Honorable William A. Harrison Opinion No. WW-459 

Commissioner of Insurance 

State Board of Insurance Re: What constitutes an underAustin, Texas writing transaction prohibited by Article 3.39, 

Section 2 of the Texas 

Dear Sir: Insurance Code? 

In your amended opinion request you ask whether 

several types of transactions are prohibited by various provisions of the Insurance Code among which is Article 3.39, 

Section 2, which reads as follows: 

"No such~company shall subscribe to, or patitlcipate in, any underwriting of the purchase or sale of 

securities or property or enter Into any such transaction for such purpose, or sell on account of such 

company jointly with any other person, firm or corporation; nor shall any such company enter into any agreement to withhold from sale any of Its property, but 

the disposition of Its property shall be at all times 

within the control of Its Board of Directors; . . ." 

The first two of the factual transactions that you are 

concerned with are summarized from our correspondence as follows: 

1. A contract between a life insurance company and 

a subdivision development company provides as follows: 

"Whereas, It Is contemplated and agreed that 

the XYZ Life Insuran‘ce Company and the B Investment 

Company will build or cause to have built for sale 

a number of~.*resldences both In Odessa, Texas, and 

Irving, Texas, to be jointly owned by both corporations, and that the title to the property shall be 

carried in the name of the B Investment Company for 

convenience only. 

"Now, therefore, be It resolved that the XYZ 

Life Insurance Company shall furnish all of the money 

through loans or provide the necessary credit-to the 

B Investment Company for the purchase of the building 

sites, materials, labor and.all building construction 
Hon. Wllllen~ A. Harrison, page 2 (W-459) 

costs; that the B Investment Company will furnish 

all of the supervision, let all contracts for 

building on a basis satisfactory to the XTZ Insurance Company and will supervise the sale of said 

houses. When the houses are sold all the profits, 

after deducting the entire cost of lots and bulldlng plus any coumlsslons paid for sale of property 

or any expenses of.any nature Incurred in the bullding of said houses, shall be divided as follows: 

"85s to the XYZ Life Insurance Company. 

"15% to the B Investment Company. 

“In arriving at the cost it Is understood that 

the interest paid on the money borrowed shall be a 

part of the costs determining the profit." 

2. A development corporation under a trust 'ogrocment 

deeds fee title to real estate for subdivision to a Trustee 

under an escrow arrangement whereby a life Insurance company 

loans the Trustee large sums of money secured by a first lien 

upon the real estate contributed by the development corporation. 

These funds held by the Trustee are advanced from time to time 

to the development corporation to build and develop the subdivision. As the subdlvlslon Is developed and sold to the 

public, the entire proceeds are deposited with the Trustee. 

The Trustee In turn uses a percentage of these total proceeds 

(agreed to in the trust instrument) to pay off:the indebtedness 

to the life Insurance company. After the loan plus interest Is 

paid off to the Insurance company, the Trustee then distributes 

the profits between the Insurance company and the development 

corporation according to a formula agreed to in the trust lnstrum&t. 

An "underwriting of the purchase or sale of . . . 

property" would consist of a promise by the insurance company 

that if property were not sold for a certain price It would 

guarantee that the insurance company would buy It for that price. 

Or conversely, unless property could be acquired at a certain 

price the Insurance company would acquire the property for the 

guaranteed price whatever the market price might be. (See 43 

Words and Phrases, p. 124, et seq.) Thus, It is evident that 

neither of the two above questioned transactions resembles a 

prohibited underwriting transaction. 

It Is our o@lnlon, however, that both of these transactions are prohibited on other grounds. The above quoted portion 

of Section 2 which contains the restrictions on underwriting and 
Hon..- :;~U!Ilam:.A. Darrlson, page 3 (W-459) 

joint accounts was not.ln 

torlc AmIWtrOng Committee 

the Texas law until 1909. The hlsreported on February 22, 1906, to . . __ - . the New York State Legislature concerning tne wlae scale atmses 

by the management of I@v York Insurance companies. The Committee 

found that the large companies had furnished their support to 

numerous speculative financial ventures through participating 

In the underwrltlngs of syndicates. In this manner, purchases 

had been made, not for Investment, but for resale. See %amlnation of Insurance Companies, Volume 2, b 

Insurance Department, New York, 1953, p. 2 L 

the New Yorkme 

, et seq. Often 

.companies furnished all the money required for the speculative 

venture while officers of the company and members of the finance 

committee would be parties&to a joint account and share In Its 

profits. In order to eliminate these wide scale abuses the 

fifth recommendation of the Armstrong Committee was as follows: 

"The statute should also forbid all syndicate 

participations, transactions for purchases and sales 

on joint account, and the making of any agreement providing the company shall withhold from the sale at sny 

time, or subject to the discretion of others, any securlties which it may own or acquire." 

This recommendation was adopted by the Legislature of 

New York on April 27, 1906, as a part of Section 100, Laws of 

New York, ch. 326, p. 798 (1906). This section Is almost ldentlcal word for word wlth the above quoted Texas provision originally 

enacted In 1909 and brought unchanged Into the Texas Insurance 

Code as Article 3?39, Section 2. 

From this statutory history, It Is clear that the quoted 

phrase of Article 3.39, Section 2, establishes three distinct 

and separate restrictions on all types of Investments: First, 

prohibiting underwriting; second, prohibiting sales on joint 

accounts and, third, prohibiting the placing of the insurance company's property beyond the control of Its Board of Directors. 

The evil sought to be remedied by the prohibition of selling 

on joint accounts was transactions of the nature of partnership 

or joint ventures for a speculation In property by which others 

than the Insurance company would share some control or the profit 

or loss of such an "Investment". 

The profit sharing features of the first transaction 

outlined above are clearly within this prohibition. Both the 

first and second.transactlons are essentially sales of property 

on joint account with another person, firm or corporation, In 

which the insurance companyputs up the money In a joint account 

to finance the development and resale of property. In both 

:lnstances the Insurance company Is to receive not only the loan 
‘> * Q;” 

Hon. William A. Harrison, page 4 (WW-439) 

money back with Interest but then it will also share in the 

profits with the developer. The profit sharing feature as 

a bonus Is prohibited. Such a transaction Is characteristic 

of.some form of joint venture rather than an ordinary loan 

upon first liens upon real estate. The first transaction Is 

further defective for the reason that title to the real estate 

Is In the Insurance company and thus would be forbidden by 

Article 3.40. 

The statute Itself nrovldes that: "A life insurance 

company organized . . . may Invest In or loan upon the following 

securities, and none others, viz: . . ." (Bnphasls ours) In 

this connection It should be noted that these transactions Involve 

property acquired for speculative resale rather than loans or 

Investments that are held for their yield In the form of Interest 

or dividends. The acquisition of such property for speculative 

resale is not authorized by Article 3.39 and therefore ultra vlres. 

The third factual situation on which you request an 

opinion as to whether or not It is a prohibited transaction is 

stated by you as follows: 

3. A "life Insurance company . . . issued shares 

of its steak to a subsidiary underwriting corporation 

with an agreement that the underwriting corporation 

would sell the shares of stock to the public, and that 

all profits over and above 30s of the realized gross 

profit on the sale of the stock would be contributed 

by the underwriters corporation to the life Insurance 

company as ~urplus.~ 

This third transaction by which a corporation acts as 

an underwriter upon shares Issued to It by an insurance company 

is somewhat anomalous. For a small consideration the underwriting corporation only commits itself to use Its best efforts 

to market the insurance company88 securities. The Insurance 

company-is not Itself acting as an underwriter. Certainly, 

however, If the Insurance company were to participate in such 

an arrangement concerning stocks other than that of Its own 

issue, It would be participating in an underwriting transaction 

which would be clearly forbidden. However, taken in context, 

the statutory underwriting prohibition applies only to lnvestments by life Insurance companies. In the instant case there 

is no'lnvestment by the insurance company In any sense when the 

insurance company attempts to market its own securities anymore 

than when it attempts to sell Its own policies. For this reason 

we do not feel that the above quoted restrictions of ArtlcXe 

3.39, Section 2, apply to this transaction. We have assumed under 

the facts of this transaction that the underwriting corporation 

waaactlng as a disinterested underwriter In an arms length 
Hon. William A. Harrison, .page 5.(WW-459) 

transaction. However, if the Board should ascertain that 

the directors in the Insurance company are "pecuniarily lnterested In" the underwriting subsidiary corporation, then It Is 

the Board's duty to subject to the strictest scrutiny the underwriting contract with the subsidiary corporation. From the 

legislative hlstory'as stressed lh the Armstrong Committee 

Report, It Is abundantly clear that any self deallng'on the 

partof the directors is prohibited. Insurance Code, Article 

3.67, Article 1.15 (formerly Articles 4727 and 469) were 

cohstrued in Attorney General Opinion O-1889 to~allow the 

Board to revoke or modify any certificate of,authorlty issued 

If a suspect transaction falls to meet the test of fairness, 

fiduciary relationship, and the standards of soundest morality. 

It should be noted In this regard that the retention of a thirty 

(30%) percent commlsslon by the underwriting corporation may 

well be a violation of The Securities Act which limits the. 

total expenses of marketing securities Including commission. 

The commlsslon retained by the underwrltln 

tion may exceed the maximum of twenty (20% 7 

subsidiary corporapercent of the 

price at which the stock was sold to the public If the 'pr$ce" 

paid by the underwriting corporation to the lnsurance~company 

were nominal. In summary, both the first and second transactions 

are sales of property on the account of the insurance company 

jointly with another person, firm or corporation and are clearly 

prohibited by Article 3.39, Section 2, as well as other sections 

of the Insurance Code. The third transaction, although it Is 

not a prohibited underwriting transaction, may be a suspect on 

other grounds. 

A transaction by which an insurance company 

advances capital for real estate development 

In return for a share of the profits is 

prohibited by Article 3.39, Section 2, Texas 

Insurancb Code. An insurance company may 

utilize an underwriter in order to market 

Its own securities unless the Insurance company directors are so "pecuniarily interested" 
Hon. Wil1iarp.A. Harrisbn;page 6 (WW-459) 

lh the transaction as to violate Article 

3.67’ of the Insurance Code. 

Yours very truly, 

WILL WILSON 

Attorney General of Texas 

MS:ph 

APPROVED: 

OPiNION COMMITTEE: 

&xi. P. Biackbirn, 

Leoxiard Passmore 

Wayland C. Rivers, 

H&ry (1. Braswell 

Mao0 Stewart 

Assistant 

Chairman 

Jr. 

REVIEWEDFORTHBATTORNEYGENERAL 

.B!t: 

W. V. Geppert.