Petition for Writ of Certiorari — NationsBank of North Carolina, N. A. v. Variable Annuity Life Insurance

evpreme Court. U.S

~\ ry

931613 APR 1 3 3994

No.

Se ee

Jn the Supreme Court of the Cinited States

OcTOBER TERM, 1993

KUGENE LUDWIG, COMPTROLLER OF THE CURRENCY,

ET AL., PETITIONERS

U.

VARIABLE ANNUITY LIFE INSURANCE COMPANY, ET AL.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

DREW S. DAys, III

Solicitor General

\

FRANK W. HUNGER

Assistant Attorney General

PAUL BENDER

Deputy Solicitor General

EDWARD C. DUMONT

Assistant to the Solicitor General

MARK B. STERN

JACOB M. LEWIS

Attorneys

WILLIAM P. BOWDEN, JR. Department of Justice

Chief Counsel Washington, D.C. 20530

Office of the Comptroller (202) 514-2217

of the Currency

Washington, D.C. 20219

(202) 874-5200

QUESTION PRESENTED

Whether federal law permits national banks, wherever

located, to act as agents in the sale of annuities.

(1)

Il

PARTIES TO THE PROCEEDING

The petitioners are Comptroller of the Currency

Kugene Ludwig (substituted as a party pursuant to Rule

55.3), the Office of the Comptroller of the Currency, and

the United States. The respondents are the Variable

Annuity Life Insurance Company and, under Rule 12.4,

NationsBank of North Carolina, N.A., and NatiousBane

Securities, Inc., intervenor-defendants below. We are

advised that. the respondents who were intervenor-

defendants below also intend to seek review of the

judgment in this case.

Page

oa. sca csnesapnsansooocoococe 1

EEE LES DETTE 1

ers oa ecscnccnascecmensscosoosacsececcooees 2

io ccc ennessocnnconoocacoes 4

Reasons for granting the petition ..............ccccccccccceceeeeeees 11

aa ss cstersescecctcocsncncnsoss 2h

TABLE OF AUTHORITIES

Cases:

American Insurance Ass'n vy. Clarke, 865 F.2d 278

i ccitnccndectnscnccasoccocecansccsoccoes 19

American Land Title Ass'n v. Clarke, 968 F.2d 150

(2d Cir. 1992), cert. denied, sub nom. Ludwig v. Amer-

ican Land Title Ass'n, 113 8. Ct. 2959 (1993) ................ 18

Chevron U.S.A. Ince. vy. Naural Resources Defense

Council, Inc., 467 U.S. 837 (1984) ............ccccccecesesees 9, 11, 13, 21

Clarke vy. Securities Industry Ass'n, 479 U.S. 388

re .csnsecseacoeees 11-12, 13, 20

Corporation Comm'n v. Equitable Life Assur. Soc.,

I I on as sscncnencosescosecocscococes 13

Helvering v. Le Gierse, 312 U.S. 531 (1941) ................66.. 13

Hughey v. United States, 495 U.S. 411 (1990) .00000000.0.... 16

Independent Bankers Ass'n v. Heimann, 613 F.2d 1164

(D.C. Cir. 1979), cert. denied, 449 U.S. 823 (1980) ........ 18

Independent Ins. Agents of Am., Inc. v. Board of Gov-

erners, 736 F.2d 468 (Sth Cir. 1984) ..............cccccceceeeeeees 14, 19

Ludwig v. American Land Title Ass'n, 113 S. Ct. 2959

i. woesssnnsesoncesoceecs 19

M&M Leasing Corp. v. Seattle First Nat'l Bank, 563

F.2d 1377 (9th Cir. 1977), cert. denied, 436 U.S. 956

is cssnsenoneonccccssocasse 15

M’Culloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819) .. 16

(IIT)

IV

Cases: Page

National R.R. Passenger Corp. v. Boston & Me. Corp.,

Sg EF SEE enn Here eee 16

New York State Ass'n of Life Underwriters Inc. v.

New York State Banking Dep't, No. 38 (N.Y. Mar. 30,

ial vscnccnesiuvinettbdsensennnnensatieiiainpidialisaeiiilion 13, 15, 19, 24

Saron vy. Georgia Ass'n of Indep. Ins. Agents, Inc.,

BS IE coesictcetnniciecees cemctiieeteaiten 8, 9

SEC v. Chenery Corp., 318 U.S. 80 (1948) .................066 18

SEC vy. Variable Annuity Life Insurance Co., 359 U.S.

ee GRD scneccmsnvidcndsisinetoninidniaidiindichniiiaapdaabieiaeadiddntrsbenviio 5

United States v. Shimer, 367 U.S. 374 (1961) ................ 21

Statutes, regulation and rule:

Act of Sept. 7, 1916, ch. 461, § 13, 39 Stat. 753 2.0000. 3

Act of Oct. 15, 1982, Pub. L. No. 97-820, Tit. IV, § 403(b),

Xe BSS ee 3

Banking Act of 1933 (Glass-Steagall Act), ch. 89, 48 Stat.

SD TEE sncscircectsnomsinenincsendiscnsenenssindiiaasiaiibindintintanentiaaaiiadisitat 7

Federal Reserve Act, ch. 6, § 13, 38 Stat. 263 .....00000..... 3

Securities Act of 1933, § 3(a)(8), 15 U.S.C. T7e(a(&) ....... 12

Rev. Stat. $ 5136 (1878) (12 U.S.C. 24) ..........cccccccscccssseees 2

ee Fe Ee II westecicninrncicciiniinntastndinemmatinnctentaiinn passim

Be CAs UE ceiicssincecscbsdinccenesisnndentsdarnutbucineiesinmmenionnmanmiien passim

Fee ERIS TID eeeadisnbicdilinsincheceninsiantenaiaitidiininteinitininnpiaadaitaategelindia 6, 12

ee SPIE TEED -ccninsnnccveninsicinduascipaniniiialidiinisendpinsiaaeabiaanis 6

Be Wes TE Sicccdieticesnisecidunerneticinnesnicuiniinientaaiaaiuntianen 6

Be We iis GUNN <ocetiniccenenconcnsscescesasmsapinnenninngticidianineiitagintn 22

Pe le, GR Fs TD cccennssesecccincstnsviitiniacnininniiisnsiisniamnenie 21

Miscellaneous:

1 J. Appleman, Insurance Law and Practice (1981) ....... 13

53 Cong. Rec. (1916):

i AIEEE clidbscanesiniendansaninssnpumntiaisaiiinnédidesimuiiasniantagilanil 14, 15

ih TT sisteiintiensinnnmetdeanpnbnncpensentmmeniaiantindipanitinesiaiitiabalias 14

59 Fed. Reg. (1994): 23

ith, TEENY eauhcicisonnnbabsennimetnacedsnctebiotunnninedasenpstnestinebianiaininiti 24

SS RE OEE TES 24

Miscellaneous: Page

Office of the Comptroller of the Currency:

Interpretive Letter No. 331, [1985-1987 Transfer

Binder| Fed. Banking L. Rep. (CCH) 9 85,501

CURED cccsccsncncenihvenpenintennascseuisenitianeninianenidesianiars 6, 17, 18

Interpretive Letter No. 499, [1989-1990 Transfer

Binder} Fed. Banking L. Rep. (CCH) 4 83,090

GEO aniennsssisssinsitiininidashinisinliinap tiliatiiabinnesiidinasinniiiieibminnintin 5, 6, 18

Right of a National Bank To Write Insurance Through

Its Officers, 2 Fed. Res. Bull. 73 (1916) ............cccceeeeeeee 15

Trimble, The Implied Power of National Banks to Issue

Letters of Credit and Accept Bills, 58 Yale L.J. 718

COG ccccsscccnsiccininsinenssneninnenainiitniadnamennenanianimienents 24

In the Supreme Court of the Gnited States

OCTOBER TERM, 1993

No.

EUGENE LUDWIG, COMPTROLLER OF THE CURRENCY,

ET AL., PETITIONERS

v.

VARIABLE ANNUITY LIFE INSURANCE COMPANY, ET AL.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

The Solicitor General, on behalf of the United

States, the Comptroller of the Currency, and the

Office of the Comptroller of the Currency, respect-

fully petitions for a writ of certiorari to review the

judgment of the United States Court of Appeals for

the Fifth Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (NBNC Pet.

App. la-17a)' is reported at 998 F.2d 1295. That

court’s order denying rehearing and rehearing en

bane, and the opinion dissenting therefrom (NBNC

Pet. App. 18a-28a), are reported at 13 F.3d 833. The

' “NBNC Pet. App.” refers to the appendix to the petition

for a writ of certiorari in NationsBank of North Carolina,

N.A., et al. v. Variable Annuity Life Insurance Co. (filed April

13, 1994), which seeks review of the same decision of the court

of appeals.

(1)

2

opinion of the district court (NBNC Pet. App. 29a-34a)

is reported at 786 F. Supp. 639. The approval letter of

the Office of the Comptroller of the Currency (NBNC

Pet. App. 35a-48a) is unreported.

JURISDICTION

The judgment of the court of appeals was entered on

August 26, 1998. A petition for rehearing was denied

on January 13, 1994. NBNC Pet. App. 18a. The

jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

STATUTES INVOLVED

1. Section 5136 of the Revised Statutes of 1878, 12

U.S.C. 24, provides in pertinent part as follows:

Upon duly making and filing articles of associa-

tion and an organization certificate a national

banking association shall become, as from the date

of the execution of its organization certificate, a

body corporate, and as such, and in the name

designated in the organization certificate, it shall

have power—

* * * *

Seventh. To exercise by its board of directors

or duly authorized officers or agents, subject to

law, all such incidental powers as shall be neces-

sary to carry on the business of banking; by

discounting and negotiating promissory notes,

drafts, bills of exchange, and other evidences of

debt; by receiving deposits, by buying and selling

exchange, coin, and bullion; by loaning money on

personal security; and by obtaining, issuing, and

circulating notes according to the provisions of

3

title 62 of the Revised Statutes. The business of

dealing in securities and stock by the association

shall be limited to purchasing and selling such

securities and stock without recourse, solely upon

the order, and for the account of, customers, and

in no case for its own account, and the association

shall not underwrite any issue of securities or

stock[.]

2. Section 13, par. 9, of the Federal Reserve Act,

Act of Dec. 23, 1913, ch. 6, 28 Stat. 263 (as added by Act

of Sept. 7, 1916, ch. 461, 39 Stat. 753), as amended by

Act of Oct. 15, 1982, Oct. 15, 1982, Pub. L. No. 97-320,

Tit. IV, § 403(b), 96 Stat. 1511, to be codified at 12

U.S.C. 92, provides as follows:

In addition to the powers now vested by law in

national banking associations organized under the

laws of the United States any such association

located and doing business in any place the popula-

tion of which does not exceed five thousand inhabi-

tants, 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 said 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 associa-

tion and the insurance company for which it may

act as agent: Provided, however, That no such

bank shall in any case assume or guarantee the

payment of any premium on insurance policies

d

issued through its agency by its principal: And

provided further, That the bank shall not guaran-

tee the truth of any statement made by an assured

in filing his application for insurance.

STATEMENT

1. This litigation involves a challenge to the

Comptroller of the Currency’s approval of an applica-

tion by the corporate predecessors of respondents

NationsBank of North Carolina, N.A., and its broker-

age subsidiary, NationsBanc Securities, Inc. (collect-

ively, NationsBank), for permission for the subsidiary

to act as an agent for customers in the purchase of

various types of fixed and variable annuities.

Annuities are contracts under which a purchaser

makes one or more premium payments to the issuer,

in return for which the issuer promises to make one

or more payments back to the purchaser when the

contract matures. In a classic “fixed” annuity, the

issuer promises to make equal payments of a prede-

termined amount at regular intervals, commencing at

maturity of the contract and continuing until the

death of the purchaser or some designated benefi-

ciary. The amount of the payments under such a

contract is generally calculated so that a purchaser

or beneficiary dying at the actuarially predicted time

will receive back, over his life, an amount equal to the

total premium paid, less applicable expenses and fees,

plus interest at a predetermined rate.2. The pur-

* Modern “fixed” annuity contracts, including all those at

issue in this case, often provide both for a low guaranteed min-

imum interest rate and for “excess” interest, payable at the

issuer’s discretion at whatever rate it may set from time to

time. See NBNC Pet. App. 36a-37a & n.1.

5

chaser of such a contract thus relinquishes control

over the invested premium and bears the risk that he

or the beneficiary will die before recovering the

entire investment, in exchange for the issuer’s

guaranty of specified payments to the date of death,

and its assumption of the risk that the purchaser or

beneficiary will live longer than predicted and thus

increase the return on the purchaser’s investment.

There are many forms of “variable” annuity. In a

typical case the issuer promises to segregate premi-

ums received from the purchaser and invest them,

over the life of the contract, as directed by the

purchaser—for example, in one or more of several

mutual funds. The value of the purchaser’s annuity at

maturity is determined by the performance of those

investments; thus, the purchaser retains both in-

vestment control and the associated risk of gain or

loss. At maturity, the purchaser usually has several

options for recovering the accumulated (or remain-

ing) value of the account, including receiving it as a

lump sum, in level periodic payments calculated in the

same manner as for a fixed annuity, or in variable

payments continuing for the life of the purchaser or a

designated beneficiary. See generally NBNC Pet.

App. 35a-36a; Office of the Comptroller of the Cur-

rency (OCC), Interpretive Letter No. 499, [1989-1990

Transfer Binder] Fed. Banking L. Rep. (CCH)

{ 83,090 at 71,211 (1990) (OCC Letter 499) (describing

annuities involved in this case); SEC v. Variable

Annuity Life Insurance Co., 359 U.S. 65, 69-72 & n.13

(1959).

Both fixed and variable annuities are covered by an

unique and complex set of federal income tax rules

that generally allow for deferral of tax on the invest-

ment returns allocable to a purchaser’s annuity

6

premiums until those returns are withdrawn during

the payout phase of the contract. See 26 U.S.C. 72.

Because the tax rules also generally provide for

penalties if an annuity investment is withdrawn

before the purchaser is 59 1/2 years old, and for

unfavorable tax treatment of amounts withdrawn

before the maturity of the contract, see 26 U.S.C.

72(e) and (q), annuities are frequently marketed as

tax-sheltered means of saving for retirement. See

NBNC Pet. App. 38a.

2. NationsBank proposed to act as a sales agent for

(not as issuer of) a variety of annuity contracts that

would allow purchasers to design “a flexible, multi-

faceted investment package comprised of variable and

fixed annuity options.” NBNC Pet. App. 37a. The

OCC Chief Counsel’s interpretive letter underlying

the approval of NationsBank’s application (see id. at

35a) noted that the Comptroller had previously

approved the sale of variable annuities by national

banks, on the ground that “variable annuity contracts

are securities, functionally resembling shares in a

mutual fund, and * * * banks are authorized, pursuant

to 12 U.S.C. 24(7) to buy and sell securities for the

account of customers.” OCC Letter 499, at 71,211,

citing OCC, Interpretive Letter No. 331, [1985-1987

Transfer Binder] Fed. Banking L. Rep. (CCH)

q 85,501 (1985) (OCC Letter 331). The additional

analysis provided by the Chief Counsel’s letter and

the Comptroller’s approval in this case therefore

focused on NationsBank’s proposal to market fixed

annuities.*

3 The Comptroller determined that sales of fixed annuities

were permissible whether or not such annuities were also

“securities” for purposes of 12 U.S.C. 24 Seventh as amended

7

In evaluating NationsBank’s application, the

Comptroller explained that “[aJs part of their tradi-

tional role as financial intermediaries, banks have

broad powers to buy and sell financial investment

instruments as agent for customers.” NBNC Pet.

App. 38a. He noted that “[a]lthough annuities have

historically been a product of insurance companies,

they are primarily financial investments,” because

fixed annuity investors “are not seeking to pool a

catastrophic risk such as death, injury, or property

damage, but are instead seeking a guaranteed, long-

term return on their assets.” Jbid. The opinion

acknowledged the element of “mortality risk” present

in some annuities, but concluded (in accordance with a

number of authorities) that it “is essentially an

investment risk, not an insurance risk,” and that

“although annuities often share with insurance the

need for actuarial calculations, they are primarily a

vehicle for investment.” Jd. at 38a-39a. Finally, the

Comptroller found a “close functional resemblance

between fixed annuity contracts and other financial

investment instruments that banks may sell as

agent” (id. at 39a), including variable annuities, con-

ventional debt instruments and certificates of deposit.

Id. at 39a-4la. He therefore concluded that “fixed

annuity contracts are financial investment instru-

by Section 16 of the Banking Act of 1933 (Glass-Steagall Act),

ch. 89, 48 Stat. 184-185 (“The business of dealing in securities

and stock by [a bank] shall be limited to purchasing and selling

* * * without recourse, solely upon the order, and for the

account of, customers[.]”). He therefore had no occasion to

consider whether fixed annuities are “securities” for purposes

of Section 24 Seventh, and this case does not present that issue.

NBNC Pet. App. 37a-38a.

8

ments that national banks have authority to sell as

agent.” Jd. at 41a.

The Comptroller also considered (NBNC Pet. App.

4la-47a) whether 12 U.S.C. 92, which permits national

banks in towns of 5,000 or fewer inhabitants to “act as

the agent for any fire, life or other insurance

company * * * by soliciting and selling insurance and

collecting premiums,” by implication prohibits banks

in other places from acting as a sales agent for

annuities. He first noted OCC’s general position that

Section 92 was intended only to provide an additional

source of revenue to national banks operating in small

towns, and has no independent effect on the powers of

banks operating elsewhere. NBNC Pet. App. 42a.

After canvassing the available authorities (id. at 43a-

47a), the Comptroller then concluded that, just as

annuities are best characterized as investment

products for purposes of Section 24 Seventh, so too

they “lack the basic insurance characteristic of

indemnification against risk of loss,” and thus should

not be considered “insurance” for purposes of Section

92. NBNC Pet. App. 47a.

Finally, the Comptroller pointed out (NBNC Pet.

App. 42a-43a) that Section 92 speaks only of a bank’s

power to act as an agent for any “fire, life, or other

general insurance company.” Applying the principle

of “ejusdem generis,” he concluded that the statute

should in all events be read to apply only to “types of

insurance that are similar to fire and life insurance,

such as other general casualty insurance policies.”

NBNC Pet. App. 43a. The Comptroller distinguished

on that basis the Fifth Circuit’s previous decision in

Saxon v. Georgia Ass’n of Indep. Ins. Agents, Inc.,

399 F.2d 1010 (1968), which held that Section 92

prevented the Comptroller from allowing a bank not

9

located in a small town to sell borrowers “broad forms

of automobile, home, casualty and liability insurance.”

399 F.2d at 1012. The Comptroller determined that,

even if annuities were to be considered “insurance”

for purposes of Section 92, they would remain “a

specialized product, unrelated to the general life and

casualty policies that section 92 concerns.” NBNC

Pet. App. 48a. That Section would therefore have no

application to annuities, which should be analyzed

only to determine whether their sale was “incidental”

to “the business of banking” under Section 24 Sev-

enth. NBNC Pet. App. 48a.

3. Variable Annuity Life Insurance Co. (VALIC),

an issuer of annuities, filed suit in federal district

court to overturn the Comptroller’s approval. After

ruling (in an unreported order) that VALIC could

properly bring suit in the Southern District of Texas

to challenge the Comptroller’s approval of annuity

sales by a bank located in North Carolina, the district

court granted summary judgment for the Comp-

troller. NBNC Pet. App. 29a-34a. Addressing pri-

marily VALIC’s argument under 12 U.S.C. 92, the

court found it “neither arbitrary nor capricious” to

view that Section “as a supplemental powers pro-

vision and not a limitation on national banks|[’]

incidental powers under § 24(7).”. NBNC Pet. App.

33a-34a. Moreover, applying the principles announced

in Chevron U.S.A. Inc. v. Natural Resources De-

fense Council, Inc., 467 U.S. 837 (1984), the court

deferred to the Comptroller’s “reasonable interpre-

tation” that “annuities are primarily financial invest-

ment instruments, not insurance” for purposes of the

relevant banking laws. NBNC Pet. App. 33a. Final-

ly, the court upheld as reasonable the Comptroller’s

determination that “annuities are a specialized prod-

10

uct and not a ‘broad form’ of insurance” covered by

Section 92 and the decision in Saxon. NBNC Pet.

App. 34a.

4. The court of appeals reversed. NBNC Pet. App.

la-17a. Relying in substantial part on its decision in

Saxon, the court determined that 12 U.S.C. 92 im-

poses an affirmative limitation on the power of

national banks not located in small towns to sell any

form of “insurance.” NBNC Pet. App. 6a-10a, 15a-17a.

The court then rejected the Comptroller’s conclu-

sions that annuities are not “insurance” for purposes

of Section 92 (NBNC Pet. App. 10a-13a) and that, in

any event, the statute applies only to “broad” types of

insurance akin to fire and life insurance (id. at 13a-

14a).

The full court of appeals denied the Comptroller’s

and NationsBank’s suggestions for rehearing en

banc. NBNC Pet. App. 18a-19a. Of the thirteen

active judges on the court, six recused themselves.

Id. at 19a n.*, 20a. Because the Fifth Circuit counts

disqualified judges in determining whether a majority

of the court wishes to review a case en bance (see id. at

20a n.1), an order granting the suggestions would

have required an unanimous vote of the remaining

seven judges—including the two who sat on the panel

that decided the case. Thus, although four judges—a

majority of those not recused—voted to hear the case,

the suggestions were denied. The four dissenters

emphasized the importance of the case “to the

banking industry and to commerce and competition in

general.” Jd. at 2la. Leaving aside the issue of

overruling Saxon, the dissenters concluded that, on

the remaining question whether all annuities are

forms of “insurance” for purposes of Section 92, “(t]he

better view—and certainly a reasonable one that is

11

entitled to deference under Chevron—is that of the

Comptroller.” NBNC Pet. App. 23a-24a.

REASONS FOR GRANTING THE PETITION

1. The decision below rests on two conclusions:

that fixed and variable annuities are forms of

“insurance” for purposes of 12 U.S.C. 92, and that

Section 92 prohibits banks located outside small

towns from acting as sales agents for any “in-

surance” product, even if the Comptroller has deter-

mined that such sales are incidental to the business of

banking within the meaning of 12 U.S.C. 24 Seventh.

Both conclusions are erroneous. More important, in

reaching neither did the court of appeals adequately

justify its rejection of the Comptroller’s contrary

interpretations of the banking statutes that Congress

has entrusted him to administer. Chevron U.S.A.

Inc. v. Natural Resources Defense Council, Inc., 467

U.S. 837, 842-845 (1984).

a. The Comptroller’s decision in this case deter-

mined (NBNC Pet. App. 43a-47a) that annuities are

not “insurance” within the meaning of 12 U.S.C. 92,

which provides that national banks doing business in

small towns “may, under such rules and regulations

as may be prescribed by the Comptroller of the

Currency, act as the ayent for any fire, life, or other

insurance company * * * by soliciting and selling.

insurance and collecting premiums on policies issued

|.)” The statute itself neither defines the term

“insurance” nor addresses the issue of annuities. As

the district court recognized (NBNC Pet. App. 33a),

under Chevron that interpretive gap in the banking

laws is one for the Comptroller to fill, provided his

interpretation is reasonable. 467 U.S. at 843; see also

Clarke v. Securities Indus. Ass’n, 479 U.S. 3838,

aie |

12

403-404 (1987). The interpretation adopted by the

Comp-troller in this case is reasonable, and it is

entitled to deference.

First, as the Comptroller explained, *| jjictionary

definitions of ‘insurance’ invariably describe it as a

contract for indemnification against risk of loss.”

NBNC Pet. App. 43a-44a (citing examples). Annu-

ities, on the other hand, to a large extent “lack the

basic insurance characteristic of indemnification

against risk.” Jd. at 47a. Indeed, as the Comptroller

observed, annuity purchasers generally “are not

seeking to pool a catastrophic risk such as death,

injury, or property damage, but are instead seeking a

* * * long-term return on their assets.” Jd. at 38a.

Second, the Comptroller marshalled considerable

authority for the proposition that annuities are not

treated as “insurance” in other contexts, including

tax, bankruptcy, and insurance law.6 NBNC Pet.

4 In this respect annuities bear some resemblance to “whole”

(as opposed to term) life insurance, which also builds cash value

over time. A whole life policy, however, in effect combines

term life insurance and investment components. An annuity

resembles only the investment component—a point consistent

with the Comptroller’s conclusion (NBNC Pet. App. 45a) that

annuities are “primarily a vehicle for investment, not

indemnification.” Whole life insurance and annuities also both

allow invested funds to compound on a federal income tax-

deferred basis. The tax benefits accorded annuities do not,

however, depend on assimilating them to insurance; annuities

are treated as sui generis for federal tax purposes. See 26

U.S.C. 72.

5 The Comptroller acknowledged (NBNC Pet. App. 46a)

that cases construing the exemption for “[aJny insurance or

endowment policy or annuity contract or optional annuity con-

tract” under Section 3(a)(8) of the Securities Act of 1933, 15

U.S.C. T7e(a)(8), “occasionally speak of fixed annuities as being

13

App. 44a-45a & nn.14-18. Indeed, as the New York

Court of Appeals recently concluded in deferring to a

state banking law interpretation based on the

Comptroller’s determination at issue in this case,

“the great weight of authority supports the position

that annuities are not insurance.” New York State

Ass’n of Life Underwriters Inc. v. New York State

Banking Dep’t, No. 38 (Mar. 30, 1994), slip op. 11.

Accord, e.g., 1 J. Appleman, Insurance Liw and

Practice § 84, at 295 (1981) (“Annuity contracts must

* * * be recognized as investments rather than as

insurance.”). This Court itself has recognized that in

terms of their risks and benefits, “annuity and insur-

ance are opposites.” Helvering v. Le Gierse, 312 U.S.

531, 541 (1941). Or, as one court aptly put it, “an-

nuities are not indemnities for death but are invest-

ments for life.” Corporation Comm’n v. Equitable

Life Assur. Soc’y., 239 P.2d 360, 362 (Ariz. 1951).

The court of appeals did not evaluate the reason-

ableness of the Comptroller’s interpretation of the

term “insurance” as used in Section 92, but rather

approached the question de novo. Whether or not the

court’s conclusions could be viewed as reasonable,

standing on their own, that approach to review of the

Comptroller’s decision was clearly erroneous. See,

e.g., Chevron, 467 U.S. at 843-845; Clarke v. Securi-

ties Industry Ass’n, 479 U.S. at 403-404. The court

never addressed the Comptroller’s fundamental point

that annuities are primarily investment vehicles,

not contracts of indemnification. Having failed to

‘insurance’ rather than ‘securities.’” As the Comptroller

pointed out, however, those cases interpret a different statute

with different purposes, and do not control the analysis in the

context of the banking statutes.

14

impeach the reasonableness of the Comptroller’s con-

struction in light of the language and purposes of

Section 92 and the remainder of the banking laws, the

court erred in substituting its judgment for his on

matters within the Comptroller’s special expertise

and regulatory competence.

b. The court of appeals also erred in refusing to

defer to the Comptroller’s conclusion that even if

annuities were considered “insurance” for purposes

of 12 U.S.C. 92, the statute should not be construed to

prohibit banks outside small towns from selling them

(as agents) once the Comptroller has concluded that

such sales are incidental to the business of banking.

Section 92 provides that “/i/n addition to the

powers now vested by law in national banking associ-

ations,” national banks in small towns may “act as the

agent for any fire, life or other insurance company” in

selling insurance policies. (Emphasis added.) The

intreductory phrase “in addition to” shows that Sec-

tion 92 is a grant of additional powers for a special

situation.® It does not purport to define the scope of

6 The statute’s legislative history also indicates that

Congress thought of Section 92 as a grant of additional powers,

not a limitation on otherwise authorized activities. Senator

Owen, Section 92’s sponsor, described the provision as “giving

some additional powers to the small banks to act as agents in

insurance matters.” 53 Cong. Rec. 11,002 (1916); see also id. at

11,001 (Comptroller’s letter explaining that pro reflected

consideration of “how the powers of these small national banks

might be enlarged”). See also Independent Ins. Agents of Am.,

Inc. v. Board of Governors, 736 F.2d 468, 477 n.6 (8th Cir.

1984) (“Congress was concerned only with providing small-

town banks with an additional profit source, not with prohibit-

ing city banks from selling insurance.”). The court of appeals

also cited (NBNC Pet. App. 16a) documents written by the

Comptroller and counsel to the Federal Reserve, prior to Sec-

15

the other lawful “powers” whose existence it assumes

and supplements. Those powers, which pre-date and

survive Section 92, include the general authority

under Section 24 Seventh to “exercise * * * all such

incidental powers as shall be necessary to carry on

the business of banking.” Even if annuities are

“insurance,” there is no reason why the Comptroller

may not conclude that those incidental powers extend

to acting as a sales agent for limited classes of such

“insurance” products, whose essential investment

character brings them within the ambit of banks’

traditional investment agency activities on behalf of

their customers.’

tion 92’s passage, to show that Congress believed national banks

had no authority to act as insurance agents before Section 92

was enacted. See 53 Cong. Rec. 11,001 (1916) (letter from

Comptroller Williams to Senator Owen); Right of a National

Bank To Write Insurance Through Its Officers, 2 Fed. Res.

Bull. 73, 74 (1916) (letter from Board Counsel Elliot to Board

Governor Hamlin). Both documents refer to insurance in

general terms. See 53 Cong. Rec. i1,001 (1916) (referring to

“fire, life, ete.” insurance); 2 Fed. Res. Bull. at 73 (analyzing

the power of national banks to write “fire, cyclone, liability and

other kinds of insurance”), Neither suggests that specific

kinds of insurance agency activity that are closely connected to

banking would not fall within the incidental powers of national

banks.

* The court of appeals stated in passing (NBNC Pet. App.

14a-15a) that even if the sale of annuities were “incidental” to

the “business of banking,” it could not be authorized under 12

U.S.C, 24 Seventh because it is not “necessary to carry on” a

banking business. Assuming that the court’s observation should

be viewed as an independent holding, it clearly embodies an

unduly crabbed notion of the statutory term “necessary.” See,

e.g.,M & M Leasing Corp. v. Seattle First Nat'l Bank, 563

F.2d 1377, 1382 (9th Cir. 1977), cert. denied, 436 U.S. 956

(1978); New York Ass'n of Life Underwriters, slip op. 7-10

\

16

To be sure, Section 92 carries some negative

implication; there would be little point in granting

small-town banks the power to act as insurance

agents if any bank could already do so under Section

24 Seventh. But the court of appeals swept too

broadly in concluding that Section 92’s reference to

some forms of “insurance” necessarily implied that

banks could have no power, independent of Section 92,

to sell any kind of “insurance.” Section 92 applies

only to the activities of national banks acting as

agents for any “fire, life or other insurance

company.” Under the interpretational principle of

ejusdem generis, a general term in a statutory list

should be understood in light of the specific terms

that surround it. E.g., Hughey v. United States, 495

U.S. 411, 419 (1990). Applying that principle, the

Comptroller permissibly concluded that Section 92's

grant of authority—and its concomitant implication

that authority was otherwise lacking—should be

construed to refer oniy to the unrestricted sale of

fire, life, and other similar insurance, and not to the

sale of investment-type “insurance” products the sale

of which falls within the business of banking or is

incidental thereto.*

(rejecting same argument under New York law on which fed-

eral law was modeled); M’Culloch v. Maryland, 17 U.S. (4

Wheat.) 316, 413-415 (1819); ef. National R.R. Passenger Corp.

v. Boston & Me. Corp., 112 S. Ct. 1394, 1402 (1992).

8 Indeed, application of ejusdem generis is necessary to give

meaning to Congress’s specification of “fire” and “life” insur-

ance in Section 92. Under the court of appeals’ reading of the

statute, those terms are entirely unnecessary, since all types of

insurance, including fire and life insurance, are encompassed in

the phrase “any * * * insurance company.”

17

The Comptroller’s construction maintains an ap-

propriate balance between Sections 24 Seventh and 92.

The general grant of powers in Section 24 Seventh

permits banks to engage only in activities (including

insurance agency activities) that are “incidental” to

the “business of banking.” Section 92, by contrast,

permits banks located in small towns to act as agents

for the sale of the full range of insurance products,

including those sold by “any fire, life or other insur-

ance company,” whether or not such sales are

incidental to the business of banking. It is this

additional authority—to engage in the sale of forms of

insurance not otherwise within the business of

banking or incidental thereto—that Section 92 gives

to national banks in small towns. That grant does not

negate the possibility that the sale of annuities, even

if properly denominated as “insurance,” might be

sufficiently related to the business of banking to come

within the existing incidental powers of national

banks. And the question whether such products, or

any others, are so related is one uniquely within the

expertise and competence of the Comptroller, not the

courts.’

* As explained above (see pages 5-6 & n.3, supra), the

Comptroller’s decision in this case focuses on fixed annuities,

the sale of variable annuities having been approved some years

before. The judicial opinions below in this case make no

distinction between fixed and variable products in their anal-

ysis. In our view, the Comptroller’s rationale for approving

the sale of fixed annuities—that they are “financial investment

interests” that banks may buy and sell on behalf of customers as

part of their “traditional role as financial intermediaries”

(NBNC Pet. App. 38a)—applies a fortiori to sales of variable

annuities, which are even more clearly investment-oriented

products. Alternatively, the Comptroller’s prior decision in

OCC Letter 331, which held that sales of variable annuities are

18

The question whether Section 92 prohibits national

banks in large towns from acting as agents for any

sort of “insurance” product has divided the courts of

appeals. The court below in this case and the Second

Circuit in American Land Title Ass’n v. Clarke, 968

F.2d 150 (1992), cert. denied sub nom. Ludwig v.

American Land Title Ass’n, 113 S. Ct. 2959 (1993),

have held that Section 92 prohibits the sale of

annuities and title insurance, respectively, despite

explicit determinations by the Comptroller that

agency sales of those products are incidental to the

business of banking. By contrast, the D.C. Circuit in

Independent Bankers Ass'n v. Heimann, 613 F.2d

1164, 1169-1170 (D.C. Cir. 1979), cert. denied, 449 U.S.

823 (1980), rejected just such a reading of Section 92

and upheld the Comptroller’s regulatory authority to

permit the agency sale of so-called “credit life

insurance” as incidental to the banking business.'°

permissible because such annuities are “securities” for purposes

of 12 U.S.C. 24 Seventh’s explicit provision addressing the per-

missible scope of banks’ “business of dealing in securities,” is

incorporated by reference in the Comptroller’s decision in this

case. NBNC Pet. App. 35a, 37a-388a; OCC Letter 499. Cf. SEC

v. Chenery Corp., 318 U.S. 80, 95 (1943) (agency decision may

be upheld only on grounds relied upon by agency). That prior

decision is as reasonable and entitled to deference as the

Comptroller’s decision with respect to fixed annuities. Indeed,

because a primary rationale for the prior decision was that

variable annuities are primarily investment contracts (see OCC

Letter 331, at 77,774, 77,776), there is little functional dif-

ference in the analysis for purposes of this case.

” The court below purported to distinguish Heimann by

noting that credit life insurance “secures the repayment of the

borrower's indebtedness, and thus is intimately related to the

bank’s primary business of lending.” NBNC Pet. App. 14a.

While certainly true, that statement is unfortunately irrelevant

ih >.

19

See also American Ins. Ass’n v. Clarke, 865 F.2d 278

(D.C. Cir. 1988) (national bank subsidiary permitted

to sell municipal bond “insurance” by analogy to

established power to provide standby letters of

credit); Independent Ins. Agents of Am., Ine. vy.

Board of Governors, 736 F.2d 468, 477 n.6 (8th Cir.

1984) (permitting agency sales of insurance related to

protecting security interest in financed property, and

noting in dictum a “strong argument” that the Fifth

Circuit’s prior Saxon decision was “wrongly de-

cided”); New York State Ass’n of Life Underwriters

Inc. v. New York State Banking Dep't, supra (defer-

ring to state regulator’s decision permitting New

York banks to act as agents for sales of annuities),

2. Although the issue of whether and to what

extent Section 92 limits banks’ ability to make agency

sales that the Comptroller has otherwise determined

to be incidental to their banking business under 12

U.S.C. 24 Seventh has produced conflict among the

circuits, the Court denied our request to resolve that

conflict last Term. Ludwig v. American Land Title

Ass’n, 113 S. Ct. 2959 (1993). This case involves the

additional issue whether annuities are “insurance”

for purposes of Section 92. N onetheless, we would not

under the court’s own holding. The court’s conclusion that

Section 92 bars banks from selling annuities rested not on a

judgment that annuities are insufficiently related to the busi-

ness of lending to come within a bank’s incidental powers, but

rather on a determination that they are contracts of

“insurance,” and ipso facto prohibited under Section 92 and

impermissible under Section 24 Seventh. NBNC Pet. App. 13a-

17a. While the characterization of annuities may be debatable,

that of credit life insurance is not—it is indisputably

“insurance.” The court’s observation therefore does nothing to

lessen the conflict between its logic and the result in Heimann.

20)

normally seek further review under these circum-

stances, even though we think the issues involved are

of substantial legal and practical importance. Addi-

tional considerations peculiar to this case, however,

persuade us that review is warranted here.

a. The decision below involves a particularly

flagrant failure by the court of appeals to apply the

well-settled principles of deference articulated by this

Court in Chevron and applied specifically to the

Comptroller in Clarke v. Securities Industry Ass'n.

The district court properly applied those principles in

evaluating the Comptroller’s decision in this case.

The court of appeals, by contrast, dismissed Chevron

on the ground that the text and intent of 12 U.S.C. 92

were so clear as to preclude interpretation. NBNC

Pet. App. 9a. The implausibility of that contention is

apparent from the differing arguments mustered by

the Comptroller’s decision on the one hand and by the

court’s own vpinion on the other. It is underscored by

the dissent of four judges from the denial of rehearing

en bane, on the explicit ground that the Comptroller’s

position on the meaning of “insurance” for purposes

of Section 92 represents “(t]he better view—and cer-

tainly a reasonable one that is entitled to deference

under Chevron” (NBNC Pet. App. 24a), and by the

conflict among the courts of appeals on the larger

issue of Section 92’s function and its relationship to

Section 24 Seventh.

The regulation of banking is an area of great

importance, requiring a combination of special func-

tional expertise and informed choices among some-

times conflicting goals. Those goals include both the

maintenance of a strong banking industry in light of

modern developments in investment and finance and

the protection of banks and bank customers from the

21

expansion of bank activities into inappropriate areas.

It would be difficult to identify a regulatory context

in which it is clearer that courts should defer, in

matters of statutory interpretation, to “reasonable

accommodation[s] of conflicting policies that were

committed to the agency’s care by the statute.”

Chevron, 467 U.S. at 845 (quoting United States v.

Shimer, 367 U.S. 374, 383 (1961)). In this case the

interpretations adopted by the Comptroller were

thoroughly discussed and well supported in his

decision. The court of appeals’ failure to defer to

those interpretations represents a clear and impor-

tant error.

b. The opportunity for rehearing and correction by

the full court often suffices to protect against a

panel’s failure to apply well-settled principles cor-

rectly in the context of a particular case. In this case

a majority of the active judges voting on the issue—

including four of the five who did not serve on the

original panel''—favored granting rehearing en banc.

NBNC Pet. App. 20a. Because six active judges

recused themselves, however, the grant of rehearing

would have required the concurrence of all non-

recused active judges, including the original panel

members. As the dissenters from the denial of

rehearing en banc pointed out, the Comptroller was

therefore precluded from “discern{ing] the views of a

substantial majority of the active judges” on the

court of appeals. /bid. Moreover, as the dissenters

pointed out, “[rjecusal seems to be a particular

problem in cases involving large banks and their

'! The original panel included judges Jolly and Wiener and

Senior Judge Goldberg, who was not entitled to vote on the

suggestion for rehearing en banc. See Fed. R. App. P. 35(a).

22

regulatory agencies (and the attorneys of both) with

whom several active judges are likely to have

relationships that require them to recuse.” /d. at 21a.

For that reason (and because it is impossible to

determine why particular judges recused themselves

in this case), it is possible that the same problem

would recur were further cases raising the same

issues brought before the Fifth Circuit.

c. Moreover, it is possible that neither the gov-

ernment nor affected banks will have the opportunity

to litigate the issues involved in this case further in

other circuits. Respondent VALIC, which is head-

quartered in Houston, underwrites and sells fixed and

variable annuities in all 50 States. NBNC Pet. App.

4a. Assuming that venue was proper in this case

(where the bank involved is not located in the Fifth

Cireuit and sold no annuities there), VALIC is

therefore in a position to challenge in the courts of

the Fifth Circuit any future decision by the Comp-

troller to approve a bank’s application to sell

annuities.'? Thus, it is possible that the decision

2 A national bank might choose to proceed with sales that it

believed to be within its authority, without seeking explicit

approval from the Comptroller. We are informed, however,

that for a variety of legal and business reasons, agency sales of

annuities are almost invariably conducted through brokerage

subsidiaries, rather than directly by the parent banks. Sales by

such subsidiaries are subject to mandatory prior legal and

policy review by the Comptroller. 12 C.F.R. 5.34. We are also

informed that national banks of significant size would typically

have sufficient business contacts with one or more States in the

Fifth Circuit to render them amenable to suit there. It thus

appears likely that any suit VALIC might be able to bring

directly against such a bank, to challenge its sales of annuities

in alleged violation of federal law, could also be brought in the

Fifth Circuit.

23

below will effectively preclude national banks from

selling annuities of any type—and perhaps a wide

variety of other products that are or may be thought

of as “insurance”—anywhere in the country (other,

presumably, than in small towns covered by Section

92), despite the Comptroller’s conclusion that they

have the power to do so. The Second Circuit’s

decision in American Land Title presented no

similar risk that it would preclude further litigation

in other circuits.

d. The issue of Section 92’s scope and effect is

inextricably intertwined with the additional issue

present in this case: whether the annuities at issue

here constitute “insurance” for purposes of that

Section. In addition, the ability to sell annuities is of

far greater importance to national banks—and

therefore to their federal regulators—than the ability

to sell title insurance of the sort involved in

American Land Title. The dissent from denial of

rehearing en banc in this case notes (NBNC Pet. App.

2la-22a) that in 1992 banks sold some $12.2 billion of

fixed and variable annuities, representing approxi-

mately 17% of all individual annuities and 21.9% of

fixed annuities sold nationwide, and accounting for

some 7% of all bank brokerage sales.'* We are

informed that the volume of bank annuity business

increased substantially in 1993."4

‘8 We are advised that annuities are valued for these

purposes on the basis of the gross premium required to be paid

by the purchaser over the life of the contract.

‘4 In light of the substantial growth in annuity sales through

banks, the federal bank regulatory agencies (including OCC)

recently proposed to require all banks under their jurisdiction

to report such sales (together with sales of mutual fund shares)

24

e. Finally, the conflict described in the American

Land Title petition has now deepened. The court of

appeals in this case cited and relied on American

Land Title and rejected (while purporting to

distinguish) the D.C. Circuit’s contrary decision in

Heimann. NBNC Pet. App. 6a-7a, 13a-14a, 16a.

Furthermore, as discussed above, the New York

Court of Appeals has recently upheld a state

regulatory decision—prompted by and premised in

large part on the Comptroller’s decision in this

case—that New York banks should be permitted to

make agency sales of annuity products. New York

State Ass’n of Life Underwriters, slip op. 2-3, 11-14.

While the New York court’s decision is based on state

law and thus presents no direct legal conflict with the

decision below (see id. at 13), it is nonetheless

relevant in two respects. First, the court’s ap-

propriate deference under state law principles to a

determination by state banking regulators that was

explicitly based on “reasons similar to those stated in

OCC Letter 499” (ibid.) provides a sharp contrast to

the court of appeals’ refusal in this case to defer,

under Chevron, to the Comptroller’s decision con-

tained in that letter itself..° Second, the existence of

approval for sales of annuities by New York banks

in their quarterly Reports of Condition and Income. See 59

Fed. Reg. 2603-2604 (1994).

'S The similarity of the issues before the New York court

and the issues in this case is further emphasized by the fact

that 12 U.S.C. 24 Seventh, the basic federal bank powers

statute at issue here, was originally modeled on the parallel

provision of New York law at issue in New York State Ass’n of

Life Underwriters. See, e.g., Trimble, The Implied Power of

National Banks To Issue Letters of Credit and Accept Bills, 58

Yale L.J. 713, 719 (1949).

25

raises the undesirable prospect of important dif-

ferences in bank powers that arise from the difference

between state and federal regulation, and yet have

been judicially placed beyond the power of federal

regulators to correct.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted.

Drew S. Days, III

Solicitor General

FRANK W. HUNGER

Assistant Attorney General

PAUL BENDER

Deputy Solicitor General

EDWARD C. DUMONT

Assistant to the Solicitor General

MARK B.STERN

JACOB M. LEWIS

Attorneys

WILLIAM P. BOWDEN. JR

Chief Counsel

Office of the Comptroller

of the Currency

APRIL 1994