Ala. Admin. Code r. 482-1-077-.04

Current through Register Vol. 43, No. 1, October 31, 2024

Section 482-1-077-.04 - Custody Agreement; Requirements

(1) An insurance company may, by written agreement with a custodian, provide for the custody of its securities with a custodian. The securities that are the subject to 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 all of the following:

(a) Securities' certificates held by the custodian shall be held separate from the securities' certificates of the custodian and of all of its other 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, if in a clearing corporation, the name of the clearing corporation and, if through an agent, 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 a 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 that custodied securities used to meet the deposit requirements set forth in Code of Ala. 1975, §§ 27-3-11, 27-3-12, 27-3-13, 27-3-14, 27-3-15, 27-3-16, 27-21A-12, and 27-30-18 shall, to the extent required by those sections, be under the control of the Commissioner of Insurance and shall not be withdrawn by the insurance company without the approval of the Commissioner of Insurance.

(e) The custodian shall agree in writing to submit to the jurisdiction of the courts of the State of Alabama upon a declaration of insolvency of the company, and the custodied securities shall be subject to the instructions of the Commissioner of Insurance for the benefit of policyholders and shall be withdrawn only upon the demand of the Commissioner of Insurance.

(f) 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. In addition, the custodian shall be required to furnish no less than monthly the insurance company with reports of 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's trust accounts shall also be provided to the insurer. Reports and verifications may be transmitted in electronic or paper form.

(g) 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 premises of the custodian, the custodian's records relating to custodied securities, but only upon furnishing the custodian with written instructions to that effect from an appropriate officer of the insurance company.

(h) The custodian and its agents shall be required to send to the insurance company both of the following:

1. All reports which they received from a clearing corporation on their respective systems of internal accounting control.

2. Reports prepared by outside auditors on the custodians or its agent's internal accounting control of custodied securities that the insurance company may reasonably request.

(i) 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.

(j) The custodian shall provide, upon written request from an appropriate officer of the insurance company, the appropriate affidavits, substantially in the form set forth at the end of this chapter, with respect to custodied securities.

(k) A national bank, state bank, federal home loan 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 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 the amount of coverage is adequate.

(l) The custodian shall be obligated to indemnify the insurance company for any loss of custodied securities, except that the custodian shall not be so obligated to the extent that the loss was caused by other than the negligence or dishonesty of the custodian.

(m) 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 burglary, robbery, holdup, theft, or mysterious disappearance, including loss by damage or destruction.

(n) In the event there is a loss of custodied securities for which the custodian shall be obligated to indemnify the insurance company as provided in Subparagraph (k) above, the custodian shall promptly replace the securities or the value thereof and the value of any loss of rights or privileges resulting from the loss of securities.

(o) The agreement may provide that 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 and including existing wars), 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 whatever beyond its reasonable control.

(p) In the event 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 shall be subject to regulation under the laws of a jurisdiction that is different from the jurisdiction the laws of which regulate the custodian, the Commissioner of Insurance of the state of domicile of the insurance company may accept a standard of liability applicable to the agent that is different from the standard of liability applicable to the custodian.

(q) The custody agreement is of no force and effect until the Commissioner approves, in writing, the custody agreement.

(r) The custodian shall provide written notification to the insurer's domiciliary commissioner if the custodial agreement with the insurer has been terminated or if 100% of the account assets in any one custody account have been withdrawn. This notification shall be remitted to the insurance commissioner within three (3) business day of the receipt by the custodian of the insurer's written notice of termination or within three (3) business days of the withdrawal of 100% of the account assets.

(3) Any securities that are not held in compliance with this chapter shall be not admissible assets for financial reporting purposes.

Ala. Admin. Code r. 482-1-077-.04

New Rule: November 13, 1986; effective February 14, 1987. Supplemented May 29, 1990; effective July 1, 1990. Revised: January 25, 1996; effective February 5, 1996. Revised: May 27, 2003; effective June 9, 2003. Filed with LRS May 30, 2003. Rule is not subject to the Alabama Administrative Procedure Act.

Amended by Alabama Administrative Monthly Volume XL, Issue No. 10, July 29, 2022, eff. 7/17/2022.

Author: Commissioner of Insurance

Statutory Authority:Code of Ala. 1975, § 27-2-17.