Custody of Securities

STATE OF CONNECTICUT

INSURANCE DEPARTMENT

Bulletin No. FS-2

April30, 2002

TO: ALL DOMESTIC INSURANCE COMPANIES

RE: CUSTODY OF SECURITIES

This bulletin supersedes Insurance Department Bulletin FS-2a of September 15, 1971 and

Bulletin FS-2b ofJuly 8, 1982.

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I.

DEFINITIONS.

As used in this bulletin, the following terms have the respective meanings set forth

below:

"Agent" means a national bank, state bank or trust company that maintains an account in

its name in a Clearing Corporation or that is a member ofthe Federal Reserve System and

through which a Custodian participates in a Clearing Corporation or the Federal Reserve Book­

Entry System, except that with respect to Securities issued by institutions organized or existing

under the laws of a foreign country or Securities used to meet the deposit requirements pursuant

to the laws of a foreign country as a condition of doing business therein. "Agent" shall include a

corporation that is organized or existing under the laws of a foreign country and legally qualified

under those laws to accept custody of Securities.

"Clearing Corporation" means a corporation as defined in section 42a-8-102(3) ofthe

Connecticut General Statutes that is organized for the purpose of effecting transactions in

Securities by computerized book-entry, except that with respect to Securities (i) issued by

institutions organized or existing under the laws of a foreign country, (ii) used to meet the

deposit requirements pursuant to the laws of a foreign country as a condition of doing business

therein, or (iii) issued in a foreign country by a United States domiciled issuer. "Clearing

Corporation" shall include a corporation that is organized or existing under the laws of a foreign

country and iegaily qualified under the laws of such foreign country to effect transactions in

Securities by computerized book-entry.

"Commissioner" means the Insurance Commissioner ofthe State of Connecticut

ein, or (iii) issued in a foreign country by a United States domiciled issuer. "Clearing

Corporation" shall include a corporation that is organized or existing under the laws of a foreign

country and iegaily qualified under the laws of such foreign country to effect transactions in

Securities by computerized book-entry.

"Commissioner" means the Insurance Commissioner ofthe State of Connecticut.

"Custodian" means a national bank, state bank or trust company, including an affiliate of

the Insurer, that shall at all times during which it acts as a custodian pursuant to this bulletin be

(a) no less than adequately capitalized as determined by the standards adopted by United States

banking regulators, (b) regulated by either state banking laws or a member ofthe Federal

Reserve System, and (c) legally qualified to accept custody of Securities in accordance with the

standards ofthis bulletin, except that with respect to Securities (i) issued by institutions

organized or existing under the laws ofa foreign country, (ii) used to meet the deposit

requirements pursuant to the laws ofa foreign country as a condition ofdoing business therein, .

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or (iii) issued in a foreign country by a United States domiciled issuer. "Custodian" shall include

a bank or trust company incorporated or organized under the laws of a country other than the

United States that is regulated as such by that country's government or an agency thereof that

shall at all times during which it acts as a custodian pursuant to this bulletin be no less than

adequately capitalized as determined by the standards adopted by international banking

authorities and legally qualified to accept custody of Securities.

"Custodied Securities" shall have the meaning set forth in Section II ofthis bulletin

such by that country's government or an agency thereof that

shall at all times during which it acts as a custodian pursuant to this bulletin be no less than

adequately capitalized as determined by the standards adopted by international banking

authorities and legally qualified to accept custody of Securities.

"Custodied Securities" shall have the meaning set forth in Section II ofthis bulletin.

"Federal Reserve Book-Entry System" means the computerized systems sponsored by the

United States Department of the Treasury and certain agencies and instrumentalities ofthe

United States for holding and transferring Securities ofthe United States government and such

agencies and instrumentalities in Federal Reserve Banks through banks that are members ofthe

Federal Reserve System or that otherwise have access to such computerized systems.

"Insurer" means an insurance company or other entity organized and existing under the

laws ofthe State of Connecticut and subject to the jurisdiction of the State of Connecticut

Insurance Department.

"Reciprocal State" means, unless otherwise permitted by the Commissioner, any state,

other than Connecticut, that (a) requires the insurance commissioner or equivalent official of

such state to be the receiver of a delinquent insurer; (b) directs the receiver to take possession of

the assets of such insurer and to administer them under the general supervision ofthe court; (c)

vests in the receiver, by operation oflaw, title to all of the property, contracts, rights of action

and books and records of such insurer, provided that with respect to any insurer domiciled in

Connecticut, such title, other than with respect to special deposits and security on secured claims,

is vested in the Commissioner or equivalent official ofthe State of Connecticut; and (d) provides

for the avoidance of fraudulent conveyances and preferential transfers

rty, contracts, rights of action

and books and records of such insurer, provided that with respect to any insurer domiciled in

Connecticut, such title, other than with respect to special deposits and security on secured claims,

is vested in the Commissioner or equivalent official ofthe State of Connecticut; and (d) provides

for the avoidance of fraudulent conveyances and preferential transfers.

"Securities" means certificated securities and uncertificated securities as defined in

clauses (a) and (b) of section 42a-8-102 ofthe Connecticut General Statutes; provided, that

"Securities" shall not include (i) securities that mature in 397 days or less from the date of

purchase; (ii) securities that are to be disposed ofwithin 180 days, (iii) securities deposited with

any govemmental agency, as required by law, ruling or regulation; (iv) securities custodied in a

foreign country, provided that such securities do not exceed ten percent ofthe Insurer's admitted

assets (securities held by a Clearing Corporation located in a foreign country shall not be

included in the determination of such ten percent); (v) securities used to meet deposit

requirements as a condition of doing business in a jurisdiction (including, without limitation, a

foreign country) that is different from the jurisdiction the laws of which regulate the Custodian;

and (vi) investments in investment companies registered under the Investment Company Act of

1940, as amended from time to time.

II.

CUSTODY; APPROVAL.

Effective April 30, 2002, an Insurer may, by written agreement with a Custodian, provide

for custody of its Securities by such Custodian or its Agent. Securities in the custody of a

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e jurisdiction the laws of which regulate the Custodian;

and (vi) investments in investment companies registered under the Investment Company Act of

1940, as amended from time to time.

II.

CUSTODY; APPROVAL.

Effective April 30, 2002, an Insurer may, by written agreement with a Custodian, provide

for custody of its Securities by such Custodian or its Agent. Securities in the custody of a

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Custodian or its Agent are referred to in this bulletin as "Custodied Securities". Each custody

agreement shall comply with the requirements set forth in this bulletin and shall be subject to the

prior approval ofthe Commissioner. Insurers are granted to July 1, 2003,,to revise existing

agreements for compliance with this Bulletin. Such compliance will be verified as part ofthe

Insurance Department financial examination of an Insurer.

III.

CUSTODY AGREEMENT; REQUIREMENTS.

a)

Certificated Securities held by a Custodian shall be held either separate from the Securities

ofthe Custodian and ofall ofits other customers or in a fungible bulk of Securities as part

ofa "filing of securities by issue" arrangement.

b)

Custodied Securities held in a fungible bulk by the Custodian and Custodied Securities in a

Clearing Corporation or in the Federal Reserve Book-Entry System shall be separately

identified on the Custodian's official records as being owned by the Insurer. The records

shall identify which Custodied Securities are held by the Custodian or by its Agent and

which Custodied Securities are in a Clearing Corporation or in the Federal Reserve Book­

Entry System. If the Custodied Securities are in a Clearing Corporation or in the Federal

Reserve Book-Entry System, the records shall also identify where the Custodied Securities

are and if in a Clearing Corporation, the name ofthe Clearing Corporation and ifthrough

an Agent, the name ofthe Agent

gent and

which Custodied Securities are in a Clearing Corporation or in the Federal Reserve Book­

Entry System. If the Custodied Securities are in a Clearing Corporation or in the Federal

Reserve Book-Entry System, the records shall also identify where the Custodied Securities

are and if in a Clearing Corporation, the name ofthe Clearing Corporation and ifthrough

an Agent, the name ofthe Agent.

c)

All Custodied Securities that are registered shall be registered in the name ofthe Insurer or

in the name ofa nominee ofthe Insurer or in the name of the Custodian or its nominee or,

if in a Clearing Corporation, in the name ofthe Clearing Corporation or its nominee.

d)

The Custodian shall be required to send or cause to be sent to the Insurer a confirmation of

all transfers ofCustodied Securities to or from the account ofthe Insurer. In addition, the

Custodian shall be required to furnish to the Insurer reports of holdings of Custodied

Securities at times (but not less than monthly) and containing information reasonably

requested by the Insurer.

e)

The Custodian shall maintain records as required for an audit and sufficient to determine

and verify information relating to Custodied Securities that may be reported in the Insurer's

Annual Statement and Schedules as filed with regulatory authorities.

f)

The Custodian shall be obligated to indemnify the Insurer for any loss of Custodied

Securities occasioned by the negligence or dishonesty ofthe Custodian or its officers or

employees, or burglary, robbery, holdup, theft or mysterious disappearance, including loss

by damage or destruction.

g)

In the event that there is a loss of Custodied Securities for which the Custodian shall be

obligated to indemnify the Insurer as provided in clause "f' above, the Custodian shall

promptly replace the Custodied Securities or the value thereof and the value of any loss of

rights or privileges resulting from the loss ofCustodied Securities.

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nce, including loss

by damage or destruction.

g)

In the event that there is a loss of Custodied Securities for which the Custodian shall be

obligated to indemnify the Insurer as provided in clause "f' above, the Custodian shall

promptly replace the Custodied Securities or the value thereof and the value of any loss of

rights or privileges resulting from the loss ofCustodied Securities.

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h)

The custody agreement may provide that the Custodian will not be liable for a failure to

take an action required under the custody agreement in the event and to the extent that the

taking ofthe 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 oflabor, strikes or other differences with employees, laws, regulations,

orders or other acts ofany governmental authority, or any other cause beyond its

reasonable control.

i)

In the event that the Custodian enters into an arrangement with a sub-custodian or gains

entry in a Clearing Corporation or in the Federal Reserve Book-Entry System through an

Agent, there shall be an agreement between the Custodian and the sub-custodian or Agent,

as the case may be, under which the sub-custodian or Agent shall be subject to the same

liability for loss of Custodied Securities as the Custodian, as set forth in clause "f' above.

However, if the sub-custodian or Agent shall be subject to regulation under the laws ofa

jurisdiction (including, without limitation, a foreign country) that is different from the

jurisdiction the laws of which regulate the Custodian, the standard of liability applicable to

the sub-custodian or Agent may be different from the standard ofliability set forth in clause

"f' above, provided that such different standard shall include the obligation to indemnify

the Insurer for any loss of Custodied Securities occasioned by the negligence or dishonesty

of the sub-custodian or Agent or its officers or employees

ulate the Custodian, the standard of liability applicable to

the sub-custodian or Agent may be different from the standard ofliability set forth in clause

"f' above, provided that such different standard shall include the obligation to indemnify

the Insurer for any loss of Custodied Securities occasioned by the negligence or dishonesty

of the sub-custodian or Agent or its officers or employees.

j)

Custodied Securities must be held subject to the instructions of the Insurer and must be

withdrawable upon the demand ofthe Insurer.

k)

The Custodian shall secure and maintain insurance protection in an adequate amount

covering the Custodian'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

ofthe Custodian's banking regulator.

1)

The Custodian shall provide written notification to the Commissioner if the custody

agreement with the insurer has been terminated or if 100% ofthe account balances in all

custody accounts established pursuant to the custody agreement have been withdrawn.

This termination notification shall be remitted to the Commissioner within three (3) days of

the custodial dissolution.

IV.

DEPARTMENT ACCESS.

a)

Any representative ofthe State of Connecticut Insurance Department shall be entitled with

written instructions from an appropriate officer of the Insurer to examine on the

Custodian's premises the Custodian's records relating to Custodied Securities.

b)

Upon the Insurer becoming aware ofany material problems in the handling by a Custodian

or its Agent ofthe Custodied Securities of such Insurer, such Insurer shall immediately

notify the Commissioner of such problems.

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led with

written instructions from an appropriate officer of the Insurer to examine on the

Custodian's premises the Custodian's records relating to Custodied Securities.

b)

Upon the Insurer becoming aware ofany material problems in the handling by a Custodian

or its Agent ofthe Custodied Securities of such Insurer, such Insurer shall immediately

notify the Commissioner of such problems.

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c)

The Custodian shall provide, upon written request from the Insurer, an affidavit, on a form

prescribed by the Commissioner, with respect to the Custodied Securities of such Insurer

held by the Custodian, whether by possession or in book entry form.

V.

DISCLOSURE OF INTERNAL AUDITS.

Upon request ofthe Insurer, the Custodian shall send to the Insurer all reports that the

Custodian receives from a Clearing Corporation on its system ofinternal accounting control and

reports prepared by outside auditors with respect to systems of internal accounting control of the

Custodian pertaining to Custodian record keeping.

VI.

LOCATION OF CUSTODIED SECURITIES.

a)

Except as set forth in the definition of"Custodian", Custodied Securities may be held only

in Reciprocal States.

b)

If, at any time, a state in which Custodied Securities are located is no longer a Reciprocal

State, any Custodied Securities located in that state shall be relocated to another state that is

a Reciprocal State or to Connecticut.

Please acknowledge receipt ofthis bulletin.

/L~~f~0~

/ Susan F. Cogswell

(J

/

Insurance Commissioner

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