§ 3-1 — Investment Regulations

(a) Any health maintenance organization may invest its funds as provided in this Section and not otherwise. A health maintenance organization that is organized as an insurance company may also acquire the investment assets authorized for an insurance company pursuant to the laws applicable to an insurance company in the organization's state of domicile. Notwithstanding the provisions of this Section, the Director may, after notice and hearing, order an organization to limit or withdraw from certain investments, or discontinue certain investment practices, to the extent the Director finds that such investments or investment practices are hazardous to the financial condition of the organization. (b) No investment or loan shall be made or engaged in by any health maintenance organization unless the same have been authorized or ratified by the board of directors or by a committee thereof charged with the duty of supervising investments and loans. Nothing contained in this subsection shall prevent the board of directors of any such organization from depositing any of its securities with a committee appointed for the purpose of protecting the interest of security holders or with the authorities of any state where it is necessary to do so in order to secure permission to transact its appropriate business therein, and nothing contained in this subsection shall prevent the board of directors of such organization from depositing any securities as collateral for the securing of any bond required for the business of the organization. (c) No health maintenance organization shall pay any commission or brokerage for the purchase or sale of property whether real or personal, in excess of that usual and customary at the time and in the locality where such purchases or sales are made, and information regarding payments of commissions and brokerage shall be maintained. (d) A health maintenance organization may not directly or indirectly, unless it has notified the Director in writing of its intention to enter into the transaction at least 30 days prior thereto, or any shorter period as the Director may permit, and the Director has not disapproved it within that period: (1) make a loan to or other investment in an officer or director of the organization or a person in which the officer or director has any direct or indirect financial interest; (2) make a guarantee for the benefit of or in favor of an officer or director of the organization or a person in which the officer or director has any direct or indirect financial interest; or (3) enter into an agreement for the purchase or sale of property from or to an officer or director of the organization or a person in which the officer or director has any direct or indirect financial interest. For the purposes of this Section, an officer or director shall not be deemed to have a financial interest by reason of an interest that is held directly or indirectly through the ownership of equity interests representing less than 2% of all outstanding equity interests issued by a person that is a party to the transaction, or solely by reason of that individual's position as a director or officer of a person that is a party to the transaction. This subsection does not apply to a transaction between an organization and any of its subsidiaries or affiliates that is entered into in compliance with Section 131.20a of the Illinois Insurance Code, other than a transaction between an insurer and its officer or director. (e) In applying the percentage limitations imposed by this Section there shall be used as a base the total of all assets which would be admitted by this Section without regard to percentage limitations. All legal measurements used as a base in the determination of all investment qualifications shall consist of the amounts determined at the most recent year end adjusted for subsequent acquisition and disposition of investments. (f) Valuation of investments. Investments shall be valued in accordance with the published valuation standards of the National Association of Insurance Commissioners. Securities investments as to which the National Association of Insurance Commissioners has not published valuation standards in its Valuations of Securities manual or its successor publication shall be valued as follows: (1) All obligations having a fixed term and rate shall, if not in default as to principal or interest, be valued as follows: if purchased at par, at the par value; if purchased above or below par, on the basis of the purchase price adjusted so as to bring the value to par at maturity and so as to yield in the meantime the effective rate of interest at which the purchase was made; (2) Common, preferred or guaranteed stocks shall be valued at market value. (3) Other security investments shall be valued in accordance with regulations promulgated by the Director pursuant to paragraph (6) of this subsection. (4) Other investments, including real property, shall be valued in accordance with regulations promulgated by the Director pursuant to paragraph (6) of this subsection, but in no event shall such other investments be valued at more than the purchase price. The purchase price for real property includes capitalized permanent improvements, less depreciation spread evenly over the life of the property or, at the option of the company, less depreciation computed on any basis permitted under the Internal Revenue Code and regulations thereunder. Such investments that have been affected by permanent declines in value shall be valued at not more than market value. (5) Any investment, including real property, not purchased by the Health Maintenance Organization but acquired in satisfaction of a debt or otherwise shall be valued in accordance with the applicable procedures for that type of investment contained in this subsection. For purposes of applying the valuation procedures, the purchase price shall be deemed to be the market value at the time the investment is acquired or, in the case of any investment acquired in satisfaction of debt, the amount of the debt, including interest, taxes and expenses, whichever amount is less. (6) The Director shall promulgate rules and regulations for determining and calculating values to be used in financial statements submitted to the Department for investments. (g) Definitions. As used in this Section, unless the context otherwise requires. (1) "Business Corporation" means corporations organized for other than not for profit purposes. (2) "Business Entity" includes sole proprietorships, corporations, associations, partnerships and business trusts. (3) "Bank or Trust Company" means any bank or trust company organized under the laws of the United States or any State thereof if said bank or trust company is regularly examined pursuant to such laws and said bank or trust company has the insurance protection afforded by an agency of the United States government. (4) "Capital" means capital stock paid-up, if any, and its use in a provision does not imply that a non-profit Health Maintenance Organization without stated capital stock is excluded from the provision. The capital of such an organization will be zero. (5) "Direct" when used in connection with "obligation" means that the designated obligor shall be primarily liable on the instrument representing the obligation. (6) "Facility" means and includes real estate and any and all forms of tangible personal property and services used constituting an operating unit. (7) "Guaranteed or insured" means that the guarantor or insurer will perform or insure the obligation of the obligor or will purchase the obligation to the extent of the guaranty or insurance. (8) "Mortgage" shall include a trust deed or other lien on real property securing an obligation for the payment of money. (9) "Servicer" means a business entity that has a contractual obligation to service a pool of mortgage loans. The service provided shall include, but is not limited to, collection of principal and interest, keeping the accounts current, maintaining or confirming in force hazard insurance and tax status and providing supportive accounting services. (10) "Single credit risk" means the direct, guaranteed or insured obligations of any one business entity including affiliates thereof. (11) "Surplus" means the amount properly shown as total net worth on a company's balance sheet, plus all voluntary reserves, but not including capital paid-up. (12) "Tangible net worth" means the par value of all issued and outstanding capital stock of a corporation (or in the case of shares having no par value, the stated value) and the amounts of all surplus accounts less the sum of (a) such intangible assets as deferred charges, organization and development expense, discount and expense incurred in securing capital, good will, trade-marks, trade-names and patents, (b) leasehold improvements, and (c) any reserves carried by the corporation and not otherwise deducted from assets. (13) "Unconditional" when used in connection with "obligation" means that nothing remains to be done or to occur to make the designated obligor liable on the instrument, and that the legal holder shall have the status at least equal to that of general creditor of the obligor. (h) Authorized investments. Any Health Maintenance Organization, except those organized as an insurance company, may acquire the assets set forth in paragraphs 1 through 17, inclusive. A Health Maintenance Organization that is organized as an insurance company may acquire the investment assets authorized for an insurance company pursuant to the laws applicable to an insurance company in the organization's state of domicile. Any restriction, exclusion or provision appearing in any paragraph shall apply only with respect to the authorization of the particular paragraph in which it appears and shall not constitute a general prohibition and shall not be applicable to any other paragraph. The qualifications or disqualifications of an investment under one paragraph shall not prevent its qualification in whole or in part under another paragraph, and an investment authorized by more than one paragraph may be held under whichever authorizing paragraph the organization elects. An investment which qualified under any paragraph at the time it was acquired or entered into by an organization shall continue to be qualified under that paragraph. An investment in whole or in part may be transferred from time to time, at the election of the organization, to the authority of any paragraph under which it qualifies, whether originally qualifying thereunder or not. (1) Direct obligations of the United States for the payment of money, or obligations for the payment of money to the extent guaranteed or insured as to the payment of principal and interest by the United States. (2) Direct obligations for the payment of money, issued by an agency or instrumentality of the United States, or obligations for the payment of money to the extent guaranteed or insured as to the payment of principal and interest by an agency or instrumentality of the United States. (3) Direct, general obligations of any state of the United States for the payment of money, or obligations for the payment of money to the extent guaranteed or insured as to the payment of principal and interest by any state of the United States, on the following conditions: (i) Such state has the power to levy taxes for the prompt payment of the principal and interest of such obligations; and (ii) Such state shall not be in default in the payment of principal or interest on any of its direct, guaranteed or insured obligations at the date of such investment. (4) Direct, general obligations of any political subdivision of any state of the United States for the payment of money, or obligations for the payment of money to the extent guaranteed as to the payment of principal and interest by any political subdivision of any state of the United States, on the following conditions: (i) The obligations are payable or guaranteed from ad valorem taxes; (ii) Such political subdivision is not in default in the payment of principal or interest on any of its direct or guaranteed obligations; (iii) No investment shall be made under this paragraph in obligations which are secured only by special assessments for local improvements; and (iv) An organization shall not invest under this paragraph more than 2% of its admitted assets in obligations issued or guaranteed by any one such political subdivision. (5) Anticipation obligations of any political subdivision of any state of the United States, including but not limited to bond anticipation notes, tax anticipation notes and construction anticipation notes, for the payment of money within 12 months from the issuance of the obligation, on the following conditions: (i) Such anticipation notes must be a direct obligation of the issuer under conditions set forth in paragraph 4; (ii) Such political subdivision is not in default in the payment of the principal or interest on any of its direct general obligations or any obligation guaranteed by such political subdivision; (iii) The anticipated funds must be specifically pledged to secure the obligation; (iv) An organization shall not invest under this paragraph more than 2% of its admitted assets in the anticipation obligations issued by any one such political subdivision. (6) Obligations of any state of the United States, a political subdivision thereof, or a public instrumentality of any one or more of the foregoing, for the payment of money, on the following conditions: (i) The obligations are payable from revenues or earnings of a public utility of such state, political subdivision, or public instrumentality which are specifically pledged therefor; (ii) The law under which the obligations are issued requires such rates for service shall be charged and collected at all times that they will produce sufficient revenue or earnings together with any other revenues or moneys pledged to pay all operating and maintenance charges of the public utility and all principal and interest on such obligations; (iii) No prior or parity obligations payable from the revenues or earnings of that public utility are in default at the date of such investment; (iv) An organization shall not invest more than 20% of its admitted assets under this paragraph; and (v) An organization shall not invest under this Section more than 2% of its admitted assets in the revenue obligations issued in connection with any one facility. (7) Obligations of any state of the United States, a political subdivision thereof, or a public instrumentality of any of the foregoing, for the payment of money, on the following conditions: (i) The obligations are payable from revenues or earnings, excluding revenues or earnings from public utilities, specifically pledged therefor by such state, political subdivision or public instrumentality; (ii) No prior or parity obligation of the same issuer payable from revenues or earnings from the same source has been in default as to principal or interest during the 5 years next preceding the date of such investment, but such issuer need not have been in existence for that period, and obligations acquired under this paragraph may be newly issued; (iii) An organization shall not invest in excess of 20% of its admitted assets under this paragraph; (iv) An organization shall not invest under this paragraph more than 2% of its admitted assets in the revenue obligations issued in connection with any one facility; and (v) An organization shall not invest under this paragraph more than 2% of its admitted assets in revenue obligations payable from revenue or earning sources which are the contractual responsibility of any one single credit risk. (8) Direct, unconditional obligations of a solvent business corporation for the payment of money, including obligations to pay rent for equipment used in its business or obligations for the payment of money to the extent guaranteed or insured as to the payment of principal and interest by any solvent business corporation, on the following conditions: (i) The corporation shall be incorporated under the laws of the United States or any state of the United States; (ii) The corporation shall have tangible net worth of not less than $1,000,000; (iii) No such obligation, guarantee or insurance of the corporation has been in default as to principal or interest during the 5 years preceding the date of investment, but the corporation need not have had obligations guarantees or insurance outstanding during that period and need not have been in existence for that period, and obligations acquired under this paragraph may be newly issued; (iv) An organization shall not invest more than 2% of its admitted assets in obligations issued, guaranteed or insured by any one such corporation; (v) An organization may invest under this paragraph up to an additional 2% of its admitted assets in obligations which (i) are issued, guaranteed or insured by any one or more such corporations, each having a tangible net worth of not less than $25,000,000 and (ii) mature within 12 months from the date of acquisition; (vi) An organization may invest not more than 1/2 of 1% of its admitted assets in such obligations of corporations which do not meet the condition of subparagraph (ii) of this paragraph; and (vii) An organization shall not invest more than 75% of its admitted assets under this paragraph. (9) Direct, unconditional obligations for the payment of money issued or obligations for the payment of money to the extent guaranteed as to principal and interest by a solvent not for profit corporation, on the following conditions: (i) The corporation shall be incorporated under the laws of the United States or of any state of the United States; (ii) The corporation shall have been in existence for at least 5 years and shall have assets of at least $2,000,000; (iii) Revenues or other income from such assets and the services or commodities dispensed by the corporation shall be pledged for the payment of the obligations or guarantees; (iv) No such obligation or guarantee of the corporation has been in default as to principal or interest during the 5 years next preceding the date of such investment, but the corporation need not have had obligations or guarantees outstanding during that period and obligations which are acquired under this paragraph may be newly issued; (v) An organization shall not invest more than 15% of its admitted assets under this paragraph; and (vi) An organization shall not invest under this paragraph more than 2% of its admitted assets in the obligations issued or guaranteed by any one such corporation. (10) Direct, unconditional nondemand obligations for the payment of money issued by a solvent bank, mutual savings bank or trust company on the following conditions: (i) The bank, mutual savings bank or trust company shall be incorporated under the laws of the United States, or of any state of the United States; (ii) The bank, mutual savings bank or trust company shall have tangible net worth of not less than $1,000,000; (iii) Such obligations must be of the type which are insured by an agency of the United States or have a maturity of no more than 1 day; (iv) An organization shall not invest under this paragraph more than the amount which is fully insured by an agency of the United States plus 2% of its admitted assets in nondemand obligations issued by any one such financial institution; and (v) An organization may invest under this paragraph up to an additional 8% of its admitted assets in nondemand obligations which (1) are issued by any such banks, mutual savings banks or trust companies, each having a tangible net worth of not less than $25,000,000 and (2) mature within 12 months from the date of acquisition. (11) Preferred or guaranteed stocks issued or guaranteed by a solvent business corporation incorporated under the laws of the United States or any state of the United States, on the following conditions: (i) The corporation shall have tangible net worth of not less than $1,000,000; (ii) If such stocks have been outstanding prior to purchase, an organization shall not invest under this paragraph in such stock if prescribed current or cumulative dividends are in arrears; (iii) An organization shall not invest more than 33 1/3% of its admitted assets under this paragraph and an organization shall not invest more than 15% of its admitted assets under this paragraph in stocks which, at the time of purchase, are not Sinking Fund Stocks. An issue of preferred or guaranteed stock shall be a Sinking Fund Stock when (1) such issue is subject to a 100% mandatory sinking fund or similar arrangement which will provide for the redemption of the entire issue over a period not longer than 40 years from the date of purchase; (2) annual mandatory sinking fund installments on each issue commence not more than 10 years from the date of issue; and (3) each annual sinking fund installment provides for the purchase or redemption of at least 2 1/2% of the original number of shares of such issue; and (iv) An organization shall not invest under this paragraph more than 2% of its admitted assets in the preferred or guaranteed stocks of any one such corporation. (12) Common stock issued by any solvent business corporation incorporated under the laws of the United States, or of any state of the United States, on the following conditions: (i) The issuing corporation must have tangible net worth of $1,000,000 or more; (ii) An organization may not invest more than an amount equal to its net worth under this paragraph; and (iii) An organization may not invest under this paragraph an amount equal to more than 10% of its net worth in the common stock of any one corporation. (13) Shares of common stock or units of beneficial interest issued by any solvent business corporation or trust incorporated or organized under the laws of the United States, or of any state of the United States, on the following conditions: (i) If the issuing corporation or trust is advised by an investment advisor which is the organization or an affiliate of the organization, the issuing corporation or trust shall have net assets of $100,000 or more, or if the issuing corporation or trust has an unaffiliated investment advisor, the issuing corporation or trust shall have net assets of $10,000,000 or more; (ii) The issuing corporation or trust is registered as an investment company with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended; (iii) An organization shall not invest under this paragraph more than the greater of $100,000 or 10% of its admitted assets in any one bond fund, municipal bond fund or money market fund; (iv) An organization shall not invest under this paragraph more than 10% of its net worth in any one common stock fund, balanced fund or income fund; (v) An organization shall not invest more than 50% of its admitted assets in bond funds, municipal bond funds and money market funds under this paragraph; and (vi) An organization's investments in common stock funds, balanced funds or income funds when combined with its investments in common stocks made under paragraph (12) shall not exceed the aggregate limitation provided by subparagraph (ii) of paragraph (12). (14) Shares of, or accounts or deposits with savings and loan associations or building and loan associations, on the following conditions: (i) The shares, accounts, or deposits, or investments in any form legally issuable shall be of a withdrawable type and issued by an association which has the insurance protection afforded by the Federal Savings and Loan Insurance Corporation; but nonwithdrawable accounts which are not eligible for insurance by the Federal Savings and Loan Insurance Corporation shall not be eligible for investment under this paragraph; (ii) The association shall have tangible net worth of not less than $1,000,000; (iii) The investment shall be in the name of and owned by the organization, unless the account is under a trusteeship with the organization named as the beneficiary; (iv) An organization shall not invest more than 50% of its admitted assets under this paragraph; and (v) Under this paragraph, an organization shall not invest in any one such association an amount in excess of 2% of its admitted assets or an amount which is fully insured by the Federal Savings and Loan Insurance Corporation, whichever is greater. (15) Direct, unconditional obligations for the payment of money secured by the pledge of any investment which is authorized by any of the preceding paragraphs, on the following conditions: (i) The investment pledged shall by its terms be legally assignable and shall be validly assigned to the organization; (ii) The investment pledged shall have a fair market value which is at least 25% greater than the amount invested under this paragraph, except that a loan may be made up to 100% of the full fair market value of collateral that would qualify as an investment under paragraph (1) provided it qualifies under condition (i) of this paragraph; and (iii) An organization's investment under this paragraph when added to its investment of the category of the collateral pledged shall not cause the sum to exceed the limits provided by the paragraph authorizing that category of investments. (16) Real estate (including leasehold estates and leasehold improvements) for the convenient accommodation of the organization's business operations, including home office, branch office, medical facilities and field office operations, on the following conditions: (i) Any parcel of real estate acquired under this paragraph may include excess space for rent to others, if it is reasonably anticipated that such excess will be required by the organization for expansion or if the excess is reasonably required in order to have one or more buildings that will function as an economic unit; (ii) Such real estate may be subject to a mortgage; and (iii) The greater of the admitted value of the asset as determined by subsection (f) or the organization's equity plus all encumbrances on such real estate owned by a company under this paragraph shall not exceed 20% of its admitted assets, except with the permission of the Director if he finds that such percentage of its admitted assets is insufficient to provide convenient accommodation for the company's business; provided, however, an organization that directly provides medical services may invest an additional 20% of its admitted assets in such real estate, not requiring the permission of the Director. (17) Any investments of any kind, in the complete discretion of the organization, without regard to any condition of, restriction in, or exclusion from paragraphs (1) to (16), inclusive, and regardless of whether the same or a similar type of investment has been included in or omitted from any such paragraph, on the following condition: An organization shall not invest under this paragraph more than the lesser of (i) 10% of its admitted assets, or (ii) 50% of the amount by which its net worth exceeds the minimum requirements of a new health maintenance organization to qualify for a certificate of authority.

Legislative History

(Source: P.A. 92-140, eff. 7-24-01; 92-651, eff. 7-11-02.)