Petition — Independent Bankers Ass'n of America v. Heimann

ED |

IN THE Spee Be en

Supreme Court of the Unite | Dtates

OcToBER TERM, 1979 Bic ‘tobacco Ky FRay CLERK

ed

No. ¥Q=I705

INDEPENDENT BANKERS ASSOCIATION OF AMERICA,

Petitioner,

V.

JOHN G. HEIMANN, Comptroller of the Currency

of the United States Department of the Treasury,

Respondent.

————

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

SAMUEL K. ABRAMS

THOMAS J. SEGAL

Brian EK. Moran

Baker & HOSTETLER

1776 K Street N.W.

Suite 900

Washington, D.C. 20006

(202) 293-6260

Attorneys for Petitioner

Of Counsel:

Horace R. HANSEN, Esquire

HANSEN, DorDELL, Brapt & ODLAUG

600 Degree of Honor Building

Fourth and Cedar Streets

Saint Paul, Minnesota 55010

Press oF ByrON S. ADAMS PRINTING, INC,, WASHINGTON, D. C.

Page

ee OF I ins oe ks 6s Faw Ries oh ee RS il

rr MM i, Lccgb ewes css Woes s behead eases 2

NE 9a 0 S00 A ba oho wk 05s ean eadheeennens 2

SOONER FOTO ooo ncn exudes cecsecsuccertess 3

StTaTuTES AND RecuuaTIon INVOLVED ..............-. 5

TATRMRIT OF THR CARE on. ccc ic cece ccceccenccssunn 5

Reasons FOR ALLOWANCE OF THE WRIT .............-. 8

1. The Court Of Appeals’ Holding That The Comp-

troller Has Authority To Issue The Credit Life

Regulation As A Legislative Rule Conflicts With

Applicable Decisions Of This Court And Raises

The Important Federal Question Of The Proper

Criteria For Determining Whether A Federal

Agency Has Legislative Rulemaking Authority .. 8

2. The Court Of Appeals’ Decision Raises The

Important Federal Question Of The Proper Scope

Of The McCarran-Ferguson Act ............... 14

3. The Court Of Appeals’ Decision Conflicts With

Decisions Of This Court And Two Circuit Courts

Of Appeals On The Scope Of Section 92 Of The

eS Pe er rer an ren ne 17

I no re cea aiben Ucables 20

ii TABLE OF AUTHORITIES

Cass: Page

American Telephone and Telegraph Co. v. United

i Ce Me CRUD. a ccna tee ssseccane

American Trucking Associations v. United States, 344

U.S. 298, reh. denied, 345 U.S. 913 (1953) ....... 13

Arnold Tours, Inc. v. Camp, 472 F.2d 427 (1st Cir.

EEE ES See 18

Batterton v. Francis, 432 U.S. 416 (1977) ........... 8

Black v. Nationwide Mut. Ins. Co., 429 F. Supp. 458

(W.D. Pa. 1977), aff’d, 571 F.2d 571 (3d Cir.

ee Aka NA) oe syerescd veseces 16

California League of Independent Ins. Producers v.

Aetna Cas. & Sur. Co., 175 F. Supp. 857 (N.D.

EE 16

Card v. National Life Ins. Co., 603 F.2d 828 (10th

eT Sek a tas wise aedeseccees 16

Cleveland v. United States, 329 U.S. 14 (1946) ....... 10

Federal Power Commission v. Texaco, Inc., 377 US. .

33, reh. denied, 377 U.S. 974 (1964) ............ 13

First Security Bank of Utah v. Comm’r of Internal

Revenue, 436 F.2d 1192 (10th Cir. 1971), aff’d,

Se 18, 19, 20

General Electric Co. v. Gilbert, 429 U.S. 125 (1976) .. 8

Group Life é Health Ins. Co. v. Royal Drug Co., 440

ec e ey slbkas'sescueoceccos 17

In re Permian Basin Area Rate Cases, 390 U.S. 747,

reh. denied, 392 U.S. 917 (1968) ................ 13

Lawyer’s Realty Corp. v. Peninsular Title Ins. Co.,

428 F. Supp. 1288 (E.D. La.), aff’d, 550 F.2d 1035

EE SESS SSRI IS 16

Mclthenny v. American Title Ins. Co., 418 F. Supp. 364

eck ack ncwiecscrcsccessccccs 17

Morton v. Ruiz, 415 U.S. 199 (1974) ................ 18

Mourning v. Family Publications Service, Inc., 411 US.

MURR MUUEGdbaaieensedccccccccsscccece 13

Table of Authorities Continued ili

Page

Nat’l Broadcasting Co. v. United States, 319 U.S. 190

CREE < eiieadc st ok CORR A EERA CORRS SE KEN Ses 12

Nat’! Labor Relations Bd. v. Wyman-Gordon Co., 394

dh, FOR CROUEE. bes cu Beer e kenkds eae 13

Nat’l Petroleum Refiners Ass’n v. Federal Trade

Comm’n, 482 F.2d 672 (D.C. Cir.), cert. denied,

ae SES Say rere ane ee se 12

Sazon v. Georgia Ass’n of Independent Ins. Agents,

Inc., 399 F.2d 1010 (5th Cir. 1968) .......... 18, 19, 20

Securities and Exchange Comm’n v, Nat’l Securities,

ae Be reer ree 15

Skidmore v. Swift € Co., 323 U.S. 134 (1944) ........ 9

United States v. Storer Broadcasting Co., 351 U.S. 192

CRE the idy pha Lee nae se Os eK 13

Weinberger v. Hynson, Westcott &€ Dunning, Inc., 412

Ae GO CUE 4 6050 ECC oa oe ee Mak Cae ee eae 13

Staturory Provisions:

SURO. SE I sk a RR 7,8

WERT ee. ks ee eas 13

15 Oe AN i in ven ecncdeieekas 13

12 U.S.C. § 1730a(h)(1) (1976) ..........cceeeeceeee 13

BG UE CUNT CUI ov os os ons vc sco eeeos 13

19 UMO. 6 IRA) (1998)... oon... ees 3, 5, 9, 11, 13

12 U.S.C. §1818(n) (1976) ....... cee. cceeeeeess 3, 5, 9-13

12 U.S.C. § 1819 (Tenth) (1976) .............cceeees 13

OM BO TE os os) dea 12

i UO SE I oes ie is 3, 4, 5, 14-17

6 1 5 I ok ks ce 2

Oe ae A cs cars 7

SE TE WT PIE oo nso cca ckccccewusa 7

Be UTR, SEDC ESE COGTED hie vivccs es bacedsavesds 7

iv Table of Authorities Continued

Page

Act of Sept. 7, 1916, ch. 461, 39 Stat. 753 amending

National Bank Act (12 U.S.C.A. $92) ...... 4, 5, 17-19

Financial Institutions Regulatory and Interest Rate

Control Act of 1978, Pub. Law No. 95-630, 92

EE TR ns Os Wa ea ci sb ocd nce ee ak teed 5

ee Ss a a ee Ok vk hea hr cncbeeuwns 15

By a Cs I 5 by ic ek evs Ve aR Ra Rs bs o8 15

Ohio Rev. Code Ann. $3911.01 (Page) .............. 15

Se AO ee Oy NOTE ke nda dc swtOcevebeaescca 15

Texas Ins. Code Ann. Art. 21.07-1-4(d) (Vernon) .... 15

REGULATION:

13 OF as. Part: 3 (1979) 22.0... k es 2, 3, 4, 5-9, 14-15, 17-18

OrHer AUTHORITIES:

S. Rep. No. 1482, 89th Cong., 2d Sess., reprinted in

[1966] U.S. Code Cong. & Ad. News 3532 ........ 10

H.R. Rep. No. 2077, 89th Cong., 2d Sess. (1966) ...... 10

Letter from Douglas M. Costle, Administrator of EPA,

to EK. G. Ratering, General Motors Corporation,

denying ‘‘Petition for Reconsideration of Noise

Emission Standard for Truck-Mounted Solid

Waste Compactors’’ (March 10, 1980) .......... 1l

IN THE

Supreme Court of the United States

OctToBER TERM, 1979

No.

INDEPENDENT BANKERS ASSOCIATION OF AMERICA,

Petitioner,

We

JOHN G. HEIMANN, Comptroller of the Currency

of the United States Department of the Treasury,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

The Independent Bankers Association of America

(‘“‘IBAA’’) respectfully petitions that a writ of certi-

orart issue to review the judgment and opinion of the

United States Court of Appeals for the District of

Columbia Circuit in Independent Bankers Association

of America v. Heimann (No. 78-2199), dated December

28, 1979.

The judgment and opinion affirmed an order of the

United States District Court for the District of Colum-

bia, which dismissed IBAA’s complaint. In that com-

plaint IBAA challenged the validity of a regulation

2

issued by the Comptroller of the Currency (‘‘Comp-

troller’), 12 C.F.R. Part 2, entitled ‘‘Disposition of

Credit Life Insurance Income’’ (‘‘Credit Life Regula-

tion’’).

OPINIONS BELOW

The opinion of the court of appeals is reported at

613 F.2d 1164; a copy is attached hereto as Appendix

A. A timely petition for rehearing was denied by the

court of appeals’ order dated February 1, 1980; a copy

of that unreported order is attached hereto as Appen-

dix B. The decisions of the district court are unre-

ported. Copies of that court’s memorandum and order

of September 13, 1978, which dismissed IBAA’s com-

plaint, and its subsequent memorandum and order of

October 11, 1978, modifying the September 13 opinion

and order, are attached hereto as Appendices C and D

respectively.

JURISDICTION

The court of appeals’ judgment was entered on

December 28, 1979. On January 11, 1980 IBAA filed a

timely petition for rehearing and suggestion for an en

banc rehearing. The court of appeals denied the peti-

tion for rehearing in an order dated February 1, 1980

and declined the suggestion for en banc review by an

order dated January 30, 1980. This Petition is being

filed within 90 days of the order denying IBAA’s pe-

tition for rehearing. The Court has jurisdiction to re-

view the court of appeals’ December 28, 1979 judg-

ment by virtue of 28 U.S.C. § 1254(1).

3

QUESTIONS PRESENTED

1. The first question presented is whether the court

of appeals correctly ruled that the Comptroller has

authority to issue the Credit Life Regulation as a bind-

ing rule of law, t.e., a legislative rule. The lower court

found legislative rulemaking authority in a statute

which, IBAA has asserted, does not confer such power

either by its plain language or by its legislative history.

The court determined that legislative rulemaking au-

thority would be consistent with the overall statutory

approach to bank regulation and that the Comptroller

should be deemed to have such power absent a clear

statement by Congress to the contrary.

Having concluded that, for policy reasons, the Comp-

troller should have legislative rulemaking power, the

court focused on the language of the Financial Institu-

tions Supervisory Act of 1966, 12 U.S.C. § 1818, and

ruled that authority to issue legislative rules is found

in subsections 1818(b) and (n). However, as IBAA

has contended, subsection 1818(b) simply empowers

the Comptroller to conduct cease-and-desist proceed-

ings, which are adjudicative actions, and subsection

1818(n) merely authorizes the Comptroller to issue

procedural rules.

2. The second question presented is whether under

the McCarran-Ferguson Act, 15 U.S.C. § 1012, the

authority of the states to regulate the business of in-

surance can be superseded by a banking regulation

issued by the Comptroller pursuant to a statute which

does not specifically relate to the business of insurance.

IBAA asserted before the court of appeals that the

Credit Life Regulation violates the McCarran-Fergu-

4

son Act, which reserves to the states plenary authority

to regulate the business of insurance except where Con-

gress has enacted legislation which specifically relates

to the business of insurance. IBAA maintained that the

regulation is an attempt to displace state insurance

laws governing the licensing of insurance agents, which

has been held to be part of the business of insurance.

The court of appeals ruled that nothing in the McCar-

ran-Ferguson Act was intended to affect the Comp-

troller’s power, under authority of Congress, to regu-

late ‘‘unsafe and unsound’’ banking practices. It there-

by permitted the Comptroller to supersede the author-

ity of the states. The Court removed this activity from

the category of the ‘‘business of insurance’’ on the

ground that the Comptroller issued the regulation

in furtherance of his power to supervise banking activ-

ities.

3. The third question which IBAA presents for re-

view is whether the court of appeals erred in holding

that the Credit Life Regulation is not contrary to

section 92 of the National Bank Act. This Court and

the Tenth and Fifth Circuits have held that this statute

precludes national banks in places of more than 5,000

persons from serving as agents for the sale of credit

life insurance. Notwithstanding these rulings, the

Credit Life Regulation determined that a national bank

may act as agent for the sale of credit life insurance,

without regard to the size of the bank’s community.

In upholding the Credit Life Regulation, the court of

appeals ruled that section 92 does not apply to credit

life insurance, thereby creating a direct conflict with

the aforesaid holdings of this Court, the Tenth Circuit

and the Fifth Circuit.

5

STATUTES AND REGULATION INVOLVED

Statutes

The following statutes are involved in this case:

Section 202 of the Financial Institutions Supervisory

Act of 1966, 12 U.S.C. § 1818(b) (1976), which is set

forth in Appendix F hereto;’

Section 202 of the Financial Institutions Supervisory

Act of 1966, 12 U.S.C. §1818(n) (1976), which is set

forth in Appendix F hereto;’

Subsections 2(a) and (b) of the McCarran-Fergu-

son Act, 15 U.S.C. §§ 1012(a). and (b), which are set

forth in Appendix G hereto;

Section 92 of the National Bank Act, Act of Sept.

7, 1916, ch. 461, 39 Stat. 753 (12 U.S.C.A. § 92), which

is set forth in Appendix H hereto.

Regulation

The regulation involved in this case is 12 C.F.R.

Part 2 (1979), which is set forth in Appendix I hereto.

STATEMENT OF THE CASE

On September 23, 1977, the Comptroller issued the

Credit Life Regulation, which he termed a ‘Final

Regulation.’”’ 42 Fed. Reg. 48518. It became effective

on January 1, 1978. This regulation, a reversal of the

government’s previous policy, bars bank personnel

*In 1978 these provisions were amended by the Financial In-

stitutions Regulatory and Interest Rate Control Act of 1978, Pub.

L. No. 95-630, Title I, §§ 107(a)(1), (b), 111(a)(5), Title III,

§ 303, 92 Stat. 3641, 3649, 3650, 3653, 3667, 3676. Those amend-

ments are immaterial to the issues in this lawsuit.

6

from retaining commission income from the sale of

credit life insurance. Specifically, it directs that ‘‘[n]o

bank employee, officer, director or principal share-

holder [a person owning more than 5% of a bank’s

outstanding shares] may retain commissions or other

income from the sale of credit life insurance in con-

nection with any loan made by the bank.’’ 12 C.F.R.

§ 2.4(a).

Credit life insurance is insurance that is sold to loan

customers of banks, including patrons of IBAA mem-

ber national banks, as security for loans. At many such

banks a loan customer may purchase credit life insur-

ance from an insurance agency which is located on the

bank’s premises and which is owned by the bank’s

directors, officers, employees or principal shareholders.

When a customer chooses to purchase a policy through

this agency, the insurance agent receives whatever

commission is paid by the insurance company.

This long-established method of selling credit life

insurance is consistent with positions previously taken

by the Comptroller and his sister agency, the Federal

Deposit Insurance Corporation. It is frequently uti-

lized in situations in which the bank itself is forbidden

by federal or state laws from retaining commission

income or from otherwise acting as an insurance agent.

The regulation authorizes eight alternative methods

by which national banks may furnish credit life insur-

ance to their customers. Under six of the alternatives,

the bank actually functions as an insurance agent

(subparagraphs 2.6(a), (b), (d), (e) and (g) and para,

2.4). As a result of the issuance of the Credit Life Regu-

lation, national banks in towns of more than 5,000

persons and national banks in certain states which bar

7

banks from acting as insurance agents faced the pros-

pect of violating federal and state law if they adopted

any of the six alternatives which permit banks to per-

form insurance agency functions. Alternatively, if a

bank adopted either of the two remaining options

specified in the regulation—the acquiring of a group

policy (subsection 2.6(¢)) or providing credit life in-

surance to loan customers at the bank’s expense (sub-

section 2.6(f))—the bank would have to absorb some

or all of the cost of furnishing credit life insurance to

its loan customers.

On December 27, 1977 IBAA filed a complaint in

the United States District Court for the District of

Columbia, alleging that the Comptroller lacked au-

thority to issue the Credit Life Regulation, that the

regulation is contrary to state and federal law, and

that the Comptroller failed to observe procedures re-

quired by the Administrative Procedure Act. Juris-

diction was premised on the United States Judicial

Code, 28 U.S.C. $§ 1331, 1337 and 1346(a) (2), and on

the Administrative Procedure Act, 5 U.S.C. §§ 701-706.

The district court dismissed IBAA’s complaint in

an order and opinion issued on September 13, 1978. It

concluded that the Comptroller had conceded that the

Credit Life Regulation is nothing more than a state-

ment of opinion and that by making this concession the

Comptroller gave IBAA all of the relief which the

court could have awarded IBAA. The Comptroller filed

a motion to modify that opinion, asserting that he never

made such a concession. On October 11, 1978 the court

modified its prior order by withdrawing its conclusion

that the regulation was merely a statement of opinion.

It nevertheless upheld its order dismissing the com-

8

plaint, this time for reasons concerning ripeness, 1.é.,

that the Credit Life Regulation’s validity should be

decided in cease-and-desist proceedings. Thus, neither

of the district court’s opinions considered the merits

of IBAA’s complaint.

The court of appeals held that the matter was ripe

for judicial review, that IBAA has standing to bring

this lawsuit, and, therefore, that it was unnecessary to

await cease-and-desist proceedings. The court went on

to address each of the issues raised by IBAA in its

appeal, holding that the Comptroller had authority to

issue the Credit Life Regulation as a binding rule of

law, that the regulation was not contrary to either

section 92 or the McCarran-Ferguson Act and that the

Comptroller did not conduct the rulemaking proceed-

ing in a manner which violated the Administrative

Procedure Act.

REASONS FOR ALLOWANCE OF THE WRIT

1. The Court Of Appeals’ Holding That The Compiroller Has

Authority To Issue The Credit Life Regulation As A Legislative

Rule Conflicts With Applicable Decisions Of This Court And

Raises The Important Federal Question Oi The Proper Criteria

For Determining Whether A Federal Agency Has Legislative

Rulemaking Authority.

The court of apeals’ ruling is a departure from the

fundamental principle that a federal agency may issu<

legislative regulations only if Congress has expressly

delegated this power to the agency. Batterton v. Fran-

cis, 432 U.S. 416, 425 (1977). As this Court has held,

in the absence of such delegation an agency’s pro-

nouncements are merely interpretative statements

rather than regulations which have the force of law.

General Electric Company v. Gilbert, 429 U.S. 125,

9

141-142 (1976). Compare American Telephone and

Telegraph Co. v. United States, 299 U.S. 232, 235-237

(1936) (which involved legislative rules), with Skid-

more v. Swift & Co., 322 U.S. 134, 140 (1944) (which

considered interpretative statements).

The court of appeals essentially concluded that the

Comptroller should have authority to issue the Credit

Life Regulation as a binding rule, and then it ‘‘found”’

such authority in a statute which neither by its plain,

unambiguous language nor by its legislative history

confers legislative rulemaking authority

Specifically, the court of appeals held that if the

Comptroller had authority to issue the Credit Life

Regulation as a legislative rule there would be no need

for case-by-case adjudication. The court further con-

cluded that the banking industry is highly regulated,

and, therefore, legislative rulemaking authority is con-

sistent with the overall statutory approach to bank reg-

ulation. It reasoned that, absent a clear statement by

Congress to the contrary, the Comptroller is deemed

to have power to issue the Credit Life Regulation as a

legislative rule of law.

With these policy considerations in mind, the court

of appeals considered whether section 1818 contains

any language which confers such rulemaking author-

ity. It focused on two provisions of the Act. One pro-

vision, subsection 1818(b), authorizes the Comptroller

to conduct cease-and-desist proceedings to determine

whether a bank has engaged in an ‘‘unsafe and un-

sound”’ practice. This measure authorizes adjudicative

actions, not rulemaking. The other provision, subsec-

tion 1818(n) (not cited by the Comptroller at the time

he promulgated the regulation), authorizes the Comp-

10

troller ‘‘. . . to administer oaths and affirmations, to

take or cause to be taken depositions, and to issue, re-

voke, quash or modify subpenas and subpena duces ©

tecum; and such agency is empowered to make rules

and regulations with respect to any such [cease-and-

desist] proceedings.’’ See Appendix F at 22a. By its

plain language it thus authorizes only procedural

regulations.

This conclusion respecting subsection 1818(n) is re-

inforced by the fact that the rulemaking clause is sand-

wiched between clauses authorizing the agency to ad-

minister oaths, to take depositions, to issue subpoenas

and to enforce subpoenas, all of which are purely pro-

cedural matters. Under the rule of ejusdem generis,

these procedural grants of authority must be consid-

ered when a court construes the meaning of the phrase

‘*such agency is empowered to make rules and regula-

tions with respect to any such proceedings.’’’ The

enumeration of specific procedurai functions in sub-

section 1818(n) must be read as a limitation on the

grant of rulemaking authority therein.

Furthermore, the Senate Committee report pertain-

ing to subsection 1818(n) made no reference whatso-

ever to the rulemaking clause. Instead, it discussed

the fact that the agency would be permitted to admin-

ister oaths, take depositions and issue subpoenas in

connection with cease-and-desist proceedings. The

House report did not even mention subsection 1818(n).*

2 Cleveland v. United States, 329 U.S. 14 (1946).

*S. Rep. No. 1482, 89th Cong., 2d Sess. 26, reprinted in [1966]

U.S. Code Cong. & Ad. News 3532, 3558; H.R. Rep. No. 2077,

89th Cong., 2d Sess. (1966).

11

In the face of the plain language of subsections

1818(b) and (n) and in the absence of any reference

in the legislative history of the Act which would indi-

cate that Congress intended for these provisions to

confer legislative rulemaking authority, the court said,

in a footnote, that these provisions constitute an ‘‘ex-

plicit’? grant of legislative rulemaking authority. 613

F.2d at 1169 n.16 (App. A at 8a.) However, that con-

clusion is directly contradicted by the court’s state-

ment, in the text of its opinion, that this statute is

‘‘ambiguous and fails to contain an express grant of

authority to define ‘unsafe and unsound practices’... .’’

613 F.2d at 1168. (App. A at 6a.)

The court thus did not base its reference to an

‘‘explicit”’ grant of legislative rulemaking authority

on the plain language of the statute at issue, nor on

statements made by any Congressional committee or

member of Congress. Instead, it effectively ruled that an

express grant is unnecessary if a court determines that

such rulemaking authority would aid the agency in the

performance of its duties and Congress has not clearly

stated that the agency lacks such authority. Such a

ruling does no less than establish that inherent legis-

lative rulemaking authority can exist. Indeed, the

Administrator of the Environmental Protection Agency

has already cited the court of appeals’ decision for the

proposition that ‘‘[a]gencies have inherent powers to

effectuate statutory purposes by reasonable means, pro-

vided those means are not inconsistent with the

statute.’’ *

‘Letter from Douglas M. Costle, Administrator of EPA, to

E. G. Ratering, General Motors Corporation, denying ‘‘ Petition

for Reconsideration of Noise Emission Standards for Truck-

Mounted Solid Waste Compactors’’ at 6. (March 10, 1980).

12

The court of appeals sought to analogize subsection

1818(n) to subsection 6(g) of the Federal Trade Com-

mission Act, 15 U.S.C. § 46(g), which the District of

Columbia Circuit has held to confer legislative rule-

making authority. National Petroleum Refiners Ass’n

v. Federal Trade Commission, 482 F.2d 672 (D.C.

Cir.), cert. denied, 415 U.S. 951 (1973). In contrast to

subsection 1818(n), which empowers the Comptroller

to ‘‘make rules and regulations with respect to any

such [cease-and-desist] proceedings,’’ subsection 6(g)

empowers the FTC to make rules and regulations for

the purpose of carrying out the provisions of the Fed-

eral Trade Commission Act itself.

It is the broad language of subsection 6(g) which

the National Petroleum court stressed when it held

that this statute authorized the F.T.C. to promulgate

binding regulations. The court added that its reading

of subsection 6(g) was reinforced by the construction

which other courts have given to similar statutes. 482

F.2d at 678. Without exception, the statutes which were

at issue in the eases cited by the National Petroleum

court conferred broad rulemaking authority on the

agency or authorized legislative rulemaking with re-

spect to a specific subject.’ Thus, these statutes are

completely unlike subsection 1818(n).

5 Subsection 6(g) (15 U.S.C. §46(g)) provides as follows:

The Commission shall also have power—

* * *

(g) From time to time to classify corporations and to make

rules and regulations for the purpose of carrying out the

provisions of section 41 to 46 and 47 to 58 of this title.

¢ These cases included decisions by this Court which held that

the following agencies possess legislative rulemaking authority:

A. Federal Communications Commission

1. National Broadcasting Co. v. United States, 319 U.S. 190

(1943) ; (continued)

13

Likewise, Congress has conferred general legislative

rulemaking authority on other agencies which regulate

financial institutions, using language similar to sub-

section 6(g) and wholly unlike subsection 1818(n).’ In

short, Congress is aware of the type of language which

confers legislative rulemaking authority on federal

agencies, and it did not include that language in sub-

section 1818(n).

By holding that subsections 1818(b) and (n) con-

stitute a grant of legislative rulemaking authority, the

court of appeals has nullified the concept that Congress

must delegate such power. Now, all that need be shown

2. United States v. Storer Broadcasting Co., 351 U.S. 192

(1956).

B. Food and Drug Administration

Weinberger v. Hynson, Westcott & Dunning, Inc., 412 U.S.

609 (1973).

C. Federal Power Commission

1. Federal Power Commission v, Texaco, Inc., 377 U.S. 33,

rehearing denied, 377 U.S. 974, 984 (1964) ;

2. In re Permian Basin Area Rate Cases, 390 U.S. 747, re-

hearing denied, 392 U.S. 917 (1968).

D. Interstate Commerce Commission

American Trucking Associations v. United States, 344 U.S.

298, rehearing denied, 345 U.S. 913 (1953).

E. Federal Reserve Board

Mourning v. Family Publications Service, Inc., 411 U.S. 356

(1973).

F. National Labor Relations Board

N.L.R.B. v. Wyman-Gordon Co., 394 U.S. 759 (1969).

"Congress has expressly granted legislative rulemaking to the

following agencies which regulate financial institutions:

A. erry ig Governors of the Federal Reserve System, 12 U.S.C.

i).

Federal Deposit Insurance Corporation, 12 U.S.C. § 1819

(Tenth).

National Credit Union Administration, 12 U.S.C, § 1766(a).

. Federal Home Loan Bank Board, 12 U.S.C. § 1464(a).

Federal Savings and Loan Insurance Corporation, 12 U.S.C.

§ 1730a(h) (1).

Hoa

14

is that such rulemaking power would aid the agency in

the performance of its duties. In the words of the EPA,

this case stands for a rule that agencies have inherent

powers to effectuate statutory purposes. The court of

appeals’ decision is a major departure from the prin-

ciples articulated by the Court on a subject of impor-

tance—legislative rulemaking authority—and, there-

fore, the Court should grant IBAA’s Petition.

2. The Court Of Appeals’ Decision Raises The Important Federal

Question Of The Proper Scope Of The McCarran-Ferguson

Act.

IBAA contended below that the Credit Life Regula-

tion violates the McCarran-Ferguson Act, 15 U.S.C.

§ 1012, because it regulates the business of insurance.

That act gives the states plenary power to regulate the

business of insurance and every person engaged there-

in, except where Congress has enacted legislation which

specifically relates to the business of insurance. 15

U.S.C. § 1012.

The Credit Life Regulation directly regulates the

business of insurance because it absolutely prohibits

individuals who are employees, officers, directors or

principal shareholders of national banks from retain-

ing commission income from the sale of credit life in-

surance to the banks’ loan customers, This prohibition

against the receipt of commission income precludes

those individuals from serving as insurance agents.

Any regulation which prohibits an individual from

receiving compensation for his labor on a job effectively

prohibits that person from engaging in that occupation.

In this manner, the Credit Life Regulation imper-

missibly intrudes upon the right of the states to estab-

lish qualifications which individuals must satisfy in

15

order to sell credit life insurance. Almost all fifty

states have enacted statutes which avthorize individ-

uals, including bank personnel, to act as agents for

this type of insurance, and such statutes establish the

qualifications which an individual must possess to ob-

tain a license.

The Credit Life Regulation further encroaches on

the licensing authority of the states by authorizing

banks to act as insurance agents and to receive income

resulting from the sale of credit life insurance. By so

authorizing national banks, the regulation vitiates the

laws of several states which bar banks from acting as

insurance agents.*

The licensing of individuals to be insurance agents

is well within the sphere of the business of insurance.

This Court, in considering what constitutes the ‘‘busi-

ness of insurance’’, has expressly stated that ‘‘the li-

censing of companies and their agents’’ is within the

scope of the McCarran-Ferguson Act. S.E.C. v. Na-

tional Securities, Inc., 393 U.S. 453, 460 (1969). Simi-

*E.g., Tex. Ins. Code Ann. Art. 21.07-1-4(d)(1) (Vernon) (a

corporation can be licensed to perform insurance agency functions

only if it is a Texas Corporation organized under the Texas Busi-

ness Corporation Act; national banks are not organized under that

Act) ; Okla Stat. Tit. 36, § 1407.1 (no corporation which has any

purpose other than the transaction of insurance business may be

licensed as an agent in Oklahoma) ; Neb. Stat. 44-392 (making it a

misdemeanor for a bank in a location having a population of

200,000 or more to sell, write or solicit any kind of insurance,

either directly or indirectly) ; Ohio Revised Code Ann. § 3911.01

(Page) (the business of life insurance or life and accident insur-

ance shall not be in any way transacted by any company which

does a banking business) ; Ill. Rev. Stat. Ch. 73 § 1065.53 (a license

to act as an agent may not issue to a national bank located in a

place exceeding 5000 in population).

® In National Securities this Court concluded that the McCarran-

Ferguson Act did not apply because the state was not regulating

16

larly, several United States courts of appeals and dis-

trict courts have treated the relationship of insurers

and their agents as being so closely related to the core

of the insurer-insured relationship as to come within

the scope of the ‘‘business of insurance’’.”°

In its opinion, the court of appeals made no effort

to reconcile its holding with these precedents. Instead,

it concluded that because the Comptroller prohibited

the retention of commission income under his authority

to regulate unsafe and unsound banking practices, the

McCarran-Ferguson Act was not implicated. The

Court said, ‘‘[n]othing in the McCarran-Ferguson Act

was intended to affect the power of the Comptroller

under authority of Congress to regulate ‘unsafe and

unsound’ banking practices of national banks.’’ 613

F.2d at 1170. (App. A at 11a.)

In an effort to accommodate the Comptroller’s inter-

est in regulating ‘‘unsafe and unsound”’ banking prac-

tices, the court ignored the fundamental statutory man-

date that if a practice involves the business of insur-

ance, it is subject to plenary regulation by the states

by virtue of the McCarran-Ferguson Act. In this re-

gard, it has been held that if an activity which is part

an insurance relationship; it was, instead, regulating the relation-

ship between a stockholder and the company in which he owns

stock. Thus, that case did not involve the issue presented by this

ease: where the state regulates an activity which is part of the

business of insurance, may a federal banking regulation supersede

the state law?

10 F.g., Black v. Nationwide Mut. Ins. Co., 429 F. Supp. 458,

463 (W.D. Pa. 1977), aff’d, 571 F.2d 571 (3d Cir. 1978) ; Card v.

Nat’l. Life Ins. Co., 603 F.2d 828, 832 (10th Cir. 1979) ; Lawyer’s

Realty Corp. v. Peninsular Title Ins. Co., 428 F. Supp. 1288, 1291

(E.D. La.), aff'd, 550 F.2d 1035 (5th Cir. 1977); California

League of Independent Ins. Producers v. Aetna Cas. & Sur. Co.,

175 F. Supp. 857, 860 (N.D. Cal. 1959).

17

of the business of insurance has a collateral conse-

quence in another area the McCarran-Ferguson Act

nevertheless reserves to the states the power to regulate

the activity. McIlhenny v. American Title Insurance

Co., 418 F. Supp. 364 (B.D. Pa. 1976). As the court

said in that case, ‘‘[t]he mere fact that the services

performed by a title insurance company are an indis-

pensable part of the transfer of real estate does not

remove those services from the sphere of the insurance

business.’’ 418 F. Supp. at 368.

The absence of any judicial support for the court

of appeals’ novel analysis is evident from the fact that

it relied solely on Group Life and Health Ins. Co. v.

Royal Drug Co., 440 U.S. 205 (1979). Such reliance is

inapposite. In Royal Drug, which was an antitrust

case, this Court held simply that transactions between

an insurer and pharmacies did not constitute the ‘‘ busi-

ness of insurance’’. Its holding concerned third-party

provider agreements whereby a pharmacy contracted

with a health insurance company to supply goods and

services other than insurance. In contrast, the Credit

Life Regulation overrides state laws which govern an

essential aspect of the business of insurance: the ecri-

teria for becoming an insurance agent.

In summary, the court of appeals’ ruling represents

an unwarranted restriction on the McCarran-Ferguson

Act’s protection of the states’ primacy in regulating

the business of insurance,

3. The Court Of Appeals’ Decision Conflicts With Decisions Of

This Court And Two Circuit Courts Of Appeals On The Scope

Of Section 92 Of The National Bank Act.

While prohibiting bank employees, officers, directors

and principal shareholders from retaining credit life

*%

18

insurance commission income, the Credit Life Regula-

tion authorizes all national banks, themselves, to act

as agents for the sale of credit life insurance, and to

retain the commission income. In support of this au-

thorization, the Comptroller asserted, in the statement

which accompanied the regulation, that ‘‘... no federal

statute bars a national bank from acting as agent or

otherwise selling credit life insurance . . .’’ 42 Fed.

Reg. at 48519. This purely legal conclusion, which di-

rectly contradicts holdings of this Court, two United

States courts of appeals, and the Comptroller’s pre-

vious interpretation of section 92, does not involve the

Comptroller’s expertise, and should be accorded no

deference by this Court.”

This Court and the Fifth Circuit and Tenth Circuit

Courts of Appeals have held that section 92 of the

National Bank Act prohibits a national bank in a com-

munity with a population of more than 5,000 persons

from acting as agent for insurance companies, includ-

ing insurance companies which sell credit life insur-

ance. First Security Bank of Utah v. Comm’r of In-

ternal Revenue, 436 F.2d 1192 (10th Cir. 1971), aff’d,

405 U.S. 394 (1972); Saxon v. Georgia Ass’n. of In-

dependent Insurance Agents, Inc., 399 F.2d 1010 (5th

Cir. 1968).

In a ruling which directly conflicts with these cases,

the court below held that the Credit Life Regulation

does not violate section 92 because it considered that

this statute does not apply to credit life insurance.

There is no basis in the legislative history of section

92 for this arbitrary exclusion of credit life insurance.

1 See Morton v. Ruiz, 415 U.S. 199, 287 (1974) ; Arnold Tours,

Ine. v. Camp, 472 F.2d 427, 435-36 n.12 (1st Cir. 1972).

19

In concluding that section 92 does not relate to credit

life insurance, the court of appeals attempted to dis-

tinguish this Court’s holding in First Security Bank

of Utah by asserting that it involved ‘‘no direct hold-

ing on the issue presented in this litigation.’’ 613 F.2d

at 1170. (App. A at 10a.) This is incorrect. In its opin-

ion in that case this Court stated that ‘‘. . . the pro-

scription against acting as insurance agent and receiv-

ing compensation therefor applies to all national banks

located in places with population in excess of 5,000 in-

habitants.’’ 405 U.S. at 407 (emphasis in text). This is

not dicta. The Court’s determination that the banks

were statutorily prohibited from receiving premium

income was essential to its conclusion that a realloca-

tion of income for federal tax purposes was unwar-

ranted. The Court said, ‘‘[w]e know of no decision of

this Court wherein a person has been found to have

taxable income that he did not receive and that he was

prohibited from receiving.’’ 405 U.S. at 403 (emphasis

added).

The court below made no reference to the Tenth

Circuit’s ruling in First Security Bank of Utah, which

also directly held that a national bank in a town of

more than 5,000 persons could not legally receive com-

mission income from the sale of credit life insurance.

Finally, the court of appeals attempted to distin-

guish the Sazon case on the ground that it ‘‘.. . did not

involve credit life but rather banks’ authurity to sell

broad forms of automobile, home, casualty and liability

insurance.’’ 613 F.2d at 1170. (App. A at 10a.) This

conclusion is incorrect. In footnote 33 on page 44 of his

brief on appeal in Sazon, the Comptroller specifically

referred to the testimony of various experts concerning

the administration of a credit life insurance program

by a bank-related insurance agency.

20

In summary, both First Security Bank of Utah and

Saxon are on point, and the District of Columbia Cir-

cuit’s holding is in conflict with them. In view of this

conflict, the Court should address the lower court’s

ruling.

CONCLUSION

For the foregoing reasons, this Petition for a writ of

certiorart should be granted.

Respectfully submitted,

SAMUEL K,. ABRAMS

THOMAS J. SEGAL

Brian E. Moran

BAKER & HOSTETLER

1776 K Street N.W.

Suite 900

Washington, D.C. 20006

(202) 293-6260

Attorneys for Petitioner

Of Counsel:

Horace R. Hansen, Esquire

HANSEN, DorbdELL, Brapt & ODLAUG

600 Degree of Honor Building

Fourth and Cedar Streets

Saint Paul, Minnesota 55010

APPENDICES

TO PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE DISTRICT OF COLUMBIA CIRCUIT

77

INDEX OF APPENDICES

APPENDIX Appendix Page

A Independent Bankers Association of America v.

Heimann, 613 F.2d 1164 (D.C. Cir. 1979) ....... la

B_ Independent Bankers Association of America v.

Heimann, No. 78-2199 (D.C. Cir.), Order denying

petition for rehearing, filed February 1, 1980 .. 13a

C Independent Bankers Association of America v.

Heimann, No. 77-2189 (D.D.C.), Memorandum

and Order of Dismissal, filed September 13, 1978 14a

D_ Independent Bankers Association of America v.

Heimann, No. 77-2189 (D.D.C.), Memorandum

and Order, filed October 11, 1978 ............. 18a

EK Financial Institutions Supervisory Act of 1966,

§ 202, 12 U.S.C. §1818(b) (1976) ............. 20a

F Financial Institutions Supervisory Act of 1966,

§ 202, 12 U.S.C. $ 1818(n) (1976) ......... cece 22a

G McCarran-Ferguson Act, §2, 12 U.S.C. § 1012

SED PUA d cucie on gees Kiakenennenesebed 23a

H Act of Sept. 7, 1916, ch. 461, 39 Stat. 753 (12

SEE Ad Sha hades cy cp vnte od adudesens 24a

I Disposition of Credit Life Insurance Income, 12

Cee BOON B ENOED che vctvccscansnancestosss 25a

la

APPENDIX A

UNITED STATES COURT OF APPEALS,

DISTRICT OF COLUMBIA CIRCUIT.

No. 78-2199

INDEPENDENT BanKeERS AssociaATION oF America, Appellant,

v.

Joun G. Hermann, Comptroller of the Currency

of the United States Department of Treasury,

Argued October 23, 1979

Decided December 28, 1979

Rehearing Denied February 1, 1980

Appeal from the United States District Court for the

District of Columbia (D.C. Civil 77-2189).

Samuel K. Abrams, Washington, D.C., with whom

Thomas J. Segal, Brian E. Moran, Washington, D.C. and

Horace R. Hansen, St. Paul, Minn., were on the brief, for

appellant.

Michael J. Ryan, Asst. U.S. Atty., Washington, D.C.,

with whom Earl J. Silbert,* U.S. Atty., John A. Terry,

Michael W. Farrell, David H. Shapiro, Asst. U.S. Attys.,

and Thomas P. Vartanian, Dorothy A. Sable, Attys., Wash-

ington, D.C., were on the brief, for appellee.

Before McGowan and Wi.key, Circuit Judges and

Gese.L,** United States District Judge for the District

of Columbia.

Opinion for the Court filed by District Judge Grse.u.

* United States Attorney at the time the brief was filed.

** Sitting by designation pursuant to 28 U.S.C. § 292(a).

=>

2a

GeseLL, District Judge.

This is an appeal from an Order of the District Court

dismissing a complaint filed by Independent Bankers Asso-

ciation of America (“IBAA”). IBAA seeks to enjoin the

Comptroller of the Currency of the United States from

continuing to enforce a regulation entitled “Disposition of

Credit Life Insurance Income,” 42 Fed.Reg. 48518-26

(1977)* The challenged regulation prevents insiders of na-

tional banks from benefitting personally by the regular

receipt of credit life insurance income sold to borrowers of

such banks, Appellant contends that the Comptroller ex-

ceeded his legal authority under the national banking laws

when he promulgated the regulation, and that he acted

arbitrarily and contrary to other specific federal and state

laws.

The District Court in effect held that since the Comp-

troller was proceeding to enforce the regulation by entering

cease and desist orders against individual non-complying

national banks, IBAA’s broad attack against the regulation

as a whole should not be entertained.? Thus the lower

court’s ruling left resolution of the issues to piecemeal

litigation, a course urged by the Comptroller. We reject

this approach. After finding that the issue of the regula-

tion’s validity is ripe for judicial review and that IBAA

has standing, we consider the merits and hold that the

Comptroller’s credit life regulation is authorized by law

and is neither arbitrary nor capricious. We therefore up-

hold the regulation against appellant’s challenge, without

necessity for remand to the District Court.

*The regulation, which took effect January 1, 1978, is codified

at 12 C.F.R. § 2 (1979).

* See Independent Bankers Assn. of America v. Heimann, No.

77-2189 (D.D.C. Sept. 13, 1978, modified Oct. 11, 1978), reproduced

at Appellant’s Appendix (AA) 247a-252a.

3a

STANDING AND RIPENESS

IBAA is a nonprofit trade association representing ap-

proximately one-half of all commercial banks in the United

States, including 1,950 national banks directly affected by

the regulation in dispute. It participated as the representa-

tive of its members in the rulemaking proceeding and is

fully qualified and authorized to represent their interests.

The complaint alleges and a subsequent affidavit supports

IBAA’s claim that the regulation has an immediate and

direct impact on its national bank members by requiring

these member banks to abandon established practices for

the provision of credit life insurance.* IBAA contends that

the Comptroller is forcing appellant’s members to choose

between switching to more costly and otherwise illegal in-

surance sales methods or risking civil prosecution with its

attendant loss of public confidence. This is more than suffi-

cient to establish a direct injury in fact. See Duke Power

Co. v. Carolina Env. Study Group, 438 U.S. 59, 98 S.Ct.

2620, 57 L.Ed.2d 595 (1978).

The injury asserted is, moreover, both a generalized

competitive impact and a specific financial detriment. Be-

cause such economic concerns of this highly regulated bank-

ing industry are committed by statute to the authority of

the Comptroller,‘ appellant has satisfied the zone of inter-

est test. See Barlow v. Collins, 397 U.S. 159, 90 S.Ct. 832, 25

L.Ed.2d 192 (1970); Association of Data Processing Serv.

Orgs. v. Camp, 397 U.S. 150, 90 S.Ct. 827, 25 L.Ed.2d 184

(1970). Although the regulation is as the Comptroller sug-

gests directed primarily to activities of insiders and not

to the banks themselves, the regulated activities are en-

tirely intermeshed with the day-to-day functions of national

*See Complaint at §{/ 9-15; Affidavit of Richard W. Peterson,

Dec. 21, 1977 at {ff 4-10, reproduced at AA 7a-12a; 42a-47a.

*See 12 U.S.C. §§ 21 et seg, (1976). See generally Investment

Co. Institute v. Camp, 401 U.S. 617, 91 S.Ct. 1091, 28 L.Ed.2d

367 (1971).

4a

banks. We have recognized IBAA’s standing in comparable

situations in the past and will do so again here.°

It is further evident that the issues raised by the com-

plaint are ripe for decision. The Comptroller states that he

fully intends to enforce the credit life regulation through

all appropriate means. This includes both public admin-

istrative proceedings pointed toward cease and desist or-

ders and negotiated compliance agreements.°

The Comptroller would apparently prefer to see the

validity of the regulation litigated over the ensuing years,

Circuit-by-Circuit. He has, however, taken final agency

action in issuing the regulation and the legal issues raised

by the complaint can be resolved without need of case-by-

ease factual development. See generally Abbott Labora-

tories v. Gardner, 387 U.S. 136, 87 S.Ct. 1507, 18 L.Ed.2d

681 (1967). As indicated above, the hardship to appellant

is sufficiently direct and immediate to confer standing. Such

being the case, prompt resolution will eliminate uncertainty

and be in the interest of efficient judicial administration.

Although the case could now be remanded to the District

Court for a decision on the merits, we have concluded that

such a course is unnecessary and indeed would be unduly

wasteful of judicial resources. A full record is before us,

devoid of issues of disputed material fact. The parties

cross-moved for summary judgment in the lower court and

the relevant legal questions have been fully briefed and

° See Independent Bankers Assn. of America v. Smith, 402 F.

Supp. 207 (D.D.C. 1975), aff'd, 175 U.S.App.D.C. 184, 534 F.2d

921 (D.C. Cir.), cert. denied, 429 U.S. 862, 97 S.Ct. 166, 50 L.Ed.

2d 141 (1976) ; Independent Bankers Assn. of America v. Heimann,

No. 78-0811 (D.D.C. Oct. 30, 1978).

* At oral argument the Comptroller represented that his office

had initiated enforcement under the regulation three times since

January, 1978. On each occasion, administrative proceedings ended

in a consent order; enforcement through cease and desist orders

has not been necessary.

5a

argued on appeal. This Court sees no benefit to be gained

by delay. See 28 U.S.C. § 2106. See generally Grosso v.

United States, 390 U.S. 62, 71-72, 88 S.Ct. 709, 19 L.Ed.2d

906 (1968).

THE COMPTROLLER’S RULEMAKING AUTHORITY

The Comptroller initiated the rulemaking proceeding in

aid of his statutory responsibilities under the Financial In-

stitutions Supervisory Act of 1966,’ 12 U.S.C. § 1818. Sec-

tion 1818(b) expressly authorizes the Comptroller in his

discretion to proceed to issue cease and desist orders

against national banks engaged in an “unsafe or unsound”

banking practice or violating “a law, rule or regulation”

the Comptroller may issue. Under Section 1818(n) the

Comptroller is “empowered to make rules and regulations”

with respect to any proceeding initiated pursuant to this

section.

The challenged regulation relating to disposition of

‘eredit life insurance income is designed to identify what the

Comptroller has determined to be an unsafe and unsound

banking practice. The regulation is not complex. It pro-

hibits officers, directors and principal shareholders of na-

tional banks from retaining for their own benefit income

derived from the sale of credit life insurance in connection

with loans made by the bank.*

Credit life insurance ® originated early in this century

as a security device to protect the extension of consumer

credit by banks. It is today a principal form of security

routinely obtained by national banks making consumer

* Pub.L.No. 89-695 ; 80 Stat. 1046.

® See 12 C.F.R. § 2.4(a) (1979).

*The term ‘‘credit life insurance’’ encompasses health, accident

or life insurance coverage issued as protection for a loan. See 12

C.F.R. § 2.3(e) (1979).

6a

loans. Formal tying arrangements between the extension

of credit and the sale of such insurance are prohibited by

statute.*° However, the receipt by officers and others of

personal commissions from credit life insurance sales may

well stimulate overselling to potentially uninterested bor-

rowers, often without disclosure to the full board of direc-

tors or at the cost of diminished attention to the bank’s

own investment priorities.‘' The Comptroller, conscious of

fiduciary principles, sought to avoid the obvious conflict

of interest which is present when insiders personally bene-

fit from bank functions through what is, in effect, a form

of self-dealing. Finding such diversions of income from the

banks to be unsafe and unsound, the Comptroller prohibited

the practice while suggesting a variety of flexible proce-

dures still available to national banks enabling them to

benefit from credit life insurance income generated by their

loan activities.”

Because the statute is ambiguous and fails to contain an

express grant of authority to define “unsafe and unsound”

practices the authority of the Comptroller to define such a

practice by rule is strenuously questioned in this proceed-

ing. Appellant urges the Court to find that in view of

Congress’s unwillingness to authorize issuance of substan-

tive regulations, the challenged publication is no more than

an interpretative statement, not entitled to status as a

binding rule. See Batterton v, Francis, 432 U.S. 416, 425

n. 9, 97 S.Ct. 2399, 53 L.Ed.2d 448 (1977); General Electric

Co. v. Gilbert, 429 U.S. 125, 141, 97 S.Ct. 401, 50 L.Ed.2d

343 (1976).

7012 U.S.C. § 1972 (1976).

1 See 42 Fed.Reg. 48523-24 (1977) (statement of reasons accom-

panying final regulation).

12 See 12 C.F.R. § 2.6(a) through (g) (1979) (listing alterna-

tives).

7a

There is little room for doubt, however, that the Comp-

troller is proceeding as Congress contemplated. National

banks are perhaps as meticulously regulated as any indus-

try. Every aspect of their affairs is scrutinized to assure

financial soundness and ethical practice. The Comptroller’s

statutory duties require the closest monitoring and con-

tinuous supervision of these institutions.’* Thus, the Comp-

troller’s discretionary authority to define and eliminate

“unsafe and unsound” conduct is to be liberally construed.

Indeed, as the language of Section 1818(b) itself suggests,

a regulation giving advance notice of conduct which the

Comptroller disapproves as threatening to the safety and

soundness of the banks he regulates is wholly consistent

with the statutory scheme. The Comptroller was given au-

thority to promulgate regulations in order to facilitate

execution of his statutory powers. See 12 U.S.C. § 1818(n).

It would undermine the regulatory purpose of Congress to

assume that the Comptroller must proceed solely by sep-

arate “cease and desist” cases. His ability to forewarn by

specifying and clarifying the nature and scope of his con-

cerns will at the same time minimize the necessity for re-

current and costly investigation into the conduct of the

many individual banks under his supervision.

This Court has had occasion in a closely analogous con-

text to consider the authority of the Federal Trade Com-

mission to implement its mandate over “unfair and de-

ceptive” practices through regulation. Considerations of

specific language and overriding statutory purpose which

led to a recognition of that Commission’s substantive rule-

8 See generally 12 U.S.C. §§ 21 et seg. (1976). One commentator

has characterized regulation of national banks as:

more intensive than the regulations of any other industry,

and .. . extends to all major steps in the establishment and

development of a national bank, including not only entry into

the business, changes in status, consolidations, reorganizations,

but also the most intensive supervision of operations. .. .

1 K. Davis, Administrative Law Treatise 247 (1958).

8a

making authority are equally and forcefully applicable to

the case at hand. See National Petroleum Refiners Assn. v.

FTC, 482 F.2d 672, cert. denied, 415 U.S. 951, 94 S.Ct.

1475, 39 L.Ed.2d 567 (1973). The statutory provisions an-

alyzed in National Petroleum are wholly comparable to

those on which the Comptroller here relies.** Moreover, as

in National Petroleum, we see no reason to impose a re-

strictive procedural gloss on the agency’s authority “to

make rules and regulations” when a properly promulgated

substantive rule unquestionably effectuates the statutory

plan. See id. at 678. Absent a clear congressional expres-

sion to the contrary,’ the Comptroller is entitled to accom-

plish his regulatory responsibilities over “unsafe and un-

sound” practices both by cease and desist proceedings and

by rules defining and explicating the practices which in his

discretion he finds threatenirg to a stable and effective

national bank system.”

* Compare 12 U.S.C. §§ 1818(b) and 1818(n) with 15 U.S.C.

§§ 45(b) and 46(g). Each statute confers authority to police un-

healthy practices, broadly defined (7. e., ‘‘unsafe and unsound

practices’’ in banking: ‘‘unfair or deceptive act[s] or practice[s]’’

in commerce), and to promulgate regulations in aid thereof.

We reject appellant’s contention that unsuccessful efforts

during the 95th Congress to legislate with respect to the Comp-

troller’s general rulemaking authority convey such a narrowing

of congressional intent. In fact, the legislative history indicates an

understanding that the explicit rulemaking authorization proposed

in Title XIV of the House bill reported out of committee was

meant to clarify existing agency powers, rather than create new

authority. See H.R.Rep.No. 1383, 95th Cong., 2d Sess. 29 (1978),

reprinted in [1978] U.S.Code Cong. & Admin.News pp. 9273, 9301.

The failure to ratify this authorization was attributable to time

constraints during the final hours of the 95th Congress. See 124

Cong.Ree. H13075 (daily ed. Oct. 14, 1978) (remarks of Rep. St.

Germain).

*® Because we hold that Section 1818(b) and (n) constitutes an

explicit grant of rulemaking authority applicable to the instant

regulation, it is unnecessary to consider whether or not the Comp-

troller, in any event, has inherent rulemaking authority to issue

rules consistent with statutory objectives.

\

9a

THE REGULATION AND OTHER LAWS

IBAA next contends that the credit life regulation, by

approving various methods which enable national banks

themselves to provide credit life insurance,” violates other

laws regulating the business of insurance. One statute pur-

portedly in direct conflict with the challenged rule is 12

U.S.C. §92 (1976). This legislation authorizes national

banks in towns of 5,000 inhabitants or less to act as agents

for life insurance companies; in appallant’s view its lan-

guage carries a clear implication that national banks ‘in

larger towns have no authority to so perform.® Unlike

other forms of insurance coverage, however, credit life

insurance is a limited special type of coverage written to

protect loans. In no way does it involve the operations of

a general life insurance business whether written in a

town of over or under 5,000 inhabitants. Moreover, Con-

gress has specifically granted national banks all incidental

powers necessary to carry on the business of banking, 12

U.S.C. § 24 (1976), and as the record thoroughly establishes

credit life insurance is now commonplace and essential

where ordinary loans on personal security are involved.”

17 These methods include having bank employees who sell the in-

surance turn over all income to the bank as compensation for the

use of its premises and good will (12 C.F.R. § 2-6(d)), refunding

all such income t:» the loan customers (12 C.F.R. § 2.6(g)) and

several other options. The list in § 2.6 is not meant to be exhaus-

tive; moreover, no single method is mandatory under the regu-

lation.

*® Under 12 U.S.C. § 92, a national bank’s authority to function

as an agent is subject to such rules and regulations as the Comp-

troller may prescribe. By its own terms, the statute does not

address the authority of national banks in larger towns or cities

to act as agents for life insurance companies.

*? In an analogous context, the Federal Reserve Board has found

the sale of credit life insurance ‘‘so closely related to banking or

managing or controlling banks as to be a proper incident thereto.’’

See 12 U.S.C. § 1843(c)(8) and 12 C.F.R. §§ 225.4(a) (9) (ii),

10a

The authorities cited by appellant, such as Saxon v.

Georgia Assn. of Independent Insurance Agents, Inc., 399

F.2d 1010 (5th Cir. 1968), and Commissioner of Internal

Revenue v. First Security Bank of Utah, NA, 405 US. 394,

92 S.Ct. 1085, 31 L.Ed.2d 318 (1974), are simply not in

point. The first case did not involve credit life but rather

banks’ authority to sell broad forms of automobile, home,

casualty and liability insurance. See Saxon, supra, 399

F.2d at 1012. The second involved no direct holding on the

issue presented in this litigation.”

IBAA also suggests that the McCarran-Ferguson Act

must be interpreted as prohibiting the credit life regula-

tion since the regulation conflicts irreconcilably with some

state insurance laws.”* While it is true that the Act pre-

serves to the states authority to regulate the relationship

225.128(c). This finding has been sustained on judicial review.

Alabama Assn. of Insurance Agents v. Board of Governers of Fed.

Res. Sys., 533 F.2d 224, 240-41 (5th Cir.), modified, 558 F.2d 729,

730 (1977), cert. denied, 435 U.S. 904, 98 S.Ct. 1448, 55 L.Ed.2d

494 (1978).

20The Supreme Court in First Security Bank of Utah, supra,

405 U.S. at 401-02, 92 S.Ct. 1085, simply adopted the litigants’

assumption that a national bank in a town of more than 5,000

persons could not legally receive commission income for the sale

of credit life insurance. That case involved the allocation, for tax

purposes, of commissions earned in the sale of credit life insur-

ance; the Court’s ‘‘assumption’’ decided nothing concerning the

meaning of 12 U.S.C. § 92. See First Natl. Bank of La Marque v.

Smith, 436 F.Supp. 824, 832 (S.D.Tex. 1977).

21 Under the McCarran-Ferguson Act, Pub.L.No. 79-15, 59 Stat.

33 (1945), codified in 15 U.S.C. §§ 1011 et seq. (1976), the busi-

ness of insurance is subject to regulation by the states. Although

appellant cites state laws in Oklahoma and Texas allegedly super-

seded by the challenged rule, its argument is not persuasive. Given

that credit life insurance is entirely optional under the regulation,

and that alternative methods for its sale are explored in depth at

the state level, we are satisfied that the regulation will not cause

national banks to violate these state laws.

lla

between the insurance company and its policyholder, Se-

curities &€ Exchange Commission v. National Securities,

Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969),

a rule affecting the disposition of credit life insurance in-

come received by national bank insiders does not fall within

the strictures of the statute. Nothing in the McCarran-

Ferguson Act was intended to affect the power of the

Comptroller under authority of Congress to regulate “un-

safe and unsound” banking practices of national banks.

This exercise of power over income dispensed internally

among national bank personnel lies well beyond the core of

protection furnished to state insurance laws under the Act.

See generally, Group Life & Health Insurance Co. v. Royal

Drug Co., 440 U.S. 205, 210-14, 99 S.Ct. 1067, 59 L.Ed.2d

261 (1979). To be sure, the states may continue to regulate.

All that is involved is the Comptroller’s proper concern

that banks under his supervision are not deprived of the

benefits of business they generate by those who seek to

take advantage of their positions as officers, directors or

‘principal shareholders.

Appellant’s claim for loss of competitive equality with

state banks is without merit. There is no support from

Congress or the courts for requiring such equality between

state and national banks with respect to provision of credit

life insurance or indeed in general. An extensive and long-

standing network of statutory requirements governing na-

tional banks alone confirms the existence of a dual banking

system. Moreover, it is puzzling if not inappropriate for

banks to claim they are experiencing a “competitive disad-

vantage” as a result of a regulation which can only increase

the earnings of banks themselves.

RULEMAKING PROCEDURES

Finally, IBAA points to the fact, raised during the rule-

making proceedings, that the Federal Deposit Insurance

Corporation (“FDIC”), which supervises and insures most

12a

state-chartered banks, has evolved less stringent regula-

“tioms-~fexdealing with the writing of credit life insurance

by insiders. Appellant urges that the Comptroller’s failure

to address these more flexible alternative approaches in

announcing the regulation artificially narrowed the scope

of the proceedings in violation of accepted rulemaking

standards. See Home Box Office, Inc. v. FCC, 185 U.S.App.

D.C. 142, 567 F.2d 9, 36 (D.C. Cir.), cert. denied, 434 U.S.

829, 98 S.Ct. 111, 54 L.Ed.2d 89 (1977); United States v.

Nova Scotia Food Products Corp., 568 F.2d 240, 253 (2d

Cir. 1977).

The Comptroller received some 200 comments over a

fifteen-month period. He was not required to meet each

separate comment head on when issuing his determination

following the comment period. See Automotive Parts &

Accessories Assn. v. Boyd, 132 U.S.App.D.C. 200, 407 F.2d

330, 338 (D.C. Cir. 1968). His task instead was to identify

vital material questions raised during the proceedings and

indicate the agency’s response to these concerns, See Home

Box Office, Inc. v. FCC, supra; Automotiwe Parts é Acces-

sorties Assn. v. Boyd, supra. This he did, facing directly

both the principal legal and management objections in a

full reasoned discussion.” His “concise general statement”

was sufficient. There were no procedural errors in the

announcement, promulgation or explanation of the chal-

lenged regulation.

Given the Comptroller’s clear authority to regulate na-

tional banks so as to achieve sound banking practice, and

the obvious conflict between congressional objectives and

the credit life insurance activities of insiders prohibited

by the regulation, we cannot find that the Comptroller has

acted arbitrarily. According due deference to his expertise

and finding no procedural or substantive infirmity, the

regulation must be sustained. The District Court’s order

dismissing the complaint is affirmed on different grounds.

22 See 42 Fed.Reg. 48518-25 (1977).

13a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1979

No. 78-2199

INDEPENDENT BANKERS ASSOCIATION OF AMERICA,

Appellant

v.

Joon G. Hermann, Comptroller of the Currency

of the United States Department of Treasury

Berore: McGowan and Wilkey, Circnit Judges; and Ge-

sell,* Judge, United States District Court for

the District of Columbia

ORDER

Filed February 1, 1980

Upon consideration of appellant’s (Independent Bankers

Assoc. of America) petition for rehearing, it is

ORDERED, by the Court, that appellant’s aforesaid petition

for rehearing is denied.

Per Curiam

For the Court:

/3/ Georce A. FisHER

George A. Fisher

Clerk

* Sitting by designation pursuant to Title 28 U.S.C. § 292(a).

l4a

APPENDIX C

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action No. 77-2189

INDEPENDENT BankKErS ASSOCIATION OF AMERICA,

Plaintiff,

v.

Joun G. Hermann,

Defendant.

MEMORANDUM AND ORDER OF DISMISSAL

Filed September 13, 1978

Plaintiff is a nonprofit Minnesota corporation which

serves as a trade association for several hundred relatively

small national banks which are its members. Plaintiff sues

here to invalidate and enjoin enforcement of a Regulation

published by the Comptroller of the Currency in 1977 re-

lating to a practice engaged in by some banks with respect

to income from the sale of credit life insurance. Comp-

troller of the Currency, “Disposition of Credit Life Insur-

ance Income” (Final Regulation), 42 Fed. Reg. 37512

(1976). That insurance is purchased by an individual bor-

rower for the benefit of a lending bank to which the insur-

ance proceeds become payable in the event the borrower

should die before the bank has been repaid.

The Regulation in question addressed the arrangements

made by some banks for the payment of income generated

by the sale of credit life insurance to their officers, direc-

tors, employees, and selected stockholders, as distinguished

from payment of that income to the lending bank itself.

The Regulation expressed the Comptroller’s opinion that

payment of income earned from the sale of credit life in-

15a

surance to persons other than the bank itself or as a pro

rata dividend to its shareholders was an unsafe and un-

sound business practice.

The matter is before the Court on defendant’s motion to

dismiss and the parties’ cross-motions for summary judg-

ment. In the preliminary injunction phase of this case,

defendant contended that the Regulation established as a

matter of law that a bank’s non-pro rata distribution of

credit insurance sales proceeds to officers, directors, stock-

holders, and employees was an unsafe and unsound bank-

ing practice. As a consequence, the defendant argued, any

cease and desist proceeding against any bank which alleg-

edly engaged in the practice would litigate only the ques-

tion of whether the respondent bank had engaged in the

practice; the issue of whether the practice was unsafe and

unsound would have been decided, and any such defense

contention would have been foreclosed, by the Regulation.

In this posture, the case raised difficult questions about

the standing of the plaintiff association in terms of the

extent, if any, to which it (as distinguished from its mem-

bers) had suffered from, or was threatened by, the Regula-

tion. More important, the case in its original posture put

squarely at issue as an original question the underlying

statutory authority of the Comptroller to issue binding

regulations. The statutory interpretation problem was com-

plicated by the fact that the laws creating the Comptroller’s

authority have been enacted by Congress piecemeal since

1863. These scattered statutes do not specifically authorize

regulations of the sort issued by many other administra-

tive agencies. Compare, e.g., National Petroleum Refiners

Association v. F.T.C., 482 F.2d 672 (D.C. Cir.), cert. de-

nied, 415 U.S. 951 (1973). Most importantly, legislation

which would clearly give the defendant the rulemaking

authority he claimed is now under active consideration in

Congress suggesting at least inferentially that the Comp-

troller does not have such authority at present, and that

l6a

Congress is the more appropriate body to resolve the

present doubts about the Comptroller’s power to issue

binding regulations. Compare American Automobile Asso-

ciation v. United States, 367 U.S. 687, 697 (1961). H.R.

13088, 95th Cong., 2d Sess., June 12, 1978.

The defendant has since conceded, however, that:

[a]lthough the Comptroller’s initial response to the

Court’s question at the hearing on plaintiff’s motions

for a temporary restraining order and for a prelimi-

nary injunction indicated that a national bank would

be precluded from attacking the validity of the regu-

lation in the course of an administrative proceeding

under 12 U.S.C. § 1818(b) (Transcript at 52), it would

appear that, upon studied reflection, a national bank

would be able to challenge the validity of the regula-

tion and present the defense that its activities are in

fact safe and sound practices both during the admin-

istrative proceeding and during judicial review in the

appropriate court of appeals, particularly where a

regulation has not previously been the subject of judi-

cial review. Memorandum of Points and Authorities in

Support of Defendant Comptroller’s Motion to Dismiss

at 28, n. 19.

The Court accepts this concession by defendant as bind-

ing upon it and therefore as dispositive of this case. The

concession reduces the Regulation to a statement of de-

fendant’s informed, expert, and well-reasoned opinion

about the practice of some banks and of the defendant’s

intention to exercise its clear statutory authority to initiate

cease and desist actions to stop the practice. Defendant’s

concession effectively ends any threat to attempt to employ

the Regulation in any cease and desist proceeding as a bar

to any bank’s defense of the soundness and safety of its

practices. Thus, defendant has already given the plaintiff

all the relief which the Court could effectively provide if it

decided in plaintiff’s favor the complex issues here raised.

17a

Accordingly, the defendant’s motion to dismiss should

be and is hereby Grantep.

/s/ Louis F. OperporFER

United States District Judge

Dated: September 13, 1978

>

18a

APPENDIX D

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action No. 77-2189

INDEPENDENT Bankers AssociATIon or America, Plaintiff,

we

Joun G. Hermann, Defendant.

MEMORANDUM AND ORDER

Filed October 11, 1978

Defendant moves to modify the Court’s Memorandum

and Order of Dismissal of September 13, 1978, because of

concern about the statement that:

... the laws creating the Comptroller’s authority .. .

do not specifically authorize regulations of the sort

issued by many other administrative agencies.

The defendant expresses concern that the statement could

result in unfounded attacks on the Comptroller’s rule-

making authority in future litigation or enforcement ac-

tions involving this and other agency rules.

Defendant correctly observes that the Court determined

not to decide this issue. Therefore, there is no basis for

defendant’s expressed concern that future parties or courts

might misconstrue the Court’s opinion as deciding some-

thing it did not decide.

The defendant also contends that the Court misunder-

stood its concession. Having carefully reviewed defendant’s

concessions in its brief and in oral argument and the

Court’s September 13 Memorandum and Order, the Court

19a

is satisfied that there is no essential difference between

concession relied upon by the Court and the defendant’s

post-judgment restatement of it. The opinion specifically

recognized defendant’s clear statutory authority to initiate

cease and desist actions to stop the practices addressed

by the Regulation. At oral argument, in its footnote 19,

and now in its postjudgment memorandum, defendant

clearly concedes the right of a respondent in a cease and

desist proceeding to challenge the Regulation as exceeding

the Comptroller’s authority, as otherwise improperly pro-

mulgated, or as arbitrary and capricious, or to present

as a defense to the proceeding the safety and soundness of

the challenged practice. Defendant objects, however, to the

Court’s observation that the “concession reduces the Regu-

lation to a statement of defendant’s informal, expert and

well-reasoned opinion about the practice of some banks.”

The ultimate point of this possibly too rhetorical state-

ment is that the Court did not decide the validity of the

Regulation, and left that issue for decision in a cease and

desist proceeding. In order to avoid confusion, the offend-

ing sentence will be stricken.

Accordingly, the Memorandum and Order of September

13, 1978, is Moptrrev by deleting the second sentence of

the second full paragraph of page three, and

Defendant’s Motion to Modify Opinion is Granrep to the

extent of the above modification and Drnigp as to all other

requested modifications, and

Plaintiff’s motion to vacate the order of dismissal, to

direct defendant to withhold publication of bulletin and to

grant further relief is Dentep.

/s/ Louis F. OBERDORFER

United States District Judge

Dated: October 11, 1978

20a

APPENDIX E

The Financial Institutions Supervisory Act of 1966, § 202,

12 U.S.C. $1818(b) (1976) (prior to 1978 amendment),

provides as follows:

(1) If, in the opinion of the appropriate Federal

banking agency, any insured bank or bank which has

insured deposits is engaging or has engaged, or the

agency has reasonable cause to believe that the bank

is about to engage, in an unsafe or unsound practice

in conducting the business of such bank, or is violating

or has violated, or the agency has reasonable cause to

believe that the bank is about to violate, a law, rule,

or regulation, or any condition imposed in writing by

the agency in connection with the granting of any

application or other request by the bank, or any written

agreement entered into with the agency, the agency

may issue and serve upon the bank a notice of charges

in respect thereof. The notice shall contain a statement

of the facts constituting the alleged violation or viola-

tions or the unsafe or unsound practice or practices,

and shall fix a time and place at which a hearing will

be held to determine whether an order to cease and

desist therefrom should issue against the bank. Such

hearing shall be fixed for a date not earlier than thirty

days nor later than sixty days after service of such

notice unless an earlier or a later date is set by the

agency at the request of the bank. Unless the bank shall

appear at the hearing by a duly authorized representa-

tive, it shall be deemed to have consented to the issu-

ance of the cease-and-desist order. In the event of such

consent, or if upon the record made at any such hear-

ing, the agency shall find that any violation or unsafe

or unsound practice specified in the notice of charges

has been established, the agency may issue and serve

upon the bank an order to cease and desist from any

such violation or practice. Such order may, by provi-

2la

sions which may be mandatory or otherwise, require

the bank and its directors, officers, employees, and

agents to cease and desist from the same, and, further,

to take affirmative action to correct the conditions

resulting from any such violation or practice.

(2) A cease-and-desist order shall become effective

at the expiration of thirty days after the service of

such order upon the bank concerned (except in the

case of a cease-and-desist order issued upon consent,

which shall become effective at the time specified there-

in), and shall remain effective and enforceable as pro-

vided therein, except to such extent as it is stayed,

modified, terminated, or set aside by action of the

agency or a reviewing court.

(3) This subsection and subsections (c), (d), (h),

(i), (k), (1), (m), and (n) of this section shall apply

to any bank holding company, and to any subsidiary

(other than a bank) of a holding company, as those

terms are defined in the Bank Holding Company Act

of 1956, in the same manner as they apply to a State

member insured bank.

22a

APPENDIX F

The Financial Institutions Supervisory Act of 1966, § 202,

12 U.S.C. §1818(n) (1976) (prior to 1978 amendment),

, provides as follows:

In the course of or in connection with any proceeding

under this section, the agency conducting the proceed-

ing, or any member or designated representative there-

of, including any person designated to conduct any

hearing under this section, shall have the power to

administer oaths and affirmations, to take or cause to

be taken depositions, and to issue, revoke, quash, or

modify subpenas and subpena duces tecum; and such

agency is empowered to make rules and regulations

with respect to any such proceedings. The attendance

of witnesses and the production of documents provided

for in this subsection may be required from any place

in any State or in any territory or other place subject

to the jurisdiction of the United States at any desig-

nated place where such proceeding is being conducted.

Any party to proceedings under this section may apply

to the United States District Court for the District

of Columbia, or the United States district court for the

judicial district or the United States court in any terri-

tory in which such proceeding is being conducted, or

where the witness resides or carries on business, foi

enforcement of any subpena or subpena duces tecum

issued pursuant to this subsection, and such courts

shall have jurisdiction and power to order and require

compliance therewith. Witnesses subpenaed under this

section shall be paid the same fees and mileage that are

paid witnesses in the district courts of the United

States. Any court having jurisdiction of any proceed-

ing instituted under this section by an insured bank

or a director or officer thereof, may allow to any such

party such reasonable expenses and attorneys’ fees as

it deems just and proper; and such expenses and fees

shall be paid by the bank or from its assets.

23a

APPENDIX G

The McCarran-Ferguson Act, § 2, 15 U.S.C, § 1012 (1976),

as amended, provides as follows:

(a) The business of insurance, and every person

engaged therein, shall be subject to the laws of the

several States which relate to the regulation or taxa-

tion of such business.

(b) No Act of Congress shall be construed to in-

validate, impair, or supersede any law enacted by any

State for the purpose of regulating the business of

insurance, or which imposes a fee or tax upon such

business, unless such Act specifically relates to the

business of insurance: Provided, That after June 30,

1948, the Act of July 2, 1890, as amended, known as the

Sherman Act, and the Act of October 15, 1914, as

amended, known as the Clayton Act, and the Act of

September 26, 1914, known as the Federal Trade Com-

mission Act, as amended, shall be applicable to the

business of insurance to the extent that such business

is not regulated by State law.

24a

APPENDIX H

Act of Sept. 7, 1916, ch. 461, 39 Stat. 753, amending the

National Bank Act (12 U.S.C.A. § 92), provides as follows:

In addition to the powers now vested by law in na-

tional banking associations organized under the laws

of the United States any such association located and

doing business in any place the population of which

does not exceed five thousand inhabitants, as shown by

the last. preceding decennial census, may, under such

rules and regulations as may be prescribed by the

Comptroller of the Currency, act as the agent for any

fire, life, or other insurance company authorized by the

authorities of the State in which such bank is located

to do business in said State, by soliciting and selling

insurance and collecting premiums on policies issued

by such company; and may receive for services so

rendered such fees or commissions as may be agreed

upon between the said association and the insurance

company for which it may act as agent; and may also

act as the broker or agent for others in making or

procuring loans on real estate located within one hun-

dred miles of the place in which said bank may be

located, receiving for such services a reasonable fee

or commission: Provided, however, That no such bank

shall in any case guarantee either the principal or in-

terest of any such loans or assume or guarantee the

payment of any premium on insurance policies issued

through its agency by its principal: And provided

further, That the bank shall not guarantee the truth

of any statement made by an assured in filing his

application for insurance.

25a

APPENDIX I

Disposition of Credit Life Insurance Income, 12 C.F.R.

Part 2 (1979), provides as follows:

§ 2.1 Authority.

This part is issued by the Comptroller of the Cur-

rency under the general authority of the national bank-

ing laws, 12 U.S.C. 1 et seq., and under the specific

authority of 12 U.S.C. 24(7), 60, 73, 92 and 1818(b).

§ 2.2 Scope and purpose.

(a) This part applies to sales of credit life, health

and accident insurance (“credit life insurance”) by

employees, officers, directors and principal sharehold-

ers of a national bank and by corporations, partner-

ships, associations or other entities in which such per-

sons have an interest of more than 5 percent.

(b) The purposes of this part are (1) to prohibit

employees, officers, directors and principal sharehold-

ers of national banks from benefitting personally on the

sale of credit life insurance to loan customers and (2)

to encourage marketing of credit life insurance through

the use of bank facilities only under arrangements

which assure that employees, officers, directors and

principal shareholders do not receive benefits not

shared with all stockholders of the bank.

§ 2.3 Definitions.

(a) “Bank” means a national banking association or

a bank located in the District of Columbia and subject

to the supervision of the Comptroller of the Currency.

(b) “Interest” shall include:

(1) Ownership through a spouse or minor children;

(2) Ownership through.a broker, nominee or other

agent ;

26a

(3) Ownership through a corporation, partnership,

association, joint venture or proprietorship controlled

by a director, officer, employee or principal shareholder

of the bank.

(c) “Principal shareholder” means any shareholder

who directly or indirectly owns or controls an interest

of more than 5 percent in the bank’s outstanding

shares.

(d) The terms “officer,” “director,” “emplcyee” and

“principal shareholder” shall include the spouse and

minor children of such officer, director, employee or

principal shareholder.

(e) The term “credit life insurance” means credit

life, health and accident insurance, sometimes referred

to as credit life and disability insurance.

§ 2.4 Distribution of credit life insurance income.

(a) No bank employee, officer, director or principal

shareholder may retain commissions or other income

from the sale of credit life insurance in connection with

any loan made by the bank. Except as provided in

subsequent paragraphs of this section, retention of

credit life insurance income by such persons or by

corporations, partnerships, associations or other en-

tities in which such persons have an interest of more

than 5 percent is an unsafe and unsound banking

practice.

(b) Income from the sale of credit life insurance to

loan customers may be credited to an affiliate of the

bank: Provided, That income in proportion to shares

held by the bank’s minority shareholders (other than

directors) is placed in trust and paid to them periodi-

cally.

(c) Other permissible arrangements for the distribu-

tion of credit life insurance income include:

27a

(1) Where the bank is wholly owned (except for

directors’ shares) by a holding company, income from

the sale of credit life insurance may be credited either

to an affiliate which is also wholly owned or to the

holding company ;

(2) Where there is no holding company, income

from the sale of credit life insurance may be credited

to an affiliate whose shareholders are identical to those

of the bank;

(3) Income from the sale of credit life insurance may

be credited to a trust for the benefit of all shareholders

of the bank, or to a corporation or wholly owned

subsidiary thereof whose stock is held in trust for the

benefit of all shareholders.

(d) Nothing in this section shall be construed to

prohibit a bank employee, officer, director, or principal

shareholder who holds an insurance agent’s license

from agreeing to compensate the bank for the use of

its premises, employees and good will; Provided, That

all income received by said employee, officer, director,

or principal shareholder from this activity is turned

over to the bank as compensation.

§ 2.5 Responsibilities of directors.

(a) The selection of an insurance underwriter, the

agreements between the underwriter and the bank or

its employees, officers, directors, or principal share-

holders, and the manner in which income from the sale

of credit life insurance is distributed shall be approved

by an appropriate resolution of the bank’s board of

directors. Such resolution shall set forth the name of

the underwriter(s), a description of the agreement

with the underwriter as to the collection of premiums

and the disbursement thereof, and a discussion of the

manner in which income from the sale of credit life

insurance is to de allocated. However, the requirements

28a

of this paragraph shall not apply where (1) all in-

come from the sale of credit life insurance is credited

to the income accounts of the bank and no employee,

officer, director, or principal shareholder receives a

personal benefit from such sales, or (2) where the bank

is wholly owned by a holding company (except direc-

tors’ qualifying shares) and the credit life insurance

income is credited either to an affiliate that is also

wholly owned or *o the holding company.

(b) When carrying out their responsibilities under

paragraph (a) above, the directors shall observe the

rules in § 2.4, and shall be mindful of their duty under

both the common law and 12 U.S.C. 73 to promote and

advance the interests of the bank over their own per-

sonal interests.

§ 2.6 Methods of selling credit life insurance.

Pursuant to 12 U.S.C. 24(7), a bank may furnish

credit life insurance to its loan customers by any of

the methods listed below. Where state insurance laws

or other legal considerations appear to preclude the

use of a particular method, a bank may select an alter-

native that complies with ¢ 2.4 of this regulation. The

list below is not intended to be exclusive.

(a) A bank may act as agent for the sale of credit

life insurance and receive income in the form of

commissions.

(b) An employee, officer, director, or principal

shareholder may be licensed as an insurance agent for

the sale of credit life insurance to loan customers, pro-

vided the rules in § 2.4 are observed.

(c) A bank may acquire a group credit life insur-

ance policy and provide coverage thereunder to loan

customers. A bank that makes credit life insurance

coverage available by means of a group policy may

29a

receive experience refunds, dividends or retrospective

rate credits as provided in the policy.

(d) As compensation for the use of its premises,

personnel and good will, a bank may contract with an

employee, officer, director or principal shareholder to

receive income payable to said individual from the

sale of credit life insurance: Provided, That said in-

dividual is obligated in the contract to pay over to the

bank all of the income received.

(e) A-bank may accept reimbursement from an in-

surance company for services rendered by the bank

in selling credit life insurance, maintaining an account

to receive premiums, disbursing premiums to the un-

derwriter, and issuing a statement of account on a

periodic basis.

(f) A bank may provide credit life insurance cover-

age to borrowers at its own expense.

(g) A bank may refund to its loan customers who

purchase credit life insurance all commissions, experi-

ence refunds or other income received from the under-

writer.

§ 2.7 Reserved authority.

The Comptroller reserves the right to give written

approval to a bank’s request to modify the applicability

of this part to that bank because of that bank’s par-

ticular circumstances. Modifications will be granted

only where assurance is provided that the overall pur-

poses of the regulation will be achieved within a short

time after its effective date. Applications for modifica-

tion should be addressed to the Comptroller of the

Currency, Washington, D.C. 20219, in the form of a

letter approved by the board of directors and accom-

panied by an indication of the number of dissenting

directors and a summary of their views. A copy of

30a

such application should simultaneously be provided to

the appropriate Regional Administrator. All applica-

tions and their disposition by the Comptroller will be

available for public inspection at the Washington, D.C.

office.