Regulatory Impact Statement for the Proposed Fourth Amendment to Regulation 29 (11 NYCRR 20).

1. Statutory authority: The Superintendent's authority for the adoption of the fourth amendment to 11 NYCRR 20 is derived from sections 202 and 302 of the Financial Services Law ("FSL") and sections 301 and 2120 of the Insurance Law.

Section 202 of the Financial Services Law establishes the office of the Superintendent and designates the Superintendent of Financial Services as the head of the Department of Financial Services ("Department").

FSL section 302 and section 301 of the Insurance Law, in relevant part, authorize the Superintendent to effectuate any power accorded to the Superintendent by the Insurance Law, the Banking Law, the Financial Services Law, or any other law of this state and to prescribe regulations interpreting the Insurance Law.

Section 2120 of the Insurance Law establishes, among other things, that insurance agents and brokers are responsible in a fiduciary capacity for the insurance funds that they receive or collect in their capacity as agents and brokers, and may not, without the express consent of the principal, commingle such funds with any funds held in any other capacity.

2. Legislative objectives: The proposed amendment furthers the goals of Section 2120 by ensuring that insurance agents and brokers ("producers"), as fiduciaries, will maintain their principals' funds in a safe and secure manner.

3. Needs and benefits: Regulation 29 establishes minimum requirements for bank accounts when producers hold fiduciary funds, including premium monies, before the funds are remitted to insurers or insureds. The proposed amendment will modernize Regulation 29 by permitting producers to place premium accounts in banks that are not physically located in New York, and permitting producers to hold premium amounts in excess of the FDIC insurance limit of $250,000 in defined circumstances.

The impetus for the proposed amendment was a proposal submitted to the Department by Independent Insurance Agents & Brokers of New York, Inc. ("IIABNY"). The proposal states that IIABNY's national association, the Independent Insurance Agents & Brokers of America ("IIABA"), had established a federally chartered savings bank, InsurBanc, headquartered in Connecticut and authorized to do business in all 50 states, including New York, and the District of Columbia. InsurBanc does business primarily via the Internet and does not have a physical location in New York, and IIABNY urged the Department to modify existing requirements to allow producers to maintain their premium accounts in InsurBanc. The Department had also been asked in the past to allow premium accounts to be held in other out-of-state banks, particularly with respect to non-resident producers.

Regulation 29 has had the same requirements for premium accounts for nearly 50 years and was originally written in a time when banking business was conducted more locally. The proposed amendment modernizes Regulation 29 to reflect current business practices, including Internet banking. To that end, the proposed amendment would permit insurance producers to maintain their premium accounts in banks (including internet and out-of-state banks) that are duly authorized to do business in New York by virtue of a state or federal charter, regardless of whether such banks are physically located or licensed in New York, provided that the banks are United States, and not foreign, banks.

Prior OGC opinions have concluded that fiduciary funds in premium accounts must be fully FDIC-insured. See OGC Opinion No. 07-02-12 and OGC Opinion No. 07-03-06. These opinions have interpolated such a requirement, relying upon the trustworthiness standard that producers must maintain under Insurance Law § 2110. The Department recognizes, however, that although the FDIC requirement is applied to the funds of each principal separately, for large producers, who routinely collect premiums from principals that exceed $250,000, the current FDIC insurance limit of $250,000 may create an undue administrative burden. In order to meet this requirement, producers may need to open many premium accounts in different banks to ensure that all fiduciary funds are FDIC-insured. This proposal would allow an insurance producer to hold the funds in a premium account in an amount that exceeds the FDIC insurance coverage limit, provided that the insurance producer first obtains the written consent of the principal. However, the producer need not obtain the principal's consent each time the principal's funds would exceed the FDIC insurance coverage limit. The producer may choose to modify existing agreements that were entered into at the inception of the producer's relationship with the principal to obtain the principal's consent on a blanket basis.

This amendment also makes it clear that producers may not open premium accounts in depository institutions, such as credit unions, that impose membership restrictions on the principal, because producers may not require principals to become members of such depository institutions as a condition of obtaining insurance.

4. Costs: The proposed amendment imposes no compliance costs upon state or local governments. With regard to the requirement that the funds of the principal must be fully FDIC-insured, the Department does not anticipate that this proposal will impose significant additional costs upon producers, since the existing regulation already requires producers to keep records identifying who the principal is and to track the funds of each principal. Producers should already have the information necessary for them to ensure that the funds of each principal are fully FDIC-insured. However, any producer that has not been complying with existing tracking requirements could incur minor additional costs. Additionally, producers should not incur significant additional costs to modify existing agreements in order to obtain the principal's written consent for funds above $250,000 not to be fully FDIC-insured. Further, given the membership restrictions that credit unions typically impose, it is unlikely that a large number of producers currently maintain their premium accounts in credit unions and will have to open new accounts. For those producers that do use credit unions, the Department anticipates that the cost to individual producers to move an account from a credit union to a bank will likely be negligible.

5. Local government mandates: The proposed amendment imposes no new mandates on any county, city, town, village, school district, fire district or other special district.

6. Paperwork: The proposed amendment requires no additional paperwork. The record keeping requirements are the same as before the amendment. Some producers may need to modify existing agreements with their principals to specifically obtain the principal's written consent that their funds may not be fully FDIC-insured.

7. Duplication: There are no known federal or other states' requirements that duplicate, overlap, or conflict with this regulation.

8. Alternatives: The Department conducted several rounds of outreach to the insurance industry and consumer groups, and considered multiple design alternatives, including the following:

a) Use of a Bank that is Duly Authorized in New York:

Under the current regulation, an insurance producer that does not immediately remit fiduciary funds to an insurer or insured must deposit such funds in a premium account that must be located in a "bank that is duly authorized to do business in New York". See 11 NYCRR § 20.3(b)(1). The Department's Office of General Counsel ("OGC") has historically interpreted this language to mean that producers' premium accounts must be placed in banks that are physically located in New York.

After examining industry comments on this issue, the Department has reconsidered the requirement that producers must maintain their accounts in banks that are duly authorized to do business in New York, since banks are not required to be separately licensed in each state to do business therein, but are authorized to do business in the United States by virtue of a state or federal charter. Moreover, the concept of physical presence in a state does not reflect the current business practices of banks, including Internet banking. However, because the proposed amendment requires all fiduciary funds to be FDIC-insured unless the producer obtains the written consent of the principal, and the FDIC does not insure the deposits of foreign banks, producers must maintain their premium accounts in United States banks.

Also, the Department received industry comments arguing that requiring non-resident producers to maintain accounts in this state may be inconsistent with reciprocity standards. After careful review of industry comments, and based on discussions with the National Association of Insurance Commissioners ("NAIC"), the Department has eliminated the requirement that non-resident producers must maintain accounts in this state.

b) Bank Consent Requirement:

A prior draft allowed producers to maintain their premium accounts in banks that are not duly authorized to do business in New York, provided that the bank files a notarized statement with the superintendent that it consents to be subject to the jurisdiction of New York State and federal courts and to comply with the superintendent's subpoenas or orders as they relate to such premium accounts. The purpose of this requirement was to ensure that the Department would have full access to producer premium account records should there be cause to bring a disciplinary proceeding against the producer. Upon further review, and in light of industry comments, the Department has eliminated this requirement because, in the past, the Department has not encountered significant problems with producers refusing to provide the Department with premium account records.

c) Credit Unions:

The Department has reconsidered whether credit unions should be eligible depository institutions for producer premium accounts. The Department understands that generally under both Federal and State law, all principals must be members of a credit union for the principal's premium funds to be included in a premium account and for the National Credit Union Share Insurance Fund to insure the principal's share of the premium funds in the premium account. See 12 U.S.C.A. § 1759; New York Banking Law § 451; 12 CFR §§ 745.0 and 745.1. The Department believes that with respect to producer premium accounts, such a membership requirement would be impractical at best and would raise significant public policy concerns. Insurance Law
§§ 2324 and 4224 prohibit producers from requiring an insured to become a member of a credit union as a condition of purchasing insurance through the producer.

In light of the above, the proposed amendment clarifies that an insurance agent or broker may not maintain a premium account in a bank that imposes a membership or similar requirement on the principal.

d) FDIC Insurance Requirement:

OGC opinions interpreting Insurance Law 2120 have historically concluded that fiduciary funds held in premium accounts must be fully insured by the Federal Deposit Insurance Corporation ("FDIC"). Although the FDIC insurance requirement applies to the funds of each principal separately, for large insurance agents and brokers, who routinely collect premiums from principals that exceed $250,000, the current FDIC insurance limit of $250,000 may create administrative burdens. In order to meet this requirement, producers may need to open many premium accounts in different banks for the same principal to ensure that the fiduciary funds of each principal are FDIC-insured. Therefore, the proposed amendment would allow insurance producers to hold the funds in premium accounts in amounts that exceed the FDIC insurance coverage limit, provided that the insurance producer first obtains the written consent of the principal. The producer may obtain such consent on a blanket basis at the inception of the principal's relationship with the producer or thereafter. In such circumstances, the producer need not obtain the principal's consent each time a principal's funds in the premium account will exceed the FDIC coverage limit, provided that the consent clearly specifies that it applies to the premium account on an ongoing, blanket, basis.

9. Federal Standards: There are no applicable federal standards.

10. Compliance Schedule: Producers are required to comply upon the effective date of the rulemaking, which would be 30 days after the date the Notice of Adoption is published in the State Register.

Regulatory Flexibility Analysis for Small Businesses and Local Governments for the Proposed Fourth Amendment to Insurance Regulation 29 (11 NYCRR 20).

1. Effect of rule: There are approximately 248,234 producers licensed in New York, of which 196,765 are insurance agents and 51,469 are insurance brokers. Most of these producers are considered to be small businesses within the meaning of section 102(8) of SAPA.

2. Compliance requirements: This proposal does not impose any new reporting requirements on regulated entities. The Department does not currently require producers to report to the Department on the minimum records that they are required to keep. However, if the Department chooses to examine the producer for compliance with applicable provisions of the Insurance Law and regulations, the producer must make those records available at the Department's request. Also, this proposal does not impose any new record keeping requirements on producers. Producers may use their existing records to identify and track a principal's funds to ensure that the funds are fully FDIC-insured.

3. Professional services: This proposal does not require the use of any professional services.

4. Compliance costs: This proposal imposes no compliance costs on local governments. The Department does not anticipate that this proposal will impose significant additional costs on producers, since the existing regulation already requires producers to keep records to identify who the principal is and to track the funds of each principal. However, any producer that has not been complying with existing requirements could incur additional costs. Producers should not incur significant additional costs to modify current agreements to obtain a principal's consent that the principal's funds above $250,000 will not be fully FDIC-insured, since a producer may obtain the consent of the principal on a blanket basis at the inception of the relationship. Under those circumstances, the producer need not obtain the principal's consent each time the principal's funds will exceed the FDIC insurance coverage limit. Nor should producers incur significant additional costs to move a premium account from a credit union to an eligible depository institution.

5. Economic and technological feasibility: This proposal does not impose any new compliance requirements that are economically or technologically unfeasible. Producers may continue to choose methods of compliance that are economically or technologically feasible based upon the needs and capabilities of each particular producer.

6. Minimizing adverse impact: This proposal applies equally to all producers, since Section 2120 of the Insurance Law applies to all producers, regardless of their size.

7. Small business and local government participation: The Department informally circulated a number of drafts of the proposal to various trade associations representing affected licensees, many of which are small businesses, and received comments on these drafts. After careful consideration of industry comments, the Department revised the proposal, where feasible. This notice is intended to provide small businesses with an additional opportunity to participate in the rule-making process.

Rural Area Flexibility Analysis for the Proposed Fourth Amendment to Regulation 29 (11 NYCRR 20).

1. Types and estimated numbers of rural areas: Insurance agents and brokers to which this regulation is applicable do business in every county of the State, including rural areas as defined under section 102(13) of the State Administrative Procedure Act. The proposed regulation will apply to all agents and brokers ("producers") licensed by this Department, regardless of whether they are in rural areas.

2. Reporting, recordkeeping and other compliance requirements; and professional services:

The proposed amendment requires no additional paperwork. The paperwork associated with this amendment should already be available in the records of each regulated entity. Some producers may need to modify existing agreements with their principals to obtain the principals' written consent that funds over $250,000 will not be fully FDIC-insured.

3. Costs: The Department does not anticipate that this proposal will impose significant additional costs upon producers, since the existing regulation already requires producers to keep records identifying who the principal is and to track the funds of each principal. However, any producer that has not been complying with existing requirements could incur minor additional costs. Additionally, producers should not incur significant additional costs to modify existing agreements in order to obtain a principal's written consent. Further, given the membership restrictions that credit unions typically impose, it is unlikely that a large number of producers currently maintain their premium accounts in credit unions and will have to open new accounts. For those producers that do use credit unions, the Department anticipates that the cost to individual producers to move the account from a credit union to a bank will likely be negligible.

4. Minimizing adverse impact: The requirements of Section 2120 of the Insurance Law apply equally to all producers, irrespective of whether they are located in rural or non-rural areas. Because the same requirements apply to both rural and non-rural entities, the proposed amendment will have the same impact on all affected entities.

5. Rural area participation: The Department informally circulated a number of drafts of the proposal to various trade associations representing producers in both rural and non-rural areas, and received comments on these drafts. After careful consideration of industry comments, the Department revised the proposal, where feasible.

Job Impact Statement for the Proposed Fourth Amendment to Regulation 29 (11 NYCRR 20).

The proposed amendment should have no significant impact on jobs and economic opportunities in this State. The requirements imposed upon producers are not so onerous that they would discourage individuals from working or creating jobs and economic opportunities in New York.