Notwithstanding Section 1100, a domestic insurer may make excess funds investments in shares of an investment company, as defined in the Federal Investment Company Act of 1940, if the requirements of subdivisions (b) and (c) are satisfied. No investment made pursuant to this section that ceases to satisfy the requirements of subdivision (b) or (c) shall be retained as an excess fund investment. No domestic insurer shall invest under any provision of this code in the shares of any investment company that has more than 33.33 percent of its investments in foreign investments that do not comply with paragraph (4) of subdivision (b).
(a) The definitions in this subdivision apply to the following terms when used in this section:
(1) A mutual fund is an open-end management company as defined in Section 5(a)(1) of the Federal Investment Company Act of 1940 (15 U.S.C. Sec. 80(a)-5(a)(1)).
(2) An exchange traded fund is either an open-end management company as defined in Section 5(a)(1) of the Federal Investment Company Act of 1940, or a unit investment trust as defined in Section 4(2) of the Federal Investment Company Act of 1940 (15 U.S.C. Sec. 80a-4(2)), that is registered under the Federal Investment Company Act of 1940 and that satisfies the terms of exemptive orders issued by the United States Securities and Exchange Commission that qualify it to be an exchange-traded fund.
(3) A fund is any investment company authorized in this section as an excess fund investment.
(b) The investment company shall:
(1) Be registered with and reporting to the United States Securities and Exchange Commission.
(2) Be domiciled in the United States.
(3) Have assets in excess of one hundred million dollars ($100,000,000), or be affiliated with other investment companies that have, in the aggregate, assets in excess of one billion dollars ($1,000,000,000).
(4) Have at least 66.67 percent of its investments be investments that are authorized under Article 3 (commencing with Section 1170) and Article 4 (commencing with Section 1190), except that any amount of a fund’s assets may consist of foreign investments, provided that if more than 50 percent of its total investments consist of foreign investments, then the insurer’s investment in that fund shall comply with the provisions of subparagraph (C) of paragraph (1) of subdivision (c), notwithstanding any other provision of this section or this code.
(5) Have at least 36 months of active investment history.
(6) Issue its shares as fully paid and nonassessable, with no preemptive, conversion, or exchange rights.
(7) Issue its shares to the insurer or to the insurer’s custodian, subcustodian, or depository designated pursuant to Section 1104.9, or have its shares be retained by a bank, trust company, or other entity other than the investment company that is authorized by the United States to act as a transfer and dividend paying agent for the investment company, provided that, notwithstanding any other provision of this code, Section 1104.9 shall not apply to the assets or investments held by the investment company.
(8) Provide equal rights and privileges to each share within the same class or series, and entitle each share within its class or series to vote and to participate equally in dividends and distributions declared by the investment company and in the net distributable assets of the investment company on liquidation.
(9) If it is a mutual fund, entitle shareholders to require the investment company to redeem all shares.
(10) If it is an exchange-traded fund, all of its shares are both of the following:
(A) Registered under the Federal Securities Act of 1933.
(B) Either listed and traded on a national securities exchange registered under the Securities Exchange Act of 1934 or have prices ascertained by quotations furnished through a nationwide automated quotations system approved by the Financial Industry Regulatory Authority.
(11) Have no investment policies that authorize any of the following:
(A) Borrowings to exceed 331/3 percent of its total assets.
(B) The aggregate notional value of its derivative instruments outstanding to exceed 10 percent of its total assets.
(C) Investment in commodities or direct ownership of real estate.
(12) Have an expense ratio that does not exceed the following amounts of its average daily net asset values:
(A) For a money market fund, 100 basis points.
(B) For a bond fund, 200 basis points.
(C) For a stock or mixed stock/bond fund, 300 basis points.
(c) An insurer shall do the following:
(1) At no time make or retain an excess fund investment under the authority of this section that exceeds the following limits:
(A) An amount of its admitted assets, as reported in its most recent annual statement, that is more than any of the following:
(i) Three percent in a single investment company or 7 percent in an affiliated group of investment companies.
(ii) Twenty-five percent in all investments authorized by this section.
(B) One hundred percent of its surplus as regards policyholders, as reported in its most recent annual statement, in all investments authorized by this section.
(C) For an investment in a fund that has more than 50 percent of its assets in foreign investments, those foreign investments shall be foreign investments as defined by Section 1240 and shall be considered foreign investments, investments denominated in foreign currencies, or both, as applicable, for purposes of the limitations set forth in subdivisions (a) and (b) of Section 1241. No insurer shall invest in any such fund pursuant to any other provision of this code.
(D) An investment in any single investment company that exceeds 10 percent of the total net asset value of that investment company.
(2) Make a specific determination, pursuant to Sections 1200 and 1201, that an investment company has stated investment policies that are suitable for the insurer’s investment objectives.
(d) In addition to any other remedies available under this code for any violation of this section, the commissioner may, after giving an insurer notice and an opportunity to be heard, deny credit in any financial statement filed with the commissioner for all or any part of an investment in an investment company, even if it otherwise complies with this section, if he or she finds the investment to be unsound or hazardous.
The grounds for finding an investment unsound or hazardous may include, but are not limited to, the following determinations:
(1) The investment company’s investment adviser or subadviser lacks sufficient investment experience to render reliable investment advice; or lacks good professional character or good standing with any securities licensing authorities having jurisdiction over them.
(2) The portfolio turnover rate of the investment company is excessive in relation to its investment goals.
(3) The investment company’s annual investment management fee, or other fees or charges incurred by the investment company or the insurer, are not reasonable when compared to charges or fees associated with similar investment companies.
(4) An investment company fails to mirror substantially any security index upon which its stated investment policy is based.
(Amended by Stats. 2010, Ch. 400, Sec. 5. (AB 2782) Effective January 1, 2011.)