OGC Op. No. 07-09-03
The Office of General Counsel issued the following opinion on September 5, 2007 representing the position of the New York State Insurance Department.3
Re: Reinsurance Intermediary Fiduciary Accounts
May a checking account containing fiduciary funds for a reinsurance intermediary be linked to a "sweep" account?1
Yes. As long as both accounts are properly identified as fiduciary accounts and are kept in banks authorized to do business in this State (or, in the case of a non-resident licensee, are members of the Federal Reserve System), a checking account containing fiduciary funds for a reinsurance intermediary may be linked to a "sweep" account.
The inquiry is of a general nature, without reference to particular facts.
New York Insurance Law § 2120 (McKinney 2006) governs the fiduciary capacity of insurance agents, insurance brokers, and reinsurance intermediaries. It is relevant to this inquiry and reads, in pertinent part, as follows:
(b) Every reinsurance intermediary acting as such in this state shall be responsible, in a fiduciary capacity for all funds received or collected in such capacity, and shall not, without the express consent of his or its principal or principals, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity.
(c) This section shall not require any such agent, broker, or reinsurance intermediary to maintain a separate bank deposit for the funds of each principal, if and as long as the funds so held for each such principal are reasonably ascertainable from the books of account and records of such agent, broker, or reinsurance intermediary, as the case may be.
11 NYCRR § 32.4 (2007) (Regulation 98) governs the fiduciary responsibility of reinsurance intermediaries. It interprets and is intended to facilitate compliance with Insurance Law § 2120. The regulation states in pertinent part as follows:
(1) A reinsurance intermediary shall deposit funds received in one or more appropriately identified accounts in a bank duly authorized to do business in this State, from which no withdrawals shall be made except as hereinafter specified (any such account is hereinafter referred to as "a premium and loss account"). A licensed nonresident reinsurance intermediary may use a bank not authorized to do business in this State, provided such bank is a member of the Federal Reserve System.
(3) No withdrawals from a premium and loss account shall be permitted except as follows: for payment or return or premiums, commission due others, losses to insurers or other parties entitled thereto, interest, if the principals have consented thereto in writing,
the intermediarys commissions, and voluntary deposits, provided that no withdrawal of voluntary deposits may be made if the balance remaining in the premium and loss account thereafter is less than aggregate net premiums, commissions due other and losses received but not remitted.
The pertinent language in 11 NYCRR § 32.3 is identical to the language set forth in 11 NYCRR § 20.3 (Regulation 29), which applies to insurance agents and brokers. Consequently, the Department construes these provisions in pari materia. See OGC Opinion No. 07-04-05 (April 4, 2007).
In interpreting 11 NYCRR § 20.3, the Department has opined that an insurance agent or broker may maintain an arrangement wherein some of the premium funds received by the agent or broker may be transferred from a checking account and placed into a "sweep account." See OGC Opinion No. 06-01-09 (January 6, 2006) (checking account may be linked to "sweep account" as long as both accounts are properly identified as premium accounts and kept in banks authorized to do business in this State.) The principal difference of Regulation 29 from Regulation 98 is that the former permits a non-resident reinsurance intermediary to utilize a bank that is a member of the Federal Reserve System but not authorized to do business in New York.
Pursuant to Insurance Law § 2120 and 11 NYCRR § 32.4 of Regulation 98, fiduciary funds of a reinsurance intermediary need not be deposited in separate accounts so long as the funds are reasonably ascertainable from the books of account and records of such reinsurance agent. Thus, a licensed reinsurance intermediary may maintain an arrangement wherein a checking account containing fiduciary funds is linked to a "sweep account", provided that the account is otherwise maintained in accordance with the provisions of Regulation 98, and adequate records are kept so as to separately identify the funds of each principal.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 A sweep account arises from a non-interest bearing transaction out of which all funds remaining at the end of the business day are automatically swept and deposited into an interest-bearing account or invested in some other manner that the account holder previously has specified.See Blacks Law Dictionary 1010 (6th ed. 1991).