BILL NUMBER:  S4116

 TITLE OF BILL :

An act to amend the insurance law, in relation to investments and
activities of insurance department employees


 PURPOSE OR GENERAL IDEA OF BILL :

This bill would permit employees of the Insurance Department to own
shares of a mutual fund that may incidentally invest in the stock of a
licensee of the Department. Ownership of shares in mutual funds that
invest primarily or exclusively in the shares of licensees of the
Insurance Department would be prohibited.

 SUMMARY OF PROVISIONS :

Section 1 of the bill amends subsection (a) of Section 204 of the
Insurance law to specify that the prohibition against ownership of
securities or investments in licensees of the Insurance Department by
Department employees is not applicable to investments in mutual
investment companies (mutual funds) that my incidentally invest in the
stock of a licensee of the Department An exception is provided for
mutual funds that are designed to invest primarily or exclusively in
the shares of licensees of the Department.
              

Section 2. Effective Date.

 JUSTIFICATION :

Section 204 of the Insurance Law was designed to ensure that the
Department and its employees regulate the insurance industry in a
disinterested and ethical manner. As a general matter, the statute
continues to serve the legislative purposes underpinning its
predecessor's enactment nearly one hundred and fifty years ago when
the Insurance Department was first established, which include
precluding not only impropriety but also the appearance of
impropriety.  Significant changes in the financial world and the
nature of investments since the statute's reenactment in 1939 have
raised questions as to the reach of Section 204.

The growth of mutual funds exemplifies the changes in the economic
landscape. The first mutual fund, established in 1924, served around
200 investors and managed $392,000 in assets.  By contrast, the
Investment Company Institute in April 2007 estimated that over 8,800
mutual funds exist, serving 93.9 million individual shareholders
nationwide and managing over $10.4 trillion in investor assets.

At the same time, even since Section 204 was last re-codified in 1984
(without substantive change) there has been significant horizontal and
vertical integration of financial services and other companies.  In
1999, when Congress passed the Gramm-Leach-Bliley Act, it repealed
major provisions of the Glass-Steagall Act, which had prohibited
commercial banks from also offering certain specific investment or
insurance services. By ratifying a trend that was already emerging in
the market, namely, the banking industry's push to offer customers a
wider range of financial services, the Gramm-Leach-Bliley Act paved
the way for the emergence of "financial supermarkets.: For example, in
2000, Citigroup, Inc. had holdings in the banking sector (Citibank),
investment brokerage sector (Smith Barney), and insurance industry
(Travelers), among others. Other market changes at the same time
allowed corporations, like auto manufacturers, to vertically
integrate, and thereby own or control the members of their supply
chain, which could include insurers licensed by this Department.

Section 204 was not intended to prohibit passive investment in
investment companies that incidentally own a securities of insurance
companies or in securities of issuers that own licensees with
insurance operations that are not material to the business of the
issuers taken as a whole.  Accordingly, this bill amends Section 204
in a reasonable manner that maintains the statutory intent.

The bill also provides an important safeguard in that it prohibits
employees of the Insurance Department from investing in mutual funds
that are designed to primarily or exclusively invest in the securities
of licensees of the Department. Specialty funds, sometimes call
"Sector Funds," may be designed to invest primarily in life insurance
companies. An investment in such a fund by a Department employee would
be prohibited by this bill.

Finally, Section 16(3)(d) of the New York State banking law as amended
by Chapter 318 of the laws of 1995 to make changes similar to this
bill for employees of the Banking Department. The employees of the two
agencies should be treated in a a similar matter, and this bill
accomplishes that goals.

 PRIOR LEGISLATIVE HISTORY :

A similar bill was introduced in 2008. The bill S.7609 passed the
Senate.

 FISCAL IMPLICATIONS :

None.

 EFFECTIVE DATE :
This bill would take effect immediately after it shall have become a
law.