|(a) Purpose. The purpose of this section is to enable insurers and HMOs to demonstrate ownership of securities held by a custodian in a manner consistent with the common practices of securities exchanges and markets while protecting the public interest. An insurer or HMO may demonstrate its ownership of other securities in accordance with Insurance Code Article 21.39-B. (b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (1) Clearing corporation--A corporation or system that provides for the book entry settlement and custody of securities and is further defined in Insurance Code, Article 21.39-B, §5(b) and Texas Business and Commerce Code, §8.102(a)(5). (2) Custodian--A qualified bank, qualified broker/dealer or a clearing corporation that accepts deposits of securities from an insurer or HMO and safeguards, holds and reports on such securities pursuant to a written custodial or trust agreement with an insurer or HMO. (3) Custodied Securities--An insurer's or HMO's securities deposited with a custodian or redeposited with a subcustodian. (4) Insurer--A domestic insurance company. (5) Qualified bank--A bank, federal home loan bank or trust company with trust powers, organized under the laws of the United States or any state thereof, which either is a member of the Federal Reserve System, a member of, or is eligible to receive deposits which are insured by the Federal Deposit Insurance Corporation, or maintains an account with a Federal Reserve Bank and is subject to supervision and examination by the Board of Governors of the Federal Reserve System, or is subject to supervision and examination by the Federal Housing Finance Board, and is no less than "adequately capitalized" as defined by standards promulgated by the appropriate federal bank regulatory agency. (6) Qualified Broker/Dealer--A securities firm which has, as shown by its most recent audited financial statement, a tangible net worth of at least $250 million, is registered with and subject to the jurisdiction of the Securities and Exchange Commission, and is a member of the Securities Investor Protection Corporation. (7) Securities--Shares, participations, or other interests in property or an enterprise as defined in the Texas Business and Commerce Code, §8.102(a). The term includes certificated and uncertificated securities. (8) Subcustodian--A qualified bank, qualified broker dealer or a clearing corporation that accepts deposits of securities from a custodian for safeguarding and holding. (9) HMO--A health maintenance organization as defined in the Insurance Code Article 20A.02(n). (c) Evidence of Securities Ownership. (1) An insurer or HMO may demonstrate ownership of its securities by having them held by a custodian pursuant to subsection (d) of this section. (2) An insurer or HMO shall maintain evidence that the custodian meets the requirements to be a qualified bank or a qualified broker/dealer as defined in subsection (b) of this section. (d) Required Provisions For Custodial Agreements. Any arrangement involving an insurer's or HMO's deposit of its securities with a custodian must be evidenced by an agreement signed by the insurer or HMO and the custodian. The agreement signed by the insurer or HMO and the custodian must provide for the conditions described in paragraphs (1) - (13) of this subsection: (1) The custodian shall exercise the same due care that is in accordance with reasonable commercial standards expected of a custodian with the responsibility for the safeguarding of the insurer's or HMO's custodied securities and for compliance with all provisions of the custodial agreement, whether the insurer's or HMO's custodied securities are in the custodian's possession or have been redeposited by the custodian with a subcustodian. (2) The custodian shall indemnify the insurer or HMO for any loss of custodied securities occasioned by the negligence or dishonesty of custodian's officers and employees, or burglary, robbery, hold-up, theft or mysterious disappearance, including loss by damage or destruction. In the event of such loss, the custodian must promptly replace the custodied securities or the value thereof, and the value of any loss of rights or privileges resulting from said loss of custodied securities. (3) Custodied securities shall be segregated at all times from the proprietary assets of the custodian and subcustodian. (4) The custodian's official records shall separately identify custodied securities owned by the insurer or the HMO, whether held by the custodian or subcustodian. If held by a subcustodian, the custodian's records shall also identify the subcustodian. (5) Custodied securities that are in registered form shall be registered only in the name of the insurer or HMO, the custodian or its nominee, or the subcustodian or its nominee. (6) All activities involving the insurer's or HMO's custodied securities shall be subject to the insurer's or HMO's instructions and the custodied securities shall be withdrawable upon demand of the insurer or HMO. (7) The custodian shall furnish, upon request by the insurer or HMO, a confirmation of all transfers of custodied securities to or from the account of the insurer or HMO, and reports of custodied securities sufficient to verify information reported in the insurer's or HMO's annual statement filed with the Texas Department of Insurance and supporting schedules and information required in any audit of the insurer's or HMO's financial statements whether the custodied securities are held by the custodian or by a subcustodian. (8) The insurer, HMO or its designee shall be entitled to examine all records maintained by the custodian or subcustodian relating to the insurer's or HMO's custodied securities during the course of the custodian's regular business hours. This paragraph does not apply to a clearing corporation or the Federal Reserve Book Entry System. (9) Upon request of the insurer or HMO, the custodian shall be required to send to the insurer or HMO all reports it receives from a clearing corporation or the Federal Reserve book-entry system on their respective systems of internal accounting control, and all reports prepared on the custodian's and subcustodian's systems of internal accounting control of custodied securities. (10) The custodian shall not use any of the insurer's or HMO's custodied securities for the custodian's benefit and none of the insurer's or HMO's custodied securities shall be loaned, pledged, or hypothecated by the custodian or subcustodian without a written contract executed by the insurer or HMO separate and apart from the custodial agreement. (11) The custodian is authorized and instructed by the insurer or HMO to honor any requests made by the Texas Department of Insurance for information concerning the insurer's or HMO's custodied securities. The department, from time to time, may request, and the custodian shall furnish, a detailed listing of the insurer's or HMO's custodied securities (whether in the possession of the custodian or with a subcustodian). The custodian's response to such requests shall be made directly to the department and shall encompass all of the insurer's or HMO's custodied securities (whether in the possession of the custodian or with a subcustodian). (12) The custodian and subcustodian shall maintain the usual and customary insurance coverage for custodial banking risks at levels considered reasonable and customary for the custodian banking industry covering the custodian's duties and activities as custodian for the insurer's or HMO's assets and shall describe the nature and extent of such insurance protection. Any change in such insurance protection during the term of the custodial agreement shall be promptly disclosed to the insurer or HMO. (e) Effective Date. All insurers and HMOs subject to this section shall comply with subsection (d) of this section no later than 90 days after the effective date of this section.