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Texas Department of Insurance
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SUBCHAPTER I. Financial Requirements 28 TAC §11.803

The Texas Department of Insurance proposes an amendment to §11.803 concerning loans, investments and other assets of health maintenance organizations (HMOs). The proposed amendment is necessary to harmonize the section with a proposed amendment to §7.86 (relating to Custodied Securities), which is published elsewhere in this issue of the Texas Register. The amendment proposes to delete the requirements in §11.803(5) to demonstrate ownership of HMO investments held by a custodian and substitute the requirements of §7.86 so that HMOs and insurers may demonstrate ownership of securities held by a custodian in the same manner.

Ms. Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that for each year of the first five years the proposed section will be in effect, there will be no fiscal impact to state and local governments as a result of the enforcement or administration of the rule. There will be no measurable effect on local employment or the local economy as a result of the proposal.

Ms. Patterson has determined that for each year of the first five years the section is in effect, the public benefit anticipated as a result of the proposed section will be more efficient practices with regard to the safeguarding of an HMOs certificated and uncertificated securities held by custodians. The probable economic cost to HMOs that comply with the proposed section will vary for the first year of the first five year period the amended section is in effect. Each HMO will need to review the custodial agreements currently in place and determine whether any modifications are necessary to comply with the section as amended. Assuming modifications to the custodial agreement are necessary, a new agreement must be prepared and executed by the HMO and the custodian. If the custodied securities must be transferred to another custodian as a result of the increased net worth requirement for qualified brokers/dealers acting as custodians, an HMO may incur additional costs for the transfer. Since custodial fees are negotiable and are impacted by other services an HMO may have with the custodian, the total cost of compliance will vary. Based on the department's experience, the cost of compliance with the amended section due to the foregoing activities should not exceed $5,000. After the cost of compliance in the first year of the first five-year period, there are no other anticipated economic costs to HMOs as a result of the proposed section. The department finds it is neither legal nor feasible to waive or reduce the effect of the proposed section on HMOs that are micro or small businesses since the section establishes minimum standards for the prudent safeguarding of an HMO's securities. The department believes those standards must be applied to all HMOs to assure their investments are prudently protected to minimize the risk of loss of the investments.

To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on October 7, 2002 to Gene C. Jarmon, Acting General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comment must be simultaneously submitted to Betty Patterson, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. A request for a public hearing should be submitted separately to the Office of the Chief Clerk.

The amendment is proposed under the Insurance Code Article 20A.22 and §36.001. Article 20A.22 authorizes the commissioner to propose reasonable rules as are necessary and proper to carry out the provisions of Insurance Code Chapter 20A. Section 36.001 authorizes the commissioner to determine rules for general and uniform application for the conduct and execution of the duties and functions of the department.

Insurance Code Article 20A.22 is affected by this proposal.

§11.803. Investments, Loans, and Other Assets.

The admitted assets of domestic and foreign HMOs must at all times comply with the provisions of this section.

(1)-(4) (No change.)

(5) Evidence of ownership. A domestic HMO may demonstrate ownership of its securities by complying with §7.86 of this title (relating to Custodied Securities.) [ own certificated and uncertificated securities, as evidenced by book entry of banks and securities brokerage limited as follows: ]

[ (A) banks must be members of the Federal Deposit Insurance Corporation.]

[ (B) securities brokerage firms are incorporated securities brokers and dealers that:]

[ (i) are subject to the regulations of the Securities and Exchange Commission of the United States of America;]

[ (ii) are members of the Securities Investor Protection Corporation; and]

[ (iii) have a tangible net worth of not less than $100 million.]

[ (C) securities held by a bank or securities brokerage firm must be held in accordance with a custodial agreement entered into between the bank or securities brokerage firm and the HMO.]

[ (D) Amounts invested in uncertificated securities through a securities brokerage firm may not exceed that amount of insurance protection provided by the Securities Investor Protection Corporation except that additional amounts may be invested whenever a securities brokerage firm has in effect additional coverage through an excess securities bond issued by an insurance company licensed in Texas and having a statutory net worth of at least 30 times the face amount of the excess securities bond, but in no event having a statutory net worth of less than $100 million according to its last filed annual statement, and then the limit on the amount that may be invested in uncertificated securities through one securities brokerage firm shall be extended to the total amount covered by the Securities Investor Protection Corporation and the excess securities bond, combined. The HMO shall be responsible for maintaining in its files a copy of the excess securities bond with a letter or copy of a letter furnished by its securities brokerage firm from the insurance company verifying the date through which premium is paid that the excess securities bond is in effect. The letter shall also reflect the excess bond number, face amount, company, and address of insuring company and the name and title of the individual signing the letter. Whenever the date is exceeded, the HMO shall be responsible for obtaining a similar letter updating the information. Certificated and uncertificated securities may be evidenced by transaction records such as receipts, invoices, and statements issued by banks and securities brokerage firms evidencing that the records of the bank or securities brokerage firm reflect the HMO's or its nominee's ownership of said securities. In addition, certificated securities shall be maintained in the possession of the HMO as its nominee, subject to obtaining any required approval under the Insurance Code Article 1.28, if located outside the State of Texas, and registered securities shall be in the name o f the HMO or its nominee. An HMO may designate a depository where certificated securities are to be held, provided access to said securities is under the control of officers and employees of the HMO or its nominee as designated by the HMO's board of directors. Certificated securities purchased in transit from the vendor need not be in the HMO's or nominee's possession within a period of 45 days from the purchase date. Certificated securities in transit for the purpose of sale within 45 days of shipping date also are exempted from the requirement that they be in the possession of the HMO or its nominee.]

(6) (No change.)

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