BULLETIN 97-6 , Custodial Arrangements

• Jurisdiction: Iowa
• Date: 04 December 1997
• Subject Matter: Custodial Arrangements
• Decider: Therese M. Vaughan, Commissioner of Insurance

BULLETIN 97-6

Date: December 4, 1997

To: All County and State Mutual Insurance Associations

From: Therese M. Vaughan, Commissioner of Insurance

Subject: Custodial Arrangements

The commissioner is aware that some county and state mutual associations have utilized the

services of broker-dealers to custody assets in lieu of holding the securities themselves or with a

banking institution. As a result, it is important to understand the ramifications, as to recovery of

insurer assets, in the event of the liquidation of either a bank or broker-dealer that custodies

assets. So long as both entities remain solvent, the differences may appear to be insignificant.

However, in the event of a liquidation, the protections afforded to customers are dramatically

different. In the event of a bank liquidation it is well established that trusteed assets held by the

trust department of a bank do not become assets of the bank and will be returned to the owner.

Upon the liquidation of a broker-dealer the same assurances are not present.

Chapters 518 and 518A, Code of Iowa (1997) provide that investment programs developed by

companies take into account the safety of the company’s principal, investment yield and growth,

stability in the value of the investment, liquidity and investment diversification. In furtherance of

these parameters, all domestic insurers have been requested to review their investment practices

including custody arrangements. Your attention is directed to assets custodied with an outside

party. If funds are held outside the trust department of a bank, potential peril for policyholder

funds exists and therefore action is necessary to obviate this exposure.

In the event that assets are held by a third party outside the trust department of a bank, the

association is directed to expediently move the assets to an appropriate custodian to insure that in

the event of a liquidation, assets will be readily retrievable.

Attached and incorporated herein is a list of commonly asked questions and answers relating to

custodial accounts and their implementation.

Any questions regarding this bulletin should be directed to Kimberlee L. Cross, Financial

Regulation Counsel at 515-281-4163.