OGC Op. No. 07-11-03
The Office of General Counsel issued the following opinion on November 7, 2007, representing the position of the New York State Insurance Department.
RE: Money Market Fund as a Sweep Option
May a reinsurance intermediary use a money market fund as a sweep option1 for a checking account that contains fiduciary funds?
No. A money market fund is not a permissible sweep option because it is a mutual fund, not a bank account, and is not Federal Deposit Insurance Corporation (FDIC) insured.
The inquiry is of a general nature, without reference to particular facts.
N.Y. Ins. Law § 2120 (McKinney 2006) imposes upon New York insurance agents, insurance brokers, and reinsurance intermediaries a fiduciary responsibility “for all funds received or collected in such capacity….” In addition, § 32.3 of N.Y. Comp. Codes R. & Regs. tit. 11, Part 32 (1982) (Regulation 98) addresses reinsurance intermediaries’ fiduciary responsibilities, and states in relevant part that:
(a) Every person, firm, association or corporation acting as reinsurance intermediary in this State, is responsible as a fiduciary for funds received by such reinsurance intermediary, in such capacity. All such funds shall be held in accordance with the following rules:
(1) A reinsurance intermediary shall deposit funds received in one or more appropriately identified accounts in a bank or banks 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.
The pertinent language in 11 NYCRR § 32.3 set forth above is identical to the language set forth in 11 NYCRR § 20.3 (Regulation 29), which applies specifically to insurance agents and insurance brokers. Consequently, the Department construes these provisions in pari materia. See OGC Opinion 07-09-03 (Sept. 5, 2007) and OGC Opinion 07-04-05 (Apr. 4, 2007). However, the principal difference between 11 NYCRR § 32.3 and 11 NYCRR § 20.3 is that the former permits a licensed, non-resident reinsurance intermediary to use a bank not authorized to do business in New York, provided that the bank is a member of the Federal Reserve System.
In interpreting 11 NYCRR § 20.3, the Department has opined that an insurance agent or broker, in his or her fiduciary capacity, may transfer premium funds from a checking account into a sweep account, and may link both accounts, if the insurance agent or broker identifies the accounts as premium accounts, and keeps the accounts in banks authorized to do business in New York. See OGC Opinion 06-01-08 (Jan. 6, 2006). Furthermore, both premium accounts must be FDIC insured. See OGC Opinion 07-03-06 (Mar. 9, 2007) and OGC Opinion 07-02-12 (Feb. 13, 2007). Consequently, an insurance agent or broker may need to open several accounts at one or more appropriate banks to receive full FDIC protection. See OGC Opinion 07-03-06 (Mar. 9, 2007) and OGC Opinion 92-77 (NILS) (Jun. 9, 1992).
Likewise, a reinsurance intermediary may link a checking account that contains fiduciary funds to a sweep account if both accounts are: properly identified as premium accounts; kept in a bank authorized to do business in New York, or, in the case of a licensed, non-resident reinsurance intermediary, in a bank that is unauthorized to do business in New York, but is a member of the Federal Reserve System; and FDIC insured.
The Department has opined that checking accounts, saving accounts, bank money market accounts, and non-negotiable bank certificates of deposit are acceptable premium accounts because they are bank accounts. However, the deposits therein must meet the criteria set forth in Insurance Law § 2120 and Regulation 98. See OGC Opinion 04-12-16 (Dec. 14, 2004) and OGC Opinion 92-77 (NILS) (Jun. 9, 1992). Accounts holding U.S. Treasury Bills, accounts at brokerage firms, short-term obligations of federal or quasi-federal agencies, non-bank money market accounts or other mutual funds, and repurchase agreements backed by U.S. Government securities are unacceptable premium accounts, because they are not bank accounts. See OGC Opinion 04-12-16 (Dec. 14, 2004) and OGC Opinion 92-77 (NILS) (Jun. 9, 1992).
The inquirer asked whether a money market fund is an acceptable sweep option. A money market fund is “a type of mutual fund that is required by law to invest in low-risk securities. These funds have relatively low risks compared to other mutual funds and pay dividends that generally reflect short-term interest rates. Unlike a ‘money market deposit account’ at a bank, money market funds are not federally insured.” See Money Market Funds, U.S. Securities and Exchange Commission, at http://www.sec.gov/answers/mfmmkt.htm. Because a money market fund is a type of mutual fund, and not a bank account, a reinsurance intermediary may not use a money market fund as a sweep option.
For further information you may contact Assistant Attorney Joana Lucashuk at the New York City office.
1 A “sweep option” involves a transaction in which monetary amounts that exceed (or fall short of) a certain level are automatically transferred to a higher-interest earning account at the close of each business day. See Sweep Account, Financial Dictionary, Investor’s Business Daily, at http://www.investors.com/FinancialDictionary/Term/Sweep_Account.asp.