DEPARTMENT OF REGULATORY AGENCIES
DIVISION OF INSURANCE
3 CCR 702-3
Repealed REGULATION 3-1-6
CONCERNING CUSTODIAL /SAFEKEEPING AGREEMENT AND THE USE OF CLEARING CORPORATIONS AND FEDERAL RESERVE BOOK-ENTRY SYSTEM
I.	Authority
This regulation is promulgated and adopted by the Colorado Commissioner of Insurance (Commissioner) under the authority of §§ 10-1-109(1), 10-3-1203(2), 10-6-129 and 10-16-109 Colorado Revised Statutes (C.R.S.).
II.	Background and Purpose
The purpose of this regulation is to provide current criteria, procedures and clarification concerning the holding of securities or book-entry securities as investments or in meeting the statutory deposits or guaranty fund deposits pursuant to §§ 10-3-210, 10-6-116, 10-16-310, 10-16-412 and 10-16-505, C.R.S. Only custodial agreements complying with this regulation shall be acceptable to the Commissioner of Insurance. 
III.	Definitions
When used in this regulation, the term
"Agent" shall mean a national bank, state bank or trust company which maintains an account in its name in a clearing corporation or which is a member of the 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 any 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" may include a corporation which is organized or existing under the laws of any foreign country and which is legally qualified under such laws to accept custody of securities.
"Clearing corporation" shall mean a corporation as defined in §§ 4-8-102(3) and 10-3-1202(1), C.R.S. which is organized for the purpose of effecting transactions in securities by computerized book-entry, except that with respect to securities issued by institutions organized or existing under the laws of any 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, "clearing corporation" may include a corporation which is organized or existing under the laws of any foreign country and which is legally qualified under such laws to effect transaction in securities by computerized book-entry.
"Company" means an insurer, captive insurance company, health maintenance organization, nonprofit hospital, medical-surgical and health service corporation, prepaid dental care plan or the Colorado Compensation Insurance Authority.
"Custodian" shall mean a national bank, state bank or trust company that shall at all times during which it acts as a custodian pursuant to this regulation be no less than adequately capitalized as determined by the standards adopted by United States banking regulators and is regulated by either state banking laws or is a member of the Federal Reserve System. The custodian must be legally qualified to accept custody of securities in accordance with the standards set forth below, 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, "custodian" may include a bank, or trust company incorporated or organized under the laws of a country other than the United States. Such bank or trust company must be regulated as such by that country’s government or an agency thereof that shall at all times during which it acts as custodian pursuant to this regulation be no less than adequately capitalized as determined by the standards adopted by international banking authorities and that is legally qualified to accept custody of securities. With respect to a custodian designated as the Commissioner's depository to receive and hold securities pursuant to § 10-3-210 C.R.S., the custodian and its administration of the pledged securities must be physically located in the City and County of Denver. 
"Custodied securities" shall mean securities held by the custodian or its agent or in a clearing corporation or in the federal reserve book-entry system.
"Federal Reserve book-entry system" shall mean the computerized systems sponsored by the United States Department of the Treasury and certain agencies and instrumentalities of the United States for holding and transferring securities of the United States government and such agencies and instrumentalities, respectively, in Federal Reserve Banks through banks which are members of the Federal Reserve System or which otherwise have access to such computerized systems.
"Securities" shall have the meaning as defined in § 4-8-102(15), C.R.S.
IV.	Custody Agreement Requirements
A.	A company may, by written agreement with a custodian, provide for the custody of its securities with a custodian, which securities may be held by the custodian or its agent or in a clearing corporation or in the Federal Reserve book-entry system.
B.	Any custodial agreement shall be in writing and shall be authorized by a resolution of the Board of Directors of the company or of an authorized committee thereof. The terms of the agreement shall comply with the following:
1.	Certificated securities held by the custodian shall be held either separate from the securities of the custodian and all of its other customers or in a fungible bulk of securities as part of a Filing of Securities by Issue (FOSBI) arrangement.
2.	Securities held in a fungible bulk by the custodian and 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 company. Said records shall identify which custodied securities are held by the custodian or by its agent and which securities are in a clearing corporation or in the Federal Reserve book-entry system. If the securities are in a clearing corporation or in the Federal Reserve book-entry system, said records shall also identify where the securities are physically located and if in a clearing corporation, the name and address of the clearing corporation , and if held by an agent, the name of the agent.
3.	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. 
4.	Custodied securities shall be held subject to the instructions of the company and shall be withdrawable upon the demand of the company, except that custodied securities used to meet the deposit requirements set forth in §§ 10-3-210, 10-6-116 , 10-16-310, 10-16-412 and 10-16-505, C.R.S., shall, to the extent required by those sections, be under the control of the Commissioner and shall not be withdrawn by the company without the approval of the Commissioner.
5.	The custodian shall be required to send or cause to be sent to the company a confirmation of all transfers of custodied securities to or from the account of the company. In addition, the custodian shall be required to furnish the company with reports of holdings of custodied securities at such times and containing such information as may be reasonably requested by the company.
6.	The Division or its representative may examine the custodian's records relating to custodied securities, during the custodian’s regular business hours and upon reasonable notice. 
7.	The custodian and its agents shall be required to send to the company (a) all reports which they receive from a clearing corporation or the Federal Reserve book-entry system on their respective systems of internal accounting control and (b) any reports prepared by outside auditors on the custodian's or its agent's internal accounting control of custodied securities that the company may reasonably request.
8.	The custodian shall maintain records sufficient to determine and verify information relating to custodied securities that may be reported in the company's Annual Statement and supporting Schedules and information required in any audit of the financial statements of the company.
9.	The custodian shall provide, upon written request from an appropriate officer of the company, an appropriate affidavit, on a form prescribed by the Commissioner, with respect to the company securities held, either by possession or in book entry form, by the custodian.. 
10.	The custodian shall secure and maintain insurance protection in an adequate amount covering the custodian’s duties and activities as custodian for insurer’ s assets, and shall state in the custody agreement that protection is in compliance with the requirements of the custodian's banking regulator. The Commissioner may determine whether the type of insurance is appropriate and the amount of coverage is adequate.
11.	The custodian shall be obligated to indemnify the 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.
12.	In the event that there is a loss of custodied securities for which the custodian shall be obligated to indemnify the company as provided in paragraph 11 above, the custodian shall promptly replace the securities or the value thereof and the value of any loss of rights or privileges resulting from said loss of securities.
13.	The agreement may provide that the custodian will not be liable for any failure to take any action required to be taken under the agreement in the event and to the extent that the taking of such 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 government authority or similar causes beyond its reasonable control.
14.	In the event that the custodian 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 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.
V.	Enforcement
Noncompliance with this regulation may result, after proper notice and hearing, in the imposition of any of the sanctions made available in the Colorado statutes pertaining to the business of insurance or other laws which include the imposition of fines and/or suspension or revocation of license.
VI.	Severability
If any provision of this regulation or the application thereof to any person or circumstance is for any reason held to be invalid, the remainder of this regulation shall not be affected thereby.
VII.	Effective Date
This regulation is hereby amended and restated and shall be effective on January 1, 1997.
This regulation is repealed October 2, 2006.