2023 Laws of Puerto Rico › TITLE TWENTY-SIX - Insurance (§§ 101 — 10377) › Subtitle 1 - Insurance Generally (§§ 101 — 4513) › Chapter 6B - Investments (§§ 648 — 662) › § 648 - Definitions

(1) AFICA.— Is the Spanish acronym for the Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financing Authority created by Act No. 121 of June 27, 1977, as coded in Sections 12 L.P.R.A. §§ 1241 et seq.
(2) Preferred stock.— Means any preferred stock, preferent or secured of a corporation or other commercial entity authorized to issue such type of stock, with liquidation preference over common stock of the issuing commercial entity.
(3) Admitted assets.— Means the assets described in §§ 516–524 of this title, excluding the assets of separate accounts that are not subject to the provisions set forth in §§ 648–662 of this title.
(4) Affiliate.— Means, with respect to any person, another person who, directly or indirectly, through one (1) or more intermediaries, controls, is controlled by, or is under common control with the person.
(5) Qualified bank.— Means:
(a) A bank organized under the laws of Puerto Rico, or a national state bank or trust company adequately capitalized at all times pursuant to banking regulations of the United States or Puerto Rico, and which is subject to the regulations and/or banking laws of a State or Puerto Rico, or which is a member of the Federal Reserve system, or
(b) a bank or trust company, incorporated or organized under the laws of a foreign country and which is regulated by the laws of said country or by an agency of said government and which at all times is adequately capitalized as determined by the standards adopted by international banking authorities.
(6) Multilateral development bank.— Means an international development organization of which the United States is a member.
(7) Real estate.— Means:
(a)
(i) Real property;
(ii) interest in real property, such as surface rights, mineral, oil and gas, which have not been separated from the real property, and leasing rights on the same, and
(iii) capital improvements and fixed facilities located on or in the real property.
(8) Capital and surplus.— Means the sum of the capital and surplus of the insurer included in the last annual report submitted to the Commissioner pursuant to § 331 of this title.
(9) Letter of credit.— Means an irrevocable and unconditional letter of credit, issued by a financial institution listed under the financial institutions that comply with the norms to issue letters of credit pursuant to the Purposes and Procedures Handbook of the Securities Valuation Office (SVO), or any succeeding publication or other nationally recognized statistics rating agency. For purposes of § 658 of this title, a letter of credit shall have a maturity date subsequent to the term of the transaction to which it is subject.
(10) Registered exchange office.— Means:
(a) A securities exchange office registered as a national exchange office under the Securities Exchange Act of 1934 (15 U.S.C.A. §§ 78 et seq.), as amended, or as registered otherwise pursuant to said law whose price quotations shall be provided through an automated national quoting system approved by the National Association of Securities Dealers, Inc.
(b) A board of trade or stock exchange designated as a contracting market by the Commodity Futures Trading Commission, or its successor.
(11) Purchase warrant certificates.— Means an instrument that confers upon the holder the right to purchase underlying assets at fixed price and term or at a series of prices and terms indicated in the purchase agreement. Warrant certificates may be issued alone or in connection with the sale of other securities, as part of a merger or recapitalization plan or agreement, or to expedite the divestiture of securities of another corporation.
(12)
(a) Acceptable collateral.— For purposes of security loan transactions, it shall mean cash, cash equivalents, letters of credit, direct obligations of, or securities whose principal and interest are secured by the government of the United States or Puerto Rico, or by their respective agencies and instrumentalities, including the Federal Home Loan Mortgage Corporation; and with regard to the loaning of foreign securities, it shall mean every sovereign debt rated 1 by the Securities Valuation Office (SVO, Spanish acronym) or with an equivalent rating issued by a nationally renowned statistics rating agency, recognized by the Securities Valuation Office (SVO).
(b) For purposes of repurchasing transactions, it shall mean cash, cash equivalent, letters or credit, direct obligations of or securities the principal and interest of which are secured by the government of the United States or Puerto Rico, or by their respective agencies and instrumentalities, including the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
(c) For purposes of reverse repurchase agreements, it shall mean cash and cash equivalent.
(13) Registered investment company.— Means an investment company as defined in § 3(a) of the Investment Company Act of 1940, as amended, and any person described in § 3(c) of said act, or a registered investment company registered under the Investment Companies Act of Puerto Rico, §§ 661 et seq. of Title 10.
(14) Limited liability company.— Means any trade organization, excluding regular partnerships and corporations, organized or operated pursuant to the laws of the United States or any states thereof, or of Puerto Rico, which limits the personal liability of investors to their investment in equity in the trade entity.
(15) Control, controls or controlled.— Means the direct or indirect holding of power to direct or influence the direction of the administration and policies of a person, whether through the ownership of voting stock entitled to vote, through contract (other than a regular trade contract or a nonadministrative service contract), or otherwise, unless the power arises from the official or corporate position held by the person. It shall be presumed that there is control if any person, directly or indirectly, holds, controls, or has a voting power totaling five percent (5%) or more, or has empowerments totaling five percent (5%) or more of any other person’s voting stock. Said presumption may be defeated if it is proved that there is no such actual control. However, the Commissioner may conclude, after giving every person concerned due notice and opportunity to comment, based on the findings of fact grounding his conclusion, that there is indeed control, notwithstanding the absence of a presumption in that sense.
(16) Direct.— If used in connection with an obligation, means that the designated debtor is primarily responsible for the instrument that represents the obligation.
(17) Trade entity.— Includes a sole owner, a corporation, partnership, limited liability company, an association, limited liability partnership, a joint-stock company, a limited partnership, special partnership, joint venture, trust, joint partnership or other similar form of trade organization whether for profit or nonprofit.
(18) Registered trade entity.— Means a trade entity which:
(a) Has issued obligations or preferred stock that are classified 1 or 2 by SVO or is an issues of obligations, preferred stock or instruments derived thereof that have been classified the equivalent of 1 or 2 by the SVO or by a recognized statistics rating agency recognized nationally or by the SVO, or
(b) is a securities producer (primary dealer) of the United States Government, as recognized by the Federal Reserve Bank of New York.
(19) Government sponsored enterprise.— Means:
(a) A government agency, or
(b) a corporation, limited liability company, association, partnership, limited partnership, special partnership, limited liability partnership, joint stock company, joint venture, a trust or any entity or instrumentality organized by the United States, a state, a political subdivision of a state, Puerto Rico, a political subdivision of Puerto Rico, Canada, a province of Canada, or a political division of Canada in order to attain a public policy or other government purpose.
(20) State.— Means a state, territory or possession of the United States of America and the District of Columbia.
(21) Cash equivalents.— Means short term investments or stocks of high credit classification and great liquidity, easily convertible into known amounts of cash without incurring penalties and are so close to maturity that they represent a minimal risk of change in their value. Cash equivalents include money market mutual funds and funds of great liquidity, easily convertible into known amounts of cash without incurring penalties, which are so close to maturity that they represent a minimal risk of change in their value. Cash equivalents include Class One Money Market Mutual Funds. For purposes of this definition, “short term investments or stocks” shall mean investments or stock with a maturity term of ninety (90) days or less.
(22) Investment strategy.— Means the techniques and methods used by an insurer to accomplish their investment objectives such as the active management of an investment portfolio, the passive management of an investment portfolio, use of hedging transactions and other investment practices.
(23) Hedging transactions.— Means a derived transaction that has been executed and maintained to reduce:
(a) The risk of changes in the value, yield, price, cash flow or amount of assets or liabilities acquired or incurred, or about to be acquired or incurred, by the insurer, or
(b) the risk of changes in the money exchange rate or in the level of exposure regarding the assets or liabilities received or incurred, or about to be acquired or incurred by an insurer.
(24) Mutual fund.— Means an investment company registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 or any other entity subject to the provisions of the Investment Companies Act of Puerto Rico, §§ 661 et seq. of Title 10.
(25) Class One Bond Mutual Fund.— Means a mutual fund that qualifies at all times for investment using the reserve factor for class one bonds of the Purposes and Procedure Manual of the SVO or any other succeeding publication, or a mutual fund registered under the Investment Companies Act of Puerto Rico that has ninety percent (90%) or more of its assets in the credit instruments or preferential debts described in former § 639(1) of this title and in AFICA obligations, setting forth hereby that if investments in other stock or obligations by any of such funds exceeds ten percent (10%) of its assets, a percentage equivalent to the investment in stock or obligations of said fund shall be deemed as an investment in equity in interest investments as described in Article 9.090(1).
(26) Money market mutual fund.— Means a mutual fund that meets the conditions established in paragraphs 270.2a-7 of Title 17 of the Code of Federal Regulations, as amended.
(27) Class One Money Market Mutual Fund.— Means a mutual fund that qualifies at all times for investment using the reserve factor for Class One bonds of the Purposes and Procedure Manual of the SVO, NAIC or any succeeding publication.
(28) Government Money Market Mutual Fund.— Means a money market mutual fund that at all times:
(a) Invests in obligations that are issued, guaranteed or secured by the government of the United States, or invests in collateralized repurchase agreements composed by said obligations, and
(b) qualifies for investment without a reserve pursuant to the Purposes and Procedure Manual of the SVO or any succeeding publication.
(29) Guaranteed or secured.— When used jointly with an obligation acquired under §§ 668–662 of this title, means that the guarantor or insurer is bound to:
(a) Assume or secure the obligation of the debtor, or to buy the obligation, or
(b) make an unconditional commitment to maintain any conditions, which allow the debtor to pay the obligation in full.
(30) Income.— With respect to securities, means interest, accrued discounts, dividends or other distributions.
(31)
(a) Rated credit instrument.— Means a contractual right to receive cash or other rated credit instrument of another entity whose instrument is:
(i) Rated or subject to rating by the SVO; or
(ii) in case of an instrument with a maturity of three hundred and ninety-seven (397) days or less, said instrument is issued, guaranteed or underwritten by an entity rated by, or any other obligation of the entity that is rated by the SVO or by any other nationally recognized statistical rating agency, recognized by the SVO; or
(iii) in case of an instrument with a maturity of ninety (90) days or less, said instrument is issued by a qualified bank; or
(iv) is a share or shares from a Class One Bond Mutual Fund, or
(v) a share or shares from a money market mutual fund.
(b) However, “rated credit instrument” does not mean:
(i) A security with a par value, which provides that the net obligation of the issuer to repay all or part of its par value shall be determined through the performance of an interest in equity, commodity, foreign interest in equity or a foreign interest in equity index, foreign commodities, foreign currency or any combination thereof, or
(ii) instruments that, obligatorily or at the option of the issuer, are convertible into interests in equity.
(32) Derived instrument.— Means an agreement, option, instrument or any combination thereof:
(a) To deliver, receive or assume a specific amount from one or more underlying interest rates, or to conduct a liquidation in cash instead, or
(b) having a price, yield, value or cash flow based in the present or expected price, level, yield, value or cash flow of one or more underlying assets. Derived instruments include options, guaranties used in hedging transactions not subject to another trade instrument, covers certificates of acquisition, maximum limits, minimum limits, exchanges, dated transactions, futures transactions and any other agreements, options or instruments substantially similar to the same, or any combination thereof. Derived instruments shall not include investments authorized by §§ 654–659 and 662 of this title, and do not include, for purposes of this §§ 648–662 of this title, collateralized mortgage obligations.
(33) Underlying interest.— Means the assets, liabilities and other interest, or a combination of same that serve as a basis for a derived instrument, such as any one or more securities, currency, rates, indexes, commodities, or derived instruments.
(34) Interest in equity.— Means any of the following, provided the same are not classified credit instruments:
(a) Common stock.
(b) Preferred stock.
(c) Participation certificate in investment partnership.
(d) Equity investment in an investment company that is not a money market mutual fund or a Class One Bond Mutual Fund.
(e) Investment in a common trust fund of a bank regulated by a federal or state agency.
(f) Any proprietary interest in minerals, petroleum or gas, in which rights have been separated from real interest on the real estate in which the minerals, petroleum or gas are located.
(g) Instruments that obligatorily have to be converted into equity securities.
(h) Interest in limited liability partnerships.
(i) Interest in limited liability companies.
(j) Guaranties or other rights to acquire equity which are created by the entity that owns or that will issue the equity interest to be acquired.
(k) Instruments that would be classified credit instruments, a described in subsection (31)(b) of this section.
(35) Investments.— Means transactions of the kind described in §§ 654–657 and 659 of this title.
(36) Top rated investments.— Means, in the case of credit instruments, those rated 1 or 2 by the SVO; or in the case of short term investments, those rated P-1 by Moody’s Investor’s Service, Inc., or A-1 by Standard and Poor’s Rating Group; or investments with similar ratings by a nationally recognized statistics rating agency, and by the SVO.
(37) Low rated investments.— Means, in the case of credit instruments, those rated 4, 5 or 6 by the SVO, or rated BB to R by Standard and Poor’s Rating Group; or investments rated similarly by a nationally recognized statistics agency, and by the SVO.
(38) Foreign investments.— Means investments in any foreign jurisdiction, or foreign person, real property, real estate or assets domiciled in a foreign jurisdiction, which are substantially of the same nature as those qualifying for investment under §§ 648–662 of this title. An investment shall not be deemed foreign if the person issuing the securities, or the qualified primary credit source or the qualified guarantor is located in a domestic jurisdiction or is a person domiciled in a domestic jurisdiction, unless:
(a) The person issuing the securities is a shell business entity, and
(b) the investment is not assumed, secured, insured or otherwise supported by a person or domestic corporation which is not a shell business entity domiciled in a domestic jurisdiction. For purposes of this definition:
(i) Shell business entity.— Means a business entity which lacks financial substance, except as a vehicle to own interest in assets issued, owned or previously owned by a person domiciled in a foreign jurisdiction.
(ii) Qualified primary credit source.— Means a credit source to which the guarantor may claim the payment of an investment and against which the insurer has a direct claim for the full and timely payment of the debt, based on a contractual right under which he may file a foreclosure action in the domestic jurisdiction.
(iii) Qualified guarantor.— Means a guarantor against whom an insurer has a direct claim for the full and timely payment of the debt, based on a contractual right under which he may file a foreclosure action in the domestic jurisdiction.
(39) Middle rated investments.— Means, in the case of credit instruments, those classified 3 by the SVO; or in the case of short term investments, investments classified P-2 and P-3 by Moody’s Investor’s Service, Inc., or classified A-2 and A-3 by Standard and Poor’s Rating Group; or in the case of long term investments, those rated BBB by Moody’s Investor’s Service, Inc., or Standard and Poor’s Rating Group; or investments rated similarly by a nationally renowned statistics rating agency, acknowledged by the SVO.
(40) Short term investments or securities.— Means investments or securities with a remaining term of one (1) year or less for maturity.
(41) Domestic jurisdiction.— Means the United States, any state of the United States, the District of Columbia, and Puerto Rico.
(42) Foreign jurisdiction.— Means a jurisdiction outside of the United States, Puerto Rico or Canada.
(43) Foreign currency.— Means any currency other than that of the United States.
(44) NAIC.— Means the National Association of Insurance Commissioners.
(45) SVO.— Means the Securities Valuation Office of the NAIC.
(46) Obligations.— Means bonds, notes, bills, trust certificates on machinery, production payments, certificates of bank deposits, term deposits, bankers acceptances, credit loans for leaseholds, loans secured by the financing of net lease and other evidence of indebtedness for the payment of money (or shares, certificates or other evidence of an interest in any of the above) which constitute general obligations of the issuer or which must be paid solely from certain income or certain funds pledged or committed for said payment.
(47) Collateralized mortgage obligations or CMO’s.— Are obligations and other evidences of debt whose payments are collateralized by several mortgages that pay or accrue interest on their principal. For purposes of this §§ 648–662 of this title, residuals are not included. The word “residuals” means obligations known as (“Interest Only” or “IOs”) or (“Principal Only” or “Pos”).
(48) Liabilities.— Means all liabilities that must be included in the last annual statement presented to the Commissioner pursuant to § 331 of this title.
(49) Person.— Means a person, business entity, multilateral development bank, or a governmental or quasigovernmental body such as a political subdivision or government sponsored enterprise.
(50) Investment practices.— Means transactions of the kind described in §§ 658 and 660 of this title.
(51) Mortgage loan.— Means an obligation secured by a mortgage, trust deed, trust contract on real property.
(52) Home mortgage loan.— Means a loan primarily secured by a mortgage loan on real property improved with a residence for one to four families.
(53) Puerto Rico.— Means the Commonwealth of Puerto Rico, its agencies, instrumentalities, municipalities and political subdivisions.
(54) Mortgage loan insurance.— Means an insurance subscribed by a private insurer to protect the mortgage lender against losses caused by default, and which is issued by an insurance company authorized and rated by a nationally recognized statistics rating agency, recognized by the SVO, whose coverage protects in a loan-to-value ratio for losses of eighty percent (80%) or more.
(55) Derivative transaction.— Means a transaction involving the use of one or more derivative instruments, but for purposes of §§ 648–662 of this title, it does not include mortgage collateralized obligations.
(56) Securities lending transaction.— Means a transaction in which the securities are loaned by an insurer to a business entity which is bound to reimburse the loaned securities or equivalent or similar securities to the insurer, whether on demand by the insurer or within a specific period of time.
(57) Repurchase transaction.— Means a transaction in which an insurer purchases securities from a business entity that is bound to repurchase the securities purchased by the insurer (or equivalent securities) at a fixed price, whether on demand by the insurer or on a fixed date.
(58) Reverse repurchase transaction.— Means a transaction in which an insurer sells securities to a business entity and is bound to repurchase the securities sold or equivalent securities from the business entity at a fixed price, whether on demand by the entity or on a fixed date.
(59) Dollar roll transaction.— Means two (2) simultaneous transactions with different liquidation dates not more than ninety-six (96) days apart, so that in the transaction with the most recent liquidation date, the insurer may sell to a business entity and in the other transaction, the insurer is bound to purchase from the same business entity substantially the same securities if they are within the following categories:
(a) Securities guaranteed by other securities, assumed or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or their respective successor agencies, and
(b) other securities guaranteed by assets described in § 106, Title 1 of the Secondary Mortgage Market Enhancement Act of 1984, as amended, codified under 15 U.S.C.A. § 77r-1.
(60) Market value.— Means:
(a) Regarding cash and cash equivalent, the amounts of these items.
(b) Regarding securities, the current price obtained from a generally recognized source, or the most recent price quotation from a generally recognized source, or if there is no generally recognized source, the price of the security as determined by the Commissioner under § 652 of this title, including the income accrued but not paid, if not previously included in the price.
(61) Equivalent securities.— Means:
(a) In security loan transactions, securities that are identical to the securities loaned including the amount of the securities loaned, except that the same have a different certificate number (if in physical possession); but if different securities are exchanged for a security loaned as a result of a reorganization, merger, consolidation or other corporate action, the security exchanged shall be deemed as the loaned security;
(b) in a repurchase transaction, securities that are identical to purchased securities including the amount of the securities purchased except for the certificate number, if the same are in physical possession, or
(c) in a reverse repurchase transaction, securities that are identical to the securities sold including the amount of securities sold, except for the certificate number, if in physical possession.
(62) Asset backed securities.— Are those securities or other instruments (excluding mutual funds) which evidence an interest in, or the right to receive payments from, or are primarily payable from, the distributions of an asset or group of financial assets, or a specifically segregated cash flow, which are deposited in a trust or are segregated in a special purpose solvent business entity, under the following conditions:
(a) The trust or business entity has been established solely for the purpose of acquiring specific types of financial assets or cash flow rights, and issues securities and other instruments which represent an interest in or a right to receive cash flow from those assets; and it is engaged in the activities that are necessary to maintain assets or rights and the credit characteristics and support of the assets owned by the trust or other business entity, and
(b) the assets of the trust or other business entity consist solely of interest yielding obligations or other contractual obligations which represent the right to receive payments from the cash flow of the assets or rights. However, the credit enhancement or other credit support characteristics such as letters of credit, guaranties and exchange agreements shall not cause a security or other instrument to be an ineligible investment.
(63) Substantially similar securities.— Means securities that meet all the requirements of substantial similarity described in the Accounting and Practices Procedures Manual published by the NAIC, as amended, and in an amount which constitutes an acceptable form of delivery, as determined from time to time by the Public Securities Administration.
(64) Short sale.— Means a transaction involving the sale of securities that are not yet part of the investment portfolio of the insurer with the intention of subsequently repurchasing the same at a lower price.
History —Ins. Code, added as § 6.020 on May 16, 2003, No. 130, § 1; Jan. 19, 2006, No. 10, § 9, eff. 120 days after Jan. 19, 2006.