2nd Engrossment - 81st Legislature (1999 - 2000) Posted on 12/15/2009 12:00am
1.1 A bill for an act 1.2 relating to commerce; conforming state statutes to the 1.3 National Association of Insurance Commissioners model 1.4 legislation providing uniform accounting principles; 1.5 regulating the registration of certain securities; 1.6 amending Minnesota Statutes 1998, sections 60A.11, 1.7 subdivision 22; 60A.12, subdivision 5; 60A.121, 1.8 subdivision 9, and by adding subdivisions; 60A.123; 1.9 60A.129, subdivision 3; 66A.16, subdivisions 1 and 2; 1.10 68A.01, subdivision 4, and by adding a subdivision; 1.11 and 68A.02; Minnesota Statutes 1999 Supplement, 1.12 section 80A.15, subdivision 2; proposing coding for 1.13 new law in Minnesota Statutes, chapters 60A; and 68A; 1.14 repealing Minnesota Statutes 1998, sections 60A.12, 1.15 subdivisions 1, 3, 4, 7, 8, and 9; 60A.125, 1.16 subdivision 3; and 60A.128. 1.17 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 1.18 Section 1. Minnesota Statutes 1998, section 60A.11, 1.19 subdivision 22, is amended to read: 1.20 Subd. 22. [PERSONAL PROPERTY UNDER LEASE.] Personal 1.21 property for intended lease or rental in the United States or 1.22 Canada. A company may not invest more than five percent of its 1.23 total admitted assets under this subdivision. In cases where 1.24 the asset leased would otherwise be nonadmitted, the asset or 1.25 associated lease is nonadmitted. 1.26 Sec. 2. Minnesota Statutes 1998, section 60A.12, 1.27 subdivision 5, is amended to read: 1.28 Subd. 5. [LOSS RESERVES.]
(1) [FOR OTHER THAN LIABILITY1.29 AND WORKERS' COMPENSATION.] The reserve for outstanding losses1.30 under policies other than workers' compensation and liability1.31 policies shall be at least equal to the aggregate estimated2.1 amounts due or to become due on account of all the losses and2.2 claims of which the corporation has received notice. The loss2.3 reserve shall also include the estimated liability on any2.4 notices received by the corporation of the occurrence of any2.5 event which may result in a loss, and the estimated liability2.6 for all losses which have occurred but on which no notice has2.7 been received. For the purpose of these reserves, the2.8 corporation shall keep a complete and itemized record showing2.9 all losses and claims on which it has received notice, including2.10 all notices received by it of the occurrence of any event which2.11 may result in a loss.2.12 When, in the judgment of the commissioner, the loss 2.13 reserves, calculated in accordance with the foregoing2.14 provisions,statutory accounting practices as set forth in the 2.15 National Association of Insurance Commissioners' accounting 2.16 practices and procedures manual are inadequate, the commissioner 2.17 may require the corporation to maintain additional reserves. 2.18 (2) [FOR LIABILITY LOSSES.] The reserve for outstanding2.19 losses and loss expenses incurred under liability policies2.20 during each of the three years immediately preceding the date of2.21 the statement shall be not less than 60 percent of the earned2.22 liability premium for each of the three corresponding years2.23 immediately preceding the date of the statement, less all loss2.24 and loss expense payments made under claims incurred during each2.25 of those years.2.26 (3) [FOR COMPENSATION CLAIMS.] The reserve for outstanding2.27 losses and loss expenses incurred under workers' compensation2.28 policies shall be at least equal to the following amounts:2.29 (a) For all compensation claims under policies written more2.30 than three years prior to the date of the statement, the present2.31 values, at four percent interest, of the determined and the2.32 estimated future payments;2.33 (b) For all compensation claims under policies written in2.34 the three years immediately preceding the date of the statement,2.35 the reserve shall be not less than 65 percent of the earned2.36 compensation premiums for each of the three years, less all loss3.1 and loss expense payments made in connection with the claims3.2 under policies written in each of the corresponding years. For3.3 the first year of the three-year period, the reserve shall be3.4 not less than the present value, at four percent interest, of3.5 the determined and the estimated unpaid compensation claims3.6 under policies written during that year.3.7 Sec. 3. Minnesota Statutes 1998, section 60A.121, is 3.8 amended by adding a subdivision to read: 3.9 Subd. 2a. [CONTRACTUAL TERMS.] "Contractual terms" means 3.10 the principal and interest payments of the commercial mortgage 3.11 loan as scheduled in the mortgage agreement. 3.12 Sec. 4. Minnesota Statutes 1998, section 60A.121, 3.13 subdivision 9, is amended to read: 3.14 Subd. 9. [MORTGAGE LOAN IN FORECLOSURE.] "Mortgage loan in 3.15 foreclosure" means (1) a loan in the process of foreclosure 3.16 including the time required for expiration of any equitable or 3.17 statutory redemption rights; (2) a loan to a mortgagor who is 3.18 the subject of a bankruptcy petition and who is not 3.19 making regular monthlypayments according to the contractual 3.20 terms; or (3) a loan secured by a mortgage on real estate that 3.21 is subject to a senior mortgage or other lien that is being 3.22 foreclosed. 3.23 Sec. 5. Minnesota Statutes 1998, section 60A.121, is 3.24 amended by adding a subdivision to read: 3.25 Subd. 10a. [PERMANENTLY IMPAIRED.] A commercial mortgage 3.26 loan will be "permanently impaired" when, based on current 3.27 information and events, it is probable that an insurer will be 3.28 unable to collect all amounts due according to the contractual 3.29 terms. 3.30 Sec. 6. Minnesota Statutes 1998, section 60A.123, is 3.31 amended to read: 3.32 60A.123 [VALUATION PROCEDURE.] 3.33 Subdivision 1. [REQUIREMENT.] An insurer shall value its 3.34 commercial mortgage loans and real estate acquired through 3.35 foreclosure of commercial mortgage loans as provided in this 3.36 section for the purpose of establishing reserves or carryinga 4.1 valuation allowance or fair values of the investments and for 4.2 statutory accounting purposes. 4.3 Subd. 2. [PERFORMING MORTGAGE LOAN.] A performing mortgage 4.4 loan must be carried at its amortized acquisition cost. 4.5 Subd. 3. [DISTRESSED MORTGAGE LOAN.] (a) The insurer shall 4.6 make an evaluation of the appropriate carryingfair value of its 4.7 commercial mortgage loans which it classifies as distressed 4.8 mortgage loans. The carryingfair value must be based upon one 4.9 or more of the following procedures: 4.10 (1) an internal appraisal; 4.11 (2) an appraisal made by an independent appraiser; 4.12 (3) the value of guarantees or other credit enhancements 4.13 related to the loan. 4.14 (b) The insurer maywill determine the carryingfair value 4.15 of its distressed mortgage loans through eitheran evaluation of 4.16 each specific distressed mortgage loan or by a sampling4.17 methodology. Insurers using a sampling methodology shall4.18 identify a sampling of its distressed mortgage loans that4.19 represents a cross section of all of its distressed mortgage4.20 loans. The insurer shall make an evaluation of the appropriate4.21 carrying value for each sample loan. The carrying value of all4.22 of the insurer's distressed mortgage loans must be the same4.23 percentage of their amortized acquisition cost as the sample4.24 loans.The carryingfair value must be based upon an internal 4.25 appraisal or an appraisal conducted by an independent appraiser. 4.26 (c) For distressed mortgage loans, the insurer shall either4.27 take a charge against its surplus or establish a reserve4.28 formeasure impairment based on the fair value of the collateral 4.29 less estimated costs to obtain and sell. A valuation allowance 4.30 should be established for the difference between the 4.31 carryingadjusted fair value of the collateral and the amortized 4.32 acquisition cost of its distressed mortgage loans. 4.33 Subd. 4. [DELINQUENT MORTGAGE LOAN.] (a) The insurer shall 4.34 make an evaluation of the appropriate carryingfair value of 4.35 each delinquent mortgage loan. The carryingfair value must be 4.36 based upon one or more of the following procedures: 5.1 (1) an internal appraisal; 5.2 (2) an appraisal by an independent appraiser; 5.3 (3) the value of guarantees or other credit enhancements 5.4 related to the loan. 5.5 (b) The insurer shall either take a charge against its 5.6 surplus or establish a reserve for the difference between the 5.7 carryingfair value and the amortized acquisition cost of its 5.8 delinquent mortgage loans. 5.9 Subd. 5. [RESTRUCTURED MORTGAGE LOAN.] (a) The insurer 5.10 shall make an evaluation of the appropriate carryingfair value 5.11 of each restructured mortgage loan. The carryingfair value 5.12 must be based upon one or more of the following procedures: 5.13 (1) an internal appraisal; 5.14 (2) an appraisal by an independent appraiser; 5.15 (3) the value of guarantees or other credit enhancements 5.16 related to the loan. 5.17 (b) The insurer shall either take a charge against its5.18 surplus or establish a reserve formeasure impairment based on 5.19 the fair value of the collateral less estimated costs to obtain 5.20 and sell. The difference between the carryingadjusted fair 5.21 value of the collateral and other assets received and the 5.22 amortized acquisition cost of its restructured mortgage 5.23 loans must be recorded as a direct write-down and a new cost 5.24 basis established. 5.25 Subd. 6. [MORTGAGE LOAN IN FORECLOSURE.] (a) The insurer 5.26 shall make an evaluation of the appropriate carryingfair value 5.27 of each mortgage loan in foreclosure. The carryingfair value 5.28 must be based upon an appraisal made by an independent appraiser 5.29 and must be adjusted for additional expenses, such as insurance, 5.30 taxes, and legal fees that have been imposed to protect the 5.31 investment or to obtain clear title to the property to the 5.32 extent these amounts are expected to be recoverable from the 5.33 disposition of the property. 5.34 (b) The insurer shall take a charge against its surplus for5.35 record as a direct write-down the difference between 5.36 the carryingfair value and the amortized acquisition cost of 6.1 its mortgage loans in the process of foreclosure. 6.2 Subd. 7. [REAL ESTATE OWNED.] (a) The insurer shall make 6.3 an evaluation of the appropriate carryingfair value of real 6.4 estate owned. The carryingfair value must be based upon an 6.5 appraisal made by an independent appraiser and must be adjusted 6.6 for additional expenses, such as insurance, taxes, and legal 6.7 fees that have been imposed to protect the investment or to 6.8 obtain clear title to the property to the extent these amounts 6.9 are expected to be recoverable from the disposition of the 6.10 property. 6.11 (b) The insurer shall take a charge against its surplus for6.12 record as a direct write-down the difference between 6.13 the carryingfair value and the amortized acquisition cost of 6.14 real estate owned. 6.15 Sec. 7. [60A.1285] [OTHER IMPAIRMENTS.] 6.16 If distressed or delinquent mortgage loans being valued 6.17 according to section 60A.123, subdivisions 3 and 4, are 6.18 determined to be permanently impaired, a direct write-down must 6.19 be recognized as a realized loss, and a new cost basis 6.20 established. 6.21 Sec. 8. Minnesota Statutes 1998, section 60A.129, 6.22 subdivision 3, is amended to read: 6.23 Subd. 3. [ANNUAL AUDIT.] (a) Every insurance company doing 6.24 business in this state, including fraternal benefit societies, 6.25 reciprocal exchanges, service plan corporations licensed 6.26 pursuant to chapter 62C, and legal service plans licensed 6.27 pursuant to chapter 62G, unless exempted by the commissioner 6.28 pursuant to subdivision 5, paragraph (a), or by subdivision 7, 6.29 shall have an annual audit of the financial activities of the 6.30 most recently completed calendar year performed by an 6.31 independent certified public accountant, and shall file the 6.32 report of this audit with the commissioner on or before June 1 6.33 for the immediately preceding year ending December 31. The 6.34 commissioner may require an insurer to file an audited financial 6.35 report earlier than June 1 with 90 days' advance notice to the 6.36 insurer. 7.1 Extensions of the June 1 filing date may be granted by the 7.2 commissioner for 30-day periods upon a showing by the insurer 7.3 and its independent certified public accountant of the reasons 7.4 for requesting the extension and a determination by the 7.5 commissioner of good cause for the extension. 7.6 The request for extension must be submitted in writing not 7.7 less than ten days before the due date in sufficient detail to 7.8 permit the commissioner to make an informed decision with 7.9 respect to the requested extension. 7.10 (b) Foreign and alien insurers filing audited financial 7.11 reports in another state under the other state's requirements of 7.12 audited financial reports which have been found by the 7.13 commissioner to be substantially similar to these requirements 7.14 are exempt from this subdivision if a copy of the audited 7.15 financial report, accountant's letter of qualifications, and 7.16 report on significant deficiencies in internal controls, which 7.17 are filed with the other state, are filed with the commissioner 7.18 in accordance with the filing dates specified in paragraphs (a) 7.19 and (l), (Canadian insurers may submit accountants' reports as 7.20 filed with the Canadian Dominion Department of Insurance); and a 7.21 copy of any notification of adverse financial condition report 7.22 filed with the other state is filed with the commissioner within 7.23 the time specified in paragraph (k). This paragraph does not 7.24 prohibit or in any way limit the commissioner from ordering, 7.25 conducting, and performing examinations of insurers under the 7.26 authority of this chapter. 7.27 (c)(i) The annual audited financial report shall report, in 7.28 conformity with statutory accounting practices required or 7.29 permitted by the commissioner of insurance of the state of 7.30 domicile, the financial position of the insurer as of the end of 7.31 the most recent calendar year and the results of its operations, 7.32 cash flows, and changes in capital and surplus for the year 7.33 ended. The annual audited financial report shall include a 7.34 report of an independent certified public accountant; a balance 7.35 sheet reporting admitted assets, liabilities, capital, and 7.36 surplus; a statement of operations; a statement of cash flows; a 8.1 statement of changes in capital and surplus; and notes to the 8.2 financial statements. 8.3 (ii) The notes required under item (i) shall be those 8.4 required by the appropriate National Association of Insurance 8.5 Commissioners annual statement instructions and any other notes8.6 required by generally accepted accounting principlesNational 8.7 Association of Insurance Commissioners Accounting Practices and 8.8 Procedures Manual and shall include reconciliation of 8.9 differences, if any, between the audited statutory financial 8.10 statements and the annual statement filed under section 60A.13, 8.11 subdivision 1, with a written description of the nature of these 8.12 differences ; and shall also include a summary of ownership and8.13 relationships of the insurer and all affiliated companies. 8.14 (iii) The financial statements included in the audited 8.15 financial report shall be prepared in a form and using language 8.16 and groupings substantially the same as the relevant sections of 8.17 the annual statement of the insurer filed with the 8.18 commissioner. The financial statement shall be comparative, 8.19 presenting the amounts as of December 31 of the current year and 8.20 the amounts as of the immediately preceding December 31. In the 8.21 first year in which an insurer is required to file an audited 8.22 financial report, the comparative data may be omitted. The 8.23 amounts may be rounded to the nearest $1,000, and all 8.24 insignificant amounts may be combined. 8.25 (d) Each insurer required by this section to file an annual 8.26 audited financial report must notify the commissioner in writing 8.27 of the name and address of the independent certified public 8.28 accountant or accounting firm retained to conduct the annual 8.29 audit within 60 days after becoming subject to the annual audit 8.30 requirement. The insurer shall obtain from the accountant a 8.31 letter which states that the accountant is aware of the 8.32 provisions that relate to accounting and financial matters in 8.33 the insurance laws and the rules of the insurance regulatory 8.34 authority of the state of domicile. The letter shall affirm 8.35 that the accountant will express an opinion on the financial 8.36 statements in terms of their conformity to the statutory 9.1 accounting practices prescribed or otherwise permitted by that 9.2 insurance regulatory authority, specifying the exceptions 9.3 believed to be appropriate. A copy of the accountant's letter 9.4 shall be filed with the commissioner. 9.5 (e) If an accountant who was the accountant for the 9.6 immediately preceding filed audited financial report is 9.7 dismissed or resigns, the insurer shall notify the commissioner 9.8 of this event within five business days. Within ten business 9.9 days of this notification, the insurer shall also furnish the 9.10 commissioner with a separate letter stating whether in the 24 9.11 months preceding this event there were any disagreements with 9.12 the former accountant on any matter of accounting principles or 9.13 practices, financial statement disclosure, or auditing scope or 9.14 procedure, which, if not resolved to the satisfaction of the 9.15 former accountant, would have caused that person to make 9.16 reference to the subject matter of the disagreement in 9.17 connection with the opinion. The disagreements required to be 9.18 reported in response to this paragraph include both those 9.19 resolved to the former accountant's satisfaction and those not 9.20 resolved to the former accountant's satisfaction. Disagreements 9.21 contemplated by this section are those disagreements between 9.22 personnel of the insurer responsible for presentation of its 9.23 financial statements and personnel of the accounting firm 9.24 responsible for rendering its report. The insurer shall also in 9.25 writing request the former accountant to furnish a letter 9.26 addressed to the insurer stating whether the accountant agrees 9.27 with the statements contained in the insurer's letter and, if 9.28 not, stating the reasons for any disagreement. The insurer 9.29 shall furnish this responsive letter from the former accountant 9.30 to the commissioner together with its own. 9.31 (f) The commissioner shall not recognize any person or firm 9.32 as a qualified independent certified public accountant that is 9.33 not in good standing with the American Institute of Certified 9.34 Public Accountants and in all states in which the accountant is 9.35 licensed to practice, or for a Canadian or British company, that 9.36 is not a chartered accountant. Except as otherwise provided, an 10.1 independent certified public accountant shall be recognized as 10.2 qualified as long as the person conforms to the standards of the 10.3 person's profession, as contained in the Code of Professional 10.4 Ethics of the American Institute of Certified Public Accountants 10.5 and the rules of professional conduct of the Minnesota board of 10.6 public accountancy or similar code. 10.7 (g) No partner or other person responsible for rendering a 10.8 report for calendar year 1997 and thereafter may act in that 10.9 capacity for more than seven consecutive years. Following any 10.10 period of service, the person shall be disqualified from acting 10.11 in that or a similar capacity for the same company or its 10.12 insurance subsidiaries or affiliates for a period of two years. 10.13 An insurer may make application to the commissioner for relief 10.14 from the above rotation requirement on the basis of unusual 10.15 circumstances. The commissioner may consider the number of 10.16 partners, the expertise of the partners or the number of 10.17 insurance clients in the currently registered firm, the premium 10.18 volume of the insurer, or the number of jurisdictions in which 10.19 the insurer transacts business in determining if the relief 10.20 should be granted. 10.21 (h) The commissioner shall not recognize as a qualified 10.22 independent certified public accountant, nor accept any audited 10.23 financial report, prepared in whole or in part by any natural 10.24 person who has been convicted of fraud, bribery, a violation of 10.25 the Racketeer Influenced and Corrupt Organizations Act, United 10.26 States Code, title 18, sections 1961 to 1968, or any dishonest 10.27 conduct or practices under federal or state law, has been found 10.28 to have violated the insurance laws of this state with respect 10.29 to any previous reports submitted under this section, or has 10.30 demonstrated a pattern or practice of failing to detect or 10.31 disclose material information in previous reports filed under 10.32 the provisions of this section. 10.33 (i) The commissioner, after notice and hearing under 10.34 chapter 14, may find that the accountant is not qualified for 10.35 purposes of expressing an opinion on the financial statements in 10.36 the annual audited financial report. The commissioner may 11.1 require the insurer to replace the accountant with another whose 11.2 relationship with the insurer is qualified within the meaning of 11.3 this section. 11.4 (j) Financial statements furnished under paragraph (a), 11.5 shall be examined by an independent certified public 11.6 accountant. The examination of the insurer's financial 11.7 statements shall be conducted in accordance with generally 11.8 accepted auditing standards and consideration should be given to 11.9 other procedures illustrated in the Financial Condition 11.10 Examiners Handbook, issued by the National Association of 11.11 Insurance Commissioners, as the independent certified public 11.12 accountant considers necessary. 11.13 (k) The insurer required to furnish the annual audited 11.14 financial report shall require the independent certified public 11.15 accountant to provide written notice within five business days 11.16 to the board of directors of the insurer or its audit committee 11.17 of any determination by that independent certified public 11.18 accountant that the insurer has materially misstated its 11.19 financial condition as reported to the commissioner as of the 11.20 balance sheet date currently under examination or that the 11.21 insurer does not meet the minimum capital and surplus 11.22 requirement of section 60A.07 as of that date. An insurer 11.23 required to file an annual audited financial report who received 11.24 a notification of adverse financial condition from the 11.25 accountant shall file a copy of the notification with the 11.26 commissioner within five business days of the receipt of the 11.27 notification. The insurer shall provide the independent 11.28 certified public accountant making the notification with 11.29 evidence of the report being furnished to the commissioner. If 11.30 the independent certified public accountant fails to receive the 11.31 evidence within the required five-day period, the independent 11.32 certified public accountant shall furnish to the commissioner a 11.33 copy of the notification to the board of directors or its audit 11.34 committee within the next five business days. No independent 11.35 certified public accountant shall be liable in any manner to any 11.36 person for any statement made in connection with this paragraph 12.1 if the statement is made in good faith in compliance with this 12.2 paragraph. If the accountant becomes aware of facts which might 12.3 have affected the audited financial report after the date it was 12.4 filed under this section, the accountant shall take the action 12.5 prescribed by Professional Standards issued by the American 12.6 Institute of Certified Public Accountants. 12.7 (l) In addition to the annual audited financial statements, 12.8 each insurer shall furnish the commissioner with a written 12.9 report prepared by the accountant describing significant 12.10 deficiencies in the insurer's internal control structure noted 12.11 by the accountant during the audit. The accountant shall follow 12.12 the professional standards issued by the American Institute of 12.13 Certified Public Accountants, which require an accountant to 12.14 communicate significant deficiencies, known as reportable 12.15 conditions, noted during a financial statement audit, to the 12.16 appropriate parties within an entity. No report shall be issued 12.17 if the accountant does not identify significant deficiencies. 12.18 Any such report by the accountant describing significant 12.19 deficiencies in the insurer's internal control structure, shall 12.20 be filed annually by the insurer with the commissioner within 60 12.21 days after the filing of the annual audited financial 12.22 statements. This report on internal control shall be in the 12.23 form prescribed by generally accepted auditing standards. The 12.24 insurer shall provide the commissioner with a description of 12.25 remedial actions taken or proposed to correct significant 12.26 deficiencies, if those actions are not described in the 12.27 accountant's report. 12.28 (m) The accountant shall furnish the insurer in connection 12.29 with, and for inclusion in, the filing of the annual audited 12.30 financial report, a letter stating that the accountant is 12.31 independent with respect to the insurer and conforms to the 12.32 standards of the accountant's profession as contained in the 12.33 Code of Professional Ethics of the American Institute of 12.34 Certified Public Accountants and the rules of professional 12.35 conduct of the Minnesota board of accountancy or similar code; 12.36 the background and experience in general, and the experience in 13.1 audits of insurers of the staff assigned to the engagement and 13.2 whether each is an independent certified public accountant; that 13.3 the accountant understands that the annual audited financial 13.4 report and the opinion thereon will be filed in compliance with 13.5 this statute and that the commissioner will be relying on this 13.6 information in the monitoring and regulation of the financial 13.7 position of insurers; that the accountant consents to the 13.8 requirements of paragraph (n) and that the accountant consents 13.9 and agrees to make available for review by the commissioner, or 13.10 the commissioner's designee or appointed agent, the workpapers, 13.11 as defined in paragraph (n); a representation that the 13.12 accountant is properly licensed by the appropriate state 13.13 licensing authority and is a member in good standing in the 13.14 American Institute of Certified Public Accountants; and, a 13.15 representation that the accountant complies with paragraph (f). 13.16 Nothing in this section shall be construed as prohibiting the 13.17 accountant from utilizing staff the accountant deems appropriate 13.18 where use is consistent with the standards prescribed by 13.19 generally accepted auditing standards. 13.20 (n) Workpapers are the records kept by the independent 13.21 certified public accountant of the procedures followed, tests 13.22 performed, information obtained, and conclusions reached 13.23 pertinent to the independent certified public accountant's 13.24 examination of the financial statements of an insurer. 13.25 Workpapers may include audit planning documents, work programs, 13.26 analyses, memoranda, letters of confirmation and representation, 13.27 management letters, abstracts of company documents, and 13.28 schedules or commentaries prepared or obtained by the 13.29 independent certified public accountant in the course of the 13.30 examination of the financial statements of an insurer and that 13.31 support the accountant's opinion. Every insurer required to 13.32 file an audited financial report shall require the accountant, 13.33 through the insurer, to make available for review by the 13.34 examiners the workpapers prepared in the conduct of the 13.35 examination and any communications related to the audit between 13.36 the accountant and the insurer. The workpapers shall be made 14.1 available at the offices of the insurer, at the offices of the 14.2 commissioner, or at any other reasonable place designated by the 14.3 commissioner. The insurer shall require that the accountant 14.4 retain the audit workpapers and communications until the 14.5 commissioner has filed a report on examination covering the 14.6 period of the audit but no longer than seven years after the 14.7 period reported upon. In the conduct of the periodic review by 14.8 the examiners, it shall be agreed that photocopies of pertinent 14.9 audit workpapers may be made and retained by the commissioner. 14.10 These copies shall be part of the commissioner's workpapers and 14.11 shall be given the same confidentiality as other examination 14.12 workpapers generated by the commissioner. 14.13 (o)(i) In the case of Canadian and British insurers, the 14.14 annual audited financial report means the annual statement of 14.15 total business on the form filed by these companies with their 14.16 domiciliary supervision authority and duly audited by an 14.17 independent chartered accountant. 14.18 (ii) For these insurers, the letter required in paragraph 14.19 (d), shall state that the accountant is aware of the 14.20 requirements relating to the annual audited statement filed with 14.21 the commissioner under paragraph (a), and shall affirm that the 14.22 opinion expressed is in conformity with those requirements. 14.23 (p) The audit report of the independent certified public 14.24 accountant that performs the audit of an insurer's annual 14.25 statement as required under paragraph (a), shall contain a 14.26 statement as to whether anything, in connection with the audit, 14.27 came to the accountant's attention that caused the accountant to 14.28 believe that the insurer failed to adopt and consistently apply 14.29 the valuation procedures as required by sections 60A.122 and 14.30 60A.123. 14.31 Sec. 9. Minnesota Statutes 1998, section 66A.16, 14.32 subdivision 1, is amended to read: 14.33 Subdivision 1. [MUTUAL FIRE INSURANCE COMPANIES.] A mutual 14.34 fire insurance company may be formed with, or an existing fire 14.35 insurance company may establish, a guaranty fund divided into 14.36 certificates of $10 each, or multiples thereof, and this 15.1 guaranty fund shall be invested in the same manner as is 15.2 provided for the investment of capital stock of insurance 15.3 companies. The certificate holders of the guaranty fund shall 15.4 be entitled to an annual dividend of not more than ten percent 15.5 on their respective certificates, if the net profits or unused 15.6 premiums left after all losses, expenses, or liabilities then 15.7 incurred, with reserves for reinsurance, are provided for shall 15.8 be sufficient to pay the same; and, if the dividends in any one 15.9 year are less than ten percent, the difference may be made up in 15.10 any subsequent year or years from the net profits. Approval of 15.11 the commissioner must be obtained before accrual for or payment 15.12 of the dividend, or any repayment of principal. 15.13 The guaranty fund shall be applied to the payment of losses 15.14 and expenses when necessary and, if the guaranty fund be 15.15 impaired, the directors may make good the whole or any part of 15.16 the impairment from future profits of the company, but no 15.17 dividend shall be paid on guaranty fund certificates while the 15.18 guaranty fund is impaired. 15.19 The holder of the guaranty fund certificate shall not be 15.20 liable for any more than the amount of the certificate which has 15.21 not been paid in and this amount shall be plainly and legibly 15.22 stated on the face of the certificate. 15.23 Each certificate holder of record shall be entitled to one 15.24 vote in person or by proxy in any meeting of the members of the 15.25 company for each $10 investment in guaranty fund certificates. 15.26 The guaranty fund may be reduced or retired by vote of the 15.27 policyholders of the company and the assent of the commissioner, 15.28 if the net assets of the company above its reinsurance reserve 15.29 and all other claims and obligations and the amount of its 15.30 guaranty fund certificates and interest thereon for two years 15.31 last preceding and including the date of its last annual 15.32 statement shall not be less than 50 percent of the premiums in 15.33 force. 15.34 Due notice of this proposed action on the part of the 15.35 company shall be mailed to each policyholder of the company not 15.36 less than 30 days before the meeting when the action may be 16.1 taken. 16.2 In mutual fire insurance companies with a guaranty fund, 16.3 the certificate holders shall be entitled to choose and elect 16.4 from among their own number or from among the policyholders at 16.5 least one-half of the total number of directors. 16.6 If any mutual fire insurance company with a guaranty fund 16.7 ceases to do business, it shall not divide among its certificate 16.8 holders any part of its assets or guaranty fund until all its 16.9 debts and obligations have been paid or canceled. 16.10 Foreign mutual fire insurance companies having a guaranty 16.11 fund shall not be required to make their certificate of guaranty 16.12 fund conform to the provisions of this section, but when the 16.13 certificates do not conform therewith the amount thereof shall 16.14 be charged as a liability. 16.15 Sec. 10. Minnesota Statutes 1998, section 66A.16, 16.16 subdivision 2, is amended to read: 16.17 Subd. 2. [MUTUAL CASUALTY COMPANIES.] Any mutual insurance 16.18 company which establishes and maintains, over and above its 16.19 liabilities and the reserves required by law of a like stock 16.20 insurance company, a guaranty fund available for the payment of 16.21 losses and expenses at least equal to the capital stock required 16.22 of a like stock insurance company may issue policies of 16.23 insurance without contingent liability, and when the articles of 16.24 incorporation of any mutual insurance company having this 16.25 guaranty fund provide, the company may transact any and all of 16.26 the kinds of business as set forth in section 60A.06, 16.27 subdivision 1, clauses (1) to (15) subject to the restrictions 16.28 and limitations imposed by law on a like stock insurance 16.29 company, and any domestic mutual company having a guaranty fund 16.30 equal to the amount of capital stock required of a like stock 16.31 insurance company may insure the same kinds of property and 16.32 conduct and carry on its business, subject only to the 16.33 restrictions and limitations applicable to like domestic stock 16.34 insurance companies. 16.35 Subdivision 1 shall not apply to this guaranty fund except 16.36 that the guaranty fund of the company shall be invested in the 17.1 same manner as is provided by law for the investment of its 17.2 other funds. Every such company shall in its annual statement 17.3 show as separate items the amount of the guaranty fund and the 17.4 remaining divisible surplus, and the aggregate of these items 17.5 shall be shown as surplus to policyholders. 17.6 A guaranty fund may be created, in whole or in part, in 17.7 either or both of the following ways: 17.8 (1) Where an existing mutual company has a surplus, the 17.9 members of the company may at any regular or special meeting set 17.10 aside from and out of its surplus such sum as shall be fixed by 17.11 resolution to be transferred to and thereafter constitute, in 17.12 whole or in part, the guaranty fund of the company; or 17.13 (2) By the issuance of guaranty fund certificates, as 17.14 specified in this subdivision, the same to be issued upon the 17.15 conditions and subject to the rights and obligations specified 17.16 in this subdivision. 17.17 Any such company establishing a guaranty fund, as provided 17.18 in this subdivision, may, subject to the restrictions and 17.19 limitations imposed by law as to a like stock insurance company, 17.20 amend its articles to provide for the doing by it of one or more 17.21 of the kinds of insurance business specified in section 60A.06, 17.22 subdivision 1, clauses (1) to (15). 17.23 The policy liability of any such mutual company issuing 17.24 policies without a contingent liability shall, as to these 17.25 policies, be computed upon the same basis as is applicable to 17.26 like policies issued by stock insurance companies. Where any 17.27 such company shall issue five-year term policies, wherein the 17.28 premiums shall be payable in annual or biennial installments and 17.29 no premium note is taken by the company as payment of the full 17.30 term premium, the company then shall be required to maintain a 17.31 reserve fund on only the portion of premiums actually collected 17.32 from time to time under these term policies and no company so 17.33 creating a guaranty fund shall issue policies without a 17.34 contingent liability after the guaranty fund shall be impaired 17.35 or reduced below the capital required of a like stock insurance 17.36 company doing the same kind or kinds of insurance. Any company 18.1 having a guaranty fund may insure, without a contingent 18.2 liability, any kind or class of property which a like stock 18.3 company may insure. 18.4 Any director, officer, or member of any mutual insurance 18.5 company, or any other person, may advance to the company any sum 18.6 of money necessary for the purposes of its business or to enable 18.7 it to comply with any of the requirements of the law, including 18.8 the creation, in whole or in part, of a guaranty fund to enable 18.9 it to do one or more of the kinds of business specified in this 18.10 subdivision, and for the creation by a company issuing policies 18.11 with a contingent liability of a guaranty fund, in such amount 18.12 as the board of directors shall determine, for the protection of 18.13 policyholders of the company, and the moneys, together with the 18.14 interest thereon as may have been agreed upon, not exceeding ten 18.15 percent per annum, shall be repaid only out of the surplus 18.16 remaining after providing for all reserves, if any, and other 18.17 liability, and which shall not otherwise be a liability or claim 18.18 against the company or any of its assets. No commission or 18.19 promotion expenses shall be paid in connection with the advance 18.20 of any money to the company, and the amount of the advance 18.21 remaining unpaid shall be reported in each annual statement. 18.22 The company shall issue to each person advancing money for 18.23 the creation of a guaranty fund a certificate or certificates 18.24 specifying the amount advanced. These certificates may be 18.25 assigned by the holder and the transfer recorded upon the books 18.26 of the company. The holders of the guaranty fund certificates 18.27 shall be entitled to annual interest thereon at the rate agreed 18.28 upon, if the net profits of the company, after all losses, 18.29 expenses, liabilities, and legal reserves, if any, have been 18.30 paid or provided for, are sufficient to pay the same. If the 18.31 net profits of the company in any year are insufficient to pay 18.32 the full amount of interest agreed upon, the difference may be 18.33 paid in any subsequent year from the net profits of the 18.34 subsequent years, if approval of the commissioner is obtained 18.35 before accrual for or payment of the interest. 18.36 The guaranty fund shall be applied to the payment of losses 19.1 and expenses when necessary and, if the guaranty fund be 19.2 impaired, the directors may make good the whole or any part of 19.3 the impairment from future net profits of the company or by the 19.4 issue and sale of additional guaranty fund certificates, but no 19.5 interest shall be paid on the guaranty fund certificates while 19.6 the guaranty fund is impaired. No certificate shall be issued 19.7 except for money actually paid to the company, which amount 19.8 shall be plainly and legibly stated therein. The company shall 19.9 issue certificates only in sums of $10, or multiples thereof; it 19.10 shall keep a record of the name and address of the person to 19.11 whom issued and of all assignments thereof. Upon surrender of a 19.12 certificate duly assigned in writing, the company shall cancel 19.13 the same and issue a new certificate to the assignee. 19.14 Each certificate holder of record shall be entitled to one 19.15 vote in person or by proxy at any meeting of the members of the 19.16 company, for each $10 investment in the guaranty fund 19.17 certificates. 19.18 The guaranty fund may be reduced or retired by vote of the 19.19 board of directors of the company and the assent of the 19.20 commissioner, if the net assets of the company, above its legal 19.21 reserves, if any, and all other claims and obligations are 19.22 sufficient therefor. The certificate holders shall be entitled 19.23 to choose and elect from among their own members or from among 19.24 the policyholders at least one-half of the total number of 19.25 directors. 19.26 In case the members of any company by resolution adopted at 19.27 any regular meeting or special meeting called for that purpose 19.28 shall determine to wind up and liquidate the business of any 19.29 such company, the assets thereof shall be applied (1) to the 19.30 payment of the expense of the liquidation; (2) to the payment of 19.31 any accrued liability, including losses, if any; (3) to the 19.32 payment of any unearned premiums on policies in force at the 19.33 time of the liquidation; (4) to the payment of guaranty fund 19.34 certificates, if any, together with accrued interest thereon, if 19.35 any; and (5) the residue shall be distributed according to the 19.36 provisions of chapter 60B. 20.1 Sec. 11. Minnesota Statutes 1998, section 68A.01, 20.2 subdivision 4, is amended to read: 20.3 Subd. 4. [INVESTMENT OF OTHER FUNDS.] After the investment 20.4 of such portion of its capital stock as hereinbefore provided 20.5 and the deposit of the securities in its guaranty fund as 20.6 aforesaid the remainder of its capital stock and funds may be 20.7 invested in such securities, records, abstract plants,and 20.8 equipment as the board of directors or the board of trustees of 20.9 the company shall determine to be suitable for the transaction 20.10 of its business, unless otherwise limited by this chapter. 20.11 Sec. 12. Minnesota Statutes 1998, section 68A.01, is 20.12 amended by adding a subdivision to read: 20.13 Subd. 6. [ADMITTED ASSET STANDARDS.] An investment in a 20.14 title plant or plants in an amount equal to the actual cost must 20.15 be allowed as an admitted asset for title insurers. The 20.16 aggregate amount of the investment must not exceed the lesser of 20.17 20 percent of admitted assets or 40 percent of surplus to 20.18 policyholders, both as required to be shown on the statutory 20.19 balance sheet of the insurer for its most recently filed 20.20 statement with the commissioner. If the amount of the 20.21 investment exceeds the limits in this subdivision, the excess 20.22 amount must be recorded as a nonadmitted asset. 20.23 Sec. 13. Minnesota Statutes 1998, section 68A.02, is 20.24 amended to read: 20.25 68A.02 [UNEARNED PREMIUM RESERVE.] 20.26 Upon issuance of each contract of title insurance issued on 20.27 or after January 1, 1964, through January 1, 2001, by a domestic 20.28 real estate title insurance company, there shall be reserved 20.29 initially a sum equal to ten percent of the original premium 20.30 charged therefor. At the end of each calendar year following 20.31 the year in which the contract of title insurance is issued, 20.32 there shall be a reduction in the sum so reserved in the amount 20.33 of one-twentieth of such sum. On any contract of title 20.34 insurance issued prior to January 1, 1964, by a domestic real 20.35 estate title insurance company, a reserve shall be set up on 20.36 January 1, 1964, and thereafter maintained in such sum as would 21.1 have been required if the foregoing requirements with respect to 21.2 title insurance reserves had existed at and after the date of 21.3 the contract of title insurance. Such sums herein required to 21.4 be reserved shall at all times and for all purposes be 21.5 considered and constitute unearned portions of the original 21.6 premiums on such contracts of title insurance, shall be charged 21.7 as a reserve liability of the real estate title insurance 21.8 company in determining its financial condition, and, for the 21.9 purpose of applying the provisions of section 60A.23, 21.10 subdivision 4, shall be deemed to constitute the whole amount of 21.11 the premiums on the unexpired risks of such real estate title 21.12 insurance company. 21.13 Sec. 14. [68A.03] [RESERVES.] 21.14 Subdivision 1. [REQUIREMENTS.] After January 1, 2001, the 21.15 financial condition of an insurer doing business under chapter 21.16 68A must be determined by applying the general provisions of the 21.17 insurance code requiring the establishment of reserves 21.18 sufficient to cover all known and unknown liabilities including 21.19 allocated and unallocated loss adjustment expense, except that a 21.20 title insurer shall also establish and maintain the reserves 21.21 required by this section. 21.22 Subd. 2. [CLAIM RESERVES.] A title insurer shall establish 21.23 and maintain a known claim reserve in an amount estimated to be 21.24 sufficient to cover all unpaid losses, claims, and allocated 21.25 loss adjustment expenses arising under title insurance policies, 21.26 guaranteed certificates of title, guaranteed searches, and 21.27 guaranteed abstracts of title and all unpaid losses, claims, and 21.28 allocated loss adjustment expenses for which the title insurer 21.29 may be liable, and for which the insurer has received notice by 21.30 or on behalf of the insured, holder of a guarantee, or escrow or 21.31 security depositor. 21.32 Subd. 3. [PREMIUM RESERVE.] (a) A title insurer shall 21.33 establish and maintain a statutory premium reserve consisting of: 21.34 (1) the amount of statutory premium reserve required by the 21.35 laws of the domiciliary state of the insurer if the insurer is a 21.36 foreign or non-U.S. title insurer; or 22.1 (2) if the insurer is a domestic title insurer of this 22.2 state, a statutory or unearned premium reserve consisting of: 22.3 (i) the amount of the statutory or unearned premium or 22.4 reinsurance reserve legally held on January 1, 2001, which 22.5 balance must be released according to the law in effect at the 22.6 time the sums were added to the reserve; and 22.7 (ii) additions to the reserve after January 1, 2001, must 22.8 be made out of total charges for title insurance policies and 22.9 guarantees written, equal to the sum of the following items, as 22.10 set forth in the title insurer's most recent annual statement 22.11 filed with the commissioner: 22.12 (A) for each title insurance policy on a single risk 22.13 written or assumed after January 1, 2001, a minimum rate of 22.14 $0.36 per $1,000 of net retained liability for policies under 22.15 $500,000 and $0.16 per $1,000 of net retained liability for 22.16 policies of $500,000 or greater; and 22.17 (B) a minimum of eight percent of escrow, settlement, and 22.18 closing fees collected in contemplation of the issuance of title 22.19 insurance policies or guarantees. 22.20 (b) The aggregate of the amounts set aside in this reserve 22.21 in any calendar year pursuant to paragraph (a), clause (2), item 22.22 (ii), must be released from the reserve and restored to net 22.23 profits over a period of 20 years at an amortization rate not to 22.24 exceed the following formula: 35 percent of the aggregate sum on 22.25 July 1 of the year next succeeding the year of addition; 15 22.26 percent of the aggregate sum on July 1 of each of the succeeding 22.27 two years; ten percent of the aggregate sum on July 1 of the 22.28 next succeeding year; three percent of the aggregate sum on July 22.29 1 of each of the next three succeeding years; two percent of the 22.30 aggregate sum on July 1 of each of the next three succeeding 22.31 years; and one percent of the aggregate sum on July 1 of each of 22.32 the next succeeding ten years. 22.33 (c) The insurer shall calculate an adjusted statutory or 22.34 unearned premium reserve as of the year of first application of 22.35 paragraph (a), clause (2), item (ii). The adjusted reserve must 22.36 be calculated as if paragraph (a), clause (2), item (ii), had 23.1 been in effect for all years beginning 20 years before the year 23.2 of first application of paragraph (a), clause (2), item (ii). 23.3 For purposes of this calculation, the balance of the reserve as 23.4 of that date is considered to be zero. If the adjusted reserve 23.5 so calculated exceeds the aggregate amount set aside for 23.6 statutory or unearned premiums in the insurer's most recent 23.7 annual statement filed with the commissioner, the insurer shall, 23.8 out of total charges for policies of title insurance, increase 23.9 its statutory or unearned premium reserve by an amount equal to 23.10 one-sixth of that excess in each of the succeeding six years, 23.11 beginning with the calendar year that includes the year of first 23.12 application of paragraph (a), clause (2), item (ii), until the 23.13 entire excess has been added. 23.14 (d) The aggregate of the amounts set aside in this reserve 23.15 in any calendar year as adjustments to the insurer's statutory 23.16 or unearned premium reserve pursuant to paragraph (c) must be 23.17 released from the reserve and restored to net profits, or equity 23.18 if the additions required by paragraph (c) reduced equity 23.19 directly, over a period not exceeding ten years pursuant to the 23.20 following table: 23.21 Year of addition Release 23.22 Year 1* Equally over ten years 23.23 Year 2 Equally over nine years 23.24 Year 3 Equally over eight years 23.25 Year 4 Equally over seven years 23.26 Year 5 Equally over six years 23.27 Year 6 Equally over five years 23.28 * The calendar year following the year of first application 23.29 of paragraphs (a), clause (2), item (ii), (b), and (c). 23.30 (e) A supplemental reserve must be established consisting 23.31 of any other reserves necessary, when taken in combination with 23.32 the reserves required by sections 68A.02 and 68A.03, to cover 23.33 the company's liabilities with respect to all losses, claims, 23.34 and loss adjusted expenses. 23.35 (f) Each title insurer subject to the provisions of this 23.36 chapter shall file with its annual statement, required under 23.37 section 60A.13, subdivision 1, a certification by a member in 23.38 good standing of the American Academy of Actuaries. The 23.39 actuarial certification required of a title insurer must conform 24.1 to the National Association of Insurance Commissioners' annual 24.2 statement instructions for title insurers. 24.3 Sec. 15. Minnesota Statutes 1999 Supplement, section 24.4 80A.15, subdivision 2, is amended to read: 24.5 Subd. 2. The following transactions are exempted from 24.6 sections 80A.08 and 80A.16: 24.7 (a) Any sales, whether or not effected through a 24.8 broker-dealer, provided that: 24.9 (1) no person shall make more than ten sales of securities 24.10 of the same issuer pursuant to this exemption, exclusive of 24.11 sales according to clause (2), during any period of 12 24.12 consecutive months; provided further, that in the case of sales 24.13 by an issuer, except sales of securities registered under the 24.14 Securities Act of 1933 or exempted by section 3(b) of that act, 24.15 (i) the seller reasonably believes that all buyers are 24.16 purchasing for investment, and (ii) the securities are not 24.17 advertised for sale to the general public in newspapers or other 24.18 publications of general circulation or otherwise, or by radio, 24.19 television, electronic means or similar communications media, or 24.20 through a program of general solicitation by means of mail or 24.21 telephone; and 24.22 (2) no issuer shall make more than 25 sales of its 24.23 securities according to this exemption, exclusive of sales 24.24 pursuant to clause (1), during any period of 12 consecutive 24.25 months; provided further, that the issuer meets the conditions 24.26 in clause (1) and, in addition meets the following additional 24.27 conditions: (i) files with the commissioner, ten days before a 24.28 sale according to this clause, a statement of issuer on a form 24.29 prescribed by the commissioner; and (ii) no commission or other 24.30 remuneration is paid or given directly or indirectly for 24.31 soliciting any prospective buyers in this state in connection 24.32 with a sale according to this clause except reasonable and 24.33 customary commissions paid by the issuer to a broker-dealer 24.34 licensed under this chapter. 24.35 (b) Any nonissuer distribution of an outstanding security 24.36 if (1) either Moody's, Fitch's, or Standard & Poor's Securities 25.1 Manuals, or other recognized manuals approved by the 25.2 commissioner contains the names of the issuer's officers and 25.3 directors, a balance sheet of the issuer as of a date not more 25.4 than 18 months prior to the date of the sale, and a profit and 25.5 loss statement for the fiscal year preceding the date of the 25.6 balance sheet, and (2) the issuer or its predecessor has been in 25.7 active, continuous business operation for the five-year period 25.8 next preceding the date of sale, and (3) if the security has a 25.9 fixed maturity or fixed interest or dividend provision, the 25.10 issuer has not, within the three preceding fiscal years, 25.11 defaulted in payment of principal, interest, or dividends on the 25.12 securities. 25.13 (c) The execution of any orders by a licensed broker-dealer 25.14 for the purchase or sale of any security, pursuant to an 25.15 unsolicited offer to purchase or sell; provided that the 25.16 broker-dealer acts as agent for the purchaser or seller, and has 25.17 no direct material interest in the sale or distribution of the 25.18 security, receives no commission, profit, or other compensation 25.19 from any source other than the purchaser and seller and delivers 25.20 to the purchaser and seller written confirmation of the 25.21 transaction which clearly itemizes the commission, or other 25.22 compensation. 25.23 (d) Any nonissuer sale of notes or bonds secured by a 25.24 mortgage lien if the entire mortgage, together with all notes or 25.25 bonds secured thereby, is sold to a single purchaser at a single 25.26 sale. 25.27 (e) Any judicial sale, exchange, or issuance of securities 25.28 made pursuant to an order of a court of competent jurisdiction. 25.29 (f) The sale, by a pledge holder, of a security pledged in 25.30 good faith as collateral for a bona fide debt. 25.31 (g) Any offer or sale to a bank, savings institution, trust 25.32 company, insurance company, investment company as defined in the 25.33 Investment Company Act of 1940, or other financial institution 25.34 or institutional buyer, or to a broker-dealer, whether the 25.35 purchaser is acting for itself or in some fiduciary capacity. 25.36 (h) An offer or sale of securities by an issuer made in 26.1 reliance on the exemptions provided by Rule 505 or 506 of 26.2 Regulation D promulgated by the Securities and Exchange 26.3 Commission, Code of Federal Regulations, title 17, sections 26.4 230.501 to 230.508, subject to the conditions and definitions 26.5 provided by Rules 501 to 503 of Regulation D, if the offer and 26.6 sale also satisfies the conditions and limitations in clauses 26.7 (1) to (10). 26.8 (1) The exemption under this paragraph is not available for 26.9 the securities of an issuer if any of the persons described in 26.10 Rule 252(c) to (f) of Regulation A promulgated by the Securities 26.11 and Exchange Commission, Code of Federal Regulations, title 17, 26.12 sections 230.251 to 230.263: 26.13 (i) has filed a registration statement that is the subject 26.14 of a currently effective order entered against the issuer, its 26.15 officers, directors, general partners, controlling persons, or 26.16 affiliates, according to any state's law within five years 26.17 before the filing of the notice required under clause (5), 26.18 denying effectiveness to, or suspending or revoking the 26.19 effectiveness of, the registration statement; 26.20 (ii) has been convicted, within five years before the 26.21 filing of the notice required under clause (5), of a felony or 26.22 misdemeanor in connection with the offer, sale, or purchase of a 26.23 security or franchise, or a felony involving fraud or deceit, 26.24 including but not limited to forgery, embezzlement, obtaining 26.25 money under false pretenses, larceny, or conspiracy to defraud; 26.26 (iii) is subject to an effective administrative order or 26.27 judgment entered by a state securities administrator within five 26.28 years before the filing of the notice required under clause (5), 26.29 that prohibits, denies, or revokes the use of an exemption from 26.30 securities registration, that prohibits the transaction of 26.31 business by the person as a broker-dealer or agent, or that is 26.32 based on fraud, deceit, an untrue statement of a material fact, 26.33 or an omission to state a material fact; or 26.34 (iv) is subject to an order, judgment, or decree of a court 26.35 entered within five years before the filing of the notice 26.36 required under clause (5), temporarily, preliminarily, or 27.1 permanently restraining or enjoining the person from engaging in 27.2 or continuing any conduct or practice in connection with the 27.3 offer, sale, or purchase of a security, or the making of a false 27.4 filing with a state. 27.5 A disqualification under paragraph (h) involving a 27.6 broker-dealer or agent is waived if the broker-dealer or agent 27.7 is or continues to be licensed in the state in which the 27.8 administrative order or judgment was entered against the person 27.9 or if the broker-dealer or agent is or continues to be licensed 27.10 in this state as a broker-dealer or agent after notifying the 27.11 commissioner of the act or event causing disqualification. 27.12 The commissioner may waive a disqualification under 27.13 paragraph (h) upon a showing of good cause that it is not 27.14 necessary under the circumstances that use of the exemption be 27.15 denied. 27.16 A disqualification under paragraph (h) may be waived if the 27.17 state securities administrator or agency of the state that 27.18 created the basis for disqualification has determined, upon a 27.19 showing of good cause, that it is not necessary under the 27.20 circumstances that an exemption from registration of securities 27.21 under the state's laws be denied. 27.22 It is a defense to a violation of paragraph (h) based upon 27.23 a disqualification if the issuer sustains the burden of proof to 27.24 establish that the issuer did not know, and in the exercise of 27.25 reasonable care could not have known, that a disqualification 27.26 under paragraph (h) existed. 27.27 (2) This exemption must not be available to an issuer with 27.28 respect to a transaction that, although in technical compliance 27.29 with this exemption, is part of a plan or scheme to evade 27.30 registration or the conditions or limitations explicitly stated 27.31 in paragraph (h). 27.32 (3) No commission, finder's fee, or other remuneration 27.33 shall be paid or given, directly or indirectly, for soliciting a 27.34 prospective purchaser, unless the recipient is appropriately 27.35 licensed, or exempt from licensure, in this state as a 27.36 broker-dealer. 28.1 (4) Nothing in this exemption is intended to or should be 28.2 in any way construed as relieving issuers or persons acting on 28.3 behalf of issuers from providing disclosure to prospective 28.4 investors adequate to satisfy the antifraud provisions of the 28.5 securities law of Minnesota. 28.6 (5) The issuer shall file with the commissioner a notice on 28.7 form D as adopted by the Securities and Exchange Commission 28.8 according to Regulation D, Code of Federal Regulations, title 28.9 17, section 230.502. The notice must be filed not later than 15 28.10 days after the first sale in this state of securities in an 28.11 offering under this exemption. Every notice on form D must be 28.12 manually signed by a person duly authorized by the issuer and 28.13 must be accompanied by a consent to service of process on a form 28.14 prescribed by the commissioner. 28.15 (6) A failure to comply with a term, condition, or 28.16 requirement of paragraph (h) will not result in loss of the 28.17 exemption for an offer or sale to a particular individual or 28.18 entity if the person relying on the exemption shows that: (i) 28.19 the failure to comply did not pertain to a term, condition, or 28.20 requirement directly intended to protect that particular 28.21 individual or entity, and the failure to comply was 28.22 insignificant with respect to the offering as a whole; and (ii) 28.23 a good faith and reasonable attempt was made to comply with all 28.24 applicable terms, conditions, and requirements of paragraph (h), 28.25 except that, where an exemption is established only through 28.26 reliance upon this provision, the failure to comply shall 28.27 nonetheless constitute a violation of section 80A.08 and be 28.28 actionable by the commissioner. 28.29 (7) The issuer, upon request by the commissioner, shall, 28.30 within ten days of the request, furnish to the commissioner a 28.31 copy of any and all information, documents, or materials 28.32 furnished to investors or offerees in connection with the offer 28.33 and sale according to paragraph (h). 28.34 (8) Neither compliance nor attempted compliance with the 28.35 exemption provided by paragraph (h), nor the absence of an 28.36 objection or order by the commissioner with respect to an offer 29.1 or sale of securities undertaken according to this exemption, 29.2 shall be considered to be a waiver of a condition of the 29.3 exemption or considered to be a confirmation by the commissioner 29.4 of the availability of this exemption. 29.5 (9) The commissioner may, by rule or order, increase the 29.6 number of purchasers or waive any other condition of this 29.7 exemption. 29.8 (10) The determination whether offers and sales made in 29.9 reliance on the exemption set forth in paragraph (h) shall be 29.10 integrated with offers and sales according to other paragraphs 29.11 of this subdivision shall be made according to the integration 29.12 standard set forth in Rule 502 of Regulation D promulgated by 29.13 the Securities and Exchange Commission, Code of Federal 29.14 Regulations, title 17, section 230.502. If not subject to 29.15 integration according to that rule, offers and sales according 29.16 to paragraph (h) shall not otherwise be integrated with offers 29.17 and sales according to other exemptions set forth in this 29.18 subdivision. 29.19 (i) Any offer (but not a sale) of a security for which a 29.20 registration statement has been filed under sections 80A.01 to 29.21 80A.31, if no stop order or refusal order is in effect and no 29.22 public proceeding or examination looking toward an order is 29.23 pending; and any offer of a security if the sale of the security 29.24 is or would be exempt under this section. The commissioner may 29.25 by rule exempt offers (but not sales) of securities for which a 29.26 registration statement has been filed as the commissioner deems 29.27 appropriate, consistent with the purposes of sections 80A.01 to 29.28 80A.31. 29.29 (j) The offer and sale by a cooperative organized under 29.30 chapter 308A or under the laws of another state, of its 29.31 securities when the securities are offered and sold only to its 29.32 members, or when the purchase of the securities is necessary or 29.33 incidental to establishing membership in the cooperative, or 29.34 when such securities are issued as patronage dividends. This 29.35 paragraph applies to a cooperative organized under the laws of 29.36 another state only if the cooperative has filed with the 30.1 commissioner a consent to service of process under section 30.2 80A.27, subdivision 7, and has, not less than ten days prior to 30.3 the issuance or delivery, furnished the commissioner with a 30.4 written general description of the transaction and any other 30.5 information that the commissioner requires by rule or otherwise. 30.6 This exemption only applies when the issuing cooperative is30.7 seeking to raise up to $1,000,000.30.8 (l) The issuance and delivery of any securities of one 30.9 corporation to another corporation or its security holders in 30.10 connection with a merger, exchange of shares, or transfer of 30.11 assets whereby the approval of stockholders of the other 30.12 corporation is required to be obtained, provided, that the 30.13 commissioner has been furnished with a general description of 30.14 the transaction and with other information as the commissioner 30.15 by rule prescribes not less than ten days prior to the issuance 30.16 and delivery. 30.17 (m) Any transaction between the issuer or other person on 30.18 whose behalf the offering is made and an underwriter or among 30.19 underwriters. 30.20 (n) The distribution by a corporation of its or other 30.21 securities to its own security holders as a stock dividend or as 30.22 a dividend from earnings or surplus or as a liquidating 30.23 distribution; or upon conversion of an outstanding convertible 30.24 security; or pursuant to a stock split or reverse stock split. 30.25 (o) Any offer or sale of securities by an affiliate of the 30.26 issuer thereof if: (1) a registration statement is in effect 30.27 with respect to securities of the same class of the issuer and 30.28 (2) the offer or sale has been exempted from registration by 30.29 rule or order of the commissioner. 30.30 (p) Any transaction pursuant to an offer to existing 30.31 security holders of the issuer, including persons who at the 30.32 time of the transaction are holders of convertible securities, 30.33 nontransferable warrants, or transferable warrants exercisable 30.34 within not more than 90 days of their issuance, if: (1) no 30.35 commission or other remuneration (other than a standby 30.36 commission) is paid or given directly or indirectly for 31.1 soliciting any security holder in this state; and (2) the 31.2 commissioner has been furnished with a general description of 31.3 the transaction and with other information as the commissioner 31.4 may by rule prescribe no less than ten days prior to the 31.5 transaction. 31.6 (q) Any nonissuer sales of any security, including a 31.7 revenue obligation, issued by the state of Minnesota or any of 31.8 its political or governmental subdivisions, municipalities, 31.9 governmental agencies, or instrumentalities. 31.10 (r) Any transaction as to which the commissioner by rule or 31.11 order finds that registration is not necessary in the public 31.12 interest and for the protection of investors. 31.13 (s) An offer or sale of a security issued in connection 31.14 with an employee's stock purchase, savings, option, profit 31.15 sharing, pension, or similar employee benefit plan, if the 31.16 following conditions are met: 31.17 (1) the issuer, its parent corporation or any of its 31.18 majority-owned subsidiaries offers or sells the security 31.19 according to a written benefit plan or written contract relating 31.20 to the compensation of the purchaser; and 31.21 (2) the class of securities offered according to the plan 31.22 or contract, or if an option or right to purchase a security, 31.23 the class of securities to be issued upon the exercise of the 31.24 option or right, is registered under section 12 of the 31.25 Securities Exchange Act of 1934, or is a class of securities 31.26 with respect to which the issuer files reports according to 31.27 section 15(d) of the Securities Exchange Act of 1934; or 31.28 (3) the issuer fully complies with the provisions of Rule 31.29 701 as adopted by the Securities and Exchange Commission, Code 31.30 of Federal Regulations, title 12, section 230.701. 31.31 The issuer shall file not less than ten days before the 31.32 transaction, a general description of the transaction and any 31.33 other information that the commissioner requires by rule or 31.34 otherwise or, if applicable, a Securities and Exchange Form S-8. 31.35 Annually, within 90 days after the end of the issuer's fiscal 31.36 year, the issuer shall file a notice as provided with the 32.1 commissioner. 32.2 (t) Any sale of a security of an issuer that is a pooled 32.3 income fund, a charitable remainder trust, or a charitable lead 32.4 trust that has a qualified charity as the only charitable 32.5 beneficiary. 32.6 (u) Any sale by a qualified charity of a security that is a 32.7 charitable gift annuity if the issuer has a net worth, otherwise 32.8 defined as unrestricted fund balance, of not less than $300,000 32.9 and either: (1) has been in continuous operation for not less 32.10 than three years; or (2) is a successor or affiliate of a 32.11 qualified charity that has been in continuous operation for not 32.12 less than three years. 32.13 Sec. 16. [REPEALER.] 32.14 Minnesota Statutes 1998, sections 60A.12, subdivisions 1, 32.15 3, 4, 7, 8, and 9; 60A.125, subdivision 3; and 60A.128, are 32.16 repealed. 32.17 Sec. 17. [EFFECTIVE DATE.] 32.18 Section 15 is effective retroactively from July 1, 1999.