34 TAC §§53.1 - 53.9, 53.11 - 53.14
The Teacher Retirement System of Texas (TRS) adopts new Chapter
53, §§53.1 - 53.9, and §§53.11-53.14, relating to certification
by companies offering qualified investment products to employees of school
districts or open-enrollment charter schools, with changes to the text of
each section as published in the January 4, 2002, issue of the
Texas Register
(27 TexReg 110). The new sections establish certification
requirements, maximum fees, costs, and penalties a certified company may charge,
notice requirements, certification fees, and related implementation provisions
as authorized under Senate Bill 273, Act of May 27, 2001, 77th Leg., R.S.,
ch 1229, §23, 2001 Tex. Gen. Law 2811, 2817 (to be codified at Tex. Rev.
Civ. Stat. Ann. Art. 6228a-5). Proposed §53.10 relating to annual demonstration
of licensure and training and §53.15 concerning additional requirements
are being withdrawn is this same issue of the
Texas
Register.
Under the adopted new sections, companies that offer qualified investment
products to educational institution employees after May 31, 2002, and expect
to receive contributions or payments through a salary reduction agreement
between the employee and employer will be required to certify to TRS that
they meet applicable requirements. The new sections establish certification
requirements for companies offering qualified investment products that are
annuity contracts, as well as qualified investment products other than annuity
contracts. They also establish maximum charges by a company to an employee.
The new sections describe the process for a company to certify to TRS and
the certification fee required. Also, the sections address the notice required
to be provided to a potential purchaser of an annuity contract. Finally, they
require TRS to maintain a list of certified companies, which is to be available
on the TRS Web site.
TRS developed proposed rules after considering letters and comments that
TRS received following enactment of SB 273, as well as the analysis of Watson
Wyatt, a consultant with expertise in institutional 403(b) products and fees.
The Policy Committee of the TRS Board of Trustees recommended that TRS publish
proposed rules for public comment. The proposed rules were published, along
with notification that a public hearing would be conducted to receive comments
on the rules.
On January 23, 2002, TRS staff conducted a public hearing to receive comments.
TRS also received written public comments before the comment period officially
ended on February 11, 2002. TRS continued to receive public comment after
the end of the official comment period. All timely comments were considered
before adoption of the rules. Any comments filed after February 11, 2002,
were considered to the extent feasible, even if not reflected in the discussion
that follows.
General Comments on the Proposed Rules
TRS received comments from many interested business entities, organizations,
and individuals, including teachers or other educational institution employees,
educator organizations, school districts, insurance agents, insurers, financial
planners, investment advisors, and securities brokers or dealers. In addition
to the groups, organizations, or business entities identified by name, TRS
received comments from individuals not identified as affiliated with any group
or organization both for and against adoption of the rules, as well as for
adoption with changes. TRS also received comments from some members of the
Texas Legislature commenting on the legislative intent and proposed implementation
of SB 273.
Groups, Associations, and Others for Adoption of the Rules: Association
of Texas Professional Educators and Martin Drought & Torres.
Groups, Associations, and Others against Adoption of the Rules: Metropolitan
Life Insurance Company; Donnell Financial Associates, Inc.; AXA Advisors,
Inc.; Lincoln Financial Group; The Security Benefit Group of Companies; The
Equitable Life Assurance Society of the United States; Zurick Life; SAFECO
Life & Investments; David Huckin Associates, Inc.; Horace Mann Companies;
Allen Bailey and Associates, Inc.; Texas Association of Insurance and Financial
Advisors; Texas Financial; Dearborn & Greggs; Asset Planning Group; Gemini
Estate Planning L.L.C.; Texas State Teachers' Association; Texas Association
of Community Schools; SWS Financial Services; Wink-Loving Independent School
District; Fort Stockton Independent School District; Mullen and Associates;
First American Pension Services; Doug Massey Financial Services; Source Financial
Services and Insurance/Educators Retirement Specialists, Inc.; Caldwell Independent
School District; Allred-Thompson-Mason-Daugherty Insurance; Quantum Pension
Services; and Veritrust Financial, L.L.C.
Groups, Associations, or Others for Adoption of the Rules with Changes
or Whose Position Was not Specifically Identifiable as for or against Adoption:
Texas Association of Life and Health Insurers; Fidelity Investments; VALIC;
Life Insurance Company of the Southwest; Akin, Gump, Strauss, Hauer &
Feld, L.L.P.; Combined Benefits Group; Aetna Investment Services, L.L.C.;
United Teacher Associates Insurance Company; TCG Consulting; CMW Financial;
CGU Life Insurance Company of America; TIAA-CREF; Ameritas Direct; Van Kampen
Trust Company; The Texas Retirement Trust; Katy Independent School District;
Diversified Investment Advisors, Inc.; Aid Association for Lutherans; Securities
Industry Association; Texas Department of Insurance; Mills, McCaghren &
Associates; OFG Financial Services; Paul Moore Investments; Houston Independent
School District; Combined Benefits Group, Inc.; and NEA Member Benefits.
·The principal reasons cited in support of the proposed rules are:
·Protection of the interests of public school employees by preventing
their accounts from being eroded by unreasonable, excessive fees
·Reduction in charges to employees, with positive impact on potential
investment returns
·Shorter surrender period that would enable employees to move assets
more freely
·Establishment of standards for certification of 403(b) companies,
including financial and ethical standards
·Mandatory disclosure of fees and other terms in annuity contracts
·Curtailment of abuses that led to lawsuits over some 403(b) products
·Creation of a more competitive environment for investment products,
particularly those that do not rely on on-site sales force
·Greater competitive opportunity for companies that provide high-quality,
more neutral investment information to employees, instead of information influenced
by commissions and supported by high fees
·Central TRS listing of certified companies with employee choice among
all certified companies; potentially higher participation rates because of
greater employee confidence
In general, TRS finds the rules as adopted will have the results identified
by comments in support of the proposed rules. TRS finds that the rules will
protect employees against excessive fees, will establish basic standards for
companies to certify to TRS, and will establish disclosure requirements through
use of a form notice when an annuity product is sold to an employee. The rules
also will allow a sufficient choice of products, will permit competition by
different kinds of companies and products, and will permit reimbursement to
certified companies or their representatives for services such as investment
advice to employees or administrative services to the school districts.
Some comments supported the rules as proposed on the grounds that the fees
and surrender periods would afford appropriate employee protection, and they
urged that the fee caps not be increased. However, TRS also received comments
objecting to the disallowance of certain fees entirely, such as annual fixed
administrative fees or sales loads, and objecting to the low level of other
fees on the grounds that they would be too low to support a sales force that
provides face-to-face information. These comments generally stated that the
proposed fees would eliminate too many companies from eligibility for certification,
and they would restrict employee choice too severely. TRS agrees that low
fees protect employees against erosion of returns on their investment dollars.
TRS also agrees that the lower the allowable fees, the fewer companies and
products that will be available to the educational institution 403(b) market.
Additionally, lower fees generally mean less in-person contact, which some
employees prefer when making investment decisions. Finally, companies have
a legitimate business need to cover costs associated with offering products
in a multi-employer environment in which they deal with more than 1,000 separate
payroll entities.
Based on all of these factual considerations, TRS finds that it is appropriate
to balance the employee protection afforded by low fees with considerations
such as employee choice and the potential impact on availability of services
to employees. TRS finds that increasing the proposed fees is appropriate considering
the likely impact of the proposed fee provisions on choice, competition, and
services. Therefore, TRS disagrees with comments that the proposed fee caps
should be adopted without any changes.
Finally, with respect to the comments in support of the rules on the basis
that they would increase employee confidence because of TRS involvement, TRS
notes that it would be incorrect to construe these rules or certification
of companies under these rules as any TRS endorsement, approval, or recommendation
of either a company or its investment products. Through this chapter, TRS
has established a certification process for companies and will establish a
list of certified companies on its Web site, as required under SB 273. Placing
the name of a company on the TRS Web site list does not indicate TRS approval
of a company. Instead, as the certification procedures of this chapter demonstrate,
certification is based on a company's own, unilateral determination that it
meets the requirements for certification. Additionally, the maximum fees established
in this chapter should not be construed as reasonable charges for all qualified
investment products. The fees in this chapter are the very highest amounts
a company may charge; the maximum charges are designed to allow employee access
to a wide variety of products, services, and features. Employees still must
exercise diligence in determining which investment products are right for
them and what fees are reasonable for the qualified investment product they
may purchase.
·TRS also received comments objecting to the proposed rules or to
certain features of the proposed rules. The principal reasons cited in opposition
to the proposed rules are:
·Potential reduction in number of companies offering 403(b) products
to employees
·Potential reduction in revenues from which commissions are paid to
insurance agents, securities broker-dealers, or investment advisors
·Potential impact on commissions, inconsistent with the legislative
intent of SB 273
·Prohibition on fees such as sales loads, inconsistent with the legislative
intent of SB 273
·Potential reduction in access to personal financial advice because
of decreased fee revenues, potentially resulting in lower participation rates
by employees
·Potential impact on investment returns available under fixed annuity
contracts because of short surrender charge period
·Potential impact on employees' investment returns because of lack
of access to full range of investment options, including products carrying
a sales load or fixed annual fee
·Restrictions on employees' choices of investments made with their
voluntary contributions
·Absence of any provisions for investor education or for a master
custodial agreement
·Absence of provisions specifically addressing broker-dealer or investment
advisor relationships with employees or school districts
TRS modified the proposed rules in response to some of the reasons urged
against adoption of the rules. To the extent TRS did not modify the proposed
rules in response to reasons cited against adoption of the rules, TRS overrules
the considerations urged against adoption of the rules for the following reasons
indicated.
Delay of regulation. Some comments urged TRS to delay implementation of
any regulations that might disrupt the 403(b) market until further study of
industry fees. TRS disagrees and finds that such delay would be inconsistent
with the requirements of SB 273. As of June 1, 2002, companies are required
to be certified in order to offer new qualified investment product contracts
to school employees using payroll reduction agreements for their contributions.
Additionally, the Legislature specifically required TRS to establish certification
criteria, including consideration of the administrative costs to employees
for qualified investment products other than annuities and setting maximum
fees, costs, and penalties for annuity products. Therefore, TRS finds it is
necessary to establish certification standards and procedures, including maximum
charges, before June 1, 2002.
Deference to TDI regulation of annuity companies. Some comments suggested
that TRS refrain from adopting regulations on fees and charges and instead
defer to Texas Department of Insurance (TDI) regulation of annuity companies.
One comment specifically noted that under art. 3.42, Insurance Code, all annuity
contract forms must be submitted to TDI for approval. TRS disagrees because
deferring to TDI regulation would inconsistent with TRS's specific responsibilities
under SB 273, which requires TRS to establish certification standards, including
maximum fees, costs, and penalties. SB 273 imposes additional requirements
on annuity companies that market qualified investment products likely to be
the subject of educational institution employee salary reduction agreements.
If an annuity company does not market such products, then it is not subject
to Chapter 53 but instead is generally regulated by TDI. Because of the requirements
of SB 273, TRS finds that it may not defer to TDI's general regulation of
annuity companies or their contracts.
Impact on availability of investment products and employee choice. Some
comments objected to the rules on the grounds that the fees would be too low
to allow availability of a wide range of products, and the allowable fees
would prevent access to any investment products with sales loads or fixed
administrative fees. More specific comments about fees are addressed under §53.3.
The rules have been revised to establish maximum fees, costs, and penalties
that will be less restrictive and thus will eliminate fewer companies or products,
but that still will prevent companies or products with excessive fees from
participating in the market.
Some comments objected to the rules on grounds that they would be inconsistent
with free enterprise and that TRS should not restrict how employees invest
their own personal, voluntary investment contributions. TRS disagrees to the
extent the comments advocate no regulations whatsoever. Access to school employees
at work by sales forces and the availability of salary reduction agreements
as a source of investment contributions support the establishment of basic
standards for companies who benefit from such opportunities. TRS finds that
employer limitations on the number of companies eligible to receive similar
tax-deferred, voluntary investment contributions, such as contributions to
401(k) or 457 plans, are common. Further, TRS notes that the requirement to
establish certification criteria, including maximum fees, is statutory. Finally,
TRS finds that the fee limitations have been changed in response to comments
to ensure that employees have access to a variety of products.
Impact on agent or broker-dealer commissions. Several comments maintained
that the legislative history of SB 273 shows that agent commissions were not
to be
impacted
by TRS regulations. The comments
said that the rules would impact agent commissions because the allowable fees
would be too low, and they would completely eliminate some sources of commissions,
such as sales loads. The comments consider the impact to be contrary to legislative
intent.
TRS disagrees with this analysis of the legislative history of SB 273 because
the House and Senate floor comments clarified that TRS is not authorized to
directly regulate commissions or to supersede the negotiated payment by a
company to an agent. Consistent with the intent of SB 273, Chapter 53 does
not regulate commissions, nor will it supersede any existing, negotiated agreements
between a company and its agents. First, existing company-employee contracts
for qualified investment products are grandfathered if they meet the requirements
of SB 273, Section 31, and these contracts presumably impose charges that
provide the revenues to support the negotiated commissions a company has agreed
to pay its agents for sale of the particular product. The rules do not affect
the charges to employees in grandfathered contracts nor the division of the
revenues resulting from those charges. Second, for contracts that are not
grandfathered, the rules establish the maximum charges that may be deducted
automatically by companies from employee payroll reduction contributions (or
accounts established with such contributions). The rules do not regulate how
the companies and their representatives may divide the revenues resulting
from those charges. Therefore, the rules are consistent with both the expressions
of legislative intent and with the express language of the law authorizing
TRS to establish maximum fees, costs, and penalties as a requirement for certification.
Several comments said there is a direct connection between revenues (generated
from fees charged to customers) and the level of commissions companies may
pay agents or broker-dealers. The comments maintained that fee regulation
would have an impact on commissions, in contravention of legislative intent.
As noted in the previous paragraph, TRS disagrees with this interpretation
of the legislative intent of SB 273. Further, TRS finds that commissions are
the subject of negotiation and agreement between companies and their representatives.
Even if there is some relationship between fees charged to employees and commissions
received by representatives of the companies, TRS nevertheless is directed
by SB 273 to establish maximum fee levels. Doing so involves consideration
of a number of factors, not just potential impact on commissions.
TRS revised the proposed rules to permit higher surrender charges and a
longer surrender period, to allow annual fixed fees, and to allow sales load
charges, as well as to increase the maximum annual percentage charge applied
to accounts. TRS finds that these changes sufficiently address the concerns
about impact on commissions because they will allow greater fee-based revenues
from which agents or representatives may be compensated for their sales efforts
on behalf of companies and for services to customers.
Impact on access to financial advice. TRS received comments expressing
concern about the impact the proposed regulations might have on the availability
of face-to-face financial advice to employees from insurance agents, broker-dealers,
and investment advisors. According to the comments, reduction in fees would
reduce financial incentives to provide one-on-one service and advice. Some
comments expressed a desire to continue to receive this kind of service.
TRS received comments contradicting the predicted loss of personal service
to employees as a result of the proposed fees. One comment questioned the
quality of financial advice given when company representatives are compensated
on a commission basis for selling a company's products. The comment indicated
this model of financial advice does not need to be protected by the rules.
According to this comment, other companies, such as direct marketing companies,
who do not use the same sales incentives, provide high quality investment
advice and information through professionally trained staff delivered through
toll-free telephone numbers or the Internet.
TRS agrees that there are different modes of delivering services, including
financial advice. Because participating in 403(b) investments is voluntary,
employees should be able to choose among a variety of products and service
modes. TRS has modified the rules to permit a fee structure that would support
the agent-based delivery system as well as the direct marketing model. Under
the rules, an employee may choose to pay higher fees if one-on-one, in-person
service from a commissioned agent or broker-dealer is desired, or the customer
may choose investment products with lower fees but no in-person service. The
adopted fee caps, when compared to those for other institutional voluntary
investment programs, are sufficient to permit the delivery of financial advice
through person-to-person contact. Further, the rules do not prohibit a financial
advisor from receiving compensation directly from an employee, on a fee for
service basis, instead of through a deduction from the employee's payroll
reduction agreement contributions.
Impact on investment returns. Some comments expressed concern about potential
impact on investment returns, based on two aspects of the proposed rules.
First, some comments said that a surrender period of only six years is too
short to permit insurance companies to make higher-yielding underlying investments
and thus could affect guaranteed returns payable to employees. They proposed
lengthening the period to prevent an adverse impact on guaranteed returns.
Second, some comments noted that fee restrictions that limit the number of
companies or products available to employees could have an impact on an employee's
ability to diversify an investment portfolio and thus have an adverse impact
on returns. TRS notes there was insufficient information to show the degree
of linkage between companies' investment earnings and the returns guaranteed
to customers in annuity contracts. TRS agrees that the lower the allowable
fees, the fewer the number or companies that may certify, but disagrees that
the certification requirements are so stringent that an employee's ability
to diversify a portfolio would be affected. Nevertheless, because of a number
of considerations raised in comments, TRS has made changes to the fee provisions,
including lengthening the surrender period from six years to twelve years,
which will address these specific concerns.
Absence of provisions on employee education or master custodial agreement.
TRS received general comments stressing the importance of investor education
and noting the confusion and administrative burdens that will continue to
be caused by a large number of companies operating in each separate school
district. One comment proposed that TRS's approach be educational, not regulatory,
and that development of a master custodial plan would be one of the most beneficial
uses of TRS resources. The comment also noted that certification criteria
based primarily on fees could lead to claims that TRS did not properly exercise
fiduciary responsibility in reviewing companies or products.
TRS agrees that investor education is important. TRS also agrees that a
large number of companies may be eligible to certify and that school districts
may, under SB 273, face challenges in coping with a large number of certified
companies to which employees wish to direct payroll deductions. However, TRS
finds it is beyond the scope of the proposed regulations and beyond the scope
of TRS's responsibilities under SB 273 to address investor education or a
master custodial agreement. For this reason, the rules do not address these
issues. With respect to the comment regarding fiduciary responsibilities,
TRS does not agree. TRS will not hold the investment funds on behalf of the
employees; creating certification requirements in compliance with SB 273 does
not establish a fiduciary relationship between TRS and the employee. Additionally,
TRS disagrees that the certification criteria are primarily fee based; they
are based on experience, financial strength, regulatory history, and other
factors, as well as compliance with fee caps.
Absence of provisions on broker-dealers. Some comments requested that the
rules be modified to specifically address managed investment accounts (MIAs)
whereby an investment advisor or broker-dealer may be designated to receive
an employee's payroll contributions and then would allocate the contributions
to different companies based on the employee's investment objectives. The
comments requested that the rules specifically allow for this kind of arrangement
and establish fees that may be deducted from the employee's contributions
to compensate the financial advisors for their services. TRS agrees that such
arrangements currently are in use but does not agree that the rules should
be modified as requested. Under Texas Revised Statutes, Article 6228a-5, §5(e),
an employee is entitled to designate any agent, broker, or company through
which a qualified investment product may be purchased or contributions made.
TRS finds it unnecessary to provide regulations expanding on the statutory
language. With respect to fees, TRS has modified the fee provisions to delete
the descriptions of specific asset classes and the list of fees specifically
associated with each class. Instead, the fees as adopted include an annual
2.75 percent charge, based on the account value, which permits more flexibility
for companies to compensate representatives for their services to customers,
including investment management services. As long as all charges by a company
do not exceed the fee totals, this chapter does not prohibit an investment
advisor or broker-dealer from receiving payment from the company for investment
services.
Other general comments and general revisions. One comment proposed that
a company be required to enroll at least five employees before an educational
institution is required to add the company to the list of approved companies.
TRS disagrees with the proposal. The creation of a local list of approved
companies, based on a minimum number of participating employees, is beyond
the scope of this chapter and beyond the scope of TRS's responsibilities under
SB 273.
Some comments stated that the certification process and thorough disclosure
were more appropriate means for protecting customers against a few bad companies
or products than establishing unrealistic fees caps. Though TRS agrees that
disclosure and certification requirements are important, SB 273 specifically
requires TRS to consider charges to employees as a certification criterion.
Further, because fees have an impact on the value of an employee's investment,
TRS finds that establishing maximum charges is an important means of protecting
employees' interests.
TRS received comments formally objecting to the absence of forms and notices
referred to in the proposed rules. The comments expressed concern that after
adoption of rules TRS might promulgate forms that contain substantive training
and licensing requirements for company representatives, in violation of due
process and the Administrative Procedure Act. TRS disagrees that such forms
and notices are required by law to be promulgated with proposed rules. It
would be administratively burdensome to treat agency forms and notices as
subject to the formalities of rulemaking. Doing so would result in significant
cost and delays and would reduce flexibility to respond to changing circumstances.
Further, TRS intends to promulgate a form consistent with the statutory requirements.
TRS received comments expressing concern about the absence of a "knowledge"
requirement in the violations described in Article 6228a-5, §10. TRS
declines to address this matter in this chapter because TRS does not have
authority to change the elements of a criminal offense as described in statute.
Finally, even if no comments were received on some provisions, TRS changed
some text to improve clarity and consistency of language. Such changes were
minor and caused no substantive change in meaning. Throughout the chapter,
text has been revised to use a standard reference to "TRS" instead of "the
retirement system." This change was made to be consistent with on-going efforts
to standardize references in TRS rules.
Comments on Specific Sections
§53.1. Definitions.
TRS received comments proposing addition of several new definitions. TRS
agrees that certain additional words or terms should be defined to clarify
applicability of the rules.
TRS added a definition of "annuity or annuity contract" as recommended
by comments. The definition clarifies that an annuity product must be a qualified
investment product, as that term is defined by SB 273 and this section, and
meet the requirements of applicable insurance laws and rules. The definition
also addresses a comment that under securities law, a fixed annuity is not
considered an "investment." The comment requested clarification of applicability
of the chapter to fixed annuities. The definition clarifies that, for purposes
of this chapter, a fixed annuity may be a qualified investment product.
TRS added a definition of "certified company" to clarify the term as used
in this chapter. Though the definition is similar to one proposed by comments,
TRS finds it is unnecessary to include a requirement that a company selling
annuity contracts be an "insurer" because both SB 273 and this chapter require
that a company offering annuity contracts be authorized to issue such contracts
in the State of Texas. Under applicable insurance laws, the entity would need
to be an insurer.
TRS modified the definition of "certify" to better reflect the process
by which certification is to be reflected.
TRS added a definition of "company" as proposed by comments to clarify
that the entity with primary liability for the performance of the obligation,
such as the mutual fund company or the insurer, is the "company" that is required
to certify. A representative, such as an insurance agent or broker-dealer,
generally would not be considered a "company."
TRS added a definition of "contract" to clarify that, as used in the chapter,
the word applies to an agreement through which an employee purchases a qualified
investment product, including an annuity certificate evidencing participation
in a group annuity contract.
Though no specific definition was proposed, comments suggested that the
word "person" as used in §53.9 (requiring a "person" who offers to sell
an annuity contract to provide notice as required by law) is unclear. TRS
disagrees and finds that this same term is used in SB 273 with respect to
notice and that the meaning of the word is self-evident. By choosing the word
"person" instead of "company" or "representative," SB 273 imposes a broad
notice requirement that applies to any person who offers to sell an annuity
contract that may be the subject of a salary reduction agreement.
TRS modified the definition of "representative" to clarify that, when required
by applicable law, a representative must be licensed or registered. TRS does
not find it necessary, as comments proposed, to modify the definition to clarify
that broker-dealers need not be certified. The clarification provided by the
addition of the definition of "company" is sufficient.
TRS added a definition of "specialized department" to clarify that a company
may provide 403(b) services through an affiliate and still meet certification
requirements.
Some comments requested definitions that TRS does not agree are necessary.
TRS declines to add a definition of "administrative cost." The comment requested
that TRS define the term in order to state that certain charges or fees are
not administrative costs. For example, the proposal requested that the term
be defined as "costs for the administration, purchase or sale of qualified
investment products other than annuity contracts" and that the rules exclude
sales loads, fees collected to pay or offset a commission, or a fee paid for
investment advice. TRS disagrees because the definition would define administrative
costs too narrowly. Under SB 273, TRS is authorized to establish reasonable
certification requirements, including but not limited to the "administrative
costs to employees." Under this provision TRS is authorized to consider all
costs assessed against employees' payroll reduction contributions and accounts
established through those contributions.
TRS also declines to add a definition of "managed investment account."
The term is not used in SB 273 or in this chapter. Further, for reasons explained
in more detail in response to comments under §53.5, TRS does not find
it necessary to address managed investment accounts; thus, adding a definition
is unnecessary.
TRS also finds it unnecessary to add definitions of the terms "broker-dealer"
and "investment advisor." The terms are not used to any significant degree
in this chapter. Further, the definition of "company" clarifies that the entity
with primary liability for the investment product must certify to TRS. No
additional clarification is needed to establish that a broker-dealer or investment
advisor generally is not required to certify.
§53.2. Applicability.
53.2(a)
One commenter requested clarification of whether the rules apply to the
Optional Retirement Program (ORP), described at Title 8, Subtitle C, Chapter
830, §830.002, Government Code. ORP is available at state-supported institutions
of higher education. It is unnecessary to add clarification in the text of
this section because the definition of "educational institution" in both §53.1
and SB 273 indicates that only school districts and open-enrollment charter
schools are "educational institutions" for purposes of this chapter
53.2(b)
Another comment requested clarification about the applicability of the
chapter to a group annuity contract issued by an insurer to an employer in
1990 as a funding vehicle for its Section 403(b) program, under which employees
sign enrollment applications but have no individual annuity contracts issued.
TRS finds that because group annuity contracts are in use, clarification is
necessary. Though such a group contract may be grandfathered with respect
to employees already enrolled, under Section 31 of SB 273 TRS finds that newly
enrolling an employee in a group contract after May 31, 2002, establishes
a new contractual relationship between the company and the employee. Thus,
such a contract, typically evidenced by an annuity certificate, is not grandfathered.
The rule text has been clarified consistent with this analysis.
Comments requested clarification of grandfather protection of contracts
entered into before June 1, 2002. For example, an employee may have interrupted
contributions to an investment product for a number of reasons, and the number
of accounts an employee opened before June 1, 2002, could have been affected
by a number of circumstances, such as changes in employment. The comments
noted that if an employee wishes to continue salary reduction contributions
to previously opened accounts, the employer possibly will not permit the employee
to do so if the company's name is not on the TRS list of certified companies.
The comments proposed that TRS draft a standardized form to be signed by the
employee and provided to the employer to verify that the accounts were established
prior to June 1, 2002. TRS agrees that such circumstances may exist and that
some clarification of the grandfather provisions of law would be helpful.
TRS has added new subsections 53.2(c) and (d). However, TRS does not agree
that TRS should promulgate a form for the employee to verify to the employer
that the contract is grandfathered. Under SB 273, it is the employer that
will decide whether to enter into a salary reduction agreement with an employee
who wishes to direct contributions to a particular company. Therefore, it
is the employer who should make the determination of whether a contract is
grandfathered.
§53.3. Maximum Fees, Costs, and Penalties on Annuity Contracts. 53.3(a)
To simplify the regulations, TRS has combined the fee provisions relating
to qualified investment products that are annuity contracts (§53.3) and
the provisions relating to qualified investment products other than annuity
contracts (subsections 53.5(c) - (e)). The title of §53.3 has been modified
to omit the reference to annuity contracts, and subsection 53.3(a) has been
modified to reflect the change in applicability of the section. Additionally,
TRS has modified the section to permit, as maximums, a six percent sales load,
an annual fixed fee of $50, an annual charge of 2.75 percent, a surrender
charge of ten percent to terminate within 12 years, and a loan initiation
fee of no more than $50. These maximum charges are established under the direction
of SB 273 to establish certification criteria, including maximum charges and
administrative costs to employees. TRS finds that because charges generally
erode investment returns or impose restrictions on employee ability to move
investment dollars as desired, maximum fee caps are appropriate.
TRS received comments proposing that in addition to the charges allowed
in this section, TRS should permit short term trading fees. TRS disagrees
because the allowable fees provide a sufficient source of revenues for companies
to cover costs associated with any short term trading that may occur. Further,
at this time there is insufficient information to show such fees should be
allowed in order to avoid making companies who charges such fees ineligible
for certification. From the comments received, TRS finds that this is not
an area of concern for a large number of companies.
One comment proposed that TRS establish maximum fees, costs, and charges
for cash-value life insurance policies, which the commenter described as a
third investment vehicle available to participants in 403(b) plans. TRS disagrees
because to the extent such policies are not annuity contracts but do meet
the requirements for a qualified investment product, the policies are subject
to provisions applicable to such products. If the policies do not meet the
criteria for a qualified investment product, then under article 6228a-5, the
policies may not be purchased through salary reduction contributions, and
establishing maximum charges for such policies would be beyond the scope of
this chapter.
TRS received comments proposing that a loan fee be permitted and comments
requesting clarification of whether in addition to such a fee, a company would
be permitted to charge interest on a loan. TRS agrees that loans are common
features on some qualified investment products and that establishing a maximum
initiation fee is appropriate because there are costs associated with processing
loan applications. A maximum loan fee has been established in subsection 53.3(g).
This subsection also clarifies that a company may charge interest in addition
to a loan initiation fee.
Many of the comments on proposed §53.3 also were made on subsection
53.5(e), maximum charges by certified companies that offer qualified investment
products other than annuity contracts. The TRS analysis of §53.3 comments
also applies to similar comments made on subsection 53.5(e).
53.3(b)
The subsection has been modified to clarify that the section does not establish
the amount of commission a
certified
company
may pay a broker, agent,
or other representative.
The changes make the provisions more inclusive.
TRS received comments that this subsection is not accurate because the
fees provided for in the proposed rules would eliminate or greatly reduce
the revenue stream that is the source for broker or agent commissions. TRS
disagrees because the rules do not establish commissions payable by a company.
For more discussion, see the general comments.
One comment stated that a change in surrender charges and schedules would
directly correlate to the compensation paid to an agent in connection with
the sale of the product. The comment suggested that reduction in compensation
to agents would lead to less personal involvement by agents in 403(b) investment
decisions of employees and possibly less participation. One comment noted
that surrender charges are not normally triggered in the 403(b) market; thus,
charges that may seem high are not frequently imposed.
TRS does not agree that reducing surrender charges and schedules will necessarily
lead to reduction in employee participation. Employees may access independent
financial advisors for information about 403(b) investments. They also may
access advice from toll-free numbers and the Internet, available from companies
that do not use commissioned agents. Further, TRS finds that the precise relationship
between surrender charges and commissions was not established. If such charges
are not frequently incurred in the 403(b) market, then it is not clear how
a reduction in the charges called for in an annuity contract, but rarely incurred,
will reduce agent commission. TRS finds that based on the comments, reduction
in maximum allowable surrender charges is not likely to reduce agent commission
to a level that will cause personal service by agents to disappear.
53.3(c)
Some comments objected to subsection 53.3(c), as well as to the corresponding
provisions of subsection 53.5(c)(1), because they would prohibit sales load
charges entirely. Generally, the comments said that the prohibition on sales
loads would eliminate financial information and advice from salespersons compensated
through such loads and would restrict customers' choices of products. Some
comments objected on the grounds that TRS has no legal authority to entirely
prevent certain fees, but only authority to establish maximums. Some comments
interpret SB 273 as implying the authority to set "reasonable" fees. Some
comments maintained that SB 273 implicitly authorizes sales loads because
in the disclosure requirements, the amount of any up-front or deferred sales
charges is required to be disclosed.
TRS does not agree with the comments regarding lack of legal authority
to prohibit certain fees; the authority to establish maximum charges necessarily
implies the authority to determine that certain fees, charged in addition
to other allowable fees, would result in excessive charges in the aggregate.
TRS agrees that the disclosure requirements of SB 273 seem to assume that
certain fees or charges would be allowed. TRS finds that the disclosure requirements,
when coupled with the potential impact on availability of products to employees,
support permitting sales loads to be charged. Sales load charges would provide
a revenue source for commissions that are incentive for agents and brokers
to market to educational institution employees, including in small or rural
school districts.
TRS based the 6 percent sales load provision on comments that showed loads
are permitted to be as high as 8.5 percent under federal securities law but
that most sales loads on 403(b) products are no higher than six percent. TRS
finds the 6 percent cap on sales loads sufficient to allow employee choice
of products.
53.3(d)
TRS received comments requesting that an annual fixed dollar fee be allowed.
Some comments indicated it could be more cost-effective for some investors
if a company could choose to apply a fixed dollar fee instead of an annual
percentage fee based on account value. Another comment proposed that the term
"fixed dollar fee" be defined in the rules for clarification.
TRS agrees that a fixed annual fee should be allowed because a fixed fee
provides a possible alternative to annual percentage charges that increase
in absolute dollar amounts as an investor's account increases. TRS also agrees
that a description of the term would be helpful and has included one similar
to a description provided in comments.
The cap of $50 annually for fixed fees is based on comments that show such
a level would not disqualify a large number of companies from certification
and thus would ensure a greater choice of products to employees. A fee of
$35 to $50 is common; TRS finds that the $50 level will not be excessive.
53.3(e) and (f)
TRS received comments proposing that the allowable annual percentage charges
be increased for different asset classes in order to make a wider variety
of products available to employees. Some commented that the allowable percentages
were too low to permit adequate company compensation for services, adequate
agent or broker/dealer compensation, personal counseling, sales meetings,
and investment advice. Additionally, some comments noted that the marketing
and administration of qualified investment products to educational institution
employees requires higher charges than proposed by TRS because the market
is very decentralized (over 1,000 payroll entities), very large geographically,
and has lower average contribution amounts than other comparable markets,
such as higher education. Some comments also suggested clarifications or additions
to the asset classes in order to establish allowable fees for specialty or
lifestyle funds. Other comments supported the fees as proposed because they
would eliminate high expense products from being sold to employees.
TRS agrees that modification of the allowable charges is warranted. The
fees as proposed would eliminate too many investment products or companies.
Several comments requested preservation of employee choice of products and
services, and TRS agrees this is important in a voluntary investment program.
TRS also agrees that the proposed fee structure did not address specialty
funds or blended accounts, and the application of the allowable percentages
to different asset classes in a portfolio would be somewhat confusing and
restrictive. TRS agrees with the comments regarding the features of the educational
institution market that make it more difficult and expensive to serve compared
to more centralized employment situations, such as higher education 403(b)
programs.
To address these concerns, TRS has adopted one maximum annual percentage
charge for all assets in an employee account, instead of different maximum
percentages applicable to different asset classes. This will give companies
flexibility to set appropriate fees, within the maximum, based on the asset
mix in an account. The maximum of 2.75 percent annually is based on the addition
of 125 basis points to the highest percentage of 1.5 percent proposed for
the international or global equity asset class. The addition of 125 basis
points will permit compensation for costs such as mortality and expense risk,
account management, personal investment advice, and administrative expenses
associated with a multi-employer, multi-payroll, geographically large market.
The percentage was established at a level that also would permit managed investment
accounts to continue to exist and to compensate investment advisors or broker-dealers
for their services to the employees and to the companies. TRS finds that the
2.75 percent charge, in combination with other charges allowed under the rules
as adopted, is flexible for both employees and companies and strikes an appropriate
balance between companies' need to cover expenses and the intent of SB 273
to protect employees from the erosive effect of high fees on long-term returns.
Increasing the allowable percentage above 2.75, as proposed by some comments,
is not warranted in light of other fee adjustments made in the adopted rules.
53.3(g)
Many of the general comments previously described were received in response
to the proposed provisions capping surrender charges at 6 percent, to terminate
within six years of contract inception. The general comments regarding impact
on agent commissions, potential impact on guaranteed returns to employees,
impact on availability of products, potential impact on access to investment
information and advice, and proposals to delay regulation or defer to TDI
regulation have been addressed as part of the general comments.
Additionally, comments noted that the six-year surrender period is inconsistent
with Article 6228a-5, §11(c)(2)(F)(iv), which implies that contract restrictions
in excess of ten years would be permissible. TRS agrees that the notice provision
of the statute implies that a restriction longer than ten years would be permissible
if disclosed. For this reason, TRS has adopted a twelve-year maximum surrender
period. This change also addresses concerns about potential impact of a shorter
period on a company's ability to make underlying investments with higher returns,
which could affect the returns guaranteed to employees.
Some comments identified the role of surrender charges within a policy
as to dissuade policyholders from withdrawing their retirement savings prior
to retirement, as well as to mitigate a company's expenses if policy values
are withdrawn before the carrier is able to recoup the cost of setting up
a new policy. Comments noted surrender charges discourage "twisting," in which
an agent encourages an employee to surrender a current annuity policy in order
to sell the employee a new one and earn a commission on the sale. TRS agrees
that surrender charges are used to cover company expenses upon premature withdrawal.
However, other comments showed that insurers expect to be able to cover such
expenses with surrender charges of no more than ten percent. As for discouraging
withdrawals, TRS finds that the federal tax code imposes an additional tax
of ten percent when tax-deferred investment dollars are withdrawn before retirement.
The federal tax code, coupled with a surrender charge of no more than ten
percent, provides sufficient discouragement to early withdrawal. Higher surrender
charges are unnecessary to achieve this purpose.
Some comments proposed that instead of the six percent, six-year maximums
proposed for surrender charges, TRS should apply the Standard Non-Forfeiture
Law for Individual Annuities (Texas Insurance Code, Article 3.44b) to all
annuity contracts, including exempt group annuities. TRS disagrees because
if the Legislature had intended that the non-forfeiture law be applied to
all annuity contracts as a means of establishing appropriate fee caps, then
Article 3.44b could have been amended to make it applicable to group annuity
contracts. However, the Legislature chose not to do so but instead directed
TRS to establish fee caps appropriate for certified companies marketing annuity
products to school employees. Further, insurance companies that market annuity
products to employees of educational institutions have access to employees
at work for marketing purposes and may receive regular premium payments through
payroll reduction agreements. The tax benefits to employees who purchase annuities
through a 403(b) program also provide such companies an additional marketing
point, while the federal tax code provisions provide additional deterrence
to early surrender. These considerations justify lower surrender charges than
the non-forfeiture provisions of Article 3.44b.
Some comments supported the proposed surrender charges because they would
allow good products to be offered but would eliminate poor products. While
TRS agrees that some good products would be available under the original proposal,
TRS finds that employees desire a wider choice of services and products than
would be available under the proposed limitations. Thus, changes to the proposed
rules are necessary.
Some comments expressed support for the proposed rules because they would
reduce the number of companies and products marketing to educational institution
employees. The comments characterized the current marketing of 403(b) products
in school districts as chaotic, with administrative burdens falling on districts,
which turn to third party administrators (TPA) to ease the paperwork burdens.
The comments noted that a TPA might use its role to provide its affiliated
marketing organization with enhanced sales opportunities in the districts.
The comments indicated a reduction in the number of companies would be beneficial,
reducing burdens on districts and reducing the role of the TPA. The comments
supported the proposed rules on the grounds that they would reduce the number
of companies marketing higher fee products through commissioned sales representatives
and would increase the opportunities for companies offering lower fee investments
but who have little or no on-site presence in the school districts. The comments
disagreed that the quality and availability of customer education would decrease
if on-site presence of other companies were reduced because investment information
can be made available by telephone or the Internet.
TRS agrees that a large number of certified companies could create a challenging
administrative environment for employers. However, SB 273 does not contain
provisions that indicate intent to dramatically restrict the number of companies
that may market to educational institution employees. In fact, it contains
several provisions to ensure that all certified companies have the opportunity
to receive contributions through salary reduction agreements. With respect
to the certification criteria in the law, though they are designed to weed
out weak companies, they are not designed to limit the number of certified
companies to only a handful. Thus, this chapter similarly is designed to establish
basic standards, including maximum fees, but not to dramatically reduce the
number of companies through stringent certification standards. Additionally,
the TRS rules are not intended to give one kind of company or product a competitive
advantage over another. Instead, they are designed to permit employees to
choose the types of products and services they find appropriate. Though TRS
agrees that quality investor education may be provided by companies though
toll free numbers or Internet sites, TRS also finds that some employees prefer
to speak to an advisor or sales representative in person. Therefore, TRS finds
that the proposed fees should be changed to avoid a large reduction in the
number of competing companies and to permit choice by employees.
In response to the comments, TRS has modified the surrender charges and
surrender period to permit a charge of no greater than ten percent with a
surrender period no greater than 12 years. These provisions will allow a variety
of products and will allow a great degree of flexibility to offer a product
suitable to the employee. They also address the potential impact on returns
by permitting companies a twelve-year period for investment, reducing the
likelihood of investment in shorter-term, lower-yielding bonds. They offer
an adequate level of protection to the customer against excessive fees or
lengthy surrender periods that penalize customers too severely. Coupled with
other allowable charges, they provide a sufficient source of revenue for company
costs.
Comments objected to the provisions prohibiting surrender charges on variable
annuity accounts. For example, they noted that providing an "annuity wrapper"
adds value to the product, and companies should be permitted to recover associated
costs. Other comments concerning variable annuity accounts noted that such
accounts should not be marketed based on tax-deferral advantages when sold
as a 403(b) product, since tax-deferral advantages would be available for
a plain mutual fund when sold as a 403(b) product. Some comments supported
the proposed fees because they would ensure parity between mutual fund and
variable annuity fees.
TRS agrees that variable annuity accounts may provide some features that
result in costs to companies. TRS finds that it is appropriate to establish
maximum surrender charges and other fees that will provide all companies flexibility
to design products and establish charges that reflect their costs for service,
features, guarantees, and other considerations. As for the comments regarding
the marketing of variable annuities, TRS agrees that the tax-deferral feature
of annuities compared to mutual fund investments is not relevant when both
investments may be made on a tax-deferred basis through a 403(b) plan. However,
if variable annuities are being marketed improperly, jurisdiction to investigate
and sanction agents lies with TDI, not TRS, and this chapter cannot address
all issues such as improper marketing of variable annuities. Therefore, TRS
does not find these comments to be relevant to the establishment of appropriate
fees for variable annuities.
Some comments proposed a "sliding scale" surrender charge of as much as
18 percent for as long as 14 years for a fixed annuity contract in which the
company offers certain guarantees. For fewer guarantees, the surrender charges
would be reduced. This approach was recommended in order for some agents to
continue to earn the same level of commissions and to create a product that
meets the employee's needs.
TRS declines to adopt the sliding scale proposal. The charges are higher
than necessary to ensure employee choice of good products and desirable service
levels. The proposal appears to be driven primarily by concern about size
of commissions. While TRS acknowledges this is a valid concern for insurance
agents, it must be balanced against other concerns. TRS received no convincing
evidence to show that an 18 percent charge is necessary to achieve other objectives,
such as compensating a company for policy set-up, deterrence of early withdrawal,
personal service, or allowing appropriate underlying investments by companies.
Additionally, the sliding scale proposal would require TRS to determine and
define the appropriate guarantees and to determine a value that presumably
correlates to the particular guarantee that a purchaser would receive in exchange
for a particular fee level. The proposal would require TRS to create very
detailed, specific product-design requirements, a task that is beyond the
scope of the maximum fee provisions envisioned by SB 273 and by the rules
as originally proposed.
Other comments proposed that TRS require that surrender charges be waived
in certain circumstances, such as death, disability, terminal illness, or
upon separation from employment. One comment proposed that in lieu of a surrender
fee on fixed accounts, a company may offer a scheduled series of payments.
TRS disagrees with the proposals because they relate to product design more
than to establishment of appropriate maximum charges, certification requirements,
and disclosure. Companies may offer such features under the rules as adopted,
but TRS declines to require such features by rule.
53.3(h)
Some comments proposed that the subsection be clarified or deleted because
it was not clear whether the subsection addressed guaranteed returns or some
other provision of annuity contracts. TRS agrees that the subsection is unclear
and has determined that it is appropriate to delete it because disclosure
requirements for annuity contracts are specifically addressed in §53.9.
53.3(i)
TRS has re-worded this subsection for clarity with no change to meaning.
§53.4. Qualifications for Certification by Companies Offering Qualified
Investment Products that are Annuity Contracts.
53.4(b)
TRS received comments proposing that the certification standard in §53.4(b)(3)(B)
be clarified to describe more precisely the type of TDI administrative or
regulatory action that would disqualify a company from certification. TRS
agrees that clarification would be helpful and has based revisions on proposals
in the comments. However, TRS finds that it is not appropriate to specify
that an order regarding hazardous conditions must be issued after notice and
hearing in order to result in ineligibility to certify. This could exempt
orders issued upon consent or waiver of hearing, even though the company is
in hazardous condition. The procedure through which the order is issued should
not be relevant when a company is in hazardous condition.
In §53.4(b)(3)(D) and (E), TRS has modified language based on TDI
suggestions to use language and terminology commonly used in the insurance
industry without altering the substance of SB 273. TRS also received comments
proposing that TRS require companies to submit the underlying capital ratio
calculations as part of their certification. TRS disagrees because capital
requirements are established by TDI regulation, and companies are required
to file annual reports showing the information necessary to make the calculations.
To the extent there is any question about the accuracy of a company's certification
that it meets the capital requirements, the information would be available
from TDI to verify the certification. With respect to one proposal that the
calculations be attested to by a company officer or actuary responsible for
preparing them, TRS disagrees with including such a requirement in the rules.
The proposal singles out one certification requirement for special verification,
and TRS finds no need to do so by rule at this time.
In §53.4(b)(3)(F), comments proposed to permit affiliates to provide
the specialized expertise for servicing qualified investment products. TRS
agrees with the proposal because the addition allows some flexibility for
a company to use a service affiliate. Another comment proposed modification
of the "specialized department" requirement to more specifically describe
what would be required for a company offering annuities and also noted that
because fixed annuities are technically not "investments" under federal securities
law, the application of the requirement was unclear. TRS declines to adopt
the proposed language because while TRS agrees that servicing of fixed annuity
products should be tailored to those products, a company nevertheless should
be prepared to assist customers with general 403(b) questions, such as tax
or rollover questions. TRS also finds it is unnecessary to adopt additional
clarification regarding applicability of this subsection to fixed annuities
because as discussed elsewhere, for purposes of this chapter, a fixed annuity
is a "qualified investment product." The requirement for a specialized department
is a statutory requirement for all companies offering qualified investment
products that are annuities, including fixed annuities.
One comment proposed that TRS require that companies not impose restrictions
on representatives seeking to offer alternative investment products. TRS disagrees
because regulation of the relationship between companies and their representatives
is not within the scope of the chapter.
§53.5. Qualifications for Certification by Companies Offering Qualified
Investment Products Other Than Annuity Contracts.
Under this section, comments proposed to add a new provision specifically
stating that a broker-dealer may obtain a payroll reduction slot with a school
district if it represents a company certified to offer qualified investment
products. Under the proposal, the broker-dealer would not be certified because,
according to the comments, TRS is preempted under federal law from creating
certification requirements for such entities. TRS disagrees with the proposal.
First, TRS finds it unnecessary to address the preemption argument because
Chapter 53 does not require that agents or broker-dealers be certified, unless
they meet the definition of "company." The addition of the definition of "company"
clarifies that the entity with the underlying liability on the qualified investment
product is the entity that must certify in order to offer the product. Typically,
a broker-dealer would not meet the definition of "company."
Second, TRS finds the proposal that Chapter 53 should authorize an uncertified
entity, such as a broker-dealer, to receive salary reduction payments from
a school district, beyond the scope of the rules. Under SB 273, TRS's main
responsibility is to receive certifications by qualified companies and to
list certified companies on the TRS Web site. Chapter 53 primarily establishes
certification requirements and procedures for entities that have underlying
liability for the qualified investment products. For these reasons, addressing
the activities of uncertified entities is beyond the scope of the chapter.
53.5(b)(4)
One comment proposed simplification of the language in the subsection.
TRS agrees that it is sufficient to require that the company must not have
had a license or registration suspension or revocation with the five years
preceding the date of certification, without need to describe any basis for
the suspension or revocation. Such a description could be interpreted as more
limiting than intended.
53.5(b)(5)
Some comments requested that the requirement to have in excess of $2 billion
in assets under management be changed or clarified. Comments supporting lowering
the amount to $1 billion maintained that doing so would avoid exclusion of
some companies. Comments also requested clarification of whether the requirement
applied company-wide or would apply fund by fund. Comments also proposed deletion
of the requirement that the funds under management be "for 403(b)" plans.
Some comments requested clarification of how, if at all, the requirement would
apply to a broker-dealer or if a company offers a managed account program
with various mutual funds shares in an employee's account.
In response to the comments, TRS has slightly re-worded the requirement
to require that a company manage assets of at least $2 billion. The requirement
that the assets be in mutual funds or other investment products "for 403(b)"
has been deleted. Under subsection 53.5(b)(1), a company is required to have
at least five years' experience in qualified investment products; this experience
requirement need not be repeated through the financial strength requirement.
TRS declines to lower the required amount from $2 billion to $1 billion.
TRS received no information on the number of additional companies that would
be eligible to certify if the financial strength requirement were reduced.
Because TRS received few comments requesting lowering of the amount, TRS finds
that the $2 billion requirement will not be unduly limiting. TRS finds that
requiring at least $2 billion in assets under management provides greater
assurance of financial strength, a consideration deemed important under SB
273.
TRS disagrees that there is a need to clarify the requirement to explain
whether the requirement is fund by fund or may be met on a company-wide basis.
The definition of "company" provides sufficient clarification that the entity,
such as the insurer or mutual fund company, that offers the underlying investments
is the entity that must manage at least $2 billion in assets. If one company
manages different mutual funds, there is no requirement for each fund to have
at least $2 billion in assets. However, if different funds are managed by
different legal entities, the financial strength requirement would apply to
each fund and each entity would be required to certify.
As for a managed account situation, in which an investment advisor directs
employee contributions to a number of mutual funds, each mutual fund company
within a customer's managed portfolio must meet the financial strength requirement.
Additionally, the financial strength requirement applies only to the entities
that certify to TRS. Therefore, unless a broker-dealer or investment advisor
is otherwise eligible to certify to TRS, the financial strength requirement
of this subsection would not be applicable. There would be no need to "count"
the mutual fund assets towards the investment advisor in an effort to have
the advisor be eligible to certify. Comments indicated that in broker-dealer
or investment advisor arrangements, in which a mutual fund company has authorized
the broker-dealer or advisor to maintain the employee's account, it is the
mutual fund company that nevertheless underwrites the account and has primary
liability on the account. Under these circumstances, the mutual fund company
is the entity that would meet the definition of "company" and would be eligible
to certify to TRS. The broker-dealer or advisor would not be eligible to certify,
regardless of whether it met the $2 billion asset requirement.
§53.5(b)(6)
TRS received comments on proposed §53.10, Annual Demonstration of
Licensure and Training. In response, TRS deleted §53.10, under that section,
and modified §53.6(c) to require that a certifying company affirm, as
part of its certification, that each of its representatives is properly licensed
and qualified. Because this requirement is applicable to all companies certifying
to TRS, is it unnecessary to have a similar requirement in subsection 53.5(b)(6)
specifically for companies offering qualified investment products other than
annuity contracts.
§53.5(b)(7), (c), (d), and (e)
TRS received several comments regarding maximum fees that may be charged
by a certified company offering qualified investment products other than annuities.
In order to simplify the organization of the rules and avoid repetition, TRS
has deleted these provisions. Applicable fee provisions are adopted as part
of §53.3, Maximum Fees, Costs, and Penalties.
Many of the comments about the fee caps applicable to annuity contracts
also were made with respect to allowable charges for qualified investment
products other than annuities. The TRS analysis of the comments under §53.3
is applicable to similar comments made on §53.5.
TRS also received comments that subsection 53.5(b)(7) should limit only
"administrative costs," with this term proposed to be defined in a restrictive
manner as described under §53.1. For example, one category of costs that
would be excluded from the definition of "administrative costs" would be fees
paid for investment advice. The proposal was not clear because, even though
it recommended that such fees be excluded from the description of administrative
costs and thus be excluded from any limitation under Chapter 53, the proposal
also recommended specific limitations on charges that a broker-dealer or investment
advisor would be permitted to charge on managed investment accounts, in addition
to maximum fees, costs, and penalties assessed by a company.
As noted under §53.1, TRS disagrees with the restrictive definition
proposed. Additionally, TRS has modified the wording of this subsection to
make it more specific and consistent with subsection 53.3(a). With the clarifications,
TRS finds it unnecessary to define the term "administrative costs." Further,
TRS finds that any charges automatically deducted from an employee's payroll
reduction contributions (or an investment or account established with such
contributions) are administrative costs and are within TRS's authority to
limit as a requirement for certification under Article 6228a-5, §8(a)(2).
Some comments proposed that additional fees be permitted for management
of a managed investment account, whether the services are provided by a certified
company or by a broker-dealer or investment advisor. Some comments also proposed
that the term "managed investment account" be described in this rule section.
For example, proposals suggested that, in addition to other allowable fees,
the rules should permit annual managed investment account (MIA) fees of 1.75
to 2.00 percent on accounts of up to $50,000, 1.75 percent on accounts between
$50,001 and $100, 000, 1.5 percent for accounts of between $101,000 and $500,000,
and 1.0 percent for accounts over $500,000.
TRS disagrees with the comments. First, TRS finds it unnecessary to define
or describe account arrangements that are not provided for in SB 273. Additionally,
the re-organized fee provisions eliminate references to specific kinds of
asset classes; the changes eliminate any need to refine or expand the asset
classes and set fees by class. This gives more flexibility for blended or
managed accounts.
Second, TRS finds it unnecessary to establish separate MIA fees. Establishing
allowable payments to be received by representatives or agents of certified
companies is beyond the scope of this chapter. The companies and their representatives
are free to share the revenues received from allowable charges to employees
in any proportion they agree upon, so long as the total charges deducted from
an employee's account or payroll reduction contributions do not exceed the
charges allowable under these rules.
Further, by permitting additional types of fees, such as fixed annual fees
and sales loads, there are additional opportunities for companies and their
representatives to receive compensation for individual services. Finally,
by increasing the annual percentage that may be charged to an employee's account,
TRS finds that the 2.75 percent maximum annual account charge is sufficient
to permit compensation to individuals who provide account management services
to employees. Companies may divide the revenues from the 2.75 percent charge
with investment advisors or broker-dealers as they see fit, but neither the
certified companies nor the MIA managers may deduct higher or additional charges
from employee accounts or payroll reduction contributions.
§53.6. Procedure for Certification.
53.6(a) and (b)
TRS made changes to clarify that when a company certifies, it must specify
whether it is offering qualified investment products that are annuity contracts,
products other than annuity contracts, or both. This is necessary so that
TRS may easily determine what qualifications apply to the company. Other wording
was changed to improve readability and for consistency in use of terms.
TRS received comments proposing that companies be required to file policy
forms or prospectuses for the products they claim are qualified, so that there
will be no confusion over which products can be sold. TRS does not agree.
SB 273 requires certification of companies, not of products. Requiring companies
to file the material would create an administrative burden on TRS to retain
and make it available, as well as to identify the specific products by name
on the Web site and to keep the list updated. TRS finds that the proposal
would require additional administrative steps for itself and for companies.
Because annuity contract forms are filed with TDI for approval and because
federal securities law requires mutual funds to provide prospectuses to customers,
TRS believes employees would not benefit from the proposed procedures.
53.6(c)
TRS received comments that the requirements for training and licensing
of representatives were not clear. Some comments also objected to the subsection
because a referenced form was not published for comment. To clarify the requirements,
TRS has modified this subsection to refer to the statutory requirements for
company representatives. TRS finds that because Article 6228a-5, §12,
requires an annual demonstration of qualifications, it is appropriate to require,
at time of certification, that certifying companies affirm that their representatives
are properly qualified. It also is appropriate to require them to affirm that
they will comply with the statutory requirement to make the same demonstration
annually. The objection to the absence of a published form is addressed in
general comments.
53.6(d)
TRS re-worded the subsection to use terminology consistent with that used
throughout the chapter. Comments on the certification deadline proposed a
"provisional" certification process under which a company would be permitted
to market products in school districts prior to certification if contract
form approval for the annuity contract products was pending at TDI. This scenario
assumed that a company would need new contract form approval from TDI in order
to have at least one qualified investment product with fees within the limits
of this chapter. Under the proposal, the company would certify to TRS after
receiving product approval from TDI for at least one product that meets the
fee limits.
TRS disagrees with the proposal because provisional certification is unnecessary
and would be both cumbersome and confusing. First, the proposal appears to
have been prompted by concern that under the proposed fee structure, many
companies would not have any products that met the fee limits and would not
be able to certify until new products were approved by TDI. However, because
of changes to the proposed fees, there should be fewer companies that do not
have at least one product with fees within the limits. Even if some companies
still will not be able to certify until they obtain new product approval from
TDI, TRS rejects provisional certification as inconsistent with SB 273. It
would permit a company that does not meet certification requirements to continue
to market products to school employees. Furthermore, after consultation with
TDI, TRS believes that the contract approval process can be handled expeditiously.
Provisional certification would add administrative burden to TRS and create
uncertainty and confusion for school districts and employees.
Second, as an alternative to provisional certification, TRS has added new
language in subsection (e) to permit certifications for the 2002-2003 school
year to be filed as late as December 31, 2002, instead of by June 1, 2002.
Though after June 1, 2002, a company may not offer products that are likely
to be the subject of salary reduction agreements unless the company is certified,
the extension of the filing date gives companies more time to obtain TDI approval
and then market newly approved products in the remaining part of the 2002-2003
school year.
53.6(f) - (h)
TRS has modified language in these subsections to use terminology more
consistently throughout the chapter and in response to various comments. The
subsections have been re-lettered to reflect new language added as subsection
(e). In subsection (g) TRS changed the time period specified for notification
of changes in company information to 30 calendar days, which is consistent
with §53.8. This change eliminates potential confusion. The subsection
also clarifies the kind of changes that TRS must be notified of, in response
to comments proposing clarifications. Comments proposed that subsection (h)
(formerly subsection (g)) be modified to clarify when notification of a violation
may result in rejection of certification. TRS agrees and has clarified the
subsection substantially as requested. Comments also proposed that TRS permit
a period of time following rejection of certification for a company to re-submit
its certification without being required to pay another certification fee.
TRS agrees with the comment and finds that if a re-certification is submitted
within 30 business days following a rejection of certification, TRS still
will have familiarity with the circumstances and can review the re-certification
more efficiently compared to a completely new certification. Therefore, TRS
agrees that a company should not be required to pay a new fee under such circumstances.
§53.7. Certification Fee
TRS received comments about the proposed $5,000 fee for five-year certification.
Some commented that it was too high and might affect investment returns. One
comment requested that the fee not apply to separate legal entities. TRS does
not agree with the comments and declines to change the fee. It will have a
negligible impact on investment returns. It amounts to $1,000 per year, statewide,
per certifying company. Further, because TRS received no legislative appropriations
specifically to administer the certification program, this fee is the source
of revenues for the administrative duties required of TRS under SB 273.
TRS finds it is appropriate to assess fees on a "per entity" basis when
separate but related legal entities certify to TRS. If companies find it necessary
or desirable to have separate legal entities for different aspects of their
business, TRS finds that separate certifications are required for each of
the different legal entities. When separate certifications are required, TRS
finds it appropriate to assess separate certification fees because TRS will
be required to review multiple certifications. TRS finds no basis to permit
different legal entities to submit only one certification and one certification
fee.
As discussed under Section 53.6, TRS agrees that if certification is rejected,
a company should be permitted to re-submit its certification within thirty
business days under the same certification fee. Accordingly, TRS has modified
subsection (d) to permit TRS to hold a certification fee for that period of
time to determine whether a company will pursue certification. This will reduce
administrative handling.
§53.8. List of Certified Companies.
TRS has made minor changes in wording to clarify meaning, to use terms
more consistently throughout the chapter, and to include a statutory reference.
§53.9. Notice to Potential Purchaser.
TRS received comments suggesting the addition of a new provision to limit
the statutory remedy of a customer to void a contract when notice has not
been given. The comments expressed concern about the open-ended time frame
in Article 6228a-5, §11(f), for a customer to request a remedy. TRS disagrees
with the comments because TRS questions the authority to limit an employee's
statutory remedy by adoption of a rule. Companies may minimize any perceived
problem by providing the required notice and other information and obtaining
a signed statement to that effect from the employee.
53.9(a)
Pursuant to comments, TRS has added language to clarify that the notice
requirement applies when there is an offer to sell an annuity contract. Also,
the subsection as proposed was confusing with regard to variable annuity contracts
and equity-based index annuity contracts and has been modified for clarity.
TRS received comments expressing concern about the absence of a definition
of the word "person." TRS finds it unnecessary to define this term because
it is self-explanatory. By using the word "person," the notice requirement
of Article 6228a-5 appears intended to apply to both companies and their representatives.
TRS declines to define the word in a way that possibly would be more restrictive
than, and would interfere with the intent of, the statute.
Another comment proposed that the specific notice requirements be set forth
in the text of the TRS rule. TRS disagrees because the statute provides very
specific notice requirements and because TRS will promulgate a form notice
as required by statute. Given the specific nature of the statute, it is unnecessary
to repeat the requirements in a rule.
53.9(b)
TRS received comments proposing clarification of when notice is required
to be provided when a sale of an annuity contract is offered. Comments proposed
different times, including when an application is signed and when consideration
is received. TRS agrees that clarification would be helpful. TRS agrees that
notice should be provided when an application is signed because this normally
is earlier than when consideration is received, especially when payroll reduction
agreements will be used. TRS finds that the earlier the disclosure notice
is provided, the more informed an employee will be before entering into a
transaction.
TRS also received comments that TRS should address technical violations
of the notice requirement differently than substantive violations of certification
requirements. TRS finds it unnecessary to address this issue as requested.
The statute sets forth notice requirements, and persons selling qualified
investment product are required to adhere to all requirements. Further, because
certification is a new process, TRS does not have sufficient information to
draw the kind of distinctions requested.
One comment suggested addition of language stating that the method for
crediting, and the amount, of interest or return must be clearly disclosed
on all statements sent to an employee and that the failure to clearly disclose
the method for crediting, and amount of, interest or return will be considered
a violation. TRS does not agree with the comment. The statute provides authority
over the form of the initial notice to the employee and specifies what the
notice must include. TRS declines to adopt rules that would apply to annual
or quarterly statements made to an employee since this is not provided for
in the statute.
53.9(d)
One comment proposed adding a provision that either a potential purchaser
or a purchaser of an annuity may request in writing from TRS a copy of a certified
company's notice relating to a specific contract. TRS disagrees and finds
that it is unnecessary to include this level of detail in the rules. The statute
and this chapter provide a sufficient procedure for TRS to obtain a copy of
the notice on behalf of a purchaser, upon request by a purchaser for TRS assistance
with such a matter. However, it is primarily the company or agent's responsibility
to provide notice to the customer, without need for a special request through
TRS. If the responsibility is met, TRS will not need to act as an intermediary
for the employee and the company or agent. Adopting a provision to specify
that an employee may request a copy of the notice from TRS would have potential
for creating an impression that employees routinely should contact TRS instead
of the company. A similar proposal suggested that TRS create a Web-based database
in which to receive and store such disclosure forms. TRS disagrees, again
because this creates an impression that an employee should routinely turn
to TRS for the notice, when it is a company's specific responsibility to provide
the notice. TRS agrees that a Web-based notice may be convenient for employees,
and companies are free to place such material on their own Web sites in order
to permit an employee to peruse the information.
§53.10. Annual Demonstration of Licensure and Training.
Some comments objected to the inclusion of proposed §53.10 on grounds
that it is beyond the scope of TRS's rulemaking authority and confusing about
what requirements are to be imposed. TRS agrees that SB 273 does not expressly
address TRS's rulemaking authority with respect to administration of Article
6228a-5, §12. However, TRS finds that it has authority to establish requirements
relating to qualifications of representatives as part of company certification.
Therefore, this section has been deleted, and the "annual demonstration" requirement
has been addressed in §53.6 as part of the certification process.
§53.11 Coordination with Regulatory Agencies
TRS made minor wording changes to conform language to other provisions
of Chapter 53. Also, TRS received comments requesting clarification regarding
the use of "may" instead of "shall" with respect to referring complaints to
regulatory agencies. TRS has clarified that it shall refer complaints, depending
on the jurisdiction of either TDI or the State Securities Board.
§53.12. Company Notification of Non-compliance.
TRS made minor wording changes to conform language to other provisions
of Chapter 53.
§53.13. Revocation of Certification.
One comment proposed language to clarify the provision. TRS agrees clarification
would be helpful and has modified the language to refer to the statutory provisions
addressing notification of a violation.
§53.14. Re-certification.
TRS has modified the language to clarify the meaning using terminology
consistent with other provisions of Chapter 53. However, one comment suggested
language that could be interpreted as permitting a company to show that all
of the requirements for certification have been met, with the exception of
the continuous, five-year historical requirements described in §53.4.
TRS disagrees with the proposed language because the five-year requirements
are statutory.
§53.15. Additional Requirements.
One comment proposed detailed requirements regarding the execution of transfer
of assets. TRS disagrees with the proposal because SB 273 does not require
TRS to adopt rules regulating the execution of transfers and doing so would
be beyond the scope of the rules as originally published. Some comments proposed
clarifying language for this section, but on review of the section, TRS has
determined the section is unnecessary, and it has been deleted. The rule repeats
a statutory requirement that, though important, is not a requirement for certification.
As for the proposed clarification offered by some comments, TRS declines to
adopt the proposals because they involve too great a level of regulation of
a company operations when viewed in the context of TRS's primary responsibility,
establishing a process for certification.
The new sections are adopted under Texas Civil Statutes, art.
6228a-5, §6(c), which authorizes the Board of Trustees of the Teacher
Retirement System of Texas to adopt rules to administer Section 5, 6, 7, 8,
and 11 of art. 6228a-5.
§53.1.Definitions.
The following words and terms when used in this chapter shall have
the following meanings, unless the context clearly indicates otherwise:
(1)
Annuity or annuity contract--A qualified investment product
that meets the requirements for a fixed or variable annuity contract under
applicable insurance laws and rules.
(2)
Board of trustees--The board of trustees of the Teacher
Retirement System of Texas (TRS).
(3)
Certified company--A company that meets all certification
requirements, that has certified to TRS and been placed on the TRS list of
certified companies, and whose certification has not expired or been rejected
or revoked.
(4)
Certify--To submit all required information to TRS and
meet all required qualifications for certification, as indicated by TRS's
inclusion of a company on the TRS list of certified companies.
(5)
Company--An entity that offers and issues a qualified investment
product and that has primary liability to the purchaser for performance of
the obligations described in the product, contract, annuity contract or annuity
certificate, or policy. Generally, "company" does not include reinsurance
companies, third party administrators, entities performing duties under administrative-services-only
contracts, and representatives such as licensed or registered agents, brokers,
or dealers, unless such entities have primary liability for performance of
the obligations in the product or contract.
(6)
Contract--An agreement through which an employee purchases
or enrolls in a qualified investment product, such as an insurance policy,
an annuity contract, or an annuity certificate in a group annuity contract,
or establishes a qualified investment product such as a mutual fund account.
(7)
Educational institution--A school district or an open-enrollment
charter school.
(8)
Eligible qualified investment--A qualified investment product
offered by a company that:
(A)
is certified to the board of trustees to offer qualified
investment products that are annuity contracts; or
(B)
is certified to the board of trustees to offer qualified
investment products other than annuity contracts.
(9)
Employee--An employee of an educational institution.
(10)
Qualified investment product--An annuity or investment
that:
(A)
meets the requirements of Section 403(b), Internal Revenue
Code of 1986, and its subsequent amendments;
(B)
complies with applicable federal insurance and securities
laws and regulations; and
(C)
complies with applicable state insurance and securities
laws and rules.
(11)
Representative--A person who sells or offers for sale
an eligible qualified investment product on behalf of a certified company
and who is licensed or registered if so required by law.
(12)
Retirement system or TRS--The Teacher Retirement System
of Texas .
(13)
Salary reduction agreement--An agreement between an educational
institution and an employee to reduce the employee's salary for the purpose
of making direct contributions to or purchases of a qualified investment product.
(14)
School year--a twelve-month period established by an educational
institution as its school year and, for purposes of this chapter, beginning
after June 1 of a calendar year.
(15)
Specialized department--One or more employees of a certified
company or a company affiliated with the certified company dedicated to service
of qualified investment products. If the certified company is authorized by
the Texas Department of Insurance to issue annuity contracts in the State
of Texas, the affiliated company must be part of an Insurance Holding Company
system as defined in Article 21.49-1, Insurance Code.
§53.2.Applicability.
(a)
This chapter applies to companies that offer qualified
investment products to employees of educational institutions in the State
of Texas if such products are, or are likely to be, the subject of salary
reduction agreements.
(b)
A company that, on or after June 1, 2002, offers, issues,
or enters into a contract for a qualified investment product that is, or is
likely to be, the subject of a salary reduction agreement shall certify to
TRS prior to offering, issuing, or entering into a contract for the product.
For purposes of this chapter, offering, issuing, or entering into a contract
for a qualified investment product includes offering enrollment in, or enrolling
an employee in, a group annuity contract through issuance of an annuity certificate.
(c)
A company that entered into a contract with an employee
before June 1, 2002, is not subject to the certification requirements established
by this chapter with respect to that contract, but the company is subject
to the certification requirements established by this chapter with respect
to any contracts or qualified investment products offered to, or entered into
with, an employee on or after June 1, 2002.
(d)
If a company has entered into a contract with an employee
before June 1, 2002, the company or employee may demonstrate in a manner acceptable
to an educational institution that the provisions of this chapter do not apply
to the contract in order for the company to receive contributions to, or payments
for purchase of, the qualified investment product described in the contract
through a salary reduction agreement between the educational institution and
the employee.
§53.3.Maximum Fees, Costs, and Penalties.
(a)
A certified company offering qualified investment products
may not assess fees, costs, or penalties in excess of the amounts established
in this section.
(b)
This section does not establish or govern the amount of
commission a certified company may pay a broker, agent, or other representative.
(c)
A certified company may charge a front-end sales load or
back-end sales load that in the aggregate does not exceed six percent (6%)
of the amount identified in the contract as subject to sales load charges,
such as premiums paid or the price of the fund shares.
(d)
A certified company may charge an annual fixed dollar fee
of no more than $50.00 per year per qualified investment product, contract,
policy, or account. A fixed dollar fee is not dependent on account values,
loan amounts, or any other amount for its determination.
(e)
For a qualified investment product other than an annuity
contract and for the portion of an annuity contract that consists of a variable
account, a certified company may assess a charge of no more than 2.75 percent
annually of the total value of assets in the employee's variable annuity contract
account or other investment product account.
(f)
A certified company may charge a surrender or withdrawal
charge on an annuity contract account that may not exceed ten percent (10%)
of the accumulation (account) value, the individual deposits, or the premiums
paid, whichever is specified in the contract. Surrender charges must terminate
within ten (10) years of the inception of the employee's contract unless a
disclosure is made informing the employee of a longer period of not in excess
of twelve (12) years. No surrender or withdrawal charge may be longer than
twelve (12) years from the inception of the employee's contract. Surrender
or withdrawal charges shall decline annually. Surrender or withdrawal charges
imposed for longer than ten (10) years are limited to no more than one percent
(1%) in year eleven and one percent (1%) in year twelve. Surrender or withdrawal
charges may be based on the accumulation value of an annuity or a component
part thereof, as specified and defined in the contract.
(g)
A certified company may charge a loan initiation fee of
no more than $50.00. This subsection does not prohibit a company from charging
interest on a loan in addition to a loan initiation fee. If the investment
product is an annuity contract, loan terms must comply with applicable requirements
of insurance laws, including Article 3.44c, Insurance Code.
(h)
This section does not authorize a certified company offering
qualified investment products that are annuity contracts to charge fees, costs,
or penalties in excess of any charges established or approved by the Texas
Department of Insurance for the company or for the annuity contract.
§53.4.Qualifications for Certification by Companies Offering Qualified Investment Products that are Annuity Contracts.
(a)
A company may certify to TRS that it offers qualified investment
products that are annuity contracts if the company meets the requirements
of this section.
(b)
A company may certify to TRS under this section if the
company:
(1)
is authorized to issue annuity contracts in the State of
Texas at the time the certification is filed;
(2)
does not assess fees, costs, or penalties in an annuity
contract that exceed the maximum amounts established by this chapter; and,
(3)
complies with the following standards:
(A)
the company's actuarial opinions required under Articles
1.11 and 3.28, Insurance Code, have not been adverse or qualified in the five
years preceding the date the certification is filed;
(B)
the company is subject to the annual audit requirements
of Article 1.15A, Insurance Code, and its most recent audit of financial strength
conducted by an independent certified public accountant is timely filed and
does not indicate the existence of any material adverse financial conditions
in the company for the five years preceding the filing deadlines for the audit;
(C)
the company has not been the subject of any of the following
administrative or regulatory actions by the Texas Department of Insurance
in the five years preceding the date the certification is filed:
(i)
an order to rectify one or more conditions that render
the continued operation of the company hazardous to policyholders, creditors,
or the general public, pursuant to Article 1.32, Insurance Code;
(ii)
a supervision, conservation, or liquidation of the company
pursuant to Article 21.28-A, Insurance Code; or
(iii)
a cease and desist order issued to the company pursuant
to §83.051, Insurance Code, or its predecessor statute, Article 110A,
Insurance Code.
(D)
the company has maintained total adjusted capital during
the five years preceding the date the certification is filed of an average
of at least 400 percent of the authorized control level risk-based capital,
as calculated in accordance with the risk-based capital requirements established
in rules adopted by the Texas Department of Insurance, with the five-year
average to be calculated using the company's financial results as of December
31 of the five preceding years;
(E)
the company's total adjusted capital has not fallen below
300 percent of the authorized control level risk-based capital, as calculated
in accordance with the risk-based capital requirements established in rules
adopted by the Texas Department of Insurance, at any time in the five years
preceding the date the certification is filed; and
(F)
the company has at least five years' experience in qualified
investment products and has a specialized department dedicated to the service
of qualified investment products. If a company is part of an Insurance Holding
Company System as defined in Article 21.49-1, §2(i), Insurance Code,
and an affiliated company has met the five years experience requirement of
this section, the company is deemed to have the same experience of its affiliate
for purposes of this section.
§53.5.Qualifications for Certification by Companies Offering Qualified Investment Products Other than Annuity Contracts.
(a)
A company that offers qualified investment products other
than annuity contracts may certify to TRS if it meets the requirements of
this section.
(b)
A company is eligible to certify if:
(1)
The company has at least five years' experience in qualified
investment products and has a specialized department dedicated to service
of qualified investment products.
(2)
The company is qualified to do business in the State of
Texas.
(3)
The company is registered with the Securities and Exchange
Commission, the State Securities Board, or other regulatory entity, if required
by law.
(4)
The company has not had a license or registration suspended
or revoked by state or federal regulators within the five years preceding
the date the certification is filed.
(5)
The company manages assets of at least $2 billion.
(6)
The company does not assess fees, costs, or penalties that
exceed the maximum amounts established by this chapter.
§53.6.Procedure for Certification.
(a)
A company that meets the qualifications for certification
may certify to TRS that it offers one or more qualified investment products,
which shall be identified in the certification as annuity contracts, qualified
investment products other than annuity contracts, or both.
(b)
A company certifies to TRS by providing all information
required in this chapter on a form promulgated by TRS for this purpose and
by paying the required certification fee.
(c)
As part of its certification to TRS, a company shall affirm
that each of its representatives is properly licensed and qualified, by training
and continuing education, to sell and service the company's eligible qualified
investments and that the company will demonstrate this annually to TRS, as
required by Texas Civil Statutes, Article 6228a-5, §12.
(d)
A certifying company shall file its certification with
TRS no later than June 1 in order to offer eligible qualified investment products
during the school year beginning after June 1 in the same calendar year.
(e)
Notwithstanding subsection (d) of this section, a company
may file its certification after June 1, 2002, but no later than December
31, 2002, in order to be eligible to offer qualified investment products during
the remainder of the 2002-2003 school year following certification by the
company.
(1)
This subsection does not authorize a company to offer qualified
investment products after June 1, 2002, without having certified to TRS.
(2)
A company that files its certification under this subsection
nevertheless is subject to the June 1 filing requirement of subsection (d)
of this section in the calendar year 2007 if it wishes to offer qualified
investment products during the entire 2007-2008 school year.
(f)
A certifying company shall pay the certification fee established
by this chapter to TRS at the time it certifies to TRS.
(g)
A certified company has an on-going duty to correct any
erroneous or misleading information provided to TRS in the certification process.
A company shall notify TRS within 30 calendar days of a change in the information
provided in its certification if such a change affects the accuracy of the
company's certification or its eligibility for certification.
(h)
TRS may reject a company's certification if the company
does not provide all required information, if the information provided indicates
the company does not meet the requirements for certification, or if TRS receives
notification of a violation regarding the company or the company's product
from either the Texas Department of Insurance, the State Securities Board,
or the company.
(i)
Rejection of certification is final but a company may re-certify
if it subsequently submits information or corrections that show it meets the
requirements for certification. Additional or corrective information filed
within 30 business days following a rejection of certification shall not require
payment of an additional certification fee.
(j)
Certification remains in effect for five school years unless
revoked by TRS.
§53.7.Certification Fee.
(a)
A company shall pay a certification fee of $5,000 to TRS
at the time certification is filed.
(b)
A company certifying that it offers both annuity contracts
and investments other than annuity contracts shall pay one certification fee
if the company files its certifications for both types of qualified investment
products at the same time. If the certifications are filed separately, a company
shall pay a separate certification fee for each separate certification.
(c)
If a company proposes to certify more than one legal entity,
the company shall submit separate certifications and fees for each legal entity.
(d)
If TRS rejects certification by a company, TRS shall retain
the amount of the certification fee sufficient to reimburse TRS for its administrative
costs associated with review of the certification. TRS may hold the entire
certification fee for at least thirty business days after rejection in order
to determine whether the company will pursue certification.
(e)
No portion of a certification fee is refundable if TRS
revokes a certification.
§53.8.List of Certified Companies.
(a)
Upon verification that all required information has been
provided in a company's certification and that the certification fee has been
paid, TRS shall include the certified company on the list maintained on the
TRS Web site.
(b)
A certified company shall notify TRS in writing of any
changes to information appearing on the list no later than thirty calendar
days after the changes become effective.
(c)
TRS shall remove a company from the list upon revocation
or expiration of the company's certification.
(d)
TRS may indicate on the list whether a certified company
has complied with the requirement of Texas Civil Statutes, Article 6228a-5,
to demonstrate annually that its representatives are properly licensed and
qualified to sell and service the company's eligible qualified investments.
§53.9.Notice to Potential Purchaser.
(a)
A person who offers to sell an annuity contract that is
or may be the subject of a salary reduction agreement shall provide notice
to a potential purchaser and other information as required under Texas Civil
Statutes, Article 6228a-5.
(b)
The notice must be given to the potential purchaser at
the time an application form is signed.
(c)
The form of the notice for an annuity contract shall be
as provided by TRS on its Internet Web site, www.trs.state.tx.us. A company
shall use the form notice as the basis for its annuity contract notices to
potential purchasers.
(d)
A certified company shall provide TRS a copy of the company's
notice relating to a specific contract within ten business days of a request
by TRS.
§53.11.Coordination with Regulatory Agencies.
(a)
TRS shall refer complaints about qualified investment products
or the companies or persons offering them to the Texas Department of Insurance
or the State Securities Board, depending on whether one or both agencies have
jurisdiction over the complaint or over the person or company that is the
subject of the complaint.
(b)
TRS may receive notifications from the Texas Department
of Insurance or the State Securities Board regarding a product or company
that violates certification requirements or standards.
§53.12.Company Notification of Non-compliance.
(a)
No later than thirty calendar days after the relevant triggering
event, a certified company shall notify TRS in writing:
(1)
if, at any time, the company is not in compliance with
the requirements and standards for certification, including as a result of
a merger or change in ownership; or,
(2)
if an investment product that the company offers to educational
institution employees is the subject of a salary reduction agreement and the
investment product is not a qualified investment product.
(b)
The company shall provide TRS information sufficient to
explain the occurrence leading to the notification, including nature of non-compliance
or reason for non-qualification of a product, date of the occurrence, and
other information requested by TRS to determine whether a company should remain
certified.
(c)
TRS may reject or revoke the certification of a company
based on notification of non-compliance with certification requirements or
based on non-qualified investment products that are the subject of salary
reduction agreements.
§53.13.Revocation of Certification.
(a)
TRS may revoke a company's certification if the company
no longer meets certification requirements or if TRS receives notification
of a violation regarding the company or the company's product as provided
in Texas Civil Statutes, Article 6228a-5, §6(f).
(b)
Upon revocation of certification, TRS shall remove the
name of the company from the list of certified companies maintained by TRS.
(c)
Revocation of certification is final but a company may
re-certify if it meets the requirements to do so.
§53.14.Re-certification.
(a)
A company may re-certify to TRS following expiration, rejection,
or revocation of its certification.
(b)
In order to re-certify, a company shall provide all information
required for certification and shall pay the certification fee in effect at
the time re-certification is filed.
(c)
To re-certify following rejection or revocation of certification,
a company must specifically demonstrate that the grounds for rejection or
revocation have been remedied.
(d)
A company shall file its re-certification with TRS no later
than June 1 in order to offer eligible qualified investments during the school
year beginning after June 1 in the same calendar year.
This agency hereby certifies that the adoption has been reviewed
by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of
the Secretary of State on April 15, 2002.
TRD-200202321
Charles Dunlap
Executive Director
Teacher Retirement System of Texas
Effective date: May 5, 2002
Proposal publication date: January 4, 2002
For further information, please call: (512) 542-6115