Re: Qualification of Assets for Use in a Regulation 114 Trust


Will an Income Fund (the "Fund") qualify as a permissible investment for use as collateral in a reinsurance trust ("Regulation 114 Trust")?


Whether the Fund would qualify as a permissible investment depends not on the rating of the Fund or the rating of the Fund’s holdings, but rather on whether the investments of the Fund conform to the requirements set forth in N.Y. Ins. Law § 1404(a)(10).


The inquirer asks whether the Fund will qualify for use as a collateral asset in a Regulation 114 Trust. The inquirer states that the Fund is rated overall as "AAA", but that some of the individual holdings of the Fund are rated below "A". The inquirer did not specify any further facts.


Reinsurance Trusts are governed by Regulation 114, N.Y. Code R. & Regs. tit. 11, § 126.1 – 126.8 (2000). With respect to the types of assets required to be used in such trusts, the Regulation, at § 126.5(a) provides as follows:

(a) A reinsurance agreement, which is entered into in conjunction with a trust agreement and the establishment of a trust account, must contain provisions that:

* * *

(2) stipulate that assets deposited in the trust account … shall consist only of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender), and the investments of the types specified in paragraphs (1), (2), (3), (8) and (10) of subsection (a) of section 1404 of the New York Insurance Law.

As indicated by its language, the Regulation does not itself set forth any requirements for permissible investments other than to limit investments to those listed in certain subsections of N.Y. Ins. Law § 1404(a). The types of investments permitted are described, in pertinent part, as follows:

(1) Government obligations. Obligations which are not in default as to principal or interest, which are valid and legally authorized, and which are issued, assumed, guaranteed or insured by:

(A) the United States or by any agency or instrumentality thereof,

(B) any state of the United States,

(C) any territory or possession of the United States or any other governmental unit in the United States, or

(D) any agency or instrumentality of any governmental unit referred to in subparagraphs (B) and (C) of this paragraph…

(2) Obligations of American institutions.

(A) Obligations which are issued by any solvent American institution or which are assumed or guaranteed by any solvent American institution (other than an insurance company) and which are not in default as to principal or interest provided such obligations: (i) are adequately secured by collateral security having a market value not less than the principal amount thereof and have investment qualities and characteristics wherein the speculative elements are not predominant, or (ii) are rated A or higher (or the equivalent thereto) by a securities rating agency recognized by the superintendent, or if not so rated, are similar in structure and in all material respects to other obligations of the same institution which are so rated, or (iii) are insured by one or more authorized insurance companies (other than the investing insurer or any parent, subsidiary or affiliate of such insurer) who are licensed to insure obligations in this state and, after considering such insurance, are rated Aaa (or the equivalent thereto) by a securities rating agency recognized by the superintendent, or (iv) have been given the highest quality designation by the Securities Valuation Office of the National Association of Insurance Commissioners.

(3) Preferred or guaranteed shares of American institutions.

(A) Preferred or guaranteed shares issued or guaranteed by a solvent American institution if all of the institution’s obligations are eligible as investments under item (ii) or (iv) of subparagraph (A) of paragraph two of this subsection. …

(8) Equity interests. (A) Investments in common shares or partnership interests of any solvent American institution, if: (i) all its obligations and preferred shares, if any, are eligible as investments under this subsection and (ii) such equity interests of any such institution except an insurance company are registered on a national securities exchange, as provided in the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78kk or otherwise registered pursuant to said act and, if so otherwise registered, price quotations therefor are furnished through a nationwide automated quotations system approved by the National Association of Securities Dealers, Inc., provided that an insurer may invest under this paragraph an amount not exceeding one percent of the insurer’s admitted assets as shown by its last statement on file with the superintendent even though such equity interests are not so registered and are not issued by an insurance company.

(10) Investment companies. (A) Securities of any investment company registered pursuant to the federal Investment Company Act of 1940, 15 U.S.C. § 802, if such company: (i) invests at least ninety percent of its assets in the types of securities which qualify as a reserve investment pursuant to the provisions of paragraph one, two or three of this subsection or which invest in securities which are determined by the superintendent to be substantively similar to the types of securities set forth in such paragraphs; or (ii) invests at least ninety percent of its assets in the types of equity interests which qualify as a reserve investment pursuant to the provisions of paragraph eight of this subsection… .

N.Y. Ins. Law § 1404(a) (McKinney 2000).

The Fund is a mutual fund or "investment company" and as such thus could constitute an investment of the type specified in N. Y. Ins. Law § 1404 (a)(10). As indicated by the statute, a mutual fund may be used as an investment in a Regulation 114 trust if the investments of that mutual fund are consistent with the standards set forth in N.Y. Ins. Law § 1404 (a)(10).

Whether the Fund itself meets these requirements is not clear, as the Prospectus provided to the Department with the inquiry does not contain a detailed list of the specific holdings of the Fund. Accordingly, the Department cannot, at this time, definitively state whether or not the Fund would qualify.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.