1. (a) All custodial agreements between a securities broker-dealer and an insurer shall comply with the following:

   1. (1) The agreement shall contain a clause appointing the securities firm to hold the insurer’s "custodied securities" (the "securities"), with all interest, dividends, distributions, and other income attributable therefrom (the “property”), and authorizes the securities firm to take such action and perform such duties on behalf of the insurer, upon the terms and conditions set forth herein, and only to the extent that such securities and property are actually delivered to the securities firm;

   2. (2) As used in the agreement, securities:

      1. (A) Shall mean:

2. (i) Certificated securities and uncertificated securities as defined in Arkansas Code § 4-8-102(1)(a) and (b); and

   1. (ii) Assets or investments as defined or regulated pursuant to Arkansas Code § 23-63-601 et seq., and Arkansas Code § 23-63-801 et seq.; and

      1. (B) Does not include any securities used for deposits under Arkansas Code § 23-63-206;
   2. (3) The securities firm shall agree to exercise the same due care with the securities and property of the insurer which is expected of a fiduciary with the responsibility for the safeguarding of the insurer’s securities and property and for compliance with all provisions of the custodial agreement, whether the insurer’s securities and property are in the securities firm's possession or have been deposited or redeposited by the securities firm with a subcustodian;
   3. (4) That the intent of the parties is that this agreement shall comply with Arkansas Code § 23-69-134, as amended, to constitute a written custodial agreement between a qualified broker-dealer and an insurer under Arkansas Code § 23-69-134, and other applicable insurance laws or rules;

   4. (5) The securities firm and insurer understand that the agreement is permitted in the discretion of the Insurance Commissioner under Arkansas Code § 23-69-134 and that the parties are aware that the agreement may be terminated by the commissioner at any time upon the breach or failure of the securities firm or insurer to abide by any provision of:

      1. (A) Their agreement;
      2. (B) Arkansas Code § 23-69-134; or
      3. (C) Other applicable insurance laws or rules;
   5. (6) The agreement shall be governed by, and construed under, the laws of the State of Arkansas;

   6. (7)

      1. (A) The securities firm or any agent used by the securities firm shall indemnify the insurer for any loss of securities and property occasioned by the negligence or dishonesty of:

         1. (i) The security firm's:
3. (a) (a) Officers and employees;

4. (b) (b) Agents; or

   1. (c) (c) Subcustodians; or

      1. (ii) Officers and employees of agents or subcustodians of the securities firm.

      2. (B) The securities firm or its designee:

         1. (i) Shall indemnify the insurer for any loss of securities and property occasioned by:
5. (a) (a) Burglary;

6. (b) (b) Robbery;

   1. (c) (c) Hold-up;

      1. (d) (d) Theft; or

7. (e) (e) Mysterious disappearance, including loss by damage or destruction to the insurer's securities and property; and

   1. (ii) Must promptly replace the securities and property or the value thereof and the value of any loss of rights or privileges resulting from the loss;

   2. (8) If there is a loss of custodied securities for which the securities firm shall be obligated to indemnify the insurer, the securities firm shall promptly:

      1. (A) Notify the commissioner in writing of the loss; and
      2. (B) Replace the securities and property or the value thereof and the value of any loss of rights or privileges resulting from said loss of said securities and property;

   3. (9)

      1. (A) The securities firm 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:

         1. (i) War, whether declared or not and including existing wars;
         2. (ii) Revolution;
         3. (iii) Insurrection;
         4. (iv) Riot;
         5. (v) Civil commotion;
         6. (vi) Act of God;
         7. (vii) Accident;
         8. (viii) Fire;
         9. (ix) Explosion;
         10. (x) Stoppage of labor, strikes, or other differences with employees; or
         11. (xi) Laws, regulations, orders, or other acts of any government authority.

      2. (B)

         1. (i) Custodied securities shall be held subject to the instructions of the insurer and shall be withdrawable upon demand of the insurer, or demand of the commissioner, when applicable under the agreement.
         2. (ii) However, custodied securities used to meet the deposit requirements set forth in Arkansas Code § 23-63-206 shall, to the extent required by that statute, be under the control of the commissioner and shall not be withdrawn by the insurer without the approval of the commissioner.

      3. (C)

         1. (i) All securities and property shall be deposited promptly by the securities firm into such accounts of the insurer as may be designated by the insurer from time to time in writing.
         2. (ii) Absent such written designation, the securities firm shall promptly deposit such income in the custody account established at the securities firm for the insurer that is entitled to such income.
         3. (iii) Each such deposit of income shall identify the securities and property upon which the income was distributed.

      4. (D) All custodied securities that are registered shall be registered:

         1. (i) In the name of:
8. (a) (a) The insurer;

9. (b) (b) The nominee of the insurer; or

   1. (c) (c) The securities firm or its nominee; or

      1. (ii) If in a clearing corporation, in the name of the clearing corporation or its nominee.
      2. (E) The securities firm shall not use any of the insurer’s securities and property for the securities firm’s benefit, and none of the insurer’s securities and property shall be loaned, pledged, or hypothecated to any person or organization.

      3. (F)

         1. (i) The securities firm may utilize the services of a Federal Reserve Bank, the Depository Trust & Clearing Corporation, or any other clearing corporation which is registered as a clearing agency under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder as the securities firm’s agent (the “depository”) for the purposes of book-entry deposit and maintenance in the depository of securities eligible to be held in book-entry form under applicable laws, regulations, and rulings, except as limited by written instructions from the insurer to the securities firm.
         2. (ii) The securities firm may authorize the depository to hold the deposited securities, to receive the income and principal becoming due thereon, to surrender for payment maturing obligations and those called for redemption, and to disburse and/or otherwise dispose of said deposited securities and the income thereof upon and pursuant to instructions given, through the securities firm, by the insurer or its designated representative.
         3. (iii) Any income received from the surrender of coupons for payment will be credited as directed by the insurer through the securities firm.
         4. (iv)
10. (a) (a) Custodied federal securities usually will be held in book-entry form through a Federal Reserve Bank.

11. (b) (b) The Federal Reserve Bank maintaining such book-entry federal securities shall be a custodian for the securities firm or for a custodian or depository for the securities firm.

    1. (v)
12. (a) (a) Property held in a clearing corporation or in the Federal Reserve book-entry system shall be separately identified on the securities firm’s official records as being owned by the insurer.

13. (b)

    1. (1) (b)(1) Such records, or the records of a custodian or clearing corporation for the securities firm, shall identify which:

       1. (A) (A) Deposited securities are held by the securities firm or by its subcustodian; and
       2. (B) (B) Securities are in a clearing corporation or in the Federal Reserve book-entry system.

    2. (2) (2) If the securities are in a clearing corporation or in the Federal Reserve book-entry system, the records shall also identify where the securities are and:

       1. (A) (A) If in a clearing corporation, the name of the clearing corporation; and

       2. (B) (B) If through a subcustodian, the name of the subcustodian.

          1. (c) (c) The securities firm shall, upon request from the insurer, or the commissioner, send to the insurer:
    3. (1) (1) All reports which it receives from a clearing corporation or the Federal Reserve book-entry system relating to the insurer’s property; and

    4. (2) (2) Any reports prepared by outside auditors on the securities firm’s internal accounting control of the insurer’s property.

       1. (G)

          1. (i)
14. (a) (a) The securities firm may transfer into the name of the securities firm or its nominee or to the clearing corporation all registered securities from time to time held under this agreement.

15. (b) (b) The securities firm shall be responsible to the insurer for the acts of its nominee with respect to such securities to the same extent that it is responsible for its own acts.

    1. (ii) To effect the transfer of registered securities into the name of the securities firm’s nominee, to facilitate the collection of any payment thereon and to effect any other action in relation thereto or in order to meet any requirement thereof, the insurer authorizes the securities firm to execute in the insurer’s name, and to deliver, any instrument determined by the securities firm to be appropriate in furtherance of the purposes hereof, and to guarantee in the securities firm’s name as the signature of the insurer any signature so placed on such instrument.

       1. (iii) The securities firm will not permit securities issued or issuable in bearer form to be transferred to any clearing corporation which is not the clearing corporation identified under 23 CAR § 13-108(a)(9)(D)(ii) of this agreement.

       2. (H)

          1. (i) The securities firm may settle all securities transactions effected by the insurer through the use of an institutional delivery system.
          2. (ii) The securities firm may deliver or receive securities in accordance with appropriate trade reports or statements received through an institutional delivery system without having received written direction directly from the insurer;

    2. (10)

       1. (A)

          1. (i) The commissioner, or his or her designee, or the insurer, shall at all times be entitled to receive copies of or examine the securities firm's records relating to the properties and securities of the insurer.
          2. (ii) In addition, the securities firm and insurer hereby agree to honor any requests made by the State Insurance Department, on behalf of the commissioner, for information concerning the insurer's securities and property subject to this agreement.
          3. (iii) The securities firm and the insurer understand that the department, from time to time, may request, and the securities firm is required to furnish, a detailed listing of the insurer's securities and property and an affidavit by the securities firm certifying the securities firm's safekeeping responsibilities relative to the securities and property of the insurer.
          4. (iv) The securities firm's response to such requests shall be made directly to the department and shall encompass all of the insurer's securities and property held by the securities firm, or agent or subcustodian of the securities firm, under this agreement.
       2. (B) The securities firm shall deliver promptly to the insurer all proxies, proxy statements, authorizations, notices, and stockholder reports which the securities firm receives with respect to the securities and property, and if the securities to which such proxies or other authorization relate are registered in the name of the securities firm or its nominee, such proxies or other authorizations when so delivered to the insurer shall be duly executed in blank by securities firm or its nominee, as the case may be.
       3. (C) All activities involving the insurer’s securities and property shall be subject to the insurer's instructions, and the securities and property shall be withdrawable upon demand by the insurer, or by the commissioner, at any time.
       4. (D) The securities firm shall furnish, upon request by the insurer, or by the commissioner, a confirmation of all purchases, sales, or transfers of securities and property to or from the account of the insurer, and reports of securities and property sufficient to verify information reported in the insurer's annual statement filed with the department, as well as supporting schedules and information required in any audit of the insurer's financial statement.
       5. (E) The insurer or its designee, or the commissioner, shall at all times be entitled to examine any records maintained by the securities firm relating to the insurer's securities and property governed under this agreement;

    3. (11)

       1. (A) The insurer and the securities firm hereby agree that the securities and property shall be segregated at all times from the proprietary assets of the securities firm.
       2. (B) The securities firm's official records shall separately identify custodied securities and property owned by the insurer;

    4. (12)

       1. (A)

          1. (i) An agreement may be terminated by the commissioner for any of the following reasons following fifteen (15) days’ notice in writing to the securities firm:
16. (a) (a) The securities firm is not currently registered with the United States Securities and Exchange Commission;

17. (b) (b) The securities firm is not currently a member in the Securities Investor Protection Corporation (SIPC);

    1. (c) (c) The tangible net worth of the securities firm does not equal or exceed one hundred million dollars ($100,000,000) plus regulatory net capital as determined by the commissioner;

       1. (d) (d) The tangible net worth of the securities firm does not equal or exceed fifty million dollars ($50,000,000), and a lack of regulatory net capital and/or the securities firm has failed to maintain excess SIPC coverage equal to or greater than the market value of the insurer's securities held by the securities firm and in the form approved by the commissioner; or

18. (e) (e) Any other failure by the securities firm to meet its qualifications to handle or manage the assets of the insurer in Arkansas Code §23-69-134(b)(4).

    1. (ii) The parties shall agree that, where any of the above requirements are not maintained by the securities firm, the commissioner shall be provided notice in writing from the securities firm within twenty-four (24) hours from the failure of the securities firm to meet any of the above requirements.

       1. (B) The commissioner may terminate this agreement, in his or her discretion, following fifteen (15) days’ notice in writing to the securities firm, whenever it appears to the commissioner that any person or company, or agents thereof, subject to this agreement has impaired the financial condition of the insurer so as to threaten its solvency or makes the further transaction of business by it hazardous to:

          1. (i) Policyholders;
          2. (ii) Creditors;
          3. (iii) Shareholders; or
          4. (iv) The public.
       2. (C) Upon termination of the agreement by the commissioner, all custodied securities of the insurer subject to this agreement shall be transferred to the insurer within fifteen (15) days after the securities firm receives written notice from the commissioner terminating the agreement;

    2. (13)

       1. (A) All notices, requests, demands, and other communications under the agreement shall be in writing and shall be deemed as having been duly given on:

          1. (i) The date of service, if served personally on the party to whom notice is to be given; or
          2. (ii) The third business day after mailing, if mailed to the party to whom notice is to be given and properly addressed as indicated below.
       2. (B) Notice must be provided to the department in writing within ten (10) days before any address change takes place;

    3. (14)

       1. (A) The securities firm and insurer must agree to maintain "securities all risks coverage" or other insurance satisfactory to the commissioner at levels considered reasonable and customary for the custodian banking industry covering the security firm's duties and activities as custodian for the insurer's assets.
       2. (B) Prior to the effective date of the agreement, the securities firm or insurer shall agree to separately provide to the department a written filing describing the nature and extent of such insurance protection.
       3. (C) Any change in such insurance protection during the term of the custodial agreement shall be promptly disclosed to the commissioner and insurer in writing within fifteen (15) days after a change occurs in such insurance protection; and

    4. (15)

       1. (A) The securities firm and insurer shall agree to abide by any administrative rule promulgated by the department which governs the handling and safekeeping of an insurer’s investments with a security broker or dealer, as may hereafter be promulgated under Arkansas Code § 23-69-134, as amended.
       2. (B) If any administrative rule conflicts with this agreement, both the securities firm and insurer shall agree to resubmit to the department an amended custodial agreement in compliance with the rule.
19. (b) The securities broker-dealer custodian shall provide the appropriate affidavits, substantially in the forms attached hereto.

Codification Notes: Securities Exchange Act of 1934 was enacted as Pub. L. No. 73-291.