ADOPTED RULES An agency may take final action on a section 30 days after a proposal has been published in the Texas Register. The section becomes effective 20 days after the agency files the correct document with the Texas Register, unless a later date is specified or unless a federal statute or regulation requires implementation of the action on shorter notice. If an agency adopts the section without any changes to the proposed text, only the preamble of the notice and statement of legal authority will be published. If an agency adopts the section with changes to the proposed text, the proposal will be republished with the changes. TITLE 7. BANKING AND SECURITIES Part I. Finance Commission of Texas Chapter 3. Banking Section Subchapter E. Banking House and Other Facilities 7 TAC sec.3.91 The Finance Commission of Texas (the Commission) adopts an amendment to sec.3.91, concerning the application of a state bank to establish a branch facility pursuant to Texas Civil Statutes, Article 342-903, without changes to the proposed text as published in the June 28, 1994, issue of the Texas Register (19 TexReg 5013). The amendment is necessary in order to conform and cross- reference sec.3.91 to new 7 TAC sec.3.92, adopted in this issue of the Texas Register. No comments were received except in response to the proposed new sec.3.92, and those comments are addressed in connection with the adoption of new sec.3. 92. The amendment is adopted under Texas Civil Statutes, Article 342-903, sec.1(c), which empower the Commission to promulgate standards and procedures for branch applications. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 22, 1994. TRD-9447059 Everette D. Jobe General Counsel Finance Commission of Texas Effective date: September 13, 1994 Proposal publication date: June 28, 1994 For further information, please call: (512) 475-1300 7 TAC sec.3.92 The Finance Commission of Texas (the Commission) adopts the repeal of sec.3.92, concerning identification of bank facilities, without changes to the proposed text as published in the June 28, 1994, issue of the Texas Register (19 TexReg 5013). New sec.3.92 is adopted in this issue of the Texas Register. Repeal of existing sec.3.92 is necessary to prevent inconsistent rules regarding the naming and advertising of bank branch facilities. No comments were received except in response to the proposed new sec.3.92, and those comments are addressed in connection with the adoption of new sec.3. 92. The repeal is adopted under Texas Civil Statutes, Article 342-103(A)(1), which provide the Commission with the authority to adopt rules and determine general policies for the regulation of state banks, and Article 342-903(1)(c), which provides the Commission with the authority to adopt standards for the approval of branch offices. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 22, 1994. TRD-9447060 Everette D. Jobe General Counsel Finance Commission of Texas Effective date: September 13, 1994 Proposal publication date: June 28, 1994 For further information, please call: (512) 475-1300 The Finance Commission of Texas (the Commission) adopts new sec.3.92, concerning the naming and advertising of bank branch facilities pursuant to Texas Civil Statutes, Article 342-917, with one definitional change in the proposed text as published in the June 28, 1994, issue of the Texas Register (19 TexReg 5014). Existing sec.3.92 was proposed for repeal in the June 28, 1994, issue of the Texas Register (19 TexReg 5013) and is repealed in this issue of the Texas Register. By definition, the legal name of the bank excludes a geographic modifier or indication of domicile. An addition is made in the adopted rule to sec.3.92(a) (4) to also exclude a corporate status indicator such as Inc., Corp., N.A., or L.B.A. from the definition of the term legal name. A corresponding change was made to sec.3.92(h) to delete the reference to N.A. or National Association as unnecessary in light of the definitional change. This change is nonsubstantive in that it merely clarifies the pre-existing intent of the rule. The Banking Code, Article 342-917, generally provides that a bank may not use any form of advertising that implies or tends to imply that a branch facility is a separate bank. In the enabling legislation, effective August 28, 1989, banks were given until June 1, 1990, to comply with the new statutory mandate, subject to a six-month hardship extension that could be granted by the Commission. To clarify specific applications of Article 342-917, the Commission adopted existing sec.3.92 in early 1989. The existing sec.3.92 contains several ambiguities that have made enforcement of its provisions difficult. New sec.3.92 is intended to eliminate these ambiguities. Two important and substantive purposes are served in regulating identification of branch facilities. The Legislature was primarily concerned with the unfair and misleading competition that could result if a failed bank is taken over by another institution which continues to represent and advertise the resulting branch as the original failed institution. Second, depositors could exceed the limits of Federal Deposit Insurance Corporation insurance coverage by unintentionally depositing excess amounts in two branches of the same bank which they perceive to be different banks. Regulation of branch identification will sometimes conflict with the understandable desire of a bank to identify with the community in which a branch facility is located by naming the facility after that community combined with the term bank or by retaining the name of a merged bank as the branch name. The new section generally prohibits advertising of a branch facility in a manner that implies, tends to imply, or tends to foster a perception that the branch facility is a separate bank, and provides specific guidance in certain situations identified as misleading. The section would require the legal name of the bank or a unique identifying logo, trademark or service mark to be placed on signs directing the public to a branch facility. If a logo, trademark or service mark is used in lieu of the legal name of the bank, or if a separate identifying name is used for the branch facility that either contains the word bank or does not contain the word branch and further does not contain a clearly visible phrase identifying the facility as a branch of the bank, an additional sign at the branch facility must identify the legal name of the bank and identify the facility as a branch. This additional sign is anticipated to be inexpensive, and could, for example, consist of lettering on a glass entrance door. Further, the bank would be required to make a prominent written disclosure of the status of a branch facility in relation to the bank to customers opening new accounts at the branch facility, which disclosure may be included in the depository contract, unless the bank uses a standardized depository contract containing the legal name of the bank at all of its bank facilities. A separate name for the branch facility may be used on a sign but is not required, although the use of a predecessor bank name by a successor institution that reopens the acquired bank as a branch is a misleading and unfair competitive practice and is prohibited. The legal name of the bank plus a geographic branch identifier is generally not considered a separate branch name; rather, the geographic designation itself is viewed as the separate branch name. A bank without a unique name that seeks to open a branch outside its city of domicile, in a location that is within the same city as or within a 30 mile radius of a pre-existing bank facility bearing the same name, will be required to either disclose its city of domicile on all signs identifying the branch facility, or give specific, written notice to all such pre-existing bank facilities to allow them the opportunity to protest the name of the proposed branch. Banks are expected to comply with and may to a limited extent take advantage of the Texas Business and Commerce Code, Chapter 36, the Assumed Business and Professional Name Act. A bank that wishes to use an assumed name must use the assumed name uniformly on all bank facilities and notify the Banking Commissioner of its intent to use an assumed name. If the Banking Commissioner does not object within 30 days, the assumed name filing may be made. Although the possibility of multiple assumed names is left open for appropriate circumstances, multiple names are generally not permitted, and a bank will in any event be expected to use the same name on all deposit taking facilities. The new section contains a provision giving banks 12 months after the effective date to comply with its requirements, subject to a six-month hardship extension that could be granted by the Banking Commissioner. While the statutory grace period for compliance expired in 1990, the Commission believes that a further grace period is appropriate to avoid adverse impacts on banks that were unaware of these requirements because of previous difficulties and laxity in enforcement. The section by its terms applies to national banks with enforcement power ceded to the Office of the Comptroller of the Currency (OCC). The Department is expressly seeking an opinion from the OCC regarding the applicability of the proposed rule to national banks and the OCC's enforcement intentions, and has received correspondence from the OCC indicating the matter is under advisement. In the opinion of the Department, the section is enforceable against national banks and the OCC is obligated to enforce it. The Department on behalf of the Commission received three comments. Consumers Union filed a comment in support of the rule. The Texas Bankers Association, based on revisions made to the latest proposal in response to prior comments, has withdrawn its previous opposition to sec.3.92 and now supports adoption. The Independent Bankers Association of Texas also supports the rule, with three qualifications. First, the commenter is concerned regarding the application of sec.3.92(e) to existing branch facilities and the substantial cost that might be incurred to comply. The Department notes that sec.3.92(e) by its terms applies only to a bank without a unique legal name ... that proposes to establish a branch facility .... The Department intends for this provision to prospectively assist in avoiding confusion in the relevant banking market. The provision is not intended to and will not have retroactive application. The Department does not believe any clarification is necessary in sec.3.92(e). Second, the commenter believes that the implications of sec.3.92(e)(1)(B) should be clarified through additional language. This provision requires a bank without a unique name that eschews the option of sec.3.92(e)(1)(A) to give specific, written notice to all pre-existing bank facilities with the same or similar name as the branching bank to allow them the opportunity to protest the name of the proposed branch. The Department disagrees that additional language is necessary or desirable. A branch name must clearly comply with Texas Civil Statutes, Article 342-917, and 7 TAC sec.3.92, in order for a branch application to be approved as provided in 7 TAC sec.3.91(g)(3)(G). Accordingly, a bank that fails to resolve a name similarity dispute through either the option provide in sec.3.92(e)(1)(A) or negotiation with a protesting bank will run the risk of a rejected application. Finally, the commenter criticizes the scope of sec.3.92(f), dealing with the use of assumed names, as beyond the power of the Commission to adopt. The Department disagrees. The Commission has clear authority to determine general policies for the regulation of state banks and has determined that the universe of potential assumed names for banks must be limited to maintain the maximum degree of protection for consumers of banking services. Accordingly, the provision that the Banking Commissioner has the right to disapprove a particular assumed name or its scope of use will remain. The new section is adopted under Texas Civil Statutes, Article 342-103(A)(1) , which provide the Commission with the authority to adopt rules and determine general policies for the regulation of state banks; and Article 342-903, sec.1(c), which provides the Commission with the authority to adopt additional standards for the approval of branch offices. sec.3.92. Naming and Advertising of Branch Facilities. (a) Definitions. For purposes of this section, the following terms have the meanings indicated, unless the context clearly indicates otherwise. (1) Bank-A state or national bank domiciled in this state. (2) Bank facility-An approved business location for the bank to receive deposits, pay checks or lend money, generally the principal banking house of a bank, any of such bank's branch facilities, or a related drive-in facility. (3) Branch facility-A branch as defined in sec.3.91(a) of this title (relating to Establishment and Closing of a Branch Facility). (4) Legal name-The full name of the bank as reflected in the bank's charter, provided that the bank may omit or exclude that portion of its formal legal name that is a corporate status indicator such as Inc., Corporation, N.A., or L.B.A., or a geographic description or modifier identifying its domicile, except as otherwise provided by this section. (5) Separate identifying name-Any term or phrase used to identify a branch facility that is not the legal name of the bank, including a geographic description or modifier that is not a part of the legal name of the bank. (6) Unique identifying logo, trademark or service mark -A federally registered, state registered, or common law trademark or service mark of a bank that is not used in identical or substantially similar form by any other bank in this state, or to which the bank has a clearly superior right of use that the bank intends to actively defend against infringing banks. (b) General Prohibition on Misleading Advertising. Notwithstanding any other provision in this section, a bank shall not use any advertising or representation, including but not limited to any sign, print advertisement or statement, electronic media broadcast advertisement or statement, official bank documentation, or any other representation, which, in the opinion of the Commissioner, implies, tends to imply, or tends to foster a belief that a branch facility is a separately chartered or organized bank. (c) Acquired Banks as Branches. Upon acquisition of a bank to serve as a branch facility of the acquiring bank, use of the prior name of the extinguished bank to identify the acquired bank facility is prohibited. (d) Signage. Any sign displayed to direct attention to a branch facility must comply with all of this subsection except as expressly provided otherwise. A sign in technical compliance with this subsection may not be used if the sign in its entirety, in the opinion of the Commissioner, incorrectly implies or tends to imply that the branch facility is a separately chartered or organized bank. (1) A sign for the purpose of directing the public to a branch facility must contain either the legal name of the bank or a unique identifying logo, trademark or service mark of the bank, or both, subject to paragraph (2) of this subsection. If a separate identifying name is used on a sign for the branch facility, the separate identifying name must contain the word branch and may not contain the word bank except as provided in paragraph (2) of this subsection. (2) If a unique identifying logo, trademark or service mark is used on a sign to direct the public to a branch facility and the legal name of the bank is omitted; or if a sign displays a separate identifying name for the branch facility that does not contain the word branch, or contains the word bank and does not include on the sign a clearly visible phrase identifying the facility as a branch of the bank, then the bank must: (A) display another plainly visible sign in or on the branch facility containing the legal name of the bank and clear identification of the facility as a branch of the bank, which sign may be in the form of lettering on the entrance door or on a plainly visible front window or may be in the form of a sign prominently featured in the lobby of the facility; and (B) unless the bank uses a standardized depository contract at all bank facilities, disclose the status of the branch facility as a branch of the bank in writing to every customer opening a new account at the branch facility. (3) The legal name of the principal bank followed by a geographic designation of the community or area in which the branch facility is located is permissible for a branch facility sign. The geographic designation is the separate identifying name of the branch facility and must comply with paragraph (2) of this subsection. (e) Common Bank Names. (1) A bank without a unique legal name (e.g., First State Bank or First National Bank) that proposes to establish a branch facility, other than a branch facility within the bank's domicile, within the same city as or within a 30-mile radius of a pre-existing bank facility of a bank with the same or substantially similar legal name, disregarding geographic modifiers in the legal name, shall either: (A) undertake to disclose the city of its domicile on all signs for the purpose of directing the public to the branch facility; or (B) perform a search for the purpose of identifying all pre-existing bank facilities of other banks within the same banking market as the proposed branch location, presumed for purposes of this section to be the same city or within a 30-mile radius of the proposed branch location, that have the same or substantially similar legal name, disregarding geographic modifiers in the legal name, and give notice of its branch application pursuant to sec.3.91 to each bank facility so identified by first class mail, specifically advising the recipient of the name to be used in connection with the proposed branch facility. (2) With regard to any proposed branch subject to paragraph (1)(B) of this subsection, any bank with the same or substantially similar legal name as the branching bank may file a protest with the Commissioner regarding the name for the proposed branch facility, but must demonstrate that the location of the proposed branch facility is within its trade territory as defined for purposes of the Community Reinvestment Act, 12 United States Code, sec.2901 et seq. In the exercise of discretion, the Commissioner will consider granting a hearing on the proposed branch facility name at the request of either the applicant or a protestant. The Commissioner may order a hearing even if no hearing has been requested by the parties, but may not be compelled to hold a hearing. Any decision regarding the application for the branch facility must be made pursuant to sec.3.91 of this title. (f) Texas Business and Commerce Code, Chapter 36 (The Texas Assumed Business or Professional Name Act), is applicable to banks. An assumed name may be used by a bank in lieu of its legal name in accordance with the requirements of other applicable law if such name is not presently being used by any bank within this state and is used uniformly for all bank facilities. In special circumstances, it may be possible for a bank to use an assumed name for limited purpose bank facilities and continue to use its legal name for other bank facilities, but use of multiple names by a bank is generally discouraged. Any bank that proposes to use an assumed name shall submit a letter to the Commissioner identifying its legal name, the proposed assumed name, the facilities where the assumed name will be used, and the steps that will be taken to adequately and appropriately inform the general public and its customers that the assumed name facilities are part of the bank and to guard against opening more than one account for a customer that may be under the mistaken belief that the multiple accounts are at separate banks. The bank may file its assumed name certificate in accordance with Texas Business and Commerce Code, Chapter 36 if the Commissioner does not either ask for additional information or deny the request within 30 days of the date the letter is received by the Commissioner. (g) Official Bank Documents. Each official bank document used by and within the control of a branch facility, including but not limited to an item of stationery, checks, cashier's checks, loan applications, depository contracts and certificates of deposit, must bear the legal name of the principal bank. (h) Application to National Banks. This section applies to national banks as does the Banking Code, Article 342-917; provided, however, that all enforcement authority shall reside with the Comptroller of the Currency. (i) No effect on rights. This section and any decisions of the Commissioner hereunder do not establish the relative priority of legal rights for purposes of federal or state law governing tradenames, trademarks, or service marks. (j) Effective date. This section shall become effective immediately; however, banks which on the effective date of this section have signs or documents which do not comply with this section shall have 12 months from the effective date to comply, and may be granted a further extension not to exceed an additional six months if the Banking Commissioner determines, on the basis of a written application with supporting documentation, that an extension is necessary to prevent undue hardship. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 22, 1994. TRD-9447061 Everette D. Jobe General Counsel Finance Commission of Texas Effective date: September 13, 1994 Proposal publication date: June 28, 1994 For further information, please call: (512) 475-1300 Part II. Banking Department of Texas Chapter 13. Practice and Procedure Subchapter A. Proposal for Decision and Orders 7 TAC sec.13.104 The Finance Commission of Texas (the Commission) adopts new sec.13.104, concerning conduct of hearings for the purpose of receiving public comment on proposed rules, without changes to the proposed text as published in the June 28, 1994, issue of the Texas Register (19 TexReg 5016). The section is adopted as part of a comprehensive revision and recodification of all Commission, State Banking Board, Banking Commissioner, and Department of Banking practice and procedure rules related to matters regulated by the Department of Banking. New sec.13.104 revises and replaces 7 TAC sec.17.3, repealed in the June 28, 1994, issue of the Texas Register and inadvertently omitted from the new rules in Chapter 13 regarding rulemaking procedures that were adopted in the same issue. No comments were received regarding adoption of the new section. The new section is adopted under the Government Code, sec.2001.004(1), which requires all administrative agencies to adopt rules of practice stating the nature and requirements of all available formal and informal procedures. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 22, 1994. TRD-9447062 Everette D. Jobe General Counsel Banking Department of Texas Effective date: September 13, 1994 Proposal publication date: June 28, 1994 For further information, please call: (512) 475-1300 Chapter 15. Orders of the Commissioner The Finance Commission of the State of Texas (the Commission) adopts the repeal of sec.sec.15.1-15.3 and sec.sec.15.11-15.13 (comprising all of Chapter 15 of Title 7), concerning certain enforcement orders, as proposed in the June 28, 1994, issue of the Texas Register (19 TexReg 5017). These sections are being repealed as part of a comprehensive revision and recodification of all Commission, State Banking Board, Banking Commissioner, and Department of Banking practice and procedure rules relating to matters regulated by the Department of Banking. The repealed sections contain provisions that, on the whole, merely restate statutory language or are inaccurate and should therefore be repealed. The Commission is adopting new sec.15.1 and sec.15.2 in this issue of the Texas Register in conjunction with this repeal to preserve and enhance certain aspects of the repealed rules. New sec.15.1 supplements Texas Civil Statutes, Article 342-801a, in regard to Banking Commissioner review of actions or proposed actions of supervisors or conservators. New sec.15.2 construes the law with respect to the conflicting sections of Texas Civil Statutes, Article 342-412, adopted by the Texas Legislature and incorporates that portion of repealed sec.15.12 that clarifies the Finance Commission was formerly the Banking Section of the Finance Commission. No comments were received regarding adoption of the repeals. 7 TAC sec.sec.15.1-15.3 The repeals are adopted pursuant to Texas Civil Statutes, Article 342-103, which give the Commission the authority to adopt rules and determine general policies for the regulation of state banks, state associations, savings banks, and the consumer credit industry of the state. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 22, 1994. TRD-9447063 Everette D. Jobe General Counsel Banking Department of Texas Effective date: September 13, 1994 Proposal publication date: June 28, 1994 For further information, please call: (512) 475-1300 7 TAC sec.15.1 The Finance Commission of Texas adopts new sec.15.1, concerning Banking Commissioner review of actions or proposed actions of supervisors or conservators, without changes to the proposed text as published in the June 28, 1994, issue of the Texas Register (19 TexReg 5017). Existing sec.sec.15. 1-15.3 of this title, which govern the same actions, are repealed in this issue of the Texas Register. New sec.15.1 incorporates and continues those portions of repealed sec.15.2 pertaining to a request for review pursuant to Texas Civil Statutes, Article 342-801a. The balance of the repealed rules were considered unnecessary as duplicative of provisions of Article 342-801a. No comments were received regarding adoption of the new section. The new section is adopted pursuant to Texas Civil Statutes, Article 342- 103A(1), which empower the Finance Commission to adopt rules for the regulation of state banks. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 22, 1994. TRD-9447065 Everette D. Jobe General Counsel Banking Department of Texas Effective date: September 13, 1994 Proposal publication date: June 28, 1994 For further information, please call: (512) 475-1300 7 TAC sec.15.2 The Finance Commission of Texas adopts new sec.15.2, concerning removal of bank officers, directors or employees from office, without changes to the proposed text as published in the June 28, 1994, issue of the Texas Register (19 TexReg 5017). Existing sec.sec.15.11-15.13 of this title, which govern the same matters, are repealed in this issue of the Texas Register. New sec.15.2 construes the law with respect to two conflicting sections of Texas Civil Statutes, Article 342-412, adopted by the Texas Legislature, and incorporates that portion of repealed sec.15.12 that clarifies the Finance Commission was formerly the Banking Section of the Finance Commission. The balance of the existing rules were considered unnecessary as they contain only provisions found in Article 342-412 or information that is inaccurate. No comments were received regarding adoption of the new section. The new section is adopted pursuant to Texas Civil Statutes, Article 342- 103A(1), which empower the Finance Commission to adopt rules for the regulation of state banks; and under Texas Civil Statutes, Article 342-412(4), which provide that the Finance Commission may adopt such rules or procedure as may be necessary to govern the fair hearing and adjudication of the questions appealed. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 22, 1994. TRD-9447066 Everette D. Jobe General Counsel Banking Department of Texas Effective date: September 13, 1994 Proposal publication date: June 28, 1994 For further information, please call: (512) 475-1300 7 TAC sec.sec.15.11-15.13 The repeals are adopted pursuant to Texas Civil Statutes, Article 342-103, which give the Finance Commission the authority to adopt rules and determine general policies for the regulation of state banks, state associations, savings banks, and the consumer credit industry of the state. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 22, 1994. TRD-9447064 Everette D. Jobe General Counsel Banking Department of Texas Effective date: September 13, 1994 Proposal publication date: June 28, 1994 For further information, please call: (512) 475-1300 Part IV. Texas Savings and Loan Department Chapter 65. Loans and Investments 7 TAC sec.65.17 The Texas Savings and Loan Department adopts an amendment to sec.65.17, without changes to the proposed text as published in the June 24, 1994, issue of the Texas Register (19 TexReg 4857). The rule as amended more closely tracks the lending and loan documentation requirements applicable to federal savings banks and associations, and state or national banks. Recent federal interagency regulations were adopted to establish the requirement for appraisals at $250,000. The amendment deletes the specific definition of a "current" financial statement, deletes the provision requiring the board of directors of a savings and loan association to separately approve a specific list of acceptable appraisers, and increases the threshold for which appraisals are required for real estate loans to $250,000. No comments were received regarding the amended section. The amendment is adopted under Texas Civil Statutes, Article 342-114, which provide the Finance Commission of Texas with the authority to promulgate general rules and regulations not inconsistent with the constitution and statutes of the state and, from time to time, to amend same. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on August 22, 1994. TRD-9447006 James L. Pledger Commissioner Texas Savings and Loan Department Effective date: September 12, 1994 Proposal publication date: June 24, 1994 For further information, please call: (512) 475-1350 Part VII. State Securities Board Chapter 101. General Administration 7 TAC sec.101.5 The State Securities Board adopts an amendment to sec.101.5, concerning charges for public information, without changes to the proposed text as published in the May 27, 1994, issue of the Texas Register (19 TexReg 4059). The amendment satisfies the requirement in House Bill 1009, Chapter 428, Acts, 73rd Legislature, that agencies adopt rules consistent with the comprehensive rules covering publicly available information adopted by the General Services Commission. The amendment also authorizes the Commissioner to waive or reduce charges in certain circumstances. The relevant charges for public information are reflected on a billing detail statement which is simultaneously adopted as Form 133.2. Persons requesting copies of publicly available information will be apprised of the charges associated with obtaining such copies. No comments were received regarding adoption of the amendment. The amendment is adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447085 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: May 27, 1994 For further information, please call: (512) 305-8300 Chapter 117. Administrative Guidelines for Registration of Real Estate Programs 7 TAC sec.sec.117.1-117.5, 117.7 The State Securities Board adopts amendments to sec.sec.117.1-117.5 and sec.117.7, concerning administrative guidelines for registration of real estate programs, adopted without changes to the proposed text as published in the May 27, 1994, issue of the Texas Register (19 TexReg 4059). The amendments will result in a substantial degree of consistency with other states in applying standards for registration of real estate program offerings. The amendments update the chapter to substantially reflect the guidelines for registration of real estate programs adopted by the North American Securities Administrators' Association, Inc. They also revise the arbitration provisions to promote the use of arbitration as an alternative dispute resolution mechanism. No comments were received regarding adoption of the amendments. The amendments are adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447086 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: May 27, 1994 For further information, please call: (512) 305-8300 Chapter 121. Administrative Guidelines for Registration of Oil and Gas Programs 7 TAC sec.sec.121.2-121.4, 121.10 The State Securities Board adopts amendments to sec.sec.121.2-121.4 and sec.121.10, concerning administrative guidelines for registration of oil and gas programs, without changes to the proposed text as published in the May 27, 1994, issue of the Texas Register (19 TexReg 4063). The amendments will result in a substantial degree of consistency with other states in applying standards for registration of oil and gas program offerings. The amendments update the chapter to substantially reflect the guidelines for registration of oil and gas programs adopted by the North American Securities Administrators' Association, Inc. They also revise the arbitration provisions to promote the use of arbitration as an alternative dispute resolution mechanism. No comments were received regarding adoption of the amendments. The amendments are adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447087 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: May 27, 1994 For further information, please call: (512) 305-8300 Chapter 133. Forms 7 TAC sec.133.2 The State Securities Board adopts new sec.133.2, concerning public records charges-billing detail, which will set out the charges for copies of public records, without changes to the proposed text as published in the May 27, 1994, issue of the Texas Register (19 TexReg 4066). The form is adopted in conjunction with sec.101.5 which is being simultaneously adopted. The form apprises the public of the costs of obtaining copies of publicly available information in different formats. No comments were received regarding adoption of the new form. The new form is adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447088 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: May 27, 1994 For further information, please call: (512) 305-8300 7 TAC sec.133.31 The State Securities Board adopts the repeal of sec.133.31, concerning the real estate guidelines cross reference sheet, without changes to the proposed text as published in the March 4, 1994, issue of the Texas Register (19 TexReg 1518). The repeal allows for the simultaneous adoption of a new real estate guidelines cross reference sheet. The repeal eliminates an outdated form. No comments were received regarding adoption of the repeal. The repeal is adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447089 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: March 4, 1994 For further information, please call: (512) 305-8300 The State Securities Board adopts new sec.133.31, concerning the real estate guidelines cross-reference sheet, without changes to the proposed text as published in the March 4, 1994, issue of the Texas Register (19 TexReg 1518). The form will enable securities analysts to more efficiently review and process applications for registration of real estate programs. The form will be used in conjunction with registration of real estate programs under Chapter 117 of this title. It will replace a form which has become outdated and which is being simultaneously repealed. No comments were received regarding adoption of the new form. The new form is adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447090 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: March 4, 1994 For further information, please call: (512) 305-8300 7 TAC sec.133.32 The State Securities Board adopts new sec.133.32, concerning real estate investment trust (REIT) guidelines cross reference sheet, without changes to the proposed text as published in the March 4, 1994, issue of the Texas Register (19 TexReg 1519). The form will enable securities analysts to more efficiently review and process applications for registration of REITs. The form will be used in conjunction with registration of REITs under the REIT guidelines which are being simultaneously adopted as Chapter 143 of this title. No comments were received regarding adoption of the new form. The new form is adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447091 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: March 4, 1994 For further information, please call: (512) 305-8300 Chapter 139. Exemptions by Rule or Order 7 TAC sec.139.15 The State Securities Board adopts new sec.139.15, concerning an exemption from registration for certain credit enhancements, without changes to the proposed text as published in the May 27, 1994, issue of the Texas Register (19 TexReg 4066). The rule eliminates uncertainty about whether certain credit enhancements must be registered as separate securities. The rule provides an exemption from registration for certain credit enhancements, which are offered in conjunction with, and not tradeable separately from, registered or exempt securities or are offered in connection with an exempt transaction. No comments were received regarding adoption of the new rule. The new rule is adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447092 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: May 27, 1994 For further information, please call: (512) 305-8300 Chapter 141. Administrative Guidelines for Registration of Equipment Programs 7 TAC sec.141.3 The State Securities Board adopts an amendment to sec.141.3, concerning administrative guidelines for registration of equipment programs, without changes to the proposed text as published in the May 27, 1994, issue of the Texas Register (19 TexReg 4067). The amendment will result in a substantial degree of consistency with other states in applying standards for registration of equipment programs. The amendment updates the chapter to substantially reflect the guidelines for registration of equipment programs adopted by the North American Securities Administrators' Association, Inc. No comments were received regarding adoption of the amendment. The amendment is adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447093 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: May 27, 1994 For further information, please call: (512) 305-8300 Chapter 143. Administrative Guidelines for Registration of Real Estate Investment Trusts 7 TAC sec.sec.143.1-143.23 The State Securities Board adopts the repeal of sec.sec.143.1-143.23, concerning administrative guidelines for registration of real estate investment trusts (REITs), without changes to the proposed text as published in the March 4, 1994, issue of the Texas Register (19 TexReg 1522). The repeals allow for the simultaneous adoption of replacement guidelines for the registration of REITs. The repeals eliminate outdated guidelines. No comments were received regarding adoption of the repeals. The repeals are adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1 provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447094 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: March 4, 1994 For further information, please call: (512) 305-8300 7 TAC sec.sec.143.1-143.8 The State Securities Board adopts new sec.sec.143.1-143.8, concerning administrative guidelines for registration of real estate investment trusts (REITs). The existing guidelines for REITs have been simultaneously repealed, with changes to the proposed text as published in the May 27, 1994, issue of the Texas Register (19 TexReg 4069). The word "a" in the first full sentence of sec.143.2(d) has been changed to "at" to correct a typographical error in the proposal. The new rules will result in a substantial degree of consistency with other states in applying standards for registration of REIT offerings. The new rules substantially reflect the guidelines for registration of REITs adopted by the North American Securities Administrators' Association, Inc. They impose standardized guidelines for registration of REITs and will replace rules which have become outdated and which are being simultaneously repealed. No comments were received regarding adoption of the new rules. The new rules are adopted under Texas Civil Statutes, Article 581, sec.28-1. Section 28-1, provides the Board with the authority to adopt rules and regulations necessary to carry out and implement the provisions of the Securities Act, including rules and regulations governing registration statements and applications; defining terms; classifying securities, persons, and matters within its jurisdiction; and prescribing different requirements for different classes. sec.143.1. Introduction. (a) Application. (1) These guidelines apply to qualifications and registrations of Real Estate Investment Trusts (REITs). (2) While applications not conforming to the standards contained herein shall be looked upon with disfavor, where good cause is shown, certain guidelines may be modified or waived by the Securities Commissioner. (b) Definitions. The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise. (1) Acquisition expenses-Expenses including, but not limited to, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, title insurance, and miscellaneous expenses related to selection and acquisition of properties, whether or not acquired. (2) Acquisition fee-The total of all fees and commissions paid by any party to any party in connection with making or investing in mortgage loans or the purchase, development or construction of property by a REIT. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee, construction fee, nonrecurring management fee, loan fees or points or any fee of a similar nature, however designated. Excluded shall be development fees and construction fees paid to persons not affiliated with the sponsor in connection with the actual development and construction of a project. (3) Administrator-Referred to as "Securities Commissioner" throughout these guidelines. (4) Adviser-The person responsible for directing or performing the day-to-day business affairs of a REIT, including a person to which an adviser subcontracts substantially all such functions. To the extent the provisions of these guidelines are germane they shall apply to self-administered REITs. (5) Affiliate-An affiliate of another person includes any of the following: (A) any person directly or indirectly owning, controlling, or holding, with power to vote, 10% or more of the outstanding voting securities of such other person; (B) any person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other person; (C) any person directly or indirectly controlling, controlled by, or under common control with such other person; (D) any executive officer, director, trustee, or general partner of such other person; (E) any legal entity for which such person acts as an executive officer, director, trustee, or general partner. (6) 27> Average invested assets-For any period, the average of the aggregate book value of the assets of the trust invested, directly or indirectly, in equity interests in, and loans secured by, real estate, before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each month during such period. (7) Competitive real estate commission-Real estate or brokerage commission paid for the purchase or sale of a property which is reasonable, customary, and competitive in light of the size, type, and location of such property. (8) Construction fee-A fee or other remuneration for acting as general contractor and/or construction manager to construct improvements, supervise, and coordinate projects or to provide major repairs or rehabilitation on a REIT's property. (9) Contract price for the property-The amount actually paid or allocated to the purchase, development, construction, or improvement of a property exclusive of acquisition fees and acquisition expenses. (10) Cross reference sheet-A compilation of the guideline sections, referenced to the page of the prospectus and declaration of trust, or other exhibits, and justification for any deviation from the guidelines. Such compilation shall comply with the provisions set forth on the cross reference sheet. (11) Declaration of trust-The declaration of trust, by-laws, certificate, articles of incorporation or other governing instrument pursuant to which a REIT is organized. (12) Development fee-A fee for the packaging of a REIT's property, including negotiating and approving plans, and undertaking to assist in obtaining zoning and necessary variances and necessary financing for the specific property, either initially or at a later date. (13) Independent expert-A person with no material current or prior business or personal relationship with the adviser or trustees who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the REIT. (14) Independent trustee(s)-The trustee(s) of a REIT who are not associated and have not been associated within the last two years, directly or indirectly, with the sponsor or adviser of the REIT. (A) A trustee shall be deemed to be associated with the sponsor or adviser if he or she: (i) owns an interest in the sponsor, adviser, or any of their affiliates; or (ii) is employed by the sponsor, adviser, or any of their affiliates; or (iii) is an officer or director of the sponsor, adviser, or any of their affiliates; or (iv) performs services, other than as a trustee, for the REIT; or (v) is a trustee for more than three REITs organized by the sponsor or advised by the adviser; or (vi) has any material business or professional relationship with the sponsor, adviser, or any of their affiliates. (B) For purposes of determining whether or not the business or professional relationship is material, the gross revenue derived by the prospective independent trustee from the sponsor and adviser and affiliates shall be deemed material per se if it exceeds 5.0% of the prospective independent trustee's: (i) annual gross revenue, derived from all sources, during either of the last two years; or (ii) net worth, on a fair market value basis. (C) An indirect relationship shall include circumstances in which a trustee's spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law, or brothers- or sisters-in-law is or has been associated with the sponsor, adviser, any of their affiliates, or the REIT. (15) Initial investment-That portion of the initial capitalization of the REIT contributed by the sponsor or its affiliates pursuant to sec.143. 2(a) of this title (relating to Requirements of Sponsor, Adviser, Trustees, and any Affiliate). (16) Leverage-The aggregate amount of indebtedness of a REIT for money borrowed (including purchase money mortgage loans) outstanding at any time, both secured and unsecured. (17) Net assets-The total assets (other than intangibles) at cost before deducting depreciation or other non-cash reserves less total liabilities, calculated at least quarterly on a basis consistently applied. (18) Net income-For any period total revenues applicable to such period, less the expenses applicable to such period other than additions to reserves for depreciation or bad debts or other similar non-cash reserves. If the adviser receives an incentive fee, net income, for purposes of calculating total operating expenses in sec.143.4(d) of this title (relating to Fees, Compensation, and Expenses), shall exclude the gain from the sale of the REIT's assets. (19) Organization and offering expenses-All expenses incurred by and to be paid from the assets of the REIT in connection with and in preparing a REIT for registration and subsequently offering and distributing it to the public, including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, mailing, salaries of employees while engaged in sales activity, charges of transfer agents, registrars, trustees, escrow holders, depositaries, experts, expenses of qualification of the sale of the securities under federal and state laws, including taxes and fees, accountants' and attorneys' fees. (20) Person-Any natural persons, partnership, corporation, association, trust, limited liability company, or other legal entity. (21) Prospectus-Shall have the meaning given to that term by the Securities Act of 1933, sec.2(10), including a preliminary prospectus; provided, however, that such term as used herein shall also include an offering circular as described in Rule 256 of the General Rules and Regulations under the Securities Act of 1933 or, in the case of an intrastate offering, any document by whatever name known, utilized for the purpose of offering and selling securities to the public. (22) Real estate investment trust (REIT)-A corporation, trust, association, or other legal entity (other than a real estate syndication) which is engaged primarily in investing in equity interests in real estate (including fee ownership and leasehold interests) or in loans secured by real estate or both. (23) Roll-up-A transaction involving the acquisition, merger, conversion, or consolidation either directly or indirectly of the REIT and the issuance of securities of a roll-up entity. Such term does not include: (A) a transaction involving securities of the REIT that have been for at least 12 months listed on a national securities exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or (B) a transaction involving the conversion to corporate, trust, or association form of only the REIT if, as a consequence of the transaction there will be no significant adverse change in any of the following: (i) shareholders' voting rights; (ii) the term of existence of the REIT; (iii) sponsor or adviser compensation; (iv) the REIT's investment objectives. (24) Roll-up entity-A partnership, real estate investment trust, corporation, trust, or other entity that would be created or would survive after the successful completion of a proposed roll-up transaction. (25) Shareholders-The registered holders of a REIT's shares. (26) Shares-Shares of beneficial interest or of common stock of a REIT of the class that has the right to elect the trustees of such REIT. (27) Specified asset REIT-A program where, at the time a securities registration is ordered effective, at least 75% of the net proceeds from the sale of shares are allocable to the purchase, construction, renovation, or improvement of individually identified assets. Reserves shall not be included in the 75%. (28) Sponsor-Any person directly or indirectly instrumental in organizing, wholly or in part, a REIT or any person who will control, manage or participate in the management of a REIT, and any affiliate of such person. Not included is any person whose only relationship with the REIT is as that of an independent property manager of REIT assets, and whose only compensation is as such. Sponsor does not include wholly independent third parties such as attorneys, accountants, and underwriters whose only compensation is for professional services. A person may also be deemed a sponsor of the REIT by: (A) taking the initiative, directly or indirectly, in founding or organizing the business or enterprise of the REIT; either alone or in conjunction with one or more other persons; (B) receiving a material participation in the REIT in connection with the founding or organizing of the business of the REIT, in consideration of services or property, or both services and property; (C) having a substantial number of relationships and contacts with the REIT; (D) possessing significant rights to control REIT properties; (E) receiving fees for providing services to the REIT which are paid on a basis that is not customary in the industry; or (F) providing goods or services to the REIT on a basis which was not negotiated at arms length with the REIT. (29) Total operating expenses-Aggregate expenses of every character paid or incurred by the REIT as determined under generally accepted accounting principles, including advisers' fees, but excluding: (A) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses, and tax incurred in connection with the issuance, distribution, transfer, registration, and stock exchange listing of the REIT's shares; (B) interest payments; (C) taxes; (D) non-cash expenditures such as depreciation, amortization, and bad debt reserves; (E) incentive fees paid in compliance with sec.143.4(f) of this title (relating to Fees, Compensation and Expenses); (F) Acquisition fees, acquisition expenses, real estate commissions on resale of property and other expenses connected with the acquisition, disposition, and ownership of real estate interests, mortgage loans, or other property, (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property). (30) Trustee(s)-The member(s) of the board of trustees or directors or other body which manages the REIT. (31) Unimproved real property-The real property of a REIT which has the following three characteristics: (A) an equity interest in real property which was not acquired for the purpose of producing rental or other operating income; (B) has no development or construction in process on such land; and (C) no development or construction on such land is planned in good faith to commence on such land within one year. sec.143.2. Requirements of Sponsor, Adviser, Trustees and any Affiliate. (a) Minimum Capital. (1) Prior to the initial public offering, the sponsor, or any affiliate, shall contribute to the Real Estate Investment Trust (REIT) an amount not less than the lesser of: (A) 10% of the total net assets upon completion of the offering, or (B) $200,000 as an initial investment. (2) The sponsor or any affiliate may not sell this initial investment while the sponsor remains a sponsor but may transfer the shares to other affiliates. (b) Number and Election of Trustees. (1) The REIT shall have a minimum of three trustees, each of whom (other than a trustee elected to fill the unexpired term of another trustee) is elected by the shareholders of the REIT and who shall serve for a term of one year. (2) Nothing in this section shall prohibit a trustee from being reelected by the shareholders. (3) A majority of the trustees shall be independent trustees. (4) Independent trustees shall nominate replacements for vacancies amongst the independent trustees' positions. (5) The trustees may establish such committees they deem appropriate (provided the majority of the members of each committee are independent trustees). (c) Duties of Trustees. (1) At or before the first meeting of the trustees, the declaration of trust shall be reviewed and ratified by a majority vote of the trustees and of the independent trustees. The prospectus shall disclose that such ratification is required. (2) The trustees shall establish written policies on investments and borrowing and shall monitor the administrative procedures, investment operations and performance of the REIT and the adviser to assure that such policies are carried out. (3) A majority of the independent trustees must approve matters to which this section and subsections (a), (f), and (g) of this section; sec.143.4(a)-(g) of this title (relating to Fees, Compensation, and Expenses); sec.143.5(e), (h), and (j) of this title (relating to Conflicts of Interest and Investment Restrictions); and sec.143.6(a), (b)(4), and (g) of this title (relating to Rights and Obligations of Shareholders), of these guidelines apply. (d) Experience of Trustees. A trustee shall have had at least three years of relevant experience demonstrating the knowledge and experience required to successfully acquire and manage the type of assets being acquired by the REIT. At least one of the independent trustees shall have three years of relevant real estate experience. (e) Fiduciary Duty. The trustees and adviser of the REIT shall be deemed to be in a fiduciary relationship to the REIT and the shareholders. The trustees of the REIT shall also have a fiduciary duty to the shareholders to supervise the relationship of the REIT with the adviser. (f) Advisory Contract. (1) It shall be the duty of the trustees to evaluate the performance of the adviser before entering into or renewing an advisory contract. The criteria used in such evaluation shall be reflected in the minutes of such meeting. (2) Each contract for the services of an adviser entered into by the trustees shall have a term of no more than one year. (3) Each advisory contract shall be terminable by a majority of the independent trustees, or the adviser on 60 days written notice without cause or penalty. In the event of the termination of such contract, the adviser will cooperate with the REIT and take all reasonable steps requested to assist the trustees in making an orderly transition of the advisory function. (4) The qualifications of the adviser shall be set forth in the prospectus relating to the initial public offering of the shares of the REIT and the trustees shall determine that any successor adviser possesses sufficient qualifications to: (A) perform the advisory function for the REIT; and (B) justify the compensation provided for in its contract with the REIT. (g) Liability and Indemnification. (1) The REIT shall not provide for indemnification of the trustees, advisers, or affiliates for any liability or loss suffered by the trustees, advisers, or affiliates, nor shall it provide that the trustees, advisers, or affiliates be held harmless for any loss or liability suffered by the REIT, unless all of the following conditions are met. (A) The trustees, advisers, or affiliates have determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of the REIT. (B) The trustees, advisers, or affiliates were acting on behalf of or performing services for the REIT. (C) Such liability or loss was not the result of: (i) negligence or misconduct by the trustees, excluding the independent trustees, advisers, or affiliates; or (ii) gross negligence or willful misconduct by the independent trustees. (D) Such indemnification or agreement to hold harmless is recoverable only out of REIT net assets and not from shareholders. (2) Notwithstanding anything to the contrary contained in paragraph (1) of this subsection, the trustees, advisers, or affiliates and any persons acting as a broker-dealer shall not be indemnified by the REIT for any losses, liabilities, or expenses arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met. (A) There has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee. (B) Such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee. (C) A court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which securities of the REIT were offered or sold as to indemnification for violations of securities laws. (3) The advancement of REIT funds to the trustees, advisers, or affiliates for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if all of the following conditions are satisfied. (A) The legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the REIT. (B) The legal action is initiated by a third party who is not a shareholder or the legal action is initiated by a shareholder acting in his or her capacity as such and a court of competent jurisdiction specifically approves such advancement. (C) The trustees, advisers, or affiliates undertake to repay the advanced funds to the REIT, together with the applicable legal rate of interest thereon, in cases in which such trustees, advisers, or affiliates are found not to be entitled to indemnification. (h) Arbitration Provisions. The declaration of trust may contain provisions relating to the use of arbitration as a means of dispute resolution. A declaration of trust which contains arbitration provisions shall prominently disclose such fact on the cover page of the declaration of trust in bold type. Allocation of the cost of arbitration may be made a matter for determination in the proceedings. sec.143.3. Suitability of Shareholders. (a) General Policy. (1) The sponsor shall establish minimum income and net worth standards for persons who purchase shares in a REIT for which there is not likely to be a substantial and active secondary market. (2) The sponsor shall propose minimum income and net worth standards which are reasonable given the type of REIT and the risks associated with the purchase of shares. REITs with greater investor risk shall have minimum standards with a substantial net worth requirement. The Securities Commissioner shall evaluate the standards proposed by the sponsor when the REIT's application for registration is reviewed. In evaluating the proposed standards, the Securities Commissioner may consider the following: (A) the REIT's use of leverage; (B) tax implications; (C) balloon payment financing; (D) potential variances in cash distributions; (E) potential shareholders; (F) relationship among potential shareholders, the sponsor and adviser; (G) liquidity of REIT shares; (H) prior performance of sponsor and adviser; (I) financial condition of the sponsor; (J) potential transactions between the REIT and the sponsor and adviser; and (K) any other relevant factors. (b) Income and Net Worth Standards. (1) Unless the Securities Commissioner determines that the risks associated with the REIT would require lower or higher standards, shareholders shall have: (A) a minimum annual gross income of $45,000 and a minimum net worth of $45,000; or (B) a minimum net worth of $150,000. (2) Net worth shall be determined exclusive of home, home furnishings, and automobiles. (3) In the case of sales to fiduciary accounts, these minimum standards shall be met by the beneficiary, the fiduciary account, or by the donor or grantor who directly or indirectly supplies the funds to purchase the shares if the donor or grantor is the fiduciary. (4) The sponsor shall set forth in the final prospectus: (A) the investment objectives of the REIT; (B) a description of the type of person who might benefit from an investment in the REIT; and (C) the minimum standards imposed on each shareholder in the REIT. (c) Determination that Sale to Shareholder is Suitable and Appropriate. (1) The sponsor and each person selling shares on behalf of the sponsor or REIT shall make every reasonable effort to determine that the purchase of shares is a suitable and appropriate investment for each shareholder. (2) In making this determination, the sponsor or each person selling shares on behalf of the sponsor or REIT shall ascertain that the prospective shareholder: (A) meets the minimum income and net worth standards established for the REIT; (B) can reasonably benefit from the REIT based on the prospective shareholder's overall investment objectives and portfolio structure; (C) is able to bear the economic risk of the investment based on the prospective shareholder's overall financial situation; and (D) has apparent understanding of: (i) the fundamental risks of the investment; (ii) the risk that the shareholder may lose the entire investment; (iii) the lack of liquidity of REIT shares; (iv) the restrictions on transferability of REIT shares; (v) the background and qualifications of the sponsor or the adviser; and (vi) the tax consequences of the investment. (3) The sponsor or each person selling shares on behalf of the sponsor or REIT will make this determination on the basis of information it has obtained from a prospective shareholder. Relevant information for this purpose will include at least the age, investment objectives, investment experience, income, net worth, financial situation, and other investments of the prospective shareholder, as well as any other pertinent factors. (4) The sponsor or each person selling shares on behalf of the sponsor or REIT shall maintain records of the information used to determine that an investment in shares is suitable and appropriate for a shareholder. The sponsor or each person selling shares on behalf of the sponsor or REIT shall maintain these records for at least six years. (5) The sponsor shall disclose in the final prospectus the responsibility of the sponsor and each person selling shares on behalf of the sponsor or REIT to make every reasonable effort to determine that the purchase of shares is a suitable and appropriate investment for each shareholder, based on information provided by the shareholder regarding the shareholder's financial situation and investment objectives. (d) Subscription Agreements. (1) The Securities Commissioner may require that each shareholder complete and sign a written subscription agreement. (2) The sponsor may require that each shareholder make certain factual representations in the subscription agreement, including the following. (A) The shareholder meets the minimum income and net worth standards established for the REIT. (B) The shareholder is purchasing the shares for his or her own account. (C) The shareholder has received a copy of the prospectus. (D) The shareholder acknowledges that the shares are not liquid. (3) The shareholder must separately sign or initial each representation made in the subscription agreement. Except in the case of fiduciary accounts, the shareholder may not grant any person a power of attorney to make such representations on his or her behalf. (4) The sponsor and each person selling shares on behalf of the sponsor or REIT shall not require shareholders to make representations in the subscription agreement which are subjective or unreasonable and which: (A) might cause the shareholder to believe that he or she has surrendered rights to which he or she is entitled under federal or state law; or (B) would have the effect of shifting the duties regarding suitability, imposed by law on broker-dealers, to the shareholders. (5) Prohibited representations include, but are not limited to, a representation that the investment is a suitable one for the shareholder. (6) The sponsor may place the content of the prohibited representations in the subscription agreement in the form of disclosures to shareholders. The sponsor may not place these disclosures in the shareholder representation section of the subscription agreement. (e) Completion of Sale. (1) The sponsor or any person selling shares on behalf of the sponsor or REIT may not complete a sale of shares to a shareholder until at least five business days after the date the shareholder receives a final prospectus. (2) The sponsor or the person designated by the sponsor shall send each shareholder a confirmation of his or her purchase. (f) Minimum Investment. The Securities Commissioner may require minimum initial and subsequent cash investment amounts. sec.143.4. Fees, Compensation, and Expenses. (a) Introduction. (1) The prospectus must fully disclose and itemize all consideration which may be received in connection with REIT activities, directly or indirectly, by the sponsor, trustees, adviser, and underwriters, what the consideration is for and how and when it will be paid. This shall be set forth in one location in tabular form. (2) The independent trustees will determine, from time to time but at least annually, that the total fees and expenses of the REIT are reasonable in light of the investment performance of the REIT, its net assets, its net income, and the fees and expenses of other comparable unaffiliated REITs. Each such determination shall be reflected in the minutes of the meeting of the trustees. (b) Organization and Offering Expenses. The organization and offering expenses paid in connection with the REIT's formation or the syndication of its shares shall be reasonable and shall in no event exceed an amount equal to 15% of the proceeds raised in an offering. (c) Acquisition Fees and Acquisition Expenses. (1) The total of all acquisition fees and acquisition expenses shall be reasonable, and shall not exceed an amount equal to 6.0% of the contract price of a property, or in the case of a mortgage loan, 6.0% of the funds advanced. (2) Notwithstanding the above-mentioned, a majority of the trustees (including a majority of the independent trustees) not otherwise interested in the transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to the REIT. (d) Total Operating Expenses. (1) The total operating expenses of the REIT shall (in the absence of a satisfactory showing to the contrary) be deemed to be excessive if they exceed in any fiscal year the greater of 2.0% of its average invested assets or 25% of its net income for such year. The independent trustees shall have the fiduciary responsibility of limiting such expenses to amounts that do not exceed such limitations unless such independent trustees shall have made a finding that, based on such unusual and non-recurring factors which they deem sufficient, a higher level of expenses is justified for such year. Any such finding and the reasons in support thereof shall be reflected in the minutes of the meeting of the trustees. (2) Within 60 days after the end of any fiscal quarter of the REIT for which total operating expenses (for the 12 months then ended) exceeded 2.0% of average invested assets or 25% of net income, whichever is greater, there shall be sent to the shareholders of the REIT a written disclosure of such fact, together with an explanation of the factors the independent trustees considered in arriving at the conclusion that such higher operating expenses were justified. (3) In the event the independent trustees do not determine such excess expenses are justified, the adviser shall reimburse the REIT at the end of the 12 month period the amount by which the aggregate annual expenses paid or incurred by the REIT exceed the limitations herein provided. (e) Real Estate Commissions on Resale of Property. If an adviser, trustee, sponsor, or any affiliate provides a substantial amount of the services in the effort to sell the property of the REIT, then that person may receive up to one- half of the brokerage commission paid but in no event to exceed an amount equal to 3.0% of the contracted for sales price. In addition, the amount paid when added to the sums paid to unaffiliated parties in such a capacity shall not exceed the lesser of the competitive real estate commission or an amount equal to 6.0% of the contracted-for sales price. (f) Incentive Fees. (1) An interest in the gain from the sale of assets of the REIT, for which full consideration is not paid in cash or property of equivalent value, shall be allowed provided the amount or percentage of such interest is reasonable. Such an interest in gain from the sale of REIT assets shall be considered presumptively reasonable if it does not exceed 15% of the balance of such net proceeds remaining after payment to shareholders, in the aggregate, of an amount equal to 100% of the original issue price of REIT shares, plus an amount equal to 6.0% of the original issue price of the REIT shares per annum cumulative. For purposes of this subsection, the original issue price of the REIT shares may be reduced by prior cash distributions to shareholders of net proceeds from the sale of REIT assets. (2) In the case of multiple advisers, advisers, and any affiliate shall be allowed incentive fees provided such fees are distributed by a proportional method reasonably designed to reflect the value added to REIT assets by each respective adviser or any affiliate. (g) Adviser Compensation. The independent trustees shall determine from time to time and at least annually that the compensation which the REIT contracts to pay to the adviser is reasonable in relation to the nature and quality of services performed and that such compensation is within the limits prescribed by these guidelines. The independent trustees shall also supervise the performance of the adviser and the compensation paid to it by the REIT to determine that the provisions of such contract are being carried out. Each such determination shall be based on the factors set forth below and all other factors such independent trustees may deem relevant and the findings of such trustees on each of such factors shall be recorded in the minutes of the trustees. (1) The size of the advisory fee in relation to the size, composition, and profitability of the portfolio of the REIT. (2) The success of the adviser in generating opportunities that meet the investment objectives of the REIT. (3) The rates charged to other REITs and to investors other than REITs by advisers performing similar services. (4) Additional revenues realized by the adviser and any affiliate through their relationship with the REIT, including loan administration, underwriting or broker commissions, servicing, engineering, inspection and other fees, whether paid by the REIT or by others with whom the REIT does business. (5) The quality and extent of service and advice furnished by the adviser. (6) The performance of the investment portfolio of the REIT, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations. (7) The quality of the portfolio of the REIT in relationship to the investments generated by the adviser for its own account. sec.143.5. Conflicts of Interest and Investment Restrictions. (a) Sales and Leases to REIT. The Real Estate Investment Trust (REIT) shall not purchase property from the sponsor, adviser, trustee, or any affiliate thereof, unless a majority of trustees (including a majority of independent trustees) not otherwise interested in such transaction approve the transaction as being fair and reasonable to the REIT and at a price to the REIT no greater than the cost of the asset to such sponsor, adviser, trustee, or any affiliate thereof, or if the price to the REIT is in excess of such cost, that substantial justification for such excess exists and such excess is reasonable. In no event shall the cost of such asset to the REIT exceed its current appraised value. (b) Sales and Leases to Sponsor, Adviser, Trustees, or any Affiliate. (1) A sponsor, adviser, trustee, or any affiliate thereof shall not acquire assets from the REIT unless approved by a majority of trustees (including a majority of independent trustees), not otherwise interested in such transaction, as being fair and reasonable to the REIT. (2) A REIT may lease assets to a sponsor, adviser, trustee, or any affiliate thereof only if approved by a majority of trustees (including a majority of independent trustees), not otherwise interested in such transaction, as being fair and reasonable to the REIT. (c) Loans. (1) No loans may be made by the REIT to the sponsor, adviser, trustee, or any affiliate thereof except as provided under subsection (k)(3) of this section or to wholly owned subsidiaries of the REIT. (2) The REIT may not borrow money from the sponsor, adviser, trustee, or any affiliate thereof, unless a majority of trustees (including a majority of independent trustees) not otherwise interested in such transaction approve the transaction as being fair, competitive, and commercially reasonable and no less favorable to the REIT than loans between unaffiliated parties under the same circumstances. (d) Investments. (1) The REIT shall not invest in joint ventures with the sponsor, adviser, trustee, or any affiliate thereof, unless a majority of trustees (including a majority of independent trustees) not otherwise interested in such transactions, approve the transaction as being fair and reasonable to the REIT and on substantially the same terms and conditions as those received by the other joint venturers. (2) The REIT shall not invest in equity securities unless a majority of trustees (including a majority of independent trustees) not otherwise interested in such transaction approve the transaction as being fair, competitive, and commercially reasonable. (e) Statement of Objectives. (1) The prospectus must state specific investment objectives of the REIT. It should indicate whether the primary objective is to obtain current income, tax benefits, or capital appreciation for its shareholders. (2) The independent trustees shall review the investment policies of the REIT with sufficient frequency and at least annually to determine that the policies being followed by the REIT at any time are in the best interests of its shareholders. Each such determination and the basis therefor shall be set forth in the minutes of the trustees. (f) Multiple Programs. The method for the allocation of the acquisition of properties by two or more programs of the same sponsor or adviser seeking to acquire similar types of assets shall be reasonable. The method shall be described in the prospectus. It shall be the duty of the trustees (including the independent trustees) to insure such method is applied fairly to the REIT. (g) Other Transactions. All other transactions between the REIT and the sponsor, adviser, trustee, or any affiliate thereof, shall require approval by a majority of the trustees (including a majority of independent trustees) not otherwise interested in such transactions as being fair and reasonable to the REIT and on terms and conditions not less favorable to the REIT than those available from unaffiliated third parties. (h) Appraisal of Real Property. The consideration paid for real property acquired by the REIT shall ordinarily be based on the fair market value of the property as determined by a majority of the trustees. In cases in which a majority of the independent trustees so determine, and in all cases in which assets are acquired from the advisers, trustees, sponsors or affiliates thereof, such fair market value shall be as determined by an independent expert selected by the independent trustees. (i) Roll-Up Transaction. (1) In connection with a proposed roll-up, an appraisal of all REIT assets shall be obtained from a competent, independent expert. If the appraisal will be included in a prospectus used to offer the securities of a roll-up entity, the appraisal shall be filed with the Securities and Exchange Commission and the Securities Commissioner as an exhibit to the registration statement for the offering. Accordingly, an issuer using the appraisal shall be subject to liability for violation of the Securities Act of 1933, sec.11, and comparable provisions under Texas law for any material misrepresentations or material omissions in the appraisal. REIT assets shall be appraised on a consistent basis. The appraisal shall be based on an evaluation of all relevant information, and shall indicate the value of the REIT's assets as of a date immediately prior to the announcement of the proposed roll-up transaction. The appraisal shall assume an orderly liquidation of REIT assets over a 12-month period. The terms of the engagement of the independent expert shall clearly state that the engagement is for the benefit of the REIT and its investors. A summary of the independent appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to the investors in connection with a proposed roll-up. (2) In connection with a proposed roll-up, the person sponsoring the roll-up shall offer to shareholders who vote "no" on the proposal the choice of: (A) accepting the securities of the roll-up entity offered in the proposed roll-up; or (B) one of the following: (i) remaining as shareholders of the REIT and preserving their interests therein on the same terms and conditions as existed previously; or (ii) receiving cash in an amount equal to the shareholders' pro-rata share of the appraised value of the net assets of the REIT. (3) The REIT shall not participate in any proposed roll-up which would result in shareholders having democracy rights in the roll-up entity that are less than those provided for under sec.143.6(a)-(e) of this title (relating to Rights and Obligations of Shareholders). (4) The REIT shall not participate in any proposed roll-up which includes provisions which would operate to materially impede or frustrate the accumulation of shares by any purchaser of the securities of the roll-up entity (except to the minimum extent necessary to preserve the tax status of the roll- up entity). The REIT shall not participate in any proposed roll-up which would limit the ability of an investor to exercise the voting rights of its securities of the roll-up entity on the basis of the number of REIT shares held by that investor. (5) The REIT shall not participate in any proposed roll-up in which investors' rights of access to the records of the roll-up entity will be less than those provided for under sec.143.6(e) of this title (relating to Rights and Obligations of Shareholders). (6) The REIT shall not participate in any proposed roll-up in which any of the costs of the transaction would be borne by the REIT if the roll-up is not approved by the shareholders. (j) Leverage. The prospectus shall include an explanation of the borrowing policies of the REIT. The aggregate borrowings of the REIT, secured and unsecured, shall be reasonable in relation to the net assets of the REIT and shall be reviewed by the trustees at least quarterly. The maximum amount of such borrowings in relation to the net assets shall, in the absence of a satisfactory showing that higher level of borrowing is appropriate, not exceed 300%. Any excess in borrowing over such 300% level shall be approved by a majority of the independent trustees and disclosed to shareholders in the next quarterly report of the REIT, along with justification for such excess. (k) Other Limitations. (1) The REIT may not invest more than 10% of its total assets in unimproved real property or mortgage loans on unimproved real property. (2) The REIT may not invest in commodities or commodity future contracts. Such limitation is not intended to apply to future contracts, when used solely for hedging purposes in connection with the REIT's ordinary business of investing in real estate assets and mortgages. (3) The REIT may not invest in or make mortgage loans unless an appraisal is obtained concerning the underlying property except for those loans insured or guaranteed by a government or government agency. In cases in which a majority of the independent trustees so determine, and in all cases in which the transaction is with the adviser, trustees, sponsor, or affiliates thereof, such an appraisal must be obtained from an independent expert concerning the underlying property. This appraisal shall be maintained in the REIT's records for at least five years, and shall be available for inspection and duplication by any shareholder. In addition to the appraisal, a mortgagee's or owner's title insurance policy or commitment as to the priority of the mortgage or the condition of the title must be obtained. Further, the adviser and trustees shall observe the following policies in connection with investing in or making mortgage loans. (A) The REIT shall not invest in real estate contracts of sale, otherwise known as land sale contracts, unless such contracts of sale are in recordable form and appropriately recorded in the chain of title. (B) The REIT shall not make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans outstanding on the property, including the loans of the REIT, would exceed an amount equal to 85% of the appraised value of the property as determined by appraisal unless substantial justification exists because of the presence of other underwriting criteria. For purposes of this paragraph, the "aggregate amount of all mortgage loans outstanding on the property, including the loans of the REIT," shall include all interest (excluding contingent participation in income and/or appreciation in value of the mortgaged property), the current payment of which may be deferred pursuant to the terms of such loans, to the extent that deferred interest on each loan exceeds 5.0% per annum of the principal balance of the loan. (C) The REIT shall not make or invest in any mortgage loans that are subordinate to any mortgage or equity interest of the adviser, trustees, sponsors, or any affiliate of the REIT. (4) The REIT may not issue redeemable equity securities. (5) The REIT may not issue debt securities unless the historical debt service coverage (in the most recently completed fiscal year) as adjusted for known changes is sufficient to properly service that higher level of debt. (6) The REIT may not issue options or warrants to purchase its shares to the adviser, trustees, sponsors, or any affiliate thereof except on the same terms as such options or warrants are sold to the general public. The REIT may issue options or warrants to persons not so connected with the REIT but not at exercise prices less than the fair market value of such securities on the date of grant and for consideration (which may include services) that in the judgement of the independent trustees, has a market value less than the value of such option on the date of grant. Options or warrants issuable to the adviser, trustees, sponsors, or any affiliate thereof shall not exceed an amount equal to 10% of the outstanding shares of the REIT on the date of grant of any options or warrants. (7) The REIT may not issue its shares on a deferred payment basis or other similar arrangement. sec.143.6. Rights and Obligations of Shareholders. (a) Meetings. (1) There shall be an annual meeting of the shareholders of the REIT upon reasonable notice and within a reasonable period (not less than 30 days) following delivery of the annual report. The trustees, including the independent trustees, shall be required to take reasonable steps to insure that this requirement is met. (2) Special meetings of the shareholders may be called by the chief executive officer, by a majority of the trustees, or by a majority of the independent trustees, and shall be called by an officer of the REIT upon written request of shareholders holding in the aggregate not less than 10% of the outstanding shares of the REIT entitled to vote at such meeting. Upon receipt of a written request, either in person or by mail, stating the purpose(s) of the meeting, the sponsor shall provide all shareholders within ten days after receipt of said request, written notice, either in person or by mail, of a meeting and the purpose of such meeting to be held on a date not less than 15 nor more than 60 days after the distribution of such notice, at a time and place specified in the request, or if none is specified, at a time and place convenient to shareholders. (b) Voting Rights of Shareholders. (1) A public offering of equity securities of a REIT other than voting shares will be looked upon with disfavor. (2) The voting rights per share of equity securities of the REIT (other than the publicly held equity securities of the REIT) sold in a private offering shall not exceed voting rights which bear the same relationship to the voting rights of the publicly held shares of the REIT as the consideration paid to the REIT for each privately offered REIT share bears to the book value of each outstanding publicly held share. (3) The declaration of trust must provide that a majority of the then- outstanding shares may, without the necessity for concurrence by the trustees, vote to: (A) amend the declaration of trust; (B) terminate the REIT; and (C) remove the trustees. (4) The declaration of trust must provide that a majority of shareholders present in person or by proxy at an annual meeting at which a quorum is present, may, without the necessity for concurrence by the trustees, vote to elect the trustees. A quorum shall be 50% of the then-outstanding shares. (5) Without concurrence of a majority of the outstanding shares, the trustees may not: (A) amend the declaration of trust, except for amendments which do not adversely affect the rights, preferences and privileges of shareholders including amendments to provisions relating to trustee qualifications, fiduciary duty, liability and indemnification, conflicts of interest, investment policies or investment restrictions; (B) sell all or substantially all of the REIT's assets other than in the ordinary course of the REIT's business or in connection with liquidation and dissolution; (C) cause the merger or other reorganization of the REIT; or (D) dissolve or liquidate the REIT, other than before the initial investment in property. (6) With respect to shares owned by the adviser, the trustees, or any affiliate, neither the adviser, nor the trustees, nor any affiliate may vote or consent on matters submitted to the shareholders regarding the removal of the adviser, trustees, or any affiliate or any transaction between the REIT and any of them. In determining the requisite percentage in interest of shares necessary to approve a matter on which the adviser, trustees, and any affiliate may not vote or consent, any shares owned by any of them shall not be included. (c) Liability of Shareholders. The declaration of trust shall provide that. (1) The shares of the REIT shall be non-assessable by the REIT whether a trust, corporation, or other entity. (2) The shareholders of the REIT which is not a corporation shall not be personally liable on account of any of the contractual obligations undertaken by the REIT. (3) All written contracts to which the REIT, which is not a corporation, is a party shall include a provision that the shareholder shall not be personally liable thereon. (d) Reports. (1) The declaration of trust shall provide that the REIT shall cause to be prepared and mailed or delivered to each shareholder as of a record date after the end of the fiscal year and each holder of other publicly held securities of the REIT within 120 days after the end of the fiscal year to which it relates an annual report for each fiscal year ending after the initial public offering of its securities which shall include: (A) financial statements prepared in accordance with generally accepted accounting principles which are audited and reported on by independent certified public accountants; (B) the ratio of the costs of raising capital during the period to the capital raised; (C) the aggregate amount of advisory fees and the aggregate amount of other fees paid to the adviser and any affiliate of the adviser by the REIT and including fees or charges paid to the adviser and any affiliate of the adviser by third parties doing business with the REIT; (D) the total operating expenses of the REIT, stated as a percentage of average invested assets and as a percentage of its net income; (E) a report from the independent trustees that the policies being followed by the REIT are in the best interests of its shareholders and the basis for such determination; and (F) separately stated, full disclosure of all material terms, factors, and circumstances surrounding any and all transactions involving the REIT, trustees, advisers, sponsors, and any affiliate thereof occurring in the year for which the annual report is made. Independent trustees shall be specifically charged with a duty to examine and comment in the report on the fairness of such transactions. (2) The trustees, including the independent trustees, shall be required to take reasonable steps to insure that the above requirements are met. (e) Access to Records. Any shareholder and any designated representative thereof shall be permitted access to all records of the REIT at all reasonable times, and may inspect and copy any of them. Inspection of the REIT books and records by the Securities Commissioner shall be provided upon reasonable notice and during normal business hours. The declaration of trust shall include the following provisions regarding access to the list of shareholders. (1) An alphabetical list of the names, addresses, and telephone numbers of the shareholders of the REIT along with the number of shares held by each of them (the "shareholder list") shall be maintained as part of the books and records of the REIT and shall be available for inspection by any shareholder or the shareholder's designated agent at the home office of the REIT upon the request of the shareholder. (2) The shareholder list shall be updated at least quarterly to reflect changes in the information contained therein. (3) A copy of the shareholder list shall be mailed to any shareholder requesting the shareholder list within ten days of the request. The copy of the shareholder list shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than ten-point type). A reasonable charge for copy work may be charged by the REIT. (4) The purposes for which a shareholder may request a copy of the shareholder list include, without limitation, matters relating to shareholders' voting rights under the REIT agreement, and the exercise of shareholders' rights under federal proxy laws. (5) If the adviser or trustees of the REIT neglects or refuses to exhibit, produce, or mail a copy of the shareholder list as requested, the adviser, and the trustees shall be liable to any shareholder requesting the list for the costs, including attorneys' fees, incurred by that shareholder for compelling the production of the shareholder list, and for actual damages suffered by any shareholder by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the shareholder list is to secure such list of shareholders or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a shareholder relative to the affairs of the REIT. The REIT may require the shareholder requesting the shareholder list to represent that the list is not requested for a commercial purpose unrelated to the shareholder's interest in the REIT. The remedies provided hereunder to shareholders requesting copies of the shareholder list are in addition to, and shall not in any way limit, other remedies available to shareholders under federal law, or the laws of any state. (f) Repurchase of Shares. Ordinarily, the REIT is not obligated to repurchase any of the shares. However, the REIT is not precluded from voluntarily repurchasing the shares if such repurchase does not impair the capital or operations of the REIT. The REIT may have excess share provisions that provide for mandatory redemption. The sponsor, adviser, trustees, or affiliates are prohibited from receiving a fee on the repurchase of the shares by the REIT. (g) Distribution Reinvestment Plans. All distribution reinvestment plans shall, at the minimum, provide for the following: (1) All material information regarding the distribution to the shareholder and the effect of reinvesting such distribution, including the tax consequences thereof, shall be provided to the shareholder at least annually. (2) Each shareholder participating in the plan shall have a reasonable opportunity to withdraw from the plan at least annually after receipt of the information required in paragraph (1) of this subsection. (h) Distributions. The declaration of trust shall state the manner in which distributions to shareholders are to be determined. (i) Distributions in Kind. Distributions in kind shall not be permitted, except for: (1) distributions of readily marketable securities; (2) distributions of beneficial interests in a liquidating trust established for the dissolution of the REIT and the liquidation of its assets in accordance with the terms of the declaration of trust; or (3) distributions of in-kind property which meet all of the following conditions: (A) The trustees advise each shareholder of the risks associated with direct ownership of the property. (B) The trustees offer each shareholder the election of receiving in-kind property distributions. (C) The trustees distribute in-kind property only to those shareholders who accept the trustee's offer. sec.143.7. Disclosure and Marketing. (a) Sales Material. Sales material, including without limitation, books, pamphlets, movies, slides, article reprints, television and radio commercials, materials prepared for broker/dealer use only, sales presentations (including prepared presentations to prospective shareholders at group meetings) and all other advertising used in the offer or sale of units shall conform to filing, disclosure, and adequacy requirements under any applicable state regulations. Statements made in sales material communicated directly or indirectly to the public may not conflict with, or modify risk factors or other statements made in the prospectus. (b) Prospectus and its Contents. (1) Prospectus. A prospectus which is not part of a registration statement declared effective by the Securities and Exchange Commission pursuant to the Securities Act of 1933 shall generally conform to the disclosure requirements which would apply if the offering were so registered. The format and information requirements of applicable Guide(s) promulgated by the Securities and Exchange Commission shall be followed, with appropriate adjustments made for the different business of the REIT. (2) Prohibited Representations. (A) In connection with the offering and sale of shares in a REIT, neither the sponsor(s) nor the underwriter(s) may, in writing or otherwise, directly or indirectly, represent or imply that the Securities Commissioner has approved the merits of the investment or any aspects thereof. (B) Any reference to the REIT's compliance with these guidelines or any provisions herein which connotes or implies compliance shall not be allowed. (3) Forecasts and Projections. (A) Neither the prospectus nor any sales material communicated directly or indirectly to the public shall contain a quantitative estimate of a REIT's anticipated economic performance or anticipated return to participants, in the form of investment objectives, cash distributions, tax benefits or otherwise, except as permitted by this paragraph of these guidelines. (B) The presentation of predicted future results of operations of programs shall be permitted but not required for specified asset REITs and shall be prohibited for all other REITs. The cover of the prospectus must contain in bold face language one of the following statements: (i) for specified asset REITs with forecasts: "Forecasts are contained in this prospectus. Any representation to the contrary and any predictions, written or oral, which do not conform to that contained in the prospectus shall not be permitted"; or (ii) for all other REITs: "The use of forecasts in this offering is prohibited. Any representations to the contrary and any predictions, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence which may flow from an investment in this program is not permitted." (C) Content of Forecasts. Forecasts for specified asset REITs may be included in the prospectus and sales material of the REIT only if they comply with all of the following requirements. (i) Generally, forecasts shall be realistic in their predictions and shall clearly identify the assumptions made with respect to all material features of presentation. Forecasts should be examined by an independent certified public accountant in accordance with the Guide for Prospective Financial Statements and the Statement on Standards for Accountant's Services on Prospective Financial Information as promulgated by the American Institute of Certified Public Accountants. The report of the independent certified public accountant must be included in the prospectus. (ii) If any part of the forecast appears in the sales material, the entire forecast must be presented. (iii) Forecasts shall generally be for a period equivalent to the anticipated holding period for REIT assets. Forecasts which do not extend through the expected term of the REIT's life must show the effects of a hypothetical liquidation of program assets under good and bad conditions. Yield information may not be presented for forecasts which do not extend through the expected term of the REIT's life. (iv) Forecasts shall disclose possible undesirable tax consequences of an early sale of program assets, such as depreciation recapture, the loss of prior year tax credits, or the possible failure to generate sufficient cash from the disposition to pay the associated tax liabilities. (v) In computing any rate of return or yield to investors, no unrealized gains or value shall be included. (c) The Securities Commissioner may require that the declaration of trust be given to prospective shareholders. sec.143.8. Miscellaneous. (a) Provisions of the Declaration of Trust. The requirements and/or provisions of appropriate portions of the following sections shall be included in the declaration of trust: sec.143.1(b) of this title (relating to Definitions); sec.143.2(a)-(h) of this title (relating to Requirements of Sponsor, Adviser, Trustees, and any Affiliate); sec.143.3(b), (c) and (f) of this title (relating to Suitability of Shareholders); sec.143.4(a)(2) and (c)-(g) of this title (relating to Fees, Compensation, and Expenses); sec.143.5(a)-(d), (e)(2) and (g)-(k) of this title (relating to Conflicts of Interest and Investment Restrictions); and sec.143. 6(a)-(i) of this title (relating to Rights and Obligations of Shareholders). (b) Amendments and Supplements. A marked copy of all amendments and supplements to an application shall be filed with the Securities Commissioner as soon as the amendment or supplement is available. (c) Cross-Reference Sheet Requirement. The cross-reference sheet shall be included with the application for registration. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447095 Denise Voigt Crawford Securities Commissioner State Securities Board Effective date: September 14, 1994 Proposal publication date: May 27, 1994 For further information, please call: (512) 305-8300 TITLE 16. ECONOMIC REGULATION Part I. Railroad Commission of Texas Chapter 3. Oil and Gas Division Conservation Rules and Regulations 16 TAC sec.3.84 The Railroad Commission of Texas adopts new sec.3.84, relating to agency procedures for determining whether there exists a natural gas supply emergency, and if so, the procedures by which the commission will implement emergency response actions, with changes to the proposed text as published in the March 1, 1994, issue of the Texas Register (19 TexReg 1429). The rule establishes the commission's mechanisms for determining that a gas shortage emergency exists and for responding to a gas shortage emergency, and provides a means for a producer or purchaser to increase, without penalty, production and takes from wells in a field in response to an increase in demand caused by unforeseen events. The rule also provides an efficient and effective means to address increased demand associated with unforeseeable circumstances. The proposed rule was published with a 30-day comment period. However, in response to a request by Texas Mid-Continent Oil and Gas Association, the commission extended the comment period for an additional 60 days, and gave notice of the extension in the April 19, 1994, issue of the Texas Register (19 TexReg 3020). The commission received comments from three associations, all of which opposed adoption of the rule as originally proposed: Texas Independent Producers and Royalty Owners Association, Texas Mid-Continent Oil and Gas Association, and the Association of Texas Intrastate Natural Gas Pipelines. One commenter suggested that references to "transporters" and "distributors" are not necessary for effective operation of the rule and should be deleted. The commission agrees, and has made the suggested change. Two commenters suggested that the proposed rule is not needed for the commission to take action to see that surges in natural gas demand are met. The commission believes that adoption of the rule will ensure that producers and purchasers will know what procedures will be used by the commission to identify and address a gas shortage emergency. The rule will allow a more efficient response by both the commission and the natural gas industry in meeting increased demand. One commenter suggested that the rule provide that the commission may determine that the gas shortage emergency has existed in addition to having the authority to determine that there is an ongoing gas shortage emergency. The commission agrees, and has made the change in sec.3.84(b) and (c). One commenter suggested substituting "gas shortages" for "curtailment" in sec.3.84(b)(2) because the word "curtailment" implies a voluntary restriction by producers or transporters. The commission agrees, and has made this change. One commenter suggested changes to sec.3.84(c) to remove any perception that persons may not respond to an apparent emergency until the commission has issued such authorization after notice of hearing. The commission agrees, and has made this change. One commenter suggested that operators who choose not to respond to the emergency should not receive supplemental allowable. The commission disagrees. Such a restriction in the rule would prevent the commission from adjusting allowable in a field in a manner adequate to protect correlative rights. The Texas Natural Resources Code and commission rules already provide that operators who choose not to produce gas from a prorated reservoir may accrue underproduction to protect their correlative rights. The commission adopts the new section under Texas Natural Resources Code, sec.81.052, which gives the commission the authority to adopt all necessary rules for governing and regulating persons and their operations under the jurisdiction of the commission. sec.3.84. Gas Shortage Emergency Response. (a) The purpose of this section is to provide a means for a producer or purchaser to increase, production and takes from wells in a field in response to an increase in demand caused by unforeseen events. This section outlines the commission's mechanisms for both determining that a gas shortage emergency exists, and responding to a gas shortage emergency. (b) The commission may, after notice and hearing, determine that a gas shortage emergency exists or has existed. The commission may also determine the duration of the emergency at such hearing. The commission shall issue notice when it has determined that a gas shortage emergency exists, or has existed, and when it determines the gas shortage emergency has ended or will end. In determining whether a gas shortage emergency exists or has existed, the commission shall consider any relevant information, including, but not limited to, the following: (1) notification from gas storage facilities that they are attaining maximum gas withdrawal rates; (2) notification from a gas utility, distributer, transporter, producer or purchaser that gas shortages have occurred or are anticipated; and (3) weather data. (c) Upon the commission's finding that a gas shortage emergency exists, or has existed, producers or purchasers shall be authorized to meet the increased demand for the duration of the gas shortage emergency as determined by the commission regardless of a well's assigned allowable or allowable status. (d) If inequities occur as a result of production authorized by subsection (c) of this section, an adjustment shall be made at the hearing in which production reported for the month of the gas shortage emergency is considered in setting future allowables. Such adjustment shall include the assignment of additional allowable to adequately protect correlative rights. The commission may determine the maximum amount of the supplemental allowable by multiplying the number of days of the gas shortage emergency period by the difference between the well's capability (as defined in sec.3.31 of this title (relating to Gas Well Allowables)) and the assigned allowable. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 23, 1994. TRD-9447072 Mary Ross McDonald Assistant Director, Legal Division, Gas Utilities/LP Gas Railroad Commission of Texas Effective date: September 13, 1994 Proposal publication date: March 1, 1994 For further information, please call: (512) 463-6768 Chapter 9. Liquefied Petroleum Gas Division Subchapter A. General Applicability and Requirements 16 TAC sec.9.31 The Railroad Commission of Texas adopts new sec.9.31, relating to LP-gas regional supply emergency response, with changes to the proposed text as published in the March 1, 1994, issue of the Texas Register (19 TexReg 1431). This section establishes a distribution plan to minimize the severity of disruptions in the supplies of LP-gas in a region of the state, and outlines the commission's mechanisms for both determining that a regional LP-gas shortage exists and responding to a regional LP-gas shortage emergency. The proposed rule was published with a 30-day comment period. However, in response to a request by Texas Mid-Continent Oil and Gas Association, the commission extended the comment period for an additional 60 days, and gave notice of the extension in the April 19, 1994, issue of the Texas Register (19 TexReg 3020). Two associations filed comments on the proposed rule: the Texas Propane Gas Association (TPGA) and the Texas Chemical Council (TCC). TPGA generally endorsed the proposed rule; TCC expressed concern about the tone of parts of the preamble but not the substance of the rule. TPGA's comments asked whether the commission would permit emergency sales only to those dealers with acceptable safety records. The commission responds that it intends to treat sales made during an emergency the same as sales made at other times. Both TPGA's and others' comments included observations on other issues related to propane supply, e.g. , minimum storage requirements. These issues are outside the scope of the present rulemaking and will not be addressed here. One comment requested that the commission: prohibit emergency sales to noncontract customers; define in more detail the factors the commission will consider in determining that a supply emergency exists; consider forming an industry advisory board to consult before declaring an emergency; clarify that by "withdrawal rates at LP-gas storage facilities" is meant not only rates of withdrawal from licensees' storage, but also from storage facilities located at gas processing plants, pipeline terminals, refineries, and inland salt domes; clarify that the term "maximum withdrawal rates" does not include withdrawal rates from plants that in winter routinely allocate and sell their whole daily production; clarify that routine winter allocation schemes at such plants are not considered "curtailments" that could trigger declaration of an emergency; and exempt plants that as a matter of policy do not load bobtail trucks from having to do so during an emergency. To the first comment, the commission responds that this kind of prohibition would not be consistent with the purpose of the rule. The commission believes that dealers have the ability and thus should have the discretion to determine how to comply with the directive in sec.9.31(c). To the second comment, the commission responds that supply emergencies in the LP-gas industry have been uncommon and are anticipated to remain so. When they arise, however, the commission needs maximum flexibility in identifying them and responding appropriately. The commission believes a general rather than a specific definition of emergency conditions provides this needed flexibility. With regard to the comment about an industry advisory committee, the commission responds that the monitoring reports from the Natural Gas Reliability Council of Texas (formerly the Voluntary Allocation Committee), the LP-Gas Division's advisory committee, and the Propane Alternative Fuels Advisory Committee already exist to advise the commission and are adequate for this purpose. Adding another advisory committee reduces the commission's flexibility at the very time it is most needed. The commission agrees with the fourth comment and has amended sec.9.31(b)(1) to clarify that the commission will consider pertinent information from any storage facility as warranted. With respect to the fifth and sixth comments, the commission agrees that a single plant's or company's sale, even routinely, of its entire daily production or the routine operation of a winter allocation scheme would not be sufficient in itself to trigger a declaration of an emergency. With respect to the last comment, the commission disagrees. The commission has no intention of interfering with propane suppliers' policies concerning which types of trucks they load. However, this rule concerns emergency shortages. The commission is not prepared to say that no emergency could arise in which preservation of human life would not be important enough to justify temporary suspension of a no-bobtails policy. The new section is adopted under Texas Natural Resources Code, sec.113.051, which gives the commission the authority to adopt rules relating to any and all aspects or phases of the LP-gas industry that will protect or tend to protect the health, welfare, and safety of the general public; under Texas Natural Resources Code, sec.113.083, which authorizes the governor to declare an LP-gas emergency which has the effect of suspending certain licensing, permitting, and certification requirements for LP-gas trucks and operators from other states in order to facilitate LP-gas exports to states experiencing LP-gas shortages; and under Texas Natural Resources Code, sec.113.243(c)(3), which authorizes the commission to develop and implement conservation and distribution plans to minimize the frequency and severity of disruptions in the supply of alternative fuels, including LP-gas (propane). sec.9.31. LP-Gas Regional Supply Emergency Response. (a) The purpose of this section is to develop a distribution plan to minimize the severity of disruptions in the supplies of LP-gas in various regions of Texas. This section outlines the commission's mechanisms for both determining that a regional LP-gas shortage exists and responding to a regional LP-gas shortage emergency. (b) The commission may, after notice and hearing, determine that an LP-gas supply emergency exists within designated counties of the state. The commission may also determine the duration of the regional supply emergency at such hearing. The commission shall issue notice when it has determined that an LP-gas regional supply emergency exists and when it determines that the LP-gas regional supply emergency has ended or will end. In determining whether an LP-gas regional supply emergency exists, the commission shall consider any relevant information, including but not limited to the following: (1) notification from LP-gas storage facilities as appropriate, including, but not limited to, storage facilities located at gas processing plants, pipeline terminals, petroleum refineries, and inland salt domes, that they are attaining maximum LP-gas withdrawal rates; (2) notification from LP-gas licensees that sufficient supplies are not available locally or that curtailments are anticipated; and (3) weather data. (c) Upon the commission finding that an LP-gas regional supply emergency exists, the commission shall instruct selected LP-gas loading rack operators to give first priority in loading to LP-gas transport vehicles whose cargoes are bound for counties designated as within the region subject to the LP-gas supply emergency until the regional supply emergency has been determined to be abated. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 23, 1994. TRD-9447073 Mary Ross McDonald Assistant Director, Legal Division, Gas Utilities/LP Gas Railroad Commission of Texas Effective date: September 13, 1994 Proposal publication date: March 1, 1994 For further information, please call: (512) 463-7291 TITLE 28. INSURANCE Part I. Texas Department of Insurance Chapter 7. Corporate and Financial Regulation Subchapter P. Licensing and Examination of Third Party Administrators 28 TAC sec.sec.7.1601-7.1613 The Commissioner of Insurance of the Texas Department of Insurance adopts the repeal of sec.sec.7.1601-7.1613, without changes to the proposed text as published in the April 29, 1994, issue of the Texas Register (19 TexReg 3231). Sections 7.1601-7.1613 concern the regulation, examination, and licensing of third party administrators. The repeal of this subchapter is necessary to enable the Commissioner simultaneously to adopt a new subchapter which replaces the repealed sections with other provisions concerning the regulation of third party administrators. This repeal and adoption of a new subchapter is necessary to bring the regulation by the Texas Department of Insurance into accord with ERISA. ERISA provides exclusive federal jurisdiction over regulation of employee benefit plans described in 29 USC sec.1003(a) and governed exclusively by ERISA and preempts any state regulation that "relates" to such plans. The sections being repealed did not allow the required exemption from state regulation for third party administrators (TPAs) in their capacity as administrators of self- funded ERISA plans. The repeal of this subchapter enables the Commissioner to adopt a new subchapter which allows TPAs to be exempt from state regulation in their capacity as administrators of self-funded ERISA plans. No comments were received regarding adoption of the repeal. The repeals are adopted pursuant to the Insurance Code, Articles 21.07-6, 1. 02, 1.03A, and 1.04C, and the Government Code, sec.2001.004, et seq. Article 21. 07-6 authorizes the State Board of Insurance to promulgate reasonable rules and regulations that are appropriate to accomplish the purposes of the Article regulating third party administrators. This authority is interpreted to be delegated to the Commissioner of Insurance under Article 1.02 of the Insurance Code, which provides that a reference in the Insurance Code or another insurance law to the State Board of Insurance means the Commissioner of Insurance or the Texas Department of Insurance, as consistent with the respective powers and duties of the Commissioner and the Department under Article 1.02. Article 1.03A provides that the Commissioner of Insurance may adopt rules and regulations, which must be for general and uniform application, for the conduct and execution of the duties and functions of the Texas Department of Insurance only as authorized by a statute. Article 1.04C of the Insurance Code requires the Commissioner of Insurance to develop and implement policies that provide the public with a reasonable opportunity to appear before the Commissioner and to speak on any issue under the Commissioner's jurisdiction. The Government Code, sec.2001.004 et seq (Administrative Procedure Act) authorizes and requires each state agency to adopt rules of practice setting forth the nature and requirement of available procedures and to prescribe the procedures for adoption of rules by a state agency. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447079 D. J. Powers Counsel and Chief Clerk Texas Department of Insurance Effective date: September 14, 1994 Proposal publication date: April 29, 1994 For further information, please call: (512) 463-6327 28 TAC sec.sec.7.1601-7.1615 The Texas Department of Insurance adopts new sec.sec.7.1601-7.1615, concerning the exemption from department regulation for third-party administrators (TPAs) in their capacity as administrators of self-funded employee benefit plans governed exclusively by ERISA and concerning the licensing, examination, and taxation of TPAs pursuant to the Insurance Code, Article 21.07-6. Sections 7.1602, 7.1606, 7.1608, and 7.1610 are adopted with changes to the proposed text as published in the April 29, 1994, issue of the Texas Register (19 TexReg 3228). Sections 7.1601, 7.1603-7.1605, 7.1607, 7.1609, and 7.1611-7.1615 are adopted without changes and will not be republished. The new sections replace repealed sec.sec.7.1601-7.1613, relating to the licensing, examination, and taxation of TPAs. The new sections are necessary to provide procedures for TPAs to notify the Texas Department of Insurance of their exemption from department regulation in their capacity as administrators of self-funded employee benefit plans governed exclusively by ERISA. In response to comments, the Department has changed and deleted certain forms adopted by reference in sec.7.1602 and has changed sec.sec.7.1606, 7.1608, and 7. 1610 of the proposed sections. The definition of an exempt administrator in sec.7.1606(a) is changed to provide that the employee benefit plan that the TPA administers must be "governed exclusively by ERISA" in order for the TPA to be exempt from regulation. The change is needed because the proposed subsection (a) exempted any administrator of a plan described in 29 U.S.C. sec.1003(a). This section of the U.S. Code covers all ERISA plans, whether fully insured by a commercial insurer or self-funded by an employer or other plan sponsor. It is the intent of the Department to exempt only self-funded plans subject to ERISA, so it is necessary to narrow the overly broad definition of employee benefit plan to only include those "governed exclusively by ERISA." Section 7. 1606(a) is also changed to delete the word "solely". This change clarifies that although some TPAs may administer all three types of employee benefit plans, including self-funded ERISA plans, fully insured ERISA plans and non-ERISA plans, the Department regulation of the non-ERISA and fully insured plans does not subject the self-funded ERISA plans that the TPA also administers to regulation. Section 7.1606(a) is further changed to delete the requirement of Departmental approval of a TPA's request for exemption and the requirement that a TPA must reapply for the exemption every 12 months. Language has been added to sec.7.1606(a) to provide that a TPA gives notification of its exemption to the Department on the appropriate forms. This change is needed because Departmental approval and expiration requirements are not consistent with the preemption of state law by ERISA, as reflected in the NGS American case. Section 7.1606(a)(1) and (2) has been changed and paragraph (3) has been added to clarify the categories of benefit plans administered and to specify the forms on which a TPA, insurer, or health maintenance organization will notify the Department of their exempt status. This change is needed because the specific form which a TPA, insurer, or health maintenance organization will use to give notice of exemption varies and is dependent upon the types of employee benefits plans being administered. The requirement of a TPA refiling the same forms on an annual basis in sec.7.1606(b) is changed to provide that a TPA update the prior year's filing as to any new self-funded ERISA plans administered or as to any plans no longer administered by the TPA. This eliminates duplicative yearly refiling requirements. TPA Form 2 sec.3, TPA Form 2A sec.4, and TPA Form 6 sec.4 have been changed to include the following new language: the language "NON-ERISA" has been added to item (b) to clarify the definition of the plans to be reported in this category; the language "Self Funded" has been added to item (c) to clarify the definition of the plans to be reported in this category; and language has been added to item (f) to allow TPAs to estimate the number of dependents covered in a plan if these figures are not available. TPA Form 6 sec.4 (the item concerning the number of annuity plans administered) has been changed to specify that the number reported is to only include annuity plans that the insurer administers but which are insured by another carrier. TPA Form 7A has been deleted because the information reported on Form 7A was a duplication of the information reported on TPA Forms 2A, 6, and 7. TPA Form 7 has been changed to include the following: the title has been changed from "Request For ERISA Exemption" to "Notification of Exemption Form"; the words "Self-Funded" have replaced the word "Qualified" in the phrase "Number of Qualified ERISA Plans Administered"; and the certification has been changed to indicate that the certification is to the best of the TPA's knowledge and belief. These changes were made to clarify that a TPA is only required to give notice of an exemption and to further clarify that a TPA is relying on the information provided by the plan sponsor when certifying to the accuracy of the information provided on TPA Form 7. Section 7.1608 has been changed to clarify that no fee shall be collected from a TPA for filing of Form 7, Notification of Exemption Form. It was felt that it was unclear whether a TPA would be required to pay a filing fee for the notice of exemption filing. Section 7.1610 is changed to specify that only "licensed" administrators would be subject to on- site visits. This narrows the category of those administrators subject to on- site visits from all administrators to only licensed administrators. The effects of the new sections include providing orderly and efficient procedures for TPAs to give notice of their exemption from Departmental regulation and taxation. Also the new sections provide forms for giving notification of exemption. The new sections further provide rules, standards, and forms concerning the licensing, examination, and taxation of TPAs that are not exempt from regulation. Implementation of these new sections will result in regulation of TPAs by the Texas Department of Insurance in accordance with ERISA. Section 7.1601 defines the terms used in the new sections. Section 7. 1602 names and adopts by reference 9 forms relating to the regulation and exemption from regulation of TPAs. Section 7.1603 defines the entities that must apply for a TPA license and specifies other general licensing criteria. Section 7.1604 sets standards and grounds for denial, suspension, cancellation or revocation of a TPA's certificate of authority. Section 7.1605 specifies the license application procedures including the proper forms needed for application. Section 7.1606 addresses the procedures for notifying the Department of exemption from licensing and regulation. Section 7.1607 defines which insurers and HMOs are subject to regulation and specifies the insurance code reporting and licensing requirements these entities are subject to. Section 7.1608 specifies the filing fees for license applications, on-site visit examinations, and filing annual reports. Section 7.1609 lists specific unfair market practices that TPAs are prohibited from engaging in. Section 7. 1610 authorizes on-site examinations and sets standards and procedures for these examinations. Section 7.1611 sets standards and procedures for the Commissioner to issue cease and desist orders. Section 7.1612 specifies procedures for the filing of annual reports. Section 7.1613 set standards for requiring TPAs to procure a fidelity bond. Section 7.1614 authorizes a maintenance tax and sets a maximum assessment. Section 7.1615 provides for severability of the sections of the subchapter if any individual section is held to be invalid. For: No comments were received in favor of the proposal as published. Against: Texas Professional Benefit Administrators Association, American Council of Life Insurance, and Metropolitan Life Insurance Company submitted written comments objecting to parts of the proposal as published. General Comment: One commenter argued that the proposed sections are invalid because they place onerous burdens on insurers acting as TPAs of ERISA plans by allowing the Department to engage in regulation of TPAs in their capacity as administrators of self-funded ERISA plans. Agency Response: The Department disagrees. The proposed sections, specifically sec.7.1606, exempt all TPAs, including insurers acting as TPAs, from department regulation in their capacity as TPAs of self-funded ERISA plans. The Department has changed sec.7.1606 to clarify that TPAs who administer self-funded ERISA plans are exempt in their capacity as administrators of self-funded ERISA plans. Comment: A commenter argues the proposed sections violate due process and equal protection because they impose regulation on some TPAs and not others. Agency Response: The agency disagrees. The sections comply with federal and state law. TPAs administering only self-funded ERISA-governed plans are exempt from state regulation because of federal preemption. TPAs which administer both ERISA- governed plans and non-ERISA governed plans may, pursuant to the Insurance Code, Article 21.07-6, be regulated by the state in their capacity as administrators of non-ERISA governed plans. Comment: One commenter asserts the Fifth Circuit Court of Appeals, in NGS American, Inc. v. Barnes, 988 F.2d 296 (5th Cir. 1993), held TPAs administering ERISA-governed plans cannot be subjected to state regulation even if they administer both ERISA and non-ERISA plans. Agency Response: The Department disagrees. The court in Barnes specifically stated "[o]ur holding does not preclude the Texas Commissioner of Insurance from enforcing the article against third-party administrators of non-ERISA governed insurance plans, or against third-party administrators of both ERISA and non-ERISA governed plans in their capacity as administrators of non-ERISA governed plans. " Comment: A commenter argues the proposed sections would subject a TPA to regulation even if all the plans it administered in Texas were self-funded ERISA plans, if the TPA also administered a non-ERISA plan in another state. Agency Response: The Department disagrees. This statement is true only if the out of state non-ERISA plan provides coverage to Texas residents. In such a case, the agency may properly regulate the TPA pursuant to Article 21.07-6, sec.1(1) of the Insurance Code. Comment: One commenter argues that the proposed sections conflict with Article 21.07-6 by assessing maintenance taxes against insurers operating as TPAs. Agency Response: The Department disagrees and believes that a reasonable interpretation of the statute supports assessing maintenance taxes on the service fees that insurers receive for the performance of TPA services. The commenter cites the language in Article 21.07-6, sec.21(a), which says that maintenance taxes may be assessed on "all administrators that are covered by certificates of authority." The commenter then argues that this language means only certificates of authority issued under Article 21.07-6 and since insurers are not issued certificates of authority under Article 21.07-6 then the insurers are not subject to maintenance taxes. The language in the statute does not limit certificates of authority to only those issued under Article 21. 07-6. Insurers are issued certificates of authority under the insurance code and it is the insurer's certificate of authority that allows the insurer to perform TPA services. The insurers acting as TPAs are clearly administrators that are covered by certificates of authority issued by the Texas Department of Insurance and are subject to maintenance taxes on the service fees they collect. Section 7.1606 Comment: One commenter believes that subsection (a) of sec.7.1606 does not clearly state which TPAs are exempt from department regulation and licensing in that the proposed subsection uses a definition which covers all ERISA plans both self-funded and fully insured. The commenter recommended clarifying the definition of exempt plans by adding the language "and governed exclusively by ERISA" after the definition. Agency Response: The Department agrees and has changed the section to include this language. Comment: One commenter objects to the use of the word "solely" in subsection (a) of sec.7.1606. The commenter points out that the use of the word "solely" implies that a TPA's administration of non-ERISA plans and fully insured plans subjects the self-funded ERISA plans it also administers to department regulation. Agency Response: The Department agrees and has changed the subsection to delete the word "solely" in order to clarify that TPAs who administer all three types of plans will be exempt in their capacity as administrators of self-funded ERISA plans. Comment: One commenter objects to the procedure set out in sec.7.1606(a) requiring TPAs to request an ERISA exemption. The commenter believes that it is not consistent with federal ERISA preemption, for the Department to make a status determination regarding whether a TPA administers a self-funded ERISA plan. The commenter further argues that since the Department does not have the authority to make a status determination regarding self-funded ERISA plans, the provision that the exemption approval will expire in 12 months should also be deleted. The commenter recommends that sec.7.1606(a) be changed to delete the language regarding the Department's determination of exempt status and that language be added to require TPAs to provide the Department with notice of their exempt status, to be updated annually. Agency Response: The Department agrees and has changed the section to provide for a notice requirement with a yearly update rather than determination of status by the Department with a 12-month expiration period. Comment: commenters object to the requirement in subsection (b) of sec.7. 1606 requiring refiling of the same materials giving notice of exemption on an annual basis. One commenter recommends that the TPA update the prior year's filing as to any new self-funded ERISA plans administered or as to any plans no longer administered by the TPA. Agency Response: The Department agrees and has changed the section accordingly. Comment: One commenter points out that it is unclear from sec.7.1606 and sec.7.1608 whether fees have been waived only for the filing of a notice of exemption or for on-site visits and filing of annual reports as well. Agency Response: The Department agrees and has changed the sections to clarify that fees are waived for the filing of TPA Form 7, Notification of Exemption Form, and are not waived for on-site visits and filing of annual reports. Section 7.1607 Comment: One commenter argues that sec.7.1607(a)-(c) imposes onerous burdens upon insurers acting in their capacity as TPAs of self-funded ERISA plans. The commenter argues that the regulatory provisions in sec.7.1609 (Prohibited Transactions), sec.7.1610 (On-Site Visits), and sec.7. 1611 (Cease and Desist Orders) are not limited to non-ERISA matters and therefore regulate TPAs in their capacity as administrators of self-funded ERISA plans. Agency Response: The Department disagrees. Sections 7.1607, 7.1609, 7.1610 and 7.1611 should not be read in isolation from the rest of Subchapter P. Each section of the subchapter must be considered in connection with every other section in order to produce a harmonious whole. A fundamental rule of construction requires that a subchapter be construed as a whole and not by reference to an isolated section of the subchapter. If sec. sec. 7.1607, 7.1609, 7. 1610 and 7.1611 are construed in conjunction with sec.7.1606(a), which gives an exemption to insurers in their capacity as administrators of self-funded ERISA plans, it is clear that insurers functioning in their capacity as TPAs of ERISA governed plans are exempt from the regulation outlined in sec.sec. 7.1607, 7. 1609, 7.1610 and 7.1611. Comment: One commenter believes that the language in sec.7.1607(a) and (b) is unclear, as to whether insurers that are generally subjected to the provisions of Subchapter P, includes insurers who administer only their own policies. The commenter further believes that it is unclear whether the category of insurers described in subsection (a) is intended to refer to or intended to incorporate the exemptions contained in subsection (b). Agency Response: The Department disagrees. Subsection (a) clearly defines the class of insurers that would be subject to regulation under Subchapter P and subsection (b) clearly states the types of insurer operations and activities in paragraphs (1) and (3) that are exempt from regulation under Subchapter P. The Department disagrees that it is unclear whether the word "insurer" in subsection (a) is intended to refer to or intended to incorporate the exemptions in subsection (b) because the language of subsection (a) clearly shows that the term "insurer" both refers to and incorporates the exemptions in subsection (b). Forms Comment: One commenter expressed objection to the use of TPA Form 7 in that it implied the form was to be submitted to the Department for approval of the plan's status as a self-funded ERISA plan. The commenter suggested inserting "SELF-INSURED" in the phrase 'NUMBER OF QUALIFIED ERISA PLANS ADMINISTERED' as a way to remedy the objection to the form. Agency Response: The Department agrees and has changed the form by inserting the phrase "SELF-FUNDED" rather than "Self-Insured" as suggested. Comment: One commenter objected to the requirement that the ERISA plan sponsor execute TPA Form 7A in that it would impose a state filing requirement on a self-funded ERISA plan which is precluded by federal law. Agency Response: The Department agrees and further found that the information reported on TPA Form 7A was a duplication of information being reported on TPA Forms 2A, 6, and 7. For these reasons TPA Form 7A has been deleted. Comment: One commenter expressed concern regarding Form 2A, sec.4(f) which requests the number of Texas "participants" covered by the plans administered. The word "participants" would include the number of covered dependents of the employees and many TPAs do not obtain census information on specific dependents and may not know the number of dependents covered. The commenter recommends adding a provision to item (f) allowing for estimates of the number of dependents where the information is not available. Agency Response: The Department agrees and has added this provision to TPA Form 2A. These sections are adopted pursuant to the Insurance Code, Articles 21.07-6, 1.02, 1.03A, and 1.04C; and the Government Code, sec.2001.004, et seq. Article 21.07-6, which regulates third-party administrators, authorizes the State Board of Insurance to promulgate reasonable rules and regulations that are appropriate to accomplish the purposes of the article. This rulemaking authority is interpreted to be delegated to the Commissioner of Insurance under Article 1.02 of the Insurance Code, which provides that a reference in the Insurance Code or another insurance law to the State Board of Insurance means the Commissioner of Insurance or the Texas Department of Insurance, as consistent with the respective powers and duties of the Commissioner and the Department under Article 1.02. Article 1.03A, provides that the Commissioner of Insurance may adopt rules and regulations, which must be for general and uniform application, for the conduct and execution of the duties and functions of the Texas Department of Insurance only as authorized by a statute. Article 1.04C of the Insurance Code requires the Commissioner of Insurance to develop and implement policies that provide the public with a reasonable opportunity to appear before the Commissioner and to speak on any issue under the Commissioner's jurisdiction. The Government Code, sec.2001.004, et seq. (Administrative Procedure Act) authorizes and requires each state agency to adopt rules of practice setting forth the nature and requirement of available procedures and to prescribe the procedures for adoption of rules by a state agency. sec.7.1602. Forms Relating to Regulation and Exemption of Administrators Under the Insurance Code, Article 21.07-6. The Texas Department of Insurance adopts and incorporates herein by reference standard administrator forms for use in the regulation and exemption from regulation of administrators. Applicants and licensed administrators are required to utilize these forms in preparing applications, notification of exemptions, statements, notices of required information, and other submissions required under the Insurance Code, Article 21.07-6, and this subchapter. These forms are published by the Texas Department of Insurance and may be obtained from the Third-Party Administrator Unit, Mail Code 105-6A, Texas Department of Insurance, P.O. Box 149104, 333 Guadalupe, Austin, Texas 78714-9104. These forms are more specifically identified in paragraphs (1)-(9) of this subsection: (1) TPA Form Number 1, Name Application; (2) TPA Form Number 1A, Assumed Name Certificate; (3) TPA Form Number 2, Application for Certificate of Authority; (4) TPA Form Number 2A, Supplemental Information/Annual Report; (5) TPA Form Number 3, Officers and Directors Page; (6) TPA Form Number 4, Biographical Affidavit; (7) TPA Form Number 5, Service of Process; (8) TPA Form Number 6, Identification and Reporting of Certain Insurers and Health Maintenance Organizations; and (9) TPA Form Number 7, Notification of Exemption Form. sec.7.1606. Exemption from Department Licensing and Regulation for Certain Administrators. (a) An administrator who is acting as the administrator of employee benefit plans, described in 29 U.S.C. sec.1003(a) and governed exclusively by ERISA, is exempt from regulation under the Insurance Code, Article 21.07-6, with regard to such plans. The administrator is subject to the Insurance Code, Article 21.07-6, with regard to all other plans, including multiple employer welfare arrangements described in 29 U.S.C. sec.1144(b)(6)(A)(ii). Administrators who administer employee benefit plans, as described in 29 U.S.C. sec.1003(a) and governed exclusively by ERISA, must notify the Texas Department of Insurance of their exempt status. To give notification of exempt status: (1) third-party administrators who only administer employee benefit plans described in 29 U.S.C. sec.1003(a) and governed exclusively by ERISA shall give notification of exempt status on TPA Form 7, Notification of Exemption Form. (2) licensed third-party administrators, other than insurers and health maintenance organizations, who administer not only employee benefit plans described in 29 U.S.C. sec.1003(a) and governed exclusively by ERISA but also non-ERISA employee benefit plans shall give notification of exempt status on TPA Form 2A, Supplemental Information /Annual Report. (3) insurers and health maintenance organizations who administer not only employee benefit plans described in 29 U. S.C. sec.1003(a) and governed exclusively by ERISA but also non-ERISA employee benefit plans shall give notification of exempt status on TPA Form 6, Identification and Reporting of Certain Insurers and Health Maintenance Organizations. (b) There shall be no filing fee for the filing of TPA Form 7, Notification of Exemption Form. The third-party administrator shall, on an annual basis, provide any updated information with regard to the prior year's filing, including the number of ERISA plans no longer administered and the number of new ERISA plans administered by the third-party administrator. sec.7.1608. Fees. The commissioner shall collect, and the person affected shall pay to the commissioner, the fees set forth in paragraphs (1)-(3) of this section. No fee shall be collected from an administrator for filing TPA Form 7, Notification of Exemption Form. (1) Filing fee for processing an original application for a certificate of authority-$500; (2) On-site visit examination fee as specified in the Insurance Code, Article 21.07-6, sec.8-$250; and (3) Filing fee for annual report-$100. sec.7.1610. On-Site Visits. (a) The commissioner or his designated representative is authorized to make a complete on-site visit examination of the affairs of each licensed administrator as often as is deemed necessary. (b) Administrators will be notified of the scheduled on-site visit by letter, which will specify, as a minimum, the identity of the commissioner's designated representative and the expected arrival date and time. (c) The administrator must make available during such on-site visits all books and records relating to its operation, including but not limited to, the information specified in paragraphs (1) and (2) of this subsection: (1) complete copies of any written agreements as defined in the Insurance Code, Article 21.07-6, sec.11; and (2) financial statements. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 24, 1994. TRD-9447080 D. J. Powers Counsel and Chief Clerk Texas Department of Insurance Effective date: September 14, 1994 Proposal publication date: April 29, 1994 For further information, please call: (512) 463-6327 TITLE 37. PUBLIC SAFETY AND CORRECTIONS Part VI. Texas Department of Criminal Justice Chapter 157. State Jail Felony Facilities 37 TAC sec.sec.157.1, 157.3, 157.11, 157.12, 157.13 The Texas Department of Criminal Justice adopts the repeal of sec.sec.157.1, 157.3, 157.11, 157.12, and 157.13, concerning admissions into, and allocation of, state jail felony facility beds, without changes to the proposed text as published in the May 31, 1994, issue of the Texas Register (19 TexReg 4247). The repeals are permitted by Government Code, Chapter 507, sec.492.013(a). The effect of the repeals is to make way for clarification of policies on state jail felony facilities under a separate proposal. No comments were received regarding adoption of the repeals. The repeals are permitted by Government Code, Chapter 507, sec.492.013(a), which respectively, give the Board of Criminal Justice authority to adopt rules and govern the implementation of state jail felony facilities. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on August 5, 1994. TRD-9447078 Carl Reynolds Board General Counsel Texas Department of Criminal Justice Effective date: September 13, 1994 Proposal publication date: May 31, 1994 For further information, please call: (512) 463-9693