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 4. AGRICULTURE Part I. Texas Department of Agriculture Chapter 1. General Procedures Subchapter D. Miscellaneous Provisions 4 TAC sec.1.85 The Texas Department of Agriculture (the department) adopts new sec.1.85, concerning agency motor vehicles exempt from the requirement of displaying identification or inscription, without changes to the proposed text as published in the February 27, 1996, issue of the Texas Register (21 TexReg 1428). The new section provides for the department's exemption of certain agency vehicles from the requirement of having the word "Texas" and the department's name printed on each side of the motor vehicles. The new section will designate exempt vehicles, describe the department's purpose for not printing the inscription on the vehicles and state the primary use of the exempt motor vehicles. No comments were received regarding adoption of the new section. The new section is proposed under the Texas Transportation Code, sec.721.002, which requires inscription on state-owned motor vehicles and sec.721.003, which allows exemption from the inscription requirement. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605829 Dolores Alvarado Hibbs Deputy General Counsel Texas Department of Agriculture Effective date: May 17, 1996 Proposal publication date: February 27, 1996 For further information, please call: (512) 463-7583 TITLE 7. BANKING AND SECURITIES Part I. State Finance Commission Chapter 3. Banking Section Subchapter A. Securities Activities and Subsidiaries 7 TAC sec.sec.3.1, 3.3, 3.4 The Finance Commission of Texas (the commission) adopts amendments to sec.sec.3.1, 3.3, and 3.4, concerning securities activities and subsidiaries. Amendment to sec.3.3 is adopted with changes to the proposed text as published in the February 20, 1996, issue of the Texas Register (21 TexReg 1331). Amendments to sec.3.1 and sec.3.4 are adopted without changes to the proposed text and will not be republished. Amendments to sec.sec.3.1, 3.3, and 3.4 are necessary to conform references from the repealed Texas Banking Code to the recently enacted Texas Banking Act. Texas Civil Statutes, Articles 342-101 through 342-1011 (The Texas Banking Code, Chapters I-X) were repealed by the 74th Legislature and replaced by Texas Civil Statutes, Articles 342-1.001 et seq (Texas Banking Act, sec.sec.1.001 et seq) (the Act). As adopted, sec.3.1(b) provides that a state-chartered bank may not acquire equity securities for which it has acted as agent or broker under this section, except as provided under the Act. The prior version of this section referred to the now repealed Texas Banking Code. Amendments to sec.3.3 conform a reference to the Texas Banking Code to the Act, modify investment limitations to conform to the Act, and renumber within the section for clarity. Finally, the amendment to sec.3.4(c) changes a reference to the Texas Banking Code to the comparable provision in the Act. Comments were received from Texas Bankers Association (TBA) and the State Securities Board, neither of which was against adoption of the amendments. TBA requests clarification that the term "subsidiary" includes more than corporate subsidiaries, and the agency concurs. The text as adopted deletes the word "corporation" after "subsidiary" in sec.3.3(c) to include non-corporate subsidiaries within the scope of the section. An employee of the State Securities Board telephoned to emphasize that a state bank and its subsidiaries must comply with the licensing requirements of Texas Civil Statutes, Articles 581-1 et seq, to engage in broker-dealer or investment advisor activities. The agency concurs and has inserted appropriate reference to the State Securities Board in sec.3.3(a) and sec.3.3(c). The amendments are adopted pursuant to the commission's rule-making authority under the Act, sec.1.012(a)(1), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify the Act. As required by the Act, sec.1.012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. sec.3.3. Securities Activities of Subsidiaries of State Banks. (a) Securities activities permitted. Pursuant to Texas Civil Statutes, sec.342-5.103(c), and subject to the provisions of 12 Code of Federal Regulations (CFR), sec.337.4, a state bank may establish or acquire a subsidiary that engages in securities activities; provided, however, that said subsidiary shall comply with all rules and regulations of the Securities and Exchange Commission and the State Securities Board applicable to registered brokers- dealers and investment advisors. The term "securities activities" means issuing, underwriting, selling, or distributing, or acting as agent or advisor in the issuing, underwriting, selling, or distributing of stocks, bonds, debentures, notes, or other securities. (b) Investment ceiling. Pursuant to Texas Civil Statutes, Article 342-5. 103(b), a state bank may invest not more than 10% of its capital and certified surplus in a subsidiary engaged in securities activities that the bank is prohibited from conducting directly. (c) Capitalization. Any subsidiary engaged in securities activities pursuant to this regulation must comply with any applicable state and federal capital requirements including, but not limited to, those imposed by the Securities and Exchange Commission, the State Securities Board, or the National Association of Securities Dealers. (d) Limitations. (1) Unless otherwise permitted by Texas Civil Statutes, Articles 342-1. 001 et seq, a subsidiary of a state bank must dispose of any equity securities acquired for its own account within 90 days after the day of purchase. (2) A state bank may not purchase, in its discretion as fiduciary or managing agent, any security underwritten, distributed, or issued by the bank's securities subsidiary or any security issued by an investment company advised by the subsidiary. (e) Notice. A state bank must file with the banking commissioner copies of all notices required to be filed with the Federal Deposit Insurance Corporation under the provisions of 12 CFR, sec.337.4, or any successor regulation. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605809 Everette D. Jobe General Counsel, Texas Department of Banking State Finance Commission Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 Subchapter B. General 7 TAC sec.3.21 The Finance Commission of Texas (the commission) adopts new sec.3.21, concerning reports of financial condition and results of operations, more commonly referred to as "call reports," by state banks subject to regulation by the Banking Commissioner of Texas (commissioner), with changes to the proposed text as published in the February 20, 1996, issue of the Texas Register (21 TexReg 1332). The new section draws a distinction between state banks subject to Federal Deposit Insurance Corporation (FDIC) regulation and those which are not. Subsection (b) provides that a state bank subject to FDIC regulation need not file a call report with the commissioner in that the filing of the call report as required by the Federal Deposit Insurance Act (12 United States Code (USC), sec.sec.1811 et seq) and the Federal Financial Institutions Examination Council (FFIEC) is deemed a filing with the commissioner. Subsection (c) provides that all other state banks (i.e., those not subject to FDIC regulation) must file quarterly call reports with the commissioner by the same due dates in substantially the same form and manner and containing the same information as is required of FDIC-regulated state banks. As adopted, sec.3.21(d) requires a state bank to file special call reports as may be requested by the commissioner to permit discharge of the commissioner's duties to monitor the safety and soundness of the bank. The provision may be invoked, for example, to more frequently monitor the affairs of a problem bank or require a detailed report on a particular line of business of concern to the commissioner. The section also requires in subsection (e) that all call reports and special call reports contain certain declarations and attestations, and sec.3. 21(f) specifies that call reports (but not special call reports) must be posted in the lobby of the state bank at a location accessible to the public. Subsection (g) provides that the public portion of call reports filed or deemed filed with the commissioner are public information. Special call reports and the non-public portions of all other call reports are confidential. Finally, sec.3.21(h) sets out the penalties for late filings, failures to file, and false or misleading filings. The agency received one written comment regarding the proposed section from the Texas Bankers Association (TBA). TBA made several suggestions requesting changes to the proposed rule. However, TBA generally does not oppose the adoption of this section. Two suggestions by TBA resulted in changes to the adopted section. (1) TBA suggested deleting the phrase "with the FDIC" as proposed in sec.3. 21(b). TBA suggested the change because federal law requires that call reports of FDIC member banks be filed with the appropriate Federal Reserve Bank. The agency reviewed this suggestion and has made the requested change. (2) TBA also suggested deleting the three director attestation requirements in sec.3.21(e). Alternatively, it was requested that the director attestation requirement be reduced to two directors from three in conformance with current requirements for state non-member banks. TBA also noted that proposed federal regulatory relief legislation would eliminate the three director attestation requirement for national banks. After review, that agency revised sec.3.21(e) to require attestation by two directors to be consistent with federal requirements for state non-member banks. TBA also made certain suggestions which, after thorough examination, the agency rejected without making the requested changes. (1) TBA was concerned that the last sentence of sec.3.21(c) could be construed as requiring some banks to file two sets of call reports. Basically, the provision authorizes the banking commissioner to make modifications and additions to call report form and contents. The agency reviewed this suggestion and declines to make any change to the text as proposed. The primary purpose of the provision at issue is to allow the banking commissioner the flexibility to change or modify call report form and content for non-FDIC insured entities to mirror FDIA and FFIEC guidelines and requirements as needed. (2) Finally, TBA recommended modifying sec.3.21(h) to protect banks from liability as a result of inadvertent error or unintentional mistakes by adding a scienter requirement to the provision. The agency has reviewed this proposal and is of the opinion that no change is warranted. Section 3.21(h) provides, in pertinent part, that a regulated bank which fails to make, file, timely file, or submit a call report or special call report as provided by the section "is subject to a penalty not exceeding $500 a day." Because of the extensive confidentiality that attaches to bank information, the agency believes that regulated banks bear a heavy duty to insure that publicly available information is accurate and, under certain conditions, a penalty is appropriate even if a violation is inadvertent. The agency further notes that the banking commissioner has discretion regarding whether to seek enforcement of a penalty on a case-by- case basis. The new section is adopted under the Act, sec.1.012, which authorizes the commission to adopt rules to implement and clarify the Act, to preserve the safety and soundness of state banks, and to grant the same rights and privilege to state banks that are or may be granted to national banks domiciled in Texas. The new section is also adopted under the Act, sec.2.009(b), which authorizes the commission to adopt rules specifying the form of a call report, including specified confidential and public information; to require public information in call reports of state banks to be published at the times and in the publications and locations the commission determines; and to require call reports to be filed with the commissioner. As required by the Act, sec.1.012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. sec.3.21. Bank Call Reports. (a) Definitions. The following words and terms, when used in this section shall have the following meanings, unless the context clearly indicates otherwise. (1) Act-Texas Civil Statutes, Articles 342-1.001 et seq (Texas Banking Act, sec.sec.1.001 et seq). (2) Commissioner-The Banking Commissioner of Texas. (3) Call report-A report of condition and income in FFIEC form as required by 12 United States Code (USC), sec.1817, or a report of financial condition and results of operations of a state bank as mandated by the commissioner pursuant to the Act, sec.2.009. (4) Department-The Texas Department of Banking. (5) FDIA-The Federal Deposit Insurance Act (12 USC, sec.sec.1811 et seq). (6) FDIC-The Federal Deposit Insurance Corporation. (7) FFIEC-The Federal Financial Institutions Examination Council. (8) State bank-A bank as defined by the Act, sec.1.002(a)(51). (b) Reporting requirements of FDIA regulated state banks. Each state bank which is subject to regulation under FDIA will be considered to have filed a copy of its call report with the commissioner if the state bank has filed its call report pursuant to FDIA and FFIEC guidelines and requirements. (c) Reporting requirements for non-FDIA regulated entities. Each state bank not subject to subsection (b) of this section shall file four call reports annually with the commissioner. Such call reports must be filed with the commissioner no later than April 30, July 31, and October 31 of each year and by January 31 of the subsequent year, and shall be for the periods ending on March 31, June 30, September 30, and December 31, respectively, of the annual reporting year. The call reports required under this subsection must be in substantially the same form and contain substantially the same information as call reports filed by FDIA-regulated state banks in accordance with FDIA and FFIEC requirements pursuant to subsection (b) of this section. The call report forms, the instructions for completing the reports and the accompanying materials will be furnished to all state banks subject to this subsection, or may be obtained upon request from the Bank and Trust Division, Texas Department of Banking, 2601 North Lamar Boulevard, Austin, Texas 78705-4294. The commissioner may make such modifications and additions to call report form and contents under this subsection as considered necessary in the discretionary discharge of the commissioner's duties, notwithstanding FDIA and FFIEC guidelines and requirements. (d) Special call reports. In addition to the requirements of subsections (b) and (c) of this section, the commissioner may require a state bank to file and submit a special call report, in such form and manner and containing such information as may be requested, on dates fixed, whenever in the commissioner's discretion the special call report is necessary in the performance of the commissioner's supervisory duties related to the safety and soundness of the state bank. Special call reports must contain only such information as is specifically requested by the commissioner. (e) Call report declarations and attestations. Each call report or special call report required to be filed under subsections (c) and (d) of this section must contain a declaration by the president, a vice president, the cashier, or by another officer designated by the board of directors of the state bank to make such declaration, that the report is true and correct to the best of such individual's knowledge and belief. The correctness of the call report or special call report must also be attested by the signatures of at least two of the directors of the state bank other than the officer making the declaration. The declaration of the directors must state that the call report or special call report has been examined by them and is true and correct to the best of their knowledge and belief. (f) Lobby notice and publication. The latest call report filed with the commissioner pursuant to subsections (b) and (c) of this subsection must be posted in the lobby of the state bank at a point accessible to the public. A state bank is not required to publish its call report in a newspaper or other media unless specifically directed to do so by the commissioner. A state bank required to publish its call report by the commissioner shall publish the report in a newspaper or other medium of general circulation as directed by the commissioner. (g) Confidentiality. Pursuant to the Act, sec.2.101, call reports filed under subsections (b) or (c) of this section are public information to the extent that such reports are considered public records under the FDIA, implementing federal regulations, and FFIEC guidelines, and may be published or otherwise disclosed to the public. Special call reports filed pursuant to subsection (d) of this section and non-public portions of call reports filed pursuant to subsections (b) or (c) of this section are confidential, subject only to such disclosure as may be permitted by the Act, sec.sec.2.102-2.108, or by sec.3.111 of this title (relating to Confidential Information). (h) Penalties for failure to file or for filing a report with false or misleading information. A state bank which fails to make, file, or submit a call report or a special call report or fails to timely file a call report or special call report as required by this section is subject to a penalty not exceeding $500 a day to be collected by the attorney general on behalf of the commissioner. Any state bank which makes, files, submits or publishes a false or misleading call report or special call report is subject to an enforcement action pursuant to the Act, Chapter 6. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605810 Everette D. Jobe General Counsel, Texas Department of Banking State Finance Commission Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 7 TAC sec.3.22 The Finance Commission of Texas (the commission) adopts the repeal of sec.3.22, concerning restrictions on loan fees on certain categories of loans, without changes to the proposal as published in the February 20, 1996, issue of the Texas Register (21 TexReg 1333). A new sec.12.32 in this title is adopted in this issue of the Texas Register to address permissible loan fees. The repeal is necessary because of changes in law made regarding loan fees as a result of the recent enactment of Texas Civil Statutes, Articles 342-1. 001 et seq (Texas Banking Act, sec. sec.1.001 et seq) (the Act), particularly by the Act, sec.5.202. Required amendments are sufficiently extensive to warrant repeal and replacement of sec.3.22 by a new section. No comments were received regarding the proposed repeal. The repeal of this section is adopted pursuant to rulemaking authority under the Act, sec.1.012(a)(1), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify the Act. As required by the Act, sec.1.012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. Issued in Austin, Texas, on April 26, 1996. TRD-9605811 Everette D. Jobe General Counsel, Texas Department of Banking State Finance Commission Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 7 TAC sec.3.35 The Finance Commission of Texas (the commission) adopts an amendment to sec.3.35, concerning safe deposit box facilities, to change references from the repealed Texas Banking Code to the recently enacted Texas Banking Act, without changes to the proposed text as published in the February 20, 1996, issue of the Texas Register (21 TexReg 1334). Texas Civil Statutes, Articles 342-101 through 342-1011 (The Texas Banking Code, Chapters I-X) were repealed by the 74th Legislature and replaced by Texas Civil Statutes, Articles 342-1. 001 et seq (Texas Banking Act, sec.sec.1.001 et seq) (the Act). Amendments to sec.3.35(a) and (f) are designed to change references to the Texas Banking Code to comparable provisions in the Act for clarity. No comments were received regarding the proposed amendments. Amendment of this section is adopted pursuant to the commission's rule-making authority under the Act, sec.1.012(a)(1), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify the Act. As required by the Act, sec.1.012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605812 Everette D. Jobe General Counsel, Texas Department of Banking State Finance Commission Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 Chapter 4. Currency Exchange Subchapter A. General 7 TAC sec.4.6 The Finance Commission of Texas (the commission) adopts the amendment of sec.4.6, concerning license exemptions available to armored car services or other courier services engaged in the business of transporting currency or other items for deposit or payment, without changes to the proposal published in the February 20, 1996, issue of the Texas Register (21 TexReg 1334). As amended, subsection (d) implements the Texas Legislature's intent to exempt licensed armored car services or other courier services from the licensing requirements of Texas Civil Statutes, Article 350, by clarifying that, subsequent to the repeal of Article 911b, an armored car service or other courier service, to be exempt under Texas Civil Statutes, Article 350, sec.3(f), must be registered and licensed under Texas Civil Statutes, Article 4413(29bb), and Article 6675c. No comments were received regarding amendment of this section. Amendment to this section is made under Article 350, sec.7, which authorizes the commission to adopt implementing rules. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605813 Everette D. Jobe General Counsel, Texas Department of Banking State Finance Commission Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 Part II. Texas Department of Banking Chapter 10. Trust Companies General 7 TAC sec.sec.10.4, 10.10, 10.11 The Finance Commission of Texas (the commission) adopts amendments to sec.sec.10.4, 10.10, and 10.11, concerning advertising, requirements applicable to applying for and maintaining status as an exempt trust company, and revocation of exempt trust company status, respectively. Section 10.10 and sec.10.11 are adopted with nonsubstantive changes to the proposed text as published in the February 20, 1996, issue of the Texas Register (21 TexReg 1335). Section 10.4 is adopted without changes and the text will not be republished. Amendments to sec.10.4 forbid, with exceptions, the use of certain terms in a business name or advertisement without written approval of the banking commissioner, provide additional notice that violation of this section is subject to enforcement action under Texas Civil Statutes, Article 342-6.201, and make other changes for clarification. The section as amended represents an adaptation of Texas Civil Statutes, 342-8.004, to the trust company industry, applicable to trust companies pursuant to Texas Civil Statutes, Article 342- 1102. Amendments to sec.10.10 and sec.10.11 change citations in these sections to references from repealed provisions of The Texas Banking Code to conform to the recently enacted Texas Banking Act. Texas Civil Statutes, Articles 342-101 through 342-1011 (The Texas Banking Code, Chapters I-X) were repealed by the 74th Legislature and replaced by Texas Civil Statutes, Articles 342-1.001 et seq (Texas Banking Act, sec.sec.1.001 et seq) (the Act). Also, the definition of "direct family member" in sec.10.10(a) has been amended to refer to the fourth degree of affinity or consanguinity. Previously, sec.10.10(a) limited the term to the second degree of affinity or consanguinity. The agency received no comments on its proposal to amend these sections. Changes were made to the text of sec.10.10 and sec.10.11 as proposed for the purpose of correcting typographical errors and to add the title of a section incorporated by cross-reference. The amendments are adopted pursuant to the commission's rule-making authority under the Act, sec.1.012(a)(1), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify the Act, and (with respect to proposed sec.10.4) under Texas Civil Statutes, Article 342-1106(b), which authorizes the commission to promulgate "general rules and regulations as may be necessary to accomplish the purposes" of Texas Civil Statutes, Articles 342-1101 et seq. sec.10.10. Requirements to Apply for and Maintain Status as Exempt Trust Company. (a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (1) Act-Texas Civil Statutes, Articles 342-1.001 et seq (Texas Banking Act, sec.sec.1.001, et seq). (2) (No change.) (3) Code-Texas Civil Statutes, Articles 342-1101 et seq. (4) Commissioner-The Banking Commissioner of Texas. (5) Control-To own or possess the power to vote 25% or more of the voting securities of the exempt trust company or to have the ability to control in any manner the election of a majority of the board of directors of the exempt trust company. (6) Department-The Texas Department of Banking. (7) Direct family member-Any person who is related within the fourth degree of affinity or consanguinity to a person who controls an exempt trust company. (8) Examination-The process of verifying the annual certification of exempt status under the Code, either by a field examination or an internal department review of exempt trust company records and reports in lieu of a field examination. (9) Exempt trust company-A trust company which has been granted an exemption by the commissioner, is current in filing annual certifications of exempt status with the department, and is not currently transacting business with the general public. (10) Transact business with general public-Any sales, solicitations, arrangements, agreements, or dealings to provide trust or other business services, whether or not for a fee, commission, or any other type of remuneration, with any individual that is not a direct family member, or a sole proprietorship, partnership, joint venture, association, trust, estate, business trust, or corporation that is not 100% owned by one or more direct family members. (b) Application for trust company exemption. (1) A trust company requesting an exemption under the Code, Article 342-1103, sec.6, shall file an application with the commissioner containing the following: (A) -(E) (No change.) (2) (No change.) (c) Requirements to maintain exemption status under the Code. (1) To maintain status as an exempt trust company under the Code, the trust company shall comply with the following: (A)-(B) (No change.) (C) An exempt trust company shall comply with the provisions of sec.15.62 of this title (relating to Exempt Trust Companies). Requests for change of home office shall comply with the address and telephone requirements of subsection (b)(1)(E) of this section. (D) (No change.) (2) (No change.) (d) (No change.) sec.10.11. Revocation of Exempt Trust Company Status. (a) (No change.) (b) Authority to revoke. The commissioner shall have authority to revoke the exempt status of a trust company in the following circumstances: (1) (No change.) (2) the exempt trust company makes a false statement under oath on any document required to be filed by the Code or by any rule promulgated by the department; or (3) (No change.) (4) the exempt trust company fails to comply with sec.15.62 of this title (relating to Exempt Trust Companies), or with the address and telephone requirements of sec.10.10(b)(1)(E) of this title (relating to Revocation of Exempt Trust Company Status); or (5)-(6) (No change.) (7) the exempt trust company violates any provision of the Code or Act applicable to exempt trust companies; or (8) (No change.) (c) Notification of revocation of exemption. If the commissioner finds that an exempt trust company has violated any of the requirements of the Code or subsection (b) of this section, the commissioner may revoke the trust company's exemption by notifying the company by certified mail, hand delivery, or express mail service that the trust company's exempt status has been revoked. The revocation of exempt trust company status shall be effective upon mailing of the notification by the commissioner or at the time the commissioner delivers the notification to the carrier for hand or express delivery. Once the notification is effective, the trust company shall be subject to all of the requirements and provisions of the Code and Act applicable to non-exempt trust companies. (d) Compliance period. A trust company shall have five calendar days after the notice is effective to comply with all of the provisions of the Code and Act applicable to non-exempt trust companies, including such capitalization requirements as shall be determined by the commissioner to be necessary to assure the safety and soundness of the trust company. If, however, the commissioner determines, at the time of revocation, that the trust company has been engaging in or attempting to engage in acts intended or designed to deceive or defraud the general public, the commissioner may waive, in the commissioner's sole discretion, the five calendar day compliance period. In case of such fraudulent or deceptive activities, the commissioner may immediately initiate action under the Code, or as provided in subsection (e) of this section. (e) Remedies for failure to comply. If the trust company does not comply with all of the provisions of the Code and Act, including such capitalization requirements as have been determined by the commissioner as necessary to assure the safety and soundness of the trust company, within the five-calendar-day period, the commissioner may institute one or more of the following actions as soon as practicable: (1) place the trust company into supervision or in conservatorship in accordance with the Code; or (2)-(4) (No change.) (5) take any other action or remedy prescribed by the Code, the Act, or any applicable rule or regulation. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605799 Everette D. Jobe General Counsel Texas Department of Banking Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 Chapter 11. Miscellaneous The Finance Commission of Texas (the commission) adopts the repeal of sec.sec.11.1-11.5, 11.21-11.26, 11.41-11.48, and 11.82, concerning miscellaneous banking regulatory matters, without changes to the proposal published in the February 20, 1996, issue of the Texas Register (21 TexReg 1337). Remaining in Chapter 11 are sec.sec.11.27, 11.81, and 11.83, which contain currently useful guidance although it is likely these sections will be amended and relocated in the near future. Repealed sections are published separately in groups organized by undesignated head as required by the Texas Register , preceded by this common preamble. The repeal is necessary because of changes in law made regarding bank regulation as a result of the recent enactment of Texas Civil Statutes, Articles 342-1.001 et seq (Texas Banking Act, sec.sec.1.001 et seq) (the Act), but primarily because the sections repealed have not been reviewed in several years and by recent examination have been determined to be outdated and obsolete as discussed further in this preamble. One comment was received from Texas Bankers Association (TBA) regarding the repeal of sec.sec.11.41-11.48 and 11.82, as discussed further in this preamble. TBA generally does not oppose the repeal. Sections 11.1-11.5 governed real estate loans. The statutory underpinning for these sections has been amended on several occasions in such a way as to render these sections obsolete. Real estate loans are now heavily regulated by federal law such as 12 Code of Federal Regulations (CFR), sec.sec.34.1 et seq, 12 CFR, sec.sec.225.61 et seq, and by 12 CFR, sec.sec.365.1 et seq, among others. Sections 11.21-11.26 were general sections setting out definitions and procedures that are now set forth elsewhere, establishing penalties for inadequate reserves, an area regulated by the Board of Governors of the Federal Reserve System, and certain other matters, all of which are now obsolete. Opinion requests to the banking commissioner were governed by sec.sec.11.41-11. 48 and these sections were not followed in practice. These sections were therefore superfluous. TBA, while acknowledging that these sections are not followed in practice, suggested that rules governing requests for formal opinions may be useful in the future. The agency agrees that such rules could be useful in the future and will consider the issue, but declines to delay repeal of sec.sec.11.41-11.48. Finally, sec.11.82 governed certain investments by banks that the agency believes are clearly permissible under the Act. TBA notes that sec.11.82(c) characterized resale or repurchase agreements as not constituting borrowings or obligations. However, TBA observes that the Act, sec.5.201(a)(7), exempts a repurchase agreement from legal lending limit analysis only to the extent that the agreed repurchase price does not exceed the original purchase price to the bank or the market value of the underlying security. TBA requests clarification, suggesting that the Act, sec.5.201(a)(7), does not reflect modern usage of repurchase agreements by state banks. The Act, sec.5.201(a)(7), is comparable to the law applicable to national banks. According to the Federal Financial Institutions Examination Council Supervisory Policy on Repurchase Agreements, attached to Banking Circular No. 210, published October 31, 1985, by the Office of the Comptroller of the Currency (OCC), "the market value of securities sold under a repurchase agreement in excess of the amount of proceeds received by the depository institution could be viewed as an unsecured extension of credit to the repurchase agreement counterparty subject to the depository institution's lending limits." The application of legal lending limits to national bank repurchase agreements was confirmed most recently by OCC Interpretive Letter 629 (July 2, 1993). The primary purpose of sec.11.82(c) was to exempt repurchase agreements from the now repealed borrowing limits of Texas Civil Statutes, Article 342-602. The agency therefore adopts the repeal of sec.11.82, but will inquire regarding modern usage of repurchase agreements by state banks. Real Estate Loans 7 TAC sec.sec.11.1-11.5 The repeals are adopted pursuant to rulemaking authority under the Act, sec.1.012(a)(1), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify the Act. As required by the Act, sec.1. 012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605800 Everette D. Jobe General Counsel Texas Department of Banking Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 General 7 TAC sec.sec.11.21-11.26 The repeals are adopted pursuant to rulemaking authority under the Act, sec.1.012(a)(1), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify the Act. As required by the Act, sec.1. 012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605801 Everette D. Jobe General Counsel Texas Department of Banking Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 Formal Opinions 7 TAC sec.sec.11.41-11.48 The repeal of these sections is proposed pursuant to rulemaking authority under the Act, sec.1.012(a)(1), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify the Act. As required by the Act, sec.1.012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605802 Everette D. Jobe General Counsel Texas Department of Banking Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 Same Powers as National Banks 7 TAC sec.11.82 The repeal is adopted pursuant to rulemaking authority under the Act, sec.1.012(a)(1), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify the Act. As required by the Act, sec.1. 012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605803 Everette D. Jobe General Counsel Texas Department of Banking Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 Chapter 12. Loans and Investments Subchapter B. Loans 7 TAC sec.12.31 The Finance Commission of Texas (the commission) adopts new sec.12.31, concerning loans made by a state bank on the collateral security of securities issued by an affiliate, to be codified in new Subchapter B entitled Loans. Changes are made to the proposed text as published in the February 20, 1996, issue of the Texas Register (21 TexReg 1338). The new section provides that, notwithstanding Texas Civil Statutes, Article 342-5.102(d), a state bank may make loans on the collateral security of securities issued by an affiliate if the loan is subject to and in compliance with the provisions of the Federal Reserve Act, sec.23A and sec.23B (12 United States Code (USC), sec.371c and sec.371c-1). Pursuant to sec.23A of the Federal Reserve Act, the securities issued by an affiliate of a bank are not acceptable as collateral for a loan or extension of credit, or guarantee, acceptance, or letter of credit issued on behalf of, that affiliate of the bank. These provisions are applicable to nonmember insured banks by virtue of the Federal Deposit Insurance Act, sec.18(j)(1) (12 USC, sec.1828(j)(1)). The new section also provides that a loan must be subtracted from the capital of a lending bank if the loan proceeds are used directly, or indirectly, for the purpose of recapitalizing the lending bank, unless the loan is fully secured by irrevocable letters of credit or other liquid assets. The agency received one written comment from the Texas Bankers Association (TBA) which suggested expanding the first sentence of sec.12.31(a) into two sentences and utilizing the terms "extension of credit," "guarantee," "acceptance," and "letter of credit." The agency concurs and has made the suggested revision. Second, TBA requested that the term "shares or participation shares" be substituted for the term "securities" in sec.12.31(a). The agency respectfully declines to make this suggested revision. The term "securities" is used in a broader sense than suggested by TBA and is inclusive of "shares and participation shares." Further, Federal Reserve Act, sec.23A and sec.23B, each contain a definition of securities that varies in accordance with the underlying public policy, and in both cases is broader than "shares and participation shares." Adoption of this section is made under Texas Civil Statutes, Article 342-5. 102(d), which authorize the commission to adopt implementing rules. Adoption of this section is also made under Texas Civil Statutes, Article 342-1.1012(a) (3) and Article 342-3.010(e), which authorize the commission to adopt rules necessary or reasonable to grant the same rights and privileges to state banks that are or may be granted to national banks domiciled in this state. As required by Texas Civil Statutes, Article 342-1.1012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state banking system, and allow for economic development within this state. Further, as required by Texas Civil Statutes, Article 342-3.010(e), the commission has concluded that national banks domiciled in this state possess the rights or privileges to perform activities the section will permit state banks to perform and the section contains adequate safeguards and controls, consistent with safety and soundness, to address the concern of the legislature evidenced by the state law the section will impact. sec.12.31. Loans Secured By Affiliate-Issued Securities. (a) Notwithstanding Texas Civil Statutes, Article 342-5.102(d), a state bank may make loans on the collateral security of securities issued by an affiliate, if the loan is subject to and in compliance with the provisions of the Federal Reserve Act, sec.23A and sec.23B (12 United States Code (USC), sec.371c and sec.371c-1). Pursuant to sec.23A of the Federal Reserve Act, the securities issued by an affiliate of a bank are not acceptable as collateral for a loan or extension of credit to, or guarantee, acceptance, or letter of credit issued on behalf of, that affiliate of the bank. These provisions are applicable to nonmember insured banks by virtue of the Federal Deposit Insurance Act, sec.18(j)(1) (12 USC, sec.1828(j)(1)). (b) A loan must be subtracted from the capital of a lending bank if the loan proceeds are used directly, or indirectly, for the purpose of recapitalizing the lending bank, unless the loan is fully secured by irrevocable letters of credit or other liquid assets. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605804 Everette D. Jobe General Counsel Texas Department of Banking Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 7 TAC sec.12.32 The Finance Commission of Texas (the commission) adopts new sec.12.32, concerning loan fees that may be charged by banks under Texas Civil Statutes, Article 342-5.202 (Texas Banking Act, sec.5.202), is adopted with changes to the proposed text as published in the February 20, 1996, issue of the Texas Register (21 TexReg 1339). Existing sec.3.22 concerning loan fees is repealed in this issue of the Texas Register. Texas Bankers Association (TBA) and Independent Bankers Association of Texas (IBAT) commented in favor of the proposed section, with suggestions as discussed in context further in this preamble. No comments against adoption were received. Texas Banking Act, sec.5.202, provides statutory authority for banks to charge loan fees and expenses. Under previous law, while such charges were not prohibited for certain loans, they were not specifically authorized, leading to questions regarding the authority of banks to charge certain fees. New Texas Banking Act, sec.5.202, parallels authority which has been available to state savings and loan associations, savings banks, and credit unions for many years. The purpose of this section is to provide clarification and a framework for such charges. Texas Banking Act, sec.5.202, does not apply to transactions subject to Texas Civil Statutes, Title 79, Subtitle Two, Chapters 2-8 (Articles 5069-2.01 through 5069-8.06), or Subtitle Three, Chapter 15 (Articles 5069-15.01 through 5069- 15.11). The section therefore provides that it does not apply to a consumer loan payable in two or more installments with a rate set under any of those articles or set under Texas Civil Statutes, Article 5069-1.04. However, Texas Banking Act, sec.5.202, does apply to first lien residential real estate loans, loans which are not for personal, family, or household use (i.e., commercial loans, including all commercial real estate loans), and "single pay" consumer loans (no periodic installments with payment in full due on the maturity date) other than those subject to Texas Civil Statutes, Article 5069-3.01 et seq. The section as adopted states that a bank may require a borrower to pay all reasonable expenses and fees incurred in connection with the making, closing, disbursing, extending, readjusting, or renewing of a loan to which Texas Banking Act, sec.5.202, applies, including fees paid to third parties as well as charges and fees paid to the bank itself for the services of bank employees. Section sec.5.202(a) further states that it "does not authorize the bank to charge its borrower for payment of fees and expenses to an officer, director, manager, or managing participant of the bank for services rendered in the person's capacity as an officer, director, manager, or managing participant." Adopted sec.12.32(b) clarifies that, pursuant to the quoted provision, charges to a borrower may not include a pass-through of a fee paid by the bank (in addition to regular salary or director's fee) to an officer or director for services rendered within the course and scope of his or her employment. For example, a borrower may not be directly charged for a fee paid to an officer of the bank for an informal appraisal of collateral or loan analysis, or as additional, incentive compensation for loan production, since such services are clearly within the duties and responsibilities of the officer. Such costs (assuming they can be legally incurred under other applicable law) may, however, be included in overhead and allocated as part of a standardized fee that captures the fully allocated cost of consummating a loan. Conversely, a fee paid by the bank to, for example, the law firm of a non-employee director for document preparation is properly characterizable as a third party fee and may be charged to the borrower since such services are not within the duties and responsibilities of a member of the board of directors. TBA requested that the last sentence of sec.12.32(b) provide that the list of specific fees is not all inclusive but rather is a list of examples of various fees which would be clearly permissible under the section. The agency has added language to doubly emphasize that the list is not exclusive. Authorized loan fees must be reasonably related to the costs incurred by the bank. Adopted sec.12.32(c) clarifies that a bank may establish fixed fees for underwriting activities for various categories of loans by taking into consideration its average costs in various activities such as taking an application, obtaining necessary reports and documentation, review of credit reports, analysis of the loan proposal and the prospective borrower's ability to repay, preparation of documents, loan review, and closing activities, plus a reasonable overhead factor. In lieu of conducting its own analysis, a bank may rely on the functional cost analysis prepared by the Board of Governors of the Federal Reserve System (the Board), which the section states a bank may rely on as reasonable. TBA proposes that sec.12.32(c) be deleted or be replaced by a statement that loan fees are assumed to comply with the Act, sec.5.202, and do not exceed the costs the bank reasonably expects to incur as long as the bank employs a reasonable cost analysis in determining the loan fees. TBA believes that banks should be allowed to make individual determinations as to those costs reasonably related to extending credit, and suggests that to do otherwise will invite unwarranted litigation challenging the validity of fees. Alternatively, if sec.12.32(c) is retained, TBA suggests adding language that the list is not all inclusive and that a bank is not required to employ the functional cost analysis prepared by the Board. The agency has reworded sec.12.32(c) to address TBA's concerns. IBAT commented that sec.12.32(c)(3) may not be interpreted as intended and suggested language that may better fulfill the agency's intent. The agency has reworded sec.12.32(c) to address IBAT's concerns. Finally, IBAT commented that it would be appropriate in this section to acknowledge the results of First Bank v. Tony's Tortilla Factory, 877 S. W.2d 285 (Tex. 1994), that fees for insufficient check processing are indeed fees for an extension of credit but do not constitute interest. The agency declines at this time to add a provision not previously proposed in order that this section may be adopted for the immediate benefit of the industry. The agency will consider whether to propose an amendment at a later date. The new section is adopted under the Texas Banking Act, sec.1.012(a)(1), which authorizes the commission to adopt rules to implement and clarify the Texas Banking Act. As required by the Texas Banking Act, sec.1.012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. sec.12.32. Loan Fees and Charges. (a) Applicability. (1) Texas Banking Act, sec.5.202, and this section apply to: (A) first lien residential real estate loans; (B) loans other than for personal, family, or household use (i.e., commercial loans including all commercial real estate loans); and (C) loans for personal, family, or household use that are repayable in a single installment and subject to Texas Civil Statutes, Article 5069-1.01 (i.e., single pay consumer loans other than loans under Texas Civil Statutes, Title 79, Subtitle Two, Chapter 3 (Articles 5069-3. 01 et seq)). (2) Texas Banking Act, sec.5.202, and this section do not apply to a consumer loan payable in two or more installments with a rate set under Texas Civil Statutes, Title 79, Subtitle Two, Chapters 2-8 (Articles 5069-2.01 through 5069- 8.06), Subtitle Three, Chapter 15 (Articles 5069-15.01 through 5069-15.11), or Article 5069-1.04. (b) Reasonable fees authorized. A bank may require a borrower to pay all reasonable expenses and fees incurred in connection with the making, closing, disbursing, extending, readjusting, or renewing of a loan subject to this section, including fees paid to third parties as well as charges and fees paid to the bank itself for the services of the bank employees. However, such charges may not include fees paid by the bank (in addition to regular salary or director's fee) to an officer or director for services rendered within the course and scope of his or her employment with the bank. Subject to limitations of other law, possible fees and charges which may be charged and collected under this section include fees for underwriting, appraisal, document preparation, title insurance or abstract and opinion, insurance (including casualty coverage for collateral and credit products), credit reports, escrows, and filing fees, among others. (c) Calculation of reasonable fee. (1) Authorized loan fees must be reasonably related to the costs incurred by the bank. In establishing loan fees, a bank may establish fixed fees for underwriting activities for various categories of loans. In establishing such fixed fees, the bank may take into consideration its average costs in various activities, including but not limited to the average cost of taking an application, obtaining necessary reports and documentation, review of credit reports, analysis of the loan proposal and the prospective borrower's ability to repay, preparation of documents, loan review, and closing activities, plus a reasonable overhead factor. In lieu of conducting its own analysis, where relevant a bank may accept as reasonable and rely on the functional cost analysis prepared by the Board of Governors of the Federal Reserve System. (2) This section does not require a bank to charge its borrower the full, true cost of accepting and consummating a lending transaction. For example, a bank may choose to assess a lower than actual cost loan fee on smaller consumer single pay loans in the interest of making loans more affordable to low to moderate income borrowers, or may deliberately underestimate its actual costs to provide a margin of security regarding compliance with law. (3) Fees and expenses charged and collected in accordance with the Act, sec.5.202, and in accordance with this section are not considered interest or compensation charged by the bank for the use, forbearance, or detention of money. However, fees and expenses which do not comply with these requirements may be characterized in litigation as interest. (d) Collection of fee. Loan fees may be collected separately or added to the amount of the promissory note and financed as part of the loan. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605805 Everette D. Jobe General Counsel Texas Department of Banking Effective date: May 17, 1996 Proposal publication date: February 20, 1996 For further information, please call: (512) 475-1300 TITLE 19. EDUCATION Part II. Texas Education Agency Chapter 33. Statement of Investment Objectives, Policies, and Guidelines 19 TAC sec.sec.33.1, 33.5, 33.10, 33.15, 33.20, 33.25, 33.30, 33. 35, 33.40, 33.45, 33.50, 33.55, 33.60, 33.65 The Texas Education Agency (TEA) adopts the repeal of sec. sec.33.1, 33.5, 33.10, 33.15, 33.20, 33.25, 33.30, 33.35, 33.40, 33.45, 33.50, 33.55, 33.60, and 33.65, concerning the Texas Permanent School Fund (PSF), without changes to the proposed text as published in the February 2, 1996, issue of the Texas Register (21 TexReg 719). The sections establish investment objectives, policies, and guidelines for the PSF. The repeals are necessary to comply with the sunset review process mandated by Senate Bill 1, 74th Texas Legislature, 1995. A new Chapter 33 is adopted in a separate submission. No comments were received regarding adoption of the repeals. The repeals are adopted under the Texas Education Code, sec.7.102, which authorizes the State Board of Education to review specified TEA rules. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 24, 1996. TRD-9605714 Criss Cloudt Assistant Commissioner, Policy Planning and Research Texas Education Agency Effective date: September 1, 1996 Proposal publication date: February 2, 1996 For further information, please call: (512) 463-9701 Chapter 33. Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund 19 TAC sec.sec.33.1, 33.5, 33.10, 33.15, 33.20, 33.25, 33.30, 33.35, 33.40, 33.45, 33.50, 33.55, 33.60, 33.65 The Texas Education Agency (TEA) adopts new sec.sec.33.1, 33.5, 33.10, 33. 15, 33.20, 33.25, 33.30, 33.35, 33.40, 33.45, 33.50, 33.55, 33.60, and 33.65, concerning the Texas Permanent School Fund (PSF). Sections 33.1, 33.15, 33.20, and 33.25 are adopted with changes to the proposed text as published in the February 2, 1996, issue of the Texas Register (21 TexReg 720). Sections 33.5, 33.10, 33.30, 33.35, 33.40, 33.45, 33.50, 33.55, 33.60, and 33.65 are adopted without changes and will not be republished. The sections establish investment objectives, policies, and guidelines for the PSF. The income of the PSF will flow to school districts and reduce the tax burden to the public and the state. The new sections are adopted as part of the sunset review process mandated by Senate Bill 1, 74th Texas Legislature, 1995. The repeal of current Chapter 33 is adopted in a separate submission. New language in sec.33.1 (relating to Constitutional Authority and Constitutional Restrictions) expands the description of the Permanent School Fund to reflect wording in the Texas Constitution. In sec.33.15 (relating to Responsible Parties and Their Duties), the word "or" has been replaced with the word "and" in subsection (g)(5) to clarify that any information requested must be reported to both the State Board of Education Committee on the Permanent School Fund and the full State Board of Education. In sec.33.20 (relating to Objectives), language has been added in subsection (c)(3) to clarify acceptable risk levels for PSF assets. Finally, in sec.33.25 (relating to Permissible and Restricted Investments and General Guidelines for Investment Managers), the word "or" has been replaced with the word "and" in subsection (b)(13) to clarify the acceptable rating for any fixed income security purchased by a PSF manager. No comments have been received regarding adoption of the new sections. The new sections are adopted under the Texas Education Code, sec.7.102(b)(32) , which authorizes SBOE to invest the PSF within the limits of the authority granted by the Texas Constitution, Article VII, sec.5(d), and the Texas Education Code, Chapter 43. Section 33.65 is adopted under the Texas Education Code, sec.7.102(b)(34), which requires SBOE to adopt an annual report on the status of the guarantee bond program and authorizes SBOE to adopt rules as necessary for the administration of the program as provided under the Texas Education Code, Chapter 45, Subchapter C. sec.33.1. Constitutional Authority and Constitutional Restrictions. (a) The Texas Permanent School Fund (PSF) is comprised of the principal of all bonds and other funds, and the principal arising from the sale of the lands set apart for the PSF. The interest and dividends derived from the PSF and any taxes authorized and levied shall be the Available School Fund, which shall be applied annually to the support of the public free schools. (b) In managing the assets of the PSF, the State Board of Education (SBOE) may acquire, exchange, sale, supervise, manage, or retain, through procedures and subject to restrictions it establishes and in amounts it considers appropriate, any kind of investment, including investments in the Texas Growth Fund created by the Texas Constitution, Article XVI, sec.70, that persons of ordinary prudence, discretion, and intelligence, exercising the judgment and care under the circumstances then prevailing, acquire or retain for their own account in the management of their affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital. sec.33.15. Responsible Parties and Their Duties. (a) The Texas Constitution, Article VII, sec.sec.1-8, establishes the Available School Fund, the Texas Permanent School Fund (PSF), and the State Board of Education (SBOE), and specifies the standard of care SBOE members must exercise in managing PSF assets. In addition, the constitution directs the legislature to establish suitable provisions for supporting and maintaining an efficient public free school system, defines the composition of the PSF and the Available School Fund, and requires the SBOE to set aside sufficient funds to provide free textbooks for the use of children attending the public free schools of this state. The Texas Education Code, Chapter 15, regulates the use of state funds to support public schools, and the provisions of this chapter govern the investment objectives, policies, and guidelines of the PSF. (b) The SBOE shall be responsible for overseeing all aspects of the PSF and may employ any of the following parties, whose duties and responsibilities are as follows. (1) An investment manager is a person, firm, corporation, bank, or insurance company the SBOE retains to manage a portion of the PSF assets under specified guidelines. (2) A custodian is an organization, normally a bank, the SBOE retains to safekeep, and provide accurate and timely reports of, PSF assets. (3) A consultant is a person or firm the SBOE retains to advise the PSF based on professional expertise. (4) Investment counsel is a person or firm retained under criteria specified in the PSF Investment Procedures Manual to advise PSF investment staff and the SBOE Committee on the Permanent School Fund within the policy framework established by the SBOE. Counsel may advise PSF internal managers regarding various issues, including: selecting companies in different industries; specific stock or corporate bond issues or other investment instruments; and timing of purchases and sales. Counsel advises on the economic and market environment and asset allocation and provides PSF investment staff direction on diversifying investments between asset classes and among respective industries. (5) A performance measurement consultant is a person or firm retained to provide the SBOE Committee on the Permanent School Fund an analysis of the PSF portfolio performance. The outside portfolio performance measurement service firm shall perform the analysis on a quarterly or as-needed basis. Quarterly reports shall be distributed to each member of the SBOE Committee on the Permanent School Fund, and a representative of the firm shall be available as necessary to brief the committee. (6) The Internal Audit Division of the Texas Education Agency (TEA) reviews the internal control procedures of the PSF Investment Office annually at the direction of the SBOE. The division conducts the audit according to standards advocated by the Institute of Internal Auditors, Inc., and reports all findings to the commissioner of education. The purpose of the internal audit shall be to evaluate the controls over assets and test compliance with TEA rules and procedures. (7) The State Auditor's Office is an independent state agency that performs an annual financial audit of the TEA at the direction of the Texas Legislature. The financial audit, conducted according to generally accepted auditing standards, is designed to test compliance with generally accepted accounting principles. The state auditor performs tests of the transactions of the PSF Investment Office as part of this annual audit, including compliance with governing statutes and SBOE policies and directives. (8) The SBOE may retain independent external auditors to review the PSF accounts annually or on an as-needed basis. (c) The SBOE shall meet on a regular or as-needed basis to conduct the affairs of the PSF. (d) In case of emergency or urgent public necessity, the SBOE Committee on the Permanent School Fund or the SBOE, as appropriate, may hold an emergency meeting under the Texas Government Code, sec.551.045. (e) The SBOE shall have the following exclusive duties: (1) determining the strategic asset allocation mix between asset classes based on the attending economic conditions and the PSF goals and objectives; (2) ratifying the investment transactions pertaining to the purchase, sale, or reinvestment of fixed income, equity, or cash securities by all internal and external managers for the current reporting period; (3) appointing members to the SBOE Investment Advisory Committee; (4) approving all contracts with external professional investment managers, financial advisors, financial consultants, or other external professionals employed to help the SBOE invest the PSF; (5) approving the performance measurement contract with a well recognized and reputable firm employed to evaluate and analyze PSF investment results. The service shall compare investment results to the written investment objectives of the SBOE and also compare the investment of the PSF with the investment of other public and private funds against market indices and by managerial style; (6) setting policies, objectives, and guidelines for investing PSF assets; and (7) representing the PSF to the state. (f) The SBOE may establish committees to administer the affairs of the PSF. The duties and responsibilities of any committee established shall be specified in the PSF Investment Procedures Manual. (g) The PSF shall have an executive administrator, with a staff to be adjusted as necessary, who functions directly with the SBOE through the SBOE Committee on the Permanent School Fund concerning investment matters, and who functions as part of the internal operation under the commissioner of education. At all times, the PSF executive administrator and staff shall invest PSF assets as directed by the SBOE according to the Texas Constitution and all other applicable Texas statutes, as amended, and SBOE rules governing the operation of the PSF. The PSF staff shall: (1) administer the PSF according to SBOE goals and objectives; (2) execute all directives, policies, and procedures from the SBOE and the SBOE Committee on the Permanent School Fund; (3) keep records and provide a continuous and accurate accounting of all PSF transactions, revenues, and expenses and provide reports on the status of the PSF portfolio; (4) advise any officials, investment firms, or other interested parties about the powers, limitations, and prohibitions regarding PSF investments that have been placed on the SBOE or PSF investment staff by statutes, attorney general opinions and court decisions, or by SBOE policies and operating procedures; (5) continuously research all internally managed securities held by the PSF and report to the SBOE Committee on the Permanent School Fund and the SBOE any information requested, including reports and statistics on the PSF, for the purpose of administering the PSF; (6) establish and maintain a procedures manual that implements this section to be approved by the SBOE; (7) make recommendations regarding investment and policy matters to the SBOE Committee on the Permanent School Fund and the SBOE; (8) establish and maintain accounting policies and internal control procedures concerning all receipts, disbursements and investments of the PSF, according to the procedures adopted by the SBOE. sec.33.20. Objectives. (a) Investment objectives. (1) Investment objectives have been formulated based on the following considerations: (A) the anticipated financial needs of the Texas public free school system in light of expected future contributions to the Texas Permanent School Fund (PSF); (B) the need to preserve capital; (C) the risk tolerance set by the State Board of Education (SBOE) and the need for diversity; (D) observations about historical rates of return on various asset classes; (E) assumptions about current and projected capital market and general economic conditions and expected levels of inflation; (F) the need to invest according to the prudent person rule; and (G) the need to document investment objectives, guidelines, and performance standards. (2) Investment objectives represent desired results and are long-term in nature, covering typical market cycles of three to five years. Any shortfall in meeting the objectives should be explainable in terms of general economic and capital market conditions and asset allocation. (3) The investment objectives are consistent with generally accepted standards of fiduciary responsibility. (4) Under the provisions of this chapter, investment managers shall have discretion and authority to implement security selection and timing. (b) Goal and objectives for the PSF. (1) Goal. The goal of the SBOE for the PSF shall be to obtain the greatest amount of income and capital appreciation consistent with the safety of principal, in light of the strategic asset allocation plan adopted. To achieve this goal, PSF investment shall be carefully administered at all times. (2) Objectives. (A) The preservation and safety of principal shall be a primary consideration in PSF investment. (B) Fixed income securities shall be purchased at the highest yield consistent with the preservation and safety of principal, emphasizing current rather than deferred income. (C) To the extent possible, the PSF administrators shall hedge against inflation by purchasing equities that emphasize stability and growth of future earnings and dividends rather than current return. (D) Securities, except investments for cash management purposes as specified in sec.33.25 of this title (relating to Permissible and Restricted Investments and General Guidelines for Investment Managers), shall be selected for investment on the basis of long-term investment merits rather than short-term gains. (c) Investment rate of return and risk objectives. (1) Because the education needs of the future generations of Texas school children are long-term in nature and directly related to income growth and income potential, the return objective of the PSF shall also be long-term and focused on maintaining asset growth while preserving real capital value. Maintaining value under an income and capital appreciation concept encompasses a policy that over the long term will provide the PSF a positive return when adjusted for inflation and spending. (2) Investment rates of return shall be based on a time-weighted calculation, compounded and annualized over a rolling period of three to five years, and shall take into account all cash income plus realized and unrealized capital gains and losses, and calculated gross and net of fees and expenses. (3) The overall risk level of PSF assets in terms of potential for price fluctuation shall not be extreme and risk variances shall be minimal. The primary means of achieving such a risk profile are: (A) a broad diversification among asset classes that, as nearly as possible, react independently through varying economic and market circumstances; (B) careful control of risk level within each asset class by avoiding over- concentration and not taking extreme positions against the market averages; and (C) a degree of emphasis on stable growth. (4) Over time, the volatility of returns (or risk) for the total fund, as measured by standard deviation of investment returns, should be comparable to investments in market indices in the proportion in which the PSF invests. (5) The objective of the domestic equity fund shall be to earn, over time, an average annual total rate of return that exceeds that of a representative benchmark index, combining dividends and capital appreciation, while maintaining an acceptable risk level compared to that of the representative benchmark index. (6) The objective of the international equity fund shall be to earn, over time, an average annual total rate of return that exceeds that of a representative international benchmark index in U.S. dollars, combining dividends and capital appreciation, while maintaining an acceptable risk level compared to that of the representative benchmark index. (7) The objective of the domestic fixed income fund shall be to earn, over time, an average annual total rate of return that exceeds that of a representative benchmark index, combining interest income and capital appreciation, while maintaining an acceptable risk level compared to that of the representative benchmark index. (8) The objective of the international fixed income fund shall be to earn, over time, an average annual total rate of return that exceeds the return of a representative Non-U. S. benchmark index in U.S. dollars, combining interest income and capital appreciation, while maintaining an acceptable risk level compared to that of the representative benchmark index. (9) The objective of the short-term cash fund shall be to provide liquidity for the timely payment of security transactions, while earning a competitive return. The expected return, over time, shall exceed that of the representative benchmark index, while maintaining an acceptable risk level compared to that of the representative benchmark index. (10) Notwithstanding the risk parameters specified in paragraphs (4)-(9) of this subsection, consideration shall be given to marginal risk variances exceeding the representative benchmark indices if returns are commensurate with the risk levels of the respective portfolios. Additional consideration shall be given to meeting the projected income expectations of the PSF in each respective biennium as a guideline in allocating assets to the respective PSF investment managers, if this guideline is consistent with the prudent person mandate of the Texas Constitution, Article VII, sec.5(d), and the SBOE asset allocation strategy. (d) Asset allocation policy. (1) The SBOE shall adopt and implement a strategic asset allocation plan based on a well diversified, balanced investment approach that uses a broad range of asset classes indicated by the following characteristics of the PSF: (A) the long-term nature of the PSF; (B) the spending policy of the PSF; (C) the relatively low liquidity requirements of the PSF; (D) the investment preferences and risk tolerance of the SBOE; (E) the rate of return objectives; and (F) the diversification objectives of the PSF, specified in the Texas Constitution, Article VII, sec.5(d), the Texas Education Code, Chapter 15, and the provisions of this chapter. (2) The strategic asset allocation plan shall contain guideline percentages, at market value of the total fund's assets, to be invested in various asset classes. The target mix may not be attainable at a specific point in time since actual asset allocation will be dictated by current and anticipated market conditions, as well as the overall directions of the SBOE. (3) The SBOE Committee on the Permanent School Fund, with the advice of the PSF investment staff, shall review the provisions of this section at least annually and, as needed, rebalance the assets of the portfolio according to the asset allocation rebalancing procedure specified in the PSF Investment Procedures Manual. The SBOE Committee on the Permanent School Fund shall consider the industry diversification and the percentage allocation between fixed income and equity securities within the following asset classes: (A) domestic equities; (B) international equities; (C) domestic fixed income; (D) international fixed income; and (E) cash. (4) Investments shall not exceed the strategic ranges the SBOE establishes for each asset class. (5) Periodically, the SBOE shall allocate segments of the total fund to each investment manager and specify guidelines, investment objectives, and standards of performance that apply to those assets. sec.33.25. Permissible and Restricted Investments and General Guidelines for Investment Managers. (a) Permissible investments. (1) Equities are considered to be common or preferred corporate stocks; corporate bonds, debentures, or preferreds that may be converted into corporate stock; and investment trusts. Stocks listed or traded on well recognized or principal U.S. or foreign exchanges or nationally recognized over-the-counter markets are permitted. (2) Fixed income securities are considered to be U.S. or foreign treasury or government agency obligations, U.S. or foreign corporate bonds, asset- or mortgage-backed securities, taxable municipal obligations, Canadian bonds, Yankee bonds, supranational bonds (denominated in U.S. dollars), and 144A securities. (3) Cash equivalents are securities with maturities of less than or equal to one year that are considered to include interest bearing or discount instruments of the U.S. government or its agencies, money market funds, corporate discounted instruments, corporate-issued commercial paper, time deposits of U.S. or foreign banks, bankers acceptances, and fully collateralized repurchase agreements. Both U.S. and foreign offerings are permitted. All residual cash in the Texas Permanent School Fund (PSF) portfolio must be swept and invested on a daily basis. (4) Any form of investment or nonpublicly traded investment may be considered by the State Board of Education (SBOE) based on risk and return characteristics, provided the investment is consistent with PSF goals and objectives. (5) The State Board of Education (SBOE) may approve currency hedging strategies for the international portfolios and delineate the related procedures in the "Standards of Performance" section of the PSF Investment Procedures Manual. (b) Prohibited transactions and restrictions. Unless the SBOE gives its written approval, the following prohibited transactions and restrictions apply for all PSF managers: (1) short sales of any kind; (2) purchasing letter or restricted stock; (3) buying or selling on margin; (4) engaging in purchasing or writing options or similar transactions; (5) purchasing or selling futures on commodities contracts; (6) borrowing money, or pledging or otherwise encumbering PSF assets; (7) purchasing the equity or debt securities of the portfolio manager's organization or an affiliated organization; (8) engaging in any purchasing transaction, after which the cumulative market value of common stock in a single corporation exceeds 2.5% of the PSF total market value or 5.0% of the manager's total portfolio market value; (9) engaging in any purchasing transaction, after which the cumulative number of shares of common stock in a single corporation held by the PSF exceeds 5.0% of the outstanding voting stock of that issuer; (10) engaging in any purchasing transaction, after which the cumulative market value of fixed income securities or cash equivalent securities in a single corporation (excluding the U.S. government or its agencies) exceeds 2.5% of the PSF total market value or 5.0% of the manager's total portfolio market value; (11) purchasing tax exempt bonds; (12) purchasing guaranteed investment contracts (GICs) from an insurance company or bank investment contracts (BICs) from a bank not rated at least AAA by Standard & Poor's or Moody's; (13) purchasing any fixed income security not rated at least BBB- by Standard & Poor's and Baa3 by Moody's, subject to the provisions in the PSF Investment Procedures Manual related to the fixed income portfolio mandates regarding quality and duration; (14) purchasing short-term money market instruments rated below A-1 by Standard & Poor's or P-1 by Moody's; (15) engaging in any transaction that results in unrelated business taxable income (excluding current holdings); (16) engaging in any transaction considered a "prohibited transaction" under the Internal Revenue Code or the Employee Retirement Income Security Act (ERISA); (17) purchasing precious metals or other commodities; (18) engaging in any transaction that would leverage a manager's position; (19) lending securities owned by the PSF, but held in custody by another party, such as a bank custodian, to any other party for any purpose, unless lending securities according to a separate written agreement the SBOE approved; and (20) purchasing fixed income securities without a stated par value amount due at maturity. (c) General guidelines for investment managers. (1) Each investment manager retained to manage a portion of PSF assets shall be aware of, and operate within, the provisions of this chapter and all applicable Texas statutes. (2) As fiduciaries of the PSF, investment managers shall discharge their duties solely in the interests of the PSF according to the prudent expert rule, engaging in activities that include the following. (A) Diversification. The investment policy shall be to diversify each manager's common stock portfolio by participating in industries and companies with above average prospects or sound fundamentals. (B) Securities trading. (i) Each manager shall send copies of each transaction record to the PSF investment staff and custodians. (ii) Each manager shall be required to reconcile the accounts under management on a monthly basis with the PSF investment staff and custodians. (iii) Each manager shall be responsible for complying fully with PSF policies for trading securities and selecting brokerage firms, as specified in sec.33.40 of this title (relating to Trading and Brokerage Policy). In particular, the emphasis of security trading shall be on best execution; that is, the highest proceeds to the PSF and the lowest costs, net of all transaction expenses. Placing orders shall be based on the financial viability of the brokerage firm and the assurance of prompt and efficient execution. (iv) The SBOE shall require each external manager to indemnify the PSF for all failed trades not due to the negligence of the PSF or its custodian. (C) Acknowledgments in writing. (i) Each external investment manager retained by the PSF must be a person, firm, or corporation registered as an investment adviser under the Investment Adviser Act of 1940, a bank as defined in the Act, or an insurance company qualified to do business in more than one state, and must acknowledge its fiduciary responsibility in writing. A firm registered with the Securities and Exchange Commission (SEC) must annually provide a copy of its Form ADV, Section II. (ii) The SBOE may require each external manager to obtain coverage for errors and omissions in an amount set by the SBOE, but the coverage shall be at least the greater of $500,000 or 1.0% of the assets managed, not exceeding $10 million. The coverage should be specific as to the assets of the PSF. The manager shall annually provide evidence in writing of the existence of the coverage. (iii) Each external manager may be required by the SBOE to obtain fidelity bonds, fiduciary liability insurance, or both. (iv) Each manager shall acknowledge in writing receiving a copy of, and agreeing to comply with, the provisions of this chapter. (D) Subject to the provisions of this chapter, any investment manager of marketable securities or other investments, retained by the PSF, shall have full discretionary investment authority over the assets for which the manager is responsible. (d) Reporting procedures for investment managers. The investment manager shall: (1) prepare a monthly report for delivery to the SBOE, the SBOE Committee on the Permanent School Fund, and the PSF investment staff that shall include, in the appropriate format, items requested by the SBOE. The reports shall cover any change in the firm's structure, professional team, or product offerings; the firm's economic review; a review of recent and anticipated investment activity; an analysis of major changes that have occurred in the investment markets and in the portfolio, particularly since the last report; a detail of the portfolio holdings and each transaction that has been completed or is in process since the last report; and a summary of the key characteristics of the PSF portfolio. Periodically, the PSF investment staff shall provide the investment manager a detailed description of, and format for, these reports; (2) when requested by the SBOE Committee on the Permanent School Fund, make a presentation describing the professionals retained for the PSF, the investment process used for the PSF portfolio under the manager's responsibility, and any related issues; (3) when requested by the PSF investment staff, meet to discuss the management of the portfolio, new developments, and any related matters; and (4) implement a specific investment process for the PSF. The manager shall describe the process and its underlying philosophy in an attachment to its investment management agreement with the PSF and manage according to this process until the PSF and manager agree in writing to any change. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 24, 1996. TRD-9605713 Criss Cloudt Associate Commissioner, Policy Planning and Research Texas Education Agency Effective date: September 1, 1996 Proposal publication date: February 2, 1996 For further information, please call: (512) 463-9701 TITLE 22. EXAMINING BOARDS Part XI. Board of Nurse Examiners Chapter 222. Advanced Practice Nurses with Limited Prescriptive Authority 22 TAC sec.222.2 The Board of Nurse Examiners adopts an amendment to sec.222.2 concerning Application for Approval with no changes in the proposed text as published in the February 2, 1996, issue of the Texas Register (21 TexReg 749). The APN Advisory Committee presented recommendations to the members of the Board of Nurse Examiners together with draft rule language regarding educational requirements for Clinical Nurse Specialists who are seeking prescriptive authority. The Board concurred with the committee. With the passage of SB 673 during the 74th Legislative Session, an increasing number of CNSs are seeking limited prescriptive authority. The adopted amendments will assure sufficient educational preparation for prescriptive authority; thereby protecting the public. One comment was received which did not question the appropriateness of the requirements; rather appropriate non-academic courses which the Board might consider. Response: The board agrees that non-academic courses offered by academic institutions for CE credit when the course is identical to the academic course should be acceptable. The Board will address this clarification through policy. The amendment is adopted under the Nursing Practice Act, (Texas Civil Statutes, Article 4514), sec.1, which provides the Board of Nurse Examiners with the authority and power to make and enforce all rules and regulations necessary for the performance of its duties and conducting of proceedings before it. Article 4514, sec.8 is affected by this section. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas on April 25, 1996. TRD-9605741 Katherine A. Thomas, MN, RN Executive Director Board of Nurse Examiners Effective date: May 16, 1996 Proposal publication date: February 2, 1996 For further information, please call: (512) 305-6811 Part XIV. Texas Optometry Board Chapter 275. Continuing Education 22 TAC sec.275.1, sec.275.2 The Texas Optometry Board adopts an amendment to sec.275.1, without changes to the proposed text as published in the February 13, 1996, issue of the Texas Register (21 TexReg 1019). The Texas Optometry Board adopts an amendment to sec.275.2, with changes to the proposed text as published in the February 13, 1996, issue of the Texas Register (21 TexReg 1019). As proposed, the rule contained general information regarding diagnostic and therapeutic education and as adopted, subsection (g) has been deleted as the information previously contained therein has been restated in sec.275.1 of Chapter 275 of Title 22. Section 275.1 and sec.275.2 are required in order to inform the licensees and sponsors of continuing education of the procedures to be followed in submitting proof of hours to the Board Office, and to remove the requirement of optometric sponsorship for individual providers of continuing education. No comments were received regarding adoptions of the amendments. The amendments are adopted under the provisions of Texas Civil Statutes, Article 4552, sec.4.01B and sec.2.14. The Texas Optometry Board interprets sec.4.01B as requiring licensees to obtain mandatory continuing education hours. The Board interprets sec.2.14 as authorizing the Board to adopt substantive and procedural rules for the regulation of the profession of optometry. sec.275.2. Required Education. (a)-(f) (No change.) This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605775 Lois Ewald Executive Director Texas Optometry Board Effective date: May 17, 1996 Proposal publication date: February 13, 1996 For further information, please call: (512) 305-8500 Chapter 277. Practice and Procedure 22 TAC sec.277.1 The Texas Optometry Board adopts an amendment to sec.277.1 without changes to the proposed text as published in the February 13, 1996, issue of the Texas Register (21 TexReg 1020). Section 277.1 is required in order to inform the licensees that a biomicroscopy examination described by the Texas Optometry Act, Texas Civil Statutes, Article 4552 sec.5.12 requires the use of a slit lamp. No comments were received regarding adoption of the amendment. The amendment is adopted under the provisions of Texas Civil Statutes, Article 4552, sec.5.12 and sec.2.14. The Texas Optometry Board interprets sec.5.12 as requiring that a slit lamp examination be used as a biomicroscopy examination. The Board interprets sec.2. 14 as authorizing the Board to adopt substantive and procedural rules for the regulation of the profession of optometry. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605771 Lois Ewald Executive Director Texas Optometry Board Effective date: May 17, 1996 Proposal publication date: February 13, 1996 For further information, please call: (512) 305-8500 Chapter 279. Interpretations 22 TAC sec.279.5 The Texas Optometry Board adopts an amendment to sec.279.5, without changes to the proposed text as published in the February 13, 1996, issue of the Texas Register (21 TexReg 1020). Section 279.5 is required in order to inform the licensees that a biomicroscopy examination described by the Texas Optometry Act, Texas Civil Statutes, Article 4552, sec.5.12 requires the use of a slit lamp. No comments were received regarding adoption of the amendment. The amendment is adopted under the provisions of Texas Civil Statutes, Article 4552, sec.5.12 and sec.2.14. The Texas Optometry Board interprets sec.5.12 as requiring that a slit lamp examination should be used as a biomicroscopy examination. The Board interprets sec.2.14 as authorizing the Board to adopt substantive and procedural rules for the regulation of the profession of optometry. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605774 Lois Ewald Executive Director Texas Optometry Board Effective date: May 17, 1996 Proposal publication date: February 13, 1996 For further information, please call: (512) 305-8500 22 TAC sec.279.7 The Texas Optometry Board adopts an amendment to 279.7, without changes to the proposed text as published in the February 13, 1996, issue of the Texas Register (21 TexReg 1021). Section sec.279.7 is required in order to inform the licensees that a biomicrosopy examination described by the Texas Optometry Act, Texas Civil Statutes, Article 4552, sec.5.12 requires the use of a slit lamp. No comments were received regarding adoption of the amendment. The amendment is adopted under the provisions of Texas Civil Statutes, Article 4552, sec.5.12 and sec.2.14. The Texas Optometry Board interprets sec.5.12 as requiring that a slit lamp examination be used as a biomicroscopy examination. The Board interprets sec.2. 14 as authorizing the Board to adopt substantive and procedural rules for the regulation of the profession of optometry. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 26, 1996. TRD-9605773 Lois Ewald Executive Director Texas Optometry Board Effective date: May 17, 1996 Proposal publication date: February 13, 1996 For further information, please call: (512) 305-8500 TITLE 28. INSURANCE Part I. Texas Department of Insurance Chapter 7. Corporate and Financial Regulation Subchapter A. Examination and Corporate Custodian and Tax 28 TAC sec.7.7 The Commissioner of Insurance adopts an amendment to sec.7.7, concerning subordinated indebtedness, surplus debentures, surplus notes, premium income notes, bonds, or debentures, and other contingent evidences of indebtedness, with changes to the proposed text published in the October 31, 1995, issue of the Texas Register (20 TexReg 8966). Requests for a public hearing were received but were withdrawn as a result of the changes to the proposed text. The amendment is necessary to implement an amendment to the Insurance Code, Article 1.39, enacted by passage of House Bill 1243, Section 1, 74th Legislature, 1995. The Insurance Code, Article 1.39 and 28 TAC sec.7.7 (relating to subordinated indebtedness, surplus debentures, surplus notes, premium income notes, bonds, or debentures, and other contingent evidences of indebtedness), provide for the regulation of the issuance by an insurer of debt instruments which are subordinated to the claims and liabilities of the insurer and which are accounted for as part of the issuing insurer's surplus. Such instruments are referred to as subordinated indebtedness agreements in the section. The section is necessary to guide insurers in requesting approval of these agreements and accounting for agreements approved by the commissioner. The section is also necessary to eliminate duplicate filing of agreements when they are between affiliates. Under the Insurance Code, Article 1.39, an insurer is required to obtain the prior approval of the commissioner for the issuance of any subordinated indebtedness agreement that the insurer proposes to include as a part of its policyholder surplus in its financial statements. The adopted section implements that requirement by describing the information necessary to be filed with the department in sec.7.7(d). Adopted subsection (e) provides for notification to the department of the payment of interest and principal which were not given prior approval when the agreement was approved. Adopted subsection (f) describes the accounting treatment of approved agreements. Adopted subsection (g) permits a foreign insurer to avoid duplicate regulation by demonstrating that its state of domicile has similar regulation. Adopted subsection (b) describes general provisions relating to filing of applications and subsequent subordination of liabilities. Adopted subsection (a) defines certain terms. The changes to the section as adopted are described in the agency's response to comments that follow. Two commenters stated that subsection (b)(2) could mislead a reader, since it did not state that an application was deemed approved 30 days after it had been filed with the agency. RESPONSE: The agency has amended subsection (b)(2) in response to the comment noting that Insurance Code Articles 1.39 and 21. 49-1 provide for an application to be deemed approved within a certain period of time after the application is filed, if the commissioner has not acted on the application. COMMENT: Two commenters stated that the language "all the material necessary" in subsection (d)(2) was unnecessarily vague and could frustrate the provision in Insurance Code, Article 1.39, that deems an application approved 30 days after it is filed with the agency. RESPONSE: The agency responds by revising subsection (d)(2) to provide that an application is deemed filed when the material required in subsection (d)(1) is filed with the agency. COMMENT: Two commenters recommended that subsection (b)(4) be deleted because there is no statutory authority in the Insurance Code, Article 1.39, to prohibit the issuance of subordinated indebtedness to initially capitalize an insurer. RESPONSE: The agency's intent in adopting subsection (b)(4) was to promulgate the agency position on the issuance of subordinated indebtedness as part of the initial capitalization of most insurers. Only the incorporation statutes for a mutual life insurance company, a county mutual and a reciprocal or interinsurance exchange authorize the use of subordinated indebtedness as part of the initial capitalization. The other statutes in the Insurance Code governing the incorporation of insurers do not authorize the issuance of subordinated indebtedness and accordingly the agency is of the opinion that subordinated indebtedness should not be used as part of the initial capitalization. On the other hand, the agency acknowledges that Insurance Code, Article 1.39, does not authorize the comprehensive prohibition in subsection (b)(4) and deleted the paragraph. The deletion of the paragraph does not change the agency's position that subordinated indebtedness cannot be used as part of the initial capitalization of an insurer unless the statute under which the insurer is created authorizes such indebtedness. As a result of the deletion proposed sec.7.7(b)(5) was renumbered sec.7.7(b)(4). COMMENT: One commenter recommended that subsection (f)(1) be revised to make it clear that part or all of a subordinated indebtedness is not reflected as a liability of the issuing insurer until the specific terms of the subordinated indebtedness agreement are satisfied, and that the existence of certain provisions in the agreement do not require the insurer to reflect the subordinated indebtedness as a liability. RESPONSE: The agency responds by rewording subsection (f)(1) to specifically state that the existence of a provision or provisions in a subordinated indebtedness agreement concerning a minimum sum payable, repayment schedule, maturity date, prepayment or any combination thereof, will not be the sole basis for determining that a liability exists under the agreement which must be in reflected in the insurer's financial statements. The agency further responds that a subordinated indebtedness agreement may contain such provisions and no financial statement liability will be required unless the specific terms and conditions precedent to payment or repayment have been met or satisfied. Conversely, a financial statement liability will be required to the extent that the terms and conditions precedent to payment or repayment have been met or satisfied. Commenting against certain provisions of the section were the Insurance Alliance of America and the Texas Association of Insurance Officials. No comments in support of the rule were received. The amendment is adopted under the Insurance Code, Article 1.39(f), which authorizes the commissioner of insurance to adopt rules as necessary to implement the statute. sec.7.7. Subordinated Indebtedness, Surplus Debentures, Surplus Notes, Premium Income Notes, Bonds, or Debentures, and Other Contingent Evidences of Indebtedness. (a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (1) Minimum surplus or floor-The amount of surplus specified in the written agreement evidencing the subordinated indebtedness which may not be used for payments or repayments of subordinated indebtedness and which amount must exceed the greater of the following: (A) a minimum surplus stated and fixed in the agreement, or (B) a minimum surplus of $500,000 for that insurer. (2) Subordinated indebtedness-Any contingent indebtedness issued by an insurer for which such insurer assumes a subordinated liability for repayment of principal and payment of interest pursuant to a written agreement providing for payment only out of that portion of an insurer's surplus that exceeds a minimum surplus stated in such agreement. Subordinated indebtedness includes advances made in accordance with the Insurance Code, Articles 11.16, 17.17 and 19.07, and surplus notes, as herein defined. (3) Surplus notes-Surplus notes, also known as "surplus debentures", "contribution certificates", "surplus capital notes", and "premium income notes, bonds, or debentures", however denominated, which are financing vehicles that increase the surplus of an insurer. (b) General Provisions. (1) A subordinated indebtedness agreement issued by an insurer on or after September 1, 1995, is subject to the prior approval of the commissioner, as to form and content, regardless of amount. (2) An insurer may not assume a subordinated liability until the commissioner has approved the subordinated indebtedness agreement, or approval has been deemed under either the Insurance Code, Article 21.49-1, or Article 1.39. Notice of a subordinated indebtedness agreement that is subject to the Insurance Code, Article 21.49-1, sec.4(d)(1), shall be given at least 90 days prior to entering into the agreement or such shorter period as the commissioner may permit. Notice of a subordinated indebtedness agreement that is subject to the Insurance Code, Article 21.49-1, sec.4(d)(2) or Article 1.39, respectively, shall be given at least 30 days prior to the entering into the agreement or such shorter period as the commissioner may permit. A subordinated indebtedness agreement subject to the Insurance Code, Article 21.49-1, is subject to all of the requirements and provisions thereof. (3) All written applications and notices contemplated by this section shall be filed with Financial Monitoring, Mail Code 303-1A, Texas Department of Insurance, P.O. Box 149099, 333 Guadalupe, Austin, Texas 78714-9099. (4) The consideration received by an insurer in return for the issuance of subordinated indebtedness shall be in the form of cash, cash equivalent securities, or other assets that have a readily determinable value and are satisfactory to the commissioner. In the instance of an issuer required by the department to increase its surplus as regards policyholders, the subordination of a current liability owed by the issuer to the prospective holder of the subordinated indebtedness, may be considered in an amount acceptable to the commissioner. (c) Written Agreements. When issuing subordinated indebtedness, the insurer must execute a written agreement with the creditor, providing the following: (1)-(4) (No change.) (5) in the event of liquidation, payment of interest and repayment of principal under the written agreement are subordinated to policyholder and beneficiary claims. (d) Written Application. (1) The written application for approval of the issuance of the subordinated indebtedness agreement shall include information including, but not limited to, the following: (A) the identity of all parties to the transaction; (B) the nature and purpose of the transaction including a description of how the subordinated indebtedness relates to the future business plans of the insurer; (C) a description of the consideration to be received by the insurer in exchange for the issuance of the subordinated indebtedness; (D) a description of how the value of the consideration was determined; (E) a statement as to whether any officers or directors of a party are pecuniarily interested in the transaction; (F) a copy of the proposed written agreement; and (G) the signed and notarized affidavit of an executive officer of the insurer which states that the insurer is aware of the requirements of the Insurance Code, Article 1.39(e) and subsection (e) of this section regarding notices to the Texas Department of Insurance relating to the payment of interest or the repayment of principal corresponding to subordinated indebtedness and agrees to comply with such requirements. (2) No application for the issuance of subordinated indebtedness shall be deemed filed with the commissioner until the date that all material listed in subsection (d)(1) of this section has been provided. (e) Payments of Interest and Repayments of Principal. (1) An insurer may not repay principal or pay interest on a subordinated liability assumed under either the Insurance Code, Article 21.49-1, sec.4, or Article 1. 39 on or after September 1, 1995, unless either: (A) such payment or repayment complies with a specific schedule of payments contained within the terms of the previously approved written agreement; or (B) written notice is provided to the commissioner at least 15 days before the date scheduled for any payment or repayment if either a schedule of payments is not contained within the terms of the previously approved agreement, or such payment or repayment does not comply with the specific schedule of payments contained within the terms of the previously approved agreement. (2) Notice required by this subsection, shall be considered promptly. Upon consideration of such notice, the commissioner may take such appropriate action as may be authorized by the Insurance Code and the regulations adopted thereunder. (f) Accounting Requirements. (1) A loan or advance made under the written agreement, and any interest accruing on the loan or advance, is a legal liability and financial statement liability of the insurer only to the extent provided by the terms and conditions of the loan or advance agreement, and the loan or advance may not otherwise be a legal liability or financial statement liability of the insurer. Such a loan or advance agreement, whether or not containing a provision for a minimum sum certain payable, repayment schedule, maturity date, prepayment or any combination thereof, shall not be considered a legal liability or financial statement liability of the insurer, and shall be considered a subordinated indebtedness to be recorded with the capital and surplus items in the financial statements of the insurer. If such a written agreement provides specific terms for the payment of principal and interest, and only after such payment of principle or interest is due, and the minimum surplus requirements for such payment of principal and interest have been met, then there shall be a financial statement liability only to the extent of such payment that is due of principal or interest and only to the extent the minimum surplus requirements have been met. Assuming such terms have been satisfied, then any provision providing that no financial statement liability exists shall be considered to be in conflict with the specific terms for the payment of principal and interest; and, for financial statement purposes, the terms for the payment of principal and interest shall result in the reflection of a financial statement liability. (2) All agreements shall be clearly reported in an insurer's "Notes to Financial Statements" of the Annual Statement and shall disclose all pertinent aspects of payment and prepayment provisions. (3) An insurer holding a subordinated indebtedness of another insurer may report it as an admitted asset equal to the amount then due and payable under the terms of the subordinated indebtedness agreement. (g) Applicability to Foreign Insurers. The provisions of this section shall apply to insurers domiciled in another state unless such other state regulates the issuance of subordinated indebtedness under laws, rules, or bulletins that the commissioner finds are substantially similar in substance and effect to Texas law and rules. To pursue this exception, the insurer shall provide, upon request, to the commissioner evidence of similarity in the form of statutes, regulations, and interpretation of the standards utilized by the state of domicile. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 29, 1996. TRD-9605872 Alicia M. Fechtel General Counsel and Chief Clerk Texas Department of Insurance Effective date: May 20, 1996 Proposal publication date: October 31, 1995 For further information, please call: (512) 463-6327 TITLE 34. PUBLIC FINANCE Part I. Comptroller of Public Accounts Chapter 3. Tax Administration Subchapter F. Motor Vehicle Sales Tax 34 TAC sec.3.95 The Comptroller of Public Accounts adopts new sec.3.95, concerning motor vehicle resale certificates and sales for resale, with changes to the proposed text as published in the October 27, 1995, issue of the Texas Register (20 TexReg 8897). The Tax Code, sec.152.063 and sec.152.0635, requires a resale certificate be secured by a seller when selling a motor vehicle for resale purposes only. Amendments to the Tax Code, sec.152.001, effective January 1, 1996, provide that only licensed dealers may purchase for resale tax free. The new section prescribes the contents of the resale certificate, and adopts the form by reference. Comment was received from the Texas Automobile Dealers Association requesting that language be incorporated to differentiate between franchised motor vehicle dealers and independent motor vehicle dealers and each one's eligibility to purchase vehicles for resale. This suggestion was not accepted because the Tax Code does not distinguish between the two categories of dealers. The Association also suggested that language be incorporated expanding on the eligible use of vehicles with metal dealer license plates as provided by the Transportation Code, Chapter 503. Subsection (d) of this section is being amended to reflect this request as it relates to the Tax Code. The new section is adopted under the Tax Code, sec.111.002, which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of the Tax Code, Title 2. The new section implements the Tax Code, sec.sec.152.001, 152.063, and 152.0635. sec.3.95. Motor Vehicle Sales Tax Resale Certificate; Sales for Resale. (a) Sale for resale. A sale for resale is not taxable. A sale for resale is a sale of a motor vehicle to a purchaser who is a dealer who holds a general distinguishing number issued under Article 6686, Revised Statutes, as amended, and the Transportation Code, Chapter 503; and (1) holds the motor vehicle exclusively for resale; or (2) operates the motor vehicle with metal dealer plates in accordance with Article 6686, Revised Statutes, as amended, and the Transportation Code, Chapter 503. (b) Acceptance of resale certificate. (1) A motor vehicle seller must document a sale for resale by obtaining from the purchaser a properly completed resale certificate. A properly completed resale certificate contains the information required by subsection (e) of this section. (2) The seller must retain properly executed Motor Vehicle Sales Tax Resale Certificates at the seller's principal office for at least four years from the date of sale. (c) Blanket resale certificate. A blanket Motor Vehicle Sales Tax Resale Certificate may be provided to a seller by a purchaser who purchases from that seller only motor vehicles for resale. The seller may rely on the blanket certificate until it is revoked in writing. The information required in subsection (e)(2) of this section is not required for a blanket resale certificate. However, vehicle identification information for vehicles sold under blanket certificates must be retained by the seller. (d) Use of a motor vehicle purchased for resale. A motor vehicle purchased for resale may be operated with metal dealer plates in accordance with Article 6686, Revised Statutes, as amended, and the Transportation Code, Chapter 503. Motor vehicle sales tax imposed in the Tax Code, sec.152.021, will be due on a motor vehicle purchase by a dealer who operates a motor vehicle with a metal dealer plate if the dealer does not hold a general distinguishing number of the category to sell that vehicle, or if the motor vehicle is operated with other registration. Motor vehicle dealers should be aware of the restrictions of their dealer's license issued by the Motor Vehicle Board of the Texas Department of Transportation. Only the holder of a valid franchised dealer's license for a particular make or makes, may operate that make new motor vehicle with a metal dealer's license plates. (e) Content of a Motor Vehicle Sales Tax Resale Certificate. Except as provided in subsection (c) of this section, the resale certificate must show: (1) the name and address of the purchaser; (2) a description of the vehicle being purchased (including the vehicle identification number, make of vehicle, and year model); (3) the signature of the purchaser and the date; (4) the name and address of the seller; and (5) the purchaser's general distinguishing number issued by the Texas Department of Transportation. (f) Form of a Motor Vehicle Sales Tax Resale Certificate. The resale certificate may be combined with related sale transaction documents that are provided to the seller. The comptroller adopts the certificate by reference. Copies are available for inspection at the office of the Texas Register or may be obtained from the Comptroller of Public Accounts, Tax Administration Division, 111 West 6th Street, Austin, Texas 78701-2913. Copies may also be requested by calling our toll-free number 1-800-252-5555. In Austin, call 463- 4600. (From a Telecommunication Device for the Deaf (TDD) only, call 1-800-248- 4099 toll free. In Austin, the local TDD number is 463-4621). This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 24, 1996. TRD-9605687 Martin Cherry Chief, General Law Comptroller of Public Accounts Effective date: May 15, 1996 Proposal publication date: October 27, 1995 For further information, please call: (512) 463-4028 Subchapter O. State Sales and Use Tax 34 TAC sec.3.316 The Comptroller of Public Accounts adopts an amendment to sec.3.316, concerning occasional sales, with changes to the proposed text as published in the December 15, 1995, issue of the Texas Register (20 TexReg 10749). This rule is being amended because of the passage of House Bill 596, 74th Legislature, 1995, which exempts certain sales by university and college student organizations. The comptroller proposes to rename the rule and add tax-free sales made by senior citizens' organizations provided for under the Tax Code, sec.151.332. Comments were received from an attorney suggesting grammatical changes to existing text and the amended text of the rule. These nonsubstantive changes were made to subsections (a), (d)(3) and (g)(2). The attorney suggested an additional change to subsection (d)(3) to incorporate the agency's long-standing policy that inventory and intangible property are not operating assets. This change is made also. Finally, the attorney felt that the amended text addressing tax-free sales by senior citizens'organizations and university and college student organizations should not be in this rule, but rather in 34 TAC sec.3.322 concerning Exempt Organizations. No change to the rule is made because sec.3. 322 is being amended and the subsection on senior citizens' organizations is being deleted. The inclusion of senior citizens' organizations and university and college student organizations under sec.3.322 creates confusion because these organizations seldom are sales tax exempt. This amendment is adopted under the Tax Code, sec.111.002, which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of the Tax Code, Title 2. The amendment implements the Tax Code, sec.151.321. sec.3.316. Occasional Sales and Other Tax-Free Sales. (a) Sales exempt. Except as provided by subsection (i) of this section, a taxable item sold or purchased by way of an occasional sale is exempt from sales and use taxes. (b) Occasional sales by persons not in the business of selling, leasing, or renting. (1) One or two sales of taxable items, other than an amusement service, during any 12-month period by a person who does not hold himself out as engaging (or who does not habitually engage) in the business of selling taxable items are occasional sales. (2) The third sale of a taxable item in a 12-month period by a person not previously in the business of selling, leasing, or renting taxable items causes that person to become a retailer. Tax must be collected and reported on the third sale and all subsequent sales unless the sale qualifies for exemption under subsection (d) or (e) of this section. If three or more sales are made in a 12-month period, then the person must obtain a permit. See sec.3. 286 of this title (relating to Seller's and Purchaser's Responsibilities). Example: A lump- sum contractor sells a back-hoe in October, a typewriter in December and a crane in February. The contractor has not sold, leased or rented any construction equipment prior to the sale of the back-hoe; therefore, the contractor can sell the back-hoe and typewriter tax free as occasional sales. The sale of the crane is the third sale within 12 months from the sale of the back-hoe. The sale of the crane is not an occasional sale. The contractor must obtain a permit, collect tax on the sale of the crane and, until an intervening 12 months have passed between sales, all subsequent sales of taxable items. (3) The sale of not more than 10 admissions for amusement services during a 12-month period by a person who does not hold himself out as engaging (or who does not habitually engage) in the provision of amusement services are occasional sales. (4) The exemption provided under subsection (b) of this section does not apply to a rental or lease of a taxable item. (c) Persons holding permits. (1) Persons engaged in the business of selling, leasing, or renting taxable items and persons selling, leasing, or renting three or more taxable items in a 12-month period are retailers for the purposes of this section. Also, persons selling more than 10 admissions for amusement services during a 12-month period are retailers for the purposes of this section. (2) Sales made by a retailer and other persons holding sales or use tax permits that are not made in the regular course of business are not occasional sales. All sales by a retailer are subject to tax except for sales that qualify for exemption under subsection (d) or (e) of this section. (3) Sales made by persons holding direct payment permits are not occasional sales. All sales by direct payment permit holders are subject to tax except for sales that qualify for exemption under subsection (d) or (e) of this section. (d) Sale of a business or an identifiable segment of a business. (1) The sale of the entire operating assets of a business or of a separate division, branch, or identifiable segment of a business is an occasional sale. The lease or rental of an identifiable segment does not qualify as an occasional sale. (2) The sale of the entire operating assets of a separate division, branch or identifiable segment of a business is an occasional sale if, prior to the sale, the income and expenses attributable to the separate division, branch or identifiable segment could be separately established from the books of account or record. (3) For the purposes of this section, a "separate division, branch or identifiable segment" means an enterprise engaged in providing a product or service to customers, usually for a profit. "Income" means revenue generated by the enterprise in providing that product or service. "Expenses" mean those operating expenses incurred by the enterprise in providing the product or services that are directly traceable to that enterprise. "Operating assets" means tangible personal property used exclusively by the enterprise in providing the product or service but does not mean tangible personal property maintained and used both for general business purposes and by the specific enterprise. Inventory and intangible property are not operating assets for purposes of the exemption. (4) The entire operating assets of the business or of the division, branch or identifiable segment of the business must be sold in a single transaction to a single purchaser. The sale of the entire operating assets through several transactions to several purchasers will not qualify as an occasional sale under this section. (e) Transfer without change in ownership. (1) Any transfer of all or substantially all the property held or used by a person in the course of an activity, when after such transfer the real or ultimate ownership of such property is substantially similar to that which existed before such transfer, is an occasional sale. Since ownership must be transferred, "transfer" does not include the lease or rental of property. (2) For the purposes of this section, stockholders, bondholders, partners, or other persons holding an interest in a corporation or other entity are regarded as having the "real or ultimate ownership" of the property of such corporation or other entity. Ownership is "substantially similar" if the person transferring the property owns 80% or more of the stock in the corporation to which the transfer is being made. Ownership is "substantially similar" if 80% or more of the stock in the corporation making the transfer is owned by the transferee. (3) "All or substantially all" of the property will be considered to have been transferred if 80% or more is transferred. (f) Occasional sales as defined in subsections (d) and (e) of this section are not restricted by subsections (a) and (b) of this section. Three or more sales of the type defined in subsections (d) and (e) of this section would not result in the loss of the occasional sale exemption. (g) Resale certificates - occasional sales - leases. (1) When a lessor purchases a taxable item tax free for rental or lease and later sells, leases or rents the item by way of an occasional sale as provided in subsection (d) or (e) of this section, then the lessor owes tax on the amount by which the lessor's purchase price exceeds the amount of rent, if any, upon which tax has been collected and reported from the prior rental or lease of the item. (2) If the item was exempt from sales tax when originally purchased by the lessor or if tax was paid on the full purchase price at the time of purchase by the lessor, then the lessor does not incur sales tax liability on the original purchase price when sold by way of an occasional sale as provided in subsection (d) or (e) of this section. (h) Purchases exempt from tax. Except as provided in subsection (i) of this section, the purchase price of an item sold by means of an occasional sale is not subject to tax. (i) Exception to subsection (h) of this section. A person who holds a permit issued pursuant to the Tax Code, Chapter 151, who makes a purchase in a transaction on which the seller is not required to collect tax under subsection (b) of this section, must accrue and remit tax to the comptroller on the transaction. (j) Senior citizens' organizations. Sales made by senior citizens' organizations will be exempt from tax if all of the following qualifications are met: (1) all of the taxable items sold are manufactured, produced, made, or assembled exclusively by persons 65 years old or older; (2) the sale is part of a fund-raising drive held or sponsored by a nonprofit organization created for the sole purpose of providing assistance to elderly persons; (3) all net proceeds from the sale go to either the organization or the person who produced the taxable item sold or both; and (4) the organizations have not conducted more than four separate fund-raising drives each calendar year for a total of not more than 20 days per year. (k) University and college student organizations. (1) A sale of a taxable item by a qualified student organization is exempted from sales tax if: (A) the student organization sells the items at a sale that lasts for one day only the primary purpose of which is to raise funds for the organization; (B) the qualifying organization holds not more than one fund-raising sale each calendar month for which the exemption is claimed; and (C) the qualifying organization has as its primary purpose a purpose other than engaging in business or performing an activity designed to make a profit. (2) A taxable item acquired tax free under paragraph (1) of this subsection is exempt from use tax on its storage, use, or consumption until the item is resold or subsequently transferred. (3) A qualifying student organization must be affiliated with an institution of higher education as defined by the Education Code, sec.61.003, or a private or independent college or university that is located in this state and that is accredited by a recognized accrediting agency under the Education Code, sec.61.003. A student organization must file with the comptroller a certification issued by the institution, college, or university showing that the organization is affiliated with the institution, college, or university. A college, university, or institution may designate one of its departments or officers to compile a list of registered or certified student organizations and submit the list to the comptroller in lieu of having each student organization submit individual certifications. The certification is valid for two years after the date the comptroller receives it. After the two-year period, the organization must re-certify with the comptroller. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas on April 26, 1996. TRD-9605770 Martin E. Cherry Chief, General Law Section Comptroller of Public Accounts Effective date: May 17, 1996 Proposal publication date: December 15, 1995 For further information, please call: (512) 463-4028 Subchapter GG. Insurance Tax 34 TAC sec.3.831 The Comptroller of Public Accounts adopts new sec.3.831, concerning gross premium definitions for property and casualty, and title insurance companies; and clarification of the taxation of the distribution of title premiums, without changes to the proposed text as published in the February 6, 1996, issue of the Texas Register (21 TexReg 838). The proposal clarifies the gross premium definitions for premium tax and maintenance tax purposes and the taxation on the distribution of title premiums. No comments were received regarding adoption of the new section. This new section is adopted under the Tax Code, sec.111.002, which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of the Tax Code, Title 2. The new section implements the Insurance Code, Article 4.10, sec.5; and Articles 5.12, 5.24, 5.49, 9.46, 9.59, sec.2; and 9.59, sec.7. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas on April 26, 1996. TRD-9605769 Martin Cherry Chief, General Law Section Comptroller of Public Accounts Effective date: May 17, 1996 Proposal publication date: February 6, 1996 For further information, please call: (512) 463-4028