Amicus Curiae Brief — NationsBank of North Carolina, N. A. v. Variable Annuity Life Insurance

/ i.

U

Nos. 93-1612 and 93-1613 Bupreme Court, U.S,

IN THE MAY 13 1994

Supreme Court of the United Siates. ad

OCTOBER TERM, 1993

NATIONSBANK OF NORTH CAROLINA, N.A.., ef ai.,

Petitioners,

Vv.

VARIABLE ANNUITY LIFE INSURANCE CO.,

Respondent.

EUGENE LUDWIG, COMPTROLLER OF THE CURRENCY, er ai.,

Petitioners,

v.

VARIABLE ANNUITY LIFE INSURANCE CO.,

Respondent.

ON PETITIONS FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

BRIEF OF THE NEW YORK CLEARING HOUSE ASSOCIATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

H. RODGIN COHEN JOHN L. WARDEN

MICHAEL M. WISEMAN Counsel for The New York

THEODORE EDELMAN Clearing House Association,

ROBERT J. GIUFFRA, JR. Amicus Curiae

125 Broad Street,

New York, New York 10004.

(212) 558-4000

SULLIVAN & CROMWELL

Of Counsel

NORMAN R. NELSON

General Counsel

The New York Clearing

House Association

Of Counsel May 13, 1994

\

TABLE OF CONTENTS

TABLE OF AUTESURITHES 2... cc ccvcvecs il

INTEREST OF AMICUS CURIAE ............ 2

SUMMARY OF ARGUMENT .............. 3

REASONS FOR GRANTING THE PETITIONS ..._ 6

I. THE PETITIONS PRESENT QUESTIONS OF

EXCEPTIONAL IMPORTANCE TO NATIONAL

BANKS AND THE NATION’S ECONOMY. ..... 6

Il. THE FIFTH CIRCUIT DEPARTED FROM

CHEVRON IN OVERRIDING THE OCC’S

REASONABLE CONSTRUCTION OF TWO

IMPORTANT PROVISIONS OF THE NBA. ..... &

III. THE COURTS OF APPEALS ARE DIVIDED

OVER WHETHER NATIONAL BANKS LOCATED

OUTSIDE OF SMALL TOWNS MAY SELL

“INSURANCE” PRODUCTS THAT ARE

INCIDENTAL TO THEIR BANKING BUSINESS. .. 13

IV. THE FIFTH CIRCUIT’S FAILURE TO FOLLOW

CHEVRON THREATENS THE OCC’S EXPERT

ADMINISTRATION OF THE NBA AND THE

DEVELOPMENT OF BANKING GENERALLY. ... 15

DET “Gotu esCu Sd eee eseveseucws 17

ii

TABLE OF AUTHORITIES

Cases

American Ins. Ass'n v. Clarke, 656

F. Supp. 404 (D.D.C. 1987), aff'd, 865

F.28 276 @.C. Ce. IRD oe see

American Land Title Ass’n v. Clarke, 968

F.2d 150 (2d Cir. 1992), cert. denied,

113 S. Co. BD (GRR). oe eee eee

Arnold Tours, Inc. v. Camp, 472 F.2d 427

(let Civ. 1972) . 0 eo oes eee

Chevron U.S.A., Inc. v. Natural Resources

Defense Council, Inc..,

467 U.S. S37 (ISSR) ww ec etebeueaeee

Clarke v. Securities Indus. Ass'n,

479 U.3. SB (IGG7) . ec escesueunen

First National Bank of E. Ark. v. Taylor,

907 F.2d 775 (8th Cir.), cert.

denied, 498 U.S. 972 (1990) ..........

Independent Bankers Ass’n v. Heimann,

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

cert. denied, 449 U.S. 823 (1980) .......

Independent Ins. Agents v. Federal Reserve

Bd., 736 F.2d 468 (8th Cir. 1984) .......

M & M Leasing Corp. v. Seattle First Nat'l

Bank, 563 F.2d 1377 (9th Cir. 1977),

cert. denied, 436 U.S. 956 (1978) .......

Page(s)

10

13

12

passim

ll

13, 14

13-14

11

New York State Ass'n of Life Underwriters,

Inc. v. New York State Banking Dep't,

1994 N.Y. LEXIS 324 (N.Y. Ct. App.

Se Sb ceopeeescccccc

Saxon v. Georgia Ass'n of Independent Ins.

Agents, 399 F.2d 1010 (Sth Cir. 1968) .....

SEC v. Variable Annuity Life Ins. Co. of Am..,

EE SS 5 ovcccssesccceces

Securities Indus. Ass'n v. Federal

Reserve Bd., 468 U.S. 207 (1984) ........

Statutes and Rules

ee tt tt ees

tec ccc e cee.

tte ee cee.

EEE

Miscellaneous

Kurt Cerulli & David Nadig, Variable Annuities

Add a Steady Flow to Bank Brokerages’

Revenue Streams, The American Banker,

TE Sc sc ccccecc cece s

Page(s)

passim

13

1]

iV

Kalen Holliday, Annuities Head List of

Insurance Products At Banks, Study Finds,

The American Banker, Sept. 30, 1993, at 20

OCC Interpretive Letter No. 494,

reprinted in [1989-1990 Transfer Binder]

Fed. Banking L. Rep. (CCH) { 83,083

i & 5 Eee aT ee eee

David Shapiro & Thomas F. Streiff,

pe ee

Karen Talley, Bank Annuity Sales Seen

Surging in 93, The American Banker,

eT

Karen Talley, N.Y. Banks Gearing Up

Annuities After Ruling, The American

Banker, Apr. 7, 1994, at12............

Phillip R. Trimble, The Implied Power of

National Banks to Issue Letters of Credit

and Accept Bills, 58 Yale L.J. 713 (1949) ....

U.S. Dep’t of the Treasury, Modernizing the

Financial System: Recommendations for Safer,

More Competitive Banks, Fed. Banking L. Rep.

(CCH), No. 1377 (Feb. 14, 1991) ........

Page(s)

12

Supreme Court of the Gnited States

October Term, 1993

Nos. 93-1612 and 93-1613

NATIONSBANK OF NORTH CAROLINA, N.A.., ef ai.,

Petitioners,

Vv.

VARIABLE ANNUITY LIFE INSURANCE COoO.,

Respondent.

EUGENE LUDWIG, COMPTROLLER OF THE

CURRENCY, ef ai.,

Petitioners,

Vv.

VARIABLE ANNUITY LIFE INSURANCE CoO.,

Respondent.

ON PETITIONS FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF OF THE NEW YORK CLEARING HOUSE

ASSOCIATION AS AMICUS CURIAE IN

SUPPORT OF PETITIONERS

Pursuant to Rule 37.2 of this Court, this brief is

respectfully submitted by The New York Clearing House

Association (the “Clearing House”) with the consent of all

parties.

INTEREST OF AMICUS CURIAE

The Clearing House is an unincorporated association of

eleven leading commercial banks in the City of New York.’

Four of the Clearing House member banks are national

banking associations subject to the National Bank Act (the

“NBA”)’ and, thus, to the supervision and regulation of

petitioners the Comptroller of the Currency and the Office of

the Comptroller of the Currency (together, the “OCC”). The

Clearing House frequently appears as an amicus curiae in

cases, such as this, raising important questions of banking

law.

The Clearing House has a substantial interest in the

questions presented by the petitions for a writ of certiorari

(the “Petitions”) filed herein because of its member banks’

interest and involvement in the sale of annuities. In addition,

in reliance on the regulations and authorizations of the OCC

and other banking regulators, Clearing House member banks

sell other products related to their conduct of the business of

banking that, unlike annuities, are generally considered

insurance. Those products include credit life, credit

disability, mortgage life, mortgage disability, and involuntary

unemployment insurance.

As a result of the decision below, national banks that are

now engaged in, or that are considering engaging in, the sale

' The members of the Clearing House are The Bank of New

York, The Chase Manhattan Bank, N.A., Citibank, N.A.,

Chemical Bank, Morgan Guaranty Trust Company of New York,

Bankers Trust Company, Marine Midland Bank, United States

Trust Company of New York, National Westminster Bank USA,

European American Bank, and Republic National Bank of New

York.

2 Ch. 106, 13 Stat. 99 (1864) (codified, as amended, in

sections of Title 12 of the United States Code).

3

of annuities and credit-related insurance products may face

legal challenges to their power to do so. In addition, the Fifth

Circuit’s unduly narrow construction of the “incidental

powers” clause contained in Section 24 (Seventh) of the NBA

has engendered confusion regarding the scope of recognized

powers of national banks. The OCC has authorized national

banks to engage in numerous activities, not specifically

enumerated in the NBA, that are incidental to the business of

banking, and commercial banks have expended substantial

resources in reliance on those authorizations and are presently

providing such services to millions of their customers.

Both law and business necessity compel Clearing House

member banks to rely on the interpretations of the federal

banking laws of the OCC and other banking agencies.

Member banks frequently invest substantial time and money

introducing new products and services in reliance on such

interpretations. The Fifth Circuit’s invalidation of the entirely

rational OCC determination that national banks may sell

annuities as agents disrupts the regulatory predictability and

stability that are indispensable to the business of banking and

the ability of banks to serve their customers.

SUMMARY OF ARGUMENT

1. As recognized by the four judges who dissented

from the Fifth Circuit’s denial of rehearing en banc, “[n]Jo

one can seriously question the importance of this case to the

banking industry and to commerce and competition in

general.” (NationsBank of North Carolina (*NBNC”) Pet.

App. at 21). This Court should grant certiorari because the

erroneous decision of a single panel of the Fifth Circuit, if

left to stand, may force national banks to exit the market,

now totalling almost $100 billion annually, for the sale of

annuities. Banks possess almost twenty percent of this

profitable and still rapidly growing market. The decision of

a panel of the Fifth Circuit—which was not reheard en banc,

although a majority of that court’s active judges who did not

4

recuse themselves voted in favor of rehearing—also calls into

question the power of banks to sell other financial and

insurance products that have become an_ increasingly

important source of revenue for commercial banks and an

increasingly significant component of the services that banks

provide to their customers.

2. The Fifth Circuit directly contravened this Court’s

decision in Chevron U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837, 842-45 (1984), in

refusing to defer to the OCC’s determination that annuities

are not “insurance” for purposes of the supplementary

insurance powers provisions of 12 U.S.C. § 92, and in

engaging in a de novo analysis of that issue. There was no

basis in either the text or the legislative history of Section 92

for the Fifth Circuit to override the OCC’s reasonable

interpretation of the statute that the OCC is charged with

administering. Moreover, the Fifth Circuit ignored

overwhelming authority holding that annuities are not

insurance, but rather a form of financial investment

instrument of the sort that national banks have long sold

pursuant to their express power to engage in all aspects of the

“business of banking.”

The analysis and result below also ran afoul of the

Chevron deference rules in rejecting the OCC’s construction

of the “incidental powers” clause of Section 24 (Seventh) of

the NBA to authorize national banks to broker annuities as

part of their historical role as agents for the sale of securities

and other financial investment instruments. The CCC

reasonably concluded in the exercise of its informed judgment

and on the basis of its knowledge and experience in the

regulation of commercial banking that the sale of annuities is

an element of the “business of banking” within the meaning

of Section 24 (Seventh). The Fifth Circuit not only

impermissibly substituted its own views on the matter for the

OCC’s interpretation, but departed in approach and result

from other case law, including the New York Court of

5

Appeals’ recent interpretation of the provision on which the

“incidental powers” clause of Section 24 (Seventh) was based

and its application to the sale of annuities by New York-

chartered banks. See New York State Ass’n of Life

Underwriters, Inc. v. New York State Banking Dep’t, 1994

N.Y. LEXIS 324 (N.Y. Ct. App. Mar. 30, 1994)

(“NYSALU”).

3. The decision below has deepened the important

conflict among the courts of appeals over whether Section 92

impliedly bars national banks located in communities of more

than 5,000 from acting as agents for the sale of certain

specialized insurance products related to the conduct of the

business of banking. The Second and Fifth Circuits, in

reliance on case law that pre-dates this Court’s decision in

Chevron, have held that Section 92 bars such activities, while

the D.C. Circuit has concluded that it does not. The ability

of national banks to engage in significant activities, especially

activities that increase competition, should not be governed

by the fortuity of the location of a bank or the venue in

which the bank’s actions may be challenged.

4. The Fifth Circuit’s clear departure from the

established principle of judicial deference to the OCC’s

reasonable interpretation of NBA provisions threatens

regulatory predictability and stability in the banking industry

If national banks could not rely on OCC regulations under,

and interpretations of, the NBA, they would be deprived of

the predictability necessary to the development of innovative

commercial banking practices.

REASONS FOR GRANTING THE PETITIONS

I.

THE PETITIONS PRESENT QUESTIONS OF

EXCEPTIONAL IMPORTANCE TO NATIONAL

BANKS AND THE NATION’S ECONOMY.

The sale of annuities in the United States is now

estimated to total approximately $100 billion annually. See

Karen Talley, N.Y. Banks Gearing Up Annuities After Ruling,

The American Banker, Apr. 7, 1994, at 12. Annuities

compete directly with other popular investment products,

such as certificates of deposit, mutual funds and stocks and

bonds; and they “have become the retirement vehicle of

choice for many Americans.” Kalen Holliday, Annuities

Head List Of Insurance Products At Banks, Study Finds, The

American Banker, Sept. 30, 1993, at 20. They are

particularly important because they permit investors to defer

the taxation of their investment gains. See 26 U.S.C. § 72.

Although annuities were sold primarily by insurance

companies in the past, commercial banks have substantially

increased their sale of annuities in recent years in response to

their customers’ demands for more sophisticated, flexible and

higher-yielding products than conventional bank accounts.

More than seventy of the nation’s 100 largest banks now

offer annuities to their customers. See Karen Talley, Bank

Annuity Sales Seen Surging in ’93, The American Banker,

June 30, 1993, at 17. In 1993, commercial banks’ annuity

sales reportedly reached an estimated $16 billion annually,

see id., and such sales represented about seven percent of all

bank brokerage activity. See Kurt Cerulli & David Nadig,

Variable Annuities Add a Steady Flow to Bank Brokerages’

Revenue Streams, The American Banker, July 14, 1993, at

12. Securities firms and other financial service providers are

also major sellers of annuities.

7

As part of their historical function as financial

intermediaries, commercial banks have long possessed broad

powers to buy and sell financial instruments as agents for

their customers. See Securities Indus. Ass’n v. Federal

Reserve Bd., 468 U.S. 207, 215 (1984). In response to

substantially increased competition from other financial

intermediaries, such as savings banks, securities brokerage

firms and mutual funds, commercial banks have expanded

their brokerage of securities, annuities and other financial

investment instruments where natural synergies with their

core banking businesses exist. See U.S. Department of the

Treasury, Modernizing the Financial System:

Recommendations for Safer, More Competitive Banks, Fed.

Banking L. Rep. (CCH), No. 1377 at XVIII-9-XVIII-23

(Feb. 14, 1991). Such brokerage activities have generated

substantial revenue for banks without posing a risk to their

safety or soundness and have benefited consumers by

increasing the availability, and reducing the cost, of financial

investment instruments, such as annuities. See David Shapiro

& Thomas F. Streiff, Annuities 17 (1992).

The decision below has created uncertainty regarding

whether national banks may continue to sell annuities and

may open the door to legal challenges to the ability of banks

to sell other products, such as credit life, credit disability,

mortgage life, mortgage disability, and involuntary unem-

ployment insurance, that are incidental to the business of

banking. More generally, the decision calls into question the

extent to which national banks may continue to respond to the

needs of their customers in the rapidly changing marketplace

for financial products. These considerations clearly warrant

exercise of this Court’s plenary jurisdiction; they are all the

more compelling given that the decision below represents the

view of only a minority of the judges of the issuing circuit

who considered the matter and was sharply criticized by the

judges who supported the suggestions for rehearing en banc.

8

(See NBNC Pet. App. 20a (panel “badly erred”); see also

OCC Pet. at 21-22; NBNC Pet. 9-10).

In addition, the importance of the questions presented

here has been augmented by the recent decision of the New

York Court of Appeals confirming that the “incidental

powers” clause of the New York Banking Law—which

served as the model for the predecessor of Section

24(Seventh)—empowers New York-chartered banks to sell

financial investment instruments such as annuities and to

adapt their product lines to meet changing economic

conditions and the evolving demands of commercial banking

customers. See NYSALU, 1994 N.Y. LEXIS 324 (N.Y. Ct.

App. Mar. 30, 1994). Unless this Court reverses the Fifth

Circuit’s decision, national banks, including certain Clearing

House member banks, would be placed at a distinct

disadvantage vis-a-vis New York-chartered banks (and banks

chartered elsewhere that follow the New York approach)

devaluing their federal charters.

Il.

THE FIFTH CIRCUIT DEPARTED FROM

CHEVRON IN OVERRIDING THE OCC’S

REASONABLE CONSTRUCTION OF TWO

IMPORTANT PROVISIONS OF THE NBA.

This Court has long recognized the necessity of judicial

deference “to [an agency’s] construction of a statutory

scheme it is entrusted to administer.” Chevron v. Natural

Resources Defense Council, 467 U.S. at 844 (footnotes

omitted); see also Clarke v. Securities Indus. Ass’n, 479 U.S.

at 403-06 (applying Chevron to OCC’s interpretation of

federal banking laws). The Fifth Circuit violated this

principle of deference in overruling the OCC’s reasonable

interpretation of Sections 92 and 24 (Seventh) of the NBA.

1. As the Petitions demonstrate, the Fifth Circuit’s

decision that annuities are “insurance” for purposes of

9

Section 92, and its method of arriving at that conclusion,

conflict sharply with Chevron. (See OCC Pet. at 11-14;

NBNC Pet. at 14-22). The Fifth Circuit plainly erred in

“substitut{ing] its own construction of a statutory provision

for [the OCC’s] reasonable interpretation.” Chevron, 467

U.S. at 844. There is nothing in Section 92 or its legislative

history indicating Congress’ intent—much less “clear” intent,

as is required by Chevron—that annuities be considered

“insurance” within the meaning of that statute. Because

Congress has never addressed that “precise question,” it was

plainly within the province of the OCC to interpret the

Statute, and mandatory for the Fifth Circuit to defer to that

interpretation. /d. at 843.

Indeed, the respective determinations that annuities are

not a form of insurance by the New York Court of Appeals

in NYSALU and of the Fifth Circuit judges who dissented

from the denial of the suggestions for rehearing en banc

demonstrate powerfully that the OCC had far more than a

reasonable basis for construing Sections 24 (Seventh) and 92

to permit national banks to broker annuities and that there

was no justification for the panel below to have substituted its

view for the OCC’s. As the Petitions establish, “the great

weight of authority” conflicts with the Panel’s conclusion

and, instead, “supports the position that annuities are not

insurance.” NYSALU, 1994 N.Y. LEXIS 325 at 14, quoted

in OCC Petition at 13; see also NBNC Petition at 15-16.

The Fifth Circuit, in impermissibly substituting its

judgment for the OCC’s, focused solely on annuities for

which the benefits are paid over the duration of the

annuitant’s life (a life income option). (See NBNC Pet. App.

at 12a, 27a). Most annuities are structured, however, such

that benefits are paid for a specified period of time (e.g., 5,

10 or 15 years) (a term certain option) or in a lump-sum

distribution of the entire cash value of the annuity. See David

Shapiro & Thomas R. Streiff, Annuities, supra, at 2-4

(describing different types of annuities).

10

Contrary to the conclusion of the Fifth Circuit (NBNC

Pet. App. at 11a), the fact that “[aJll fifty states currently

regulate annuities under their insurance laws” does not

strip annuities of the characteristics of a financial

investment instrument and render them forms of insurance.

“‘Banking’ and ‘insurance’ are not mutually exclusive

businesses; ‘from a functional point of view there is a

considerable overlap between the [two].’” American Ins.

Ass’n v. Clarke, 656 F. Supp. 404, 409-10 (D.D.C. 1987),

aff'd, 865 F.2d 278 (D.C. Cir. 1988) (quoting Henry

Harfield, Bank Credit and Acceptances 184 (Sth ed. 1974))

(brackets in original).

2. The Fifth Circuit also departed from Chevron in

rejecting the OCC’s reasonable interpretation of Section 24

(Seventh) to include the power to sell annuities within that

section’s authorization to national banks to “exercise . . . all

such incidental powers as shall be necessary to carry on the

business of banking.”

It was plainly within the province of the OCC to

construe the technical terminology of the “incidental powers”

clause to permit national banks to broker annuities. C7.

NYSALU, 1994 N.Y. LEXIS 324 at *7 (“[c]learly, the

‘incidental powers’ clause in Banking Law Section 96(1) does

not consist of common words of clear import, and that clause

is susceptible to differing interpretation”). At a minimum, it

was not clearly unreasonable for the OCC to interpret the

“business of banking” as used in Section 24 (Seventh), as

being “comprised of all those powers which are recognized

incidents or features of that business.” OCC Interpretive

Letter No. 494, reprinted in [1989-1990 Transfer Binder]

Fed. Banking L. Rep. (CCH) 4 83,083, at 71,195 (Dec. 20,

1]

1989).* Thus, there was no basis for the Fifth Circuit to

reject the OCC’s determination that the express authorization

in Section 24 (Seventh) for commercial banks to engage in

“all such incidental powers as shall be necessary to carry on

the business of banking” includes the power to sell annuities

and other financial investment instruments as agents. (See

NBNC Pet. App. at 38a).

Even if the Fifth Circuit were authorized to examine de

novo the OCC’s interpretation of the “incidental powers”

clause—and it was not—the court erred in holding that

“conceding arguendo that the power to sell annuities would

be one incidental to banking, by no stretch of the imagination

can that power be deemed ‘necessary.’” (NBNC Pet. App.

at 14a-15a). This unduly narrow construction of the incidental

powers clause — which defines “necessary” as synonymous

with “essential” — is contrary to that of other courts of

appeals and of the banking regulators charged with

interpreting and enforcing the NBA. See First Nat’! Bank of

E. Ark. v. Taylor, 907 F.2d 775, 778 (8th Cir.) (collecting

cases holding that “the ‘incidental powers’ of national banks

are not limited to activities that are deemed essential to the

exercise of express powers”), cert. denied, 498 U.S. 972

(1990). For example, the Ninth Circuit has recognized that

the incidental powers clause was included in the NBA “to

permit the use of new ways of conducting the very old

business of banking.” 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); of. SEC v. Variable Annuity

Life Ins. Co. of Am., 359 U.S. 65, 71 (1959) (refusing “to

freeze the concepts of ‘insurance’ or ‘annuity’ into the mold

they fitted when [the Securities, Investment Company and

McCarran-Ferguson] Acts were passed” and, thus, holding

* The OCC relied upon Interpretive Letter 494 in

determining that national banks may broker fixed-rate annuities.

(See NBNC Pet. App. at 38a).

12

that variable annuities are “securities” that must be registered

with the SEC).

The Fifth Circuit’s crabbed interpretation of the

incidental powers clause of the NBA is in stark contrast to

that of the New York Court of Appeals in NYSALU. The

Court of Appeals deferred to state bank regulators in holding

unanimously that commercial banks chartered in New York

may sell annuities as agents, construing the incidental powers

provision of Section 96(1) of the New York Banking Law,

the provision on which Section 24 (Seventh) of the NBA was

based,* to authorize New York-chartered banks to expand

their banking services over time to meet evolving business

practices and customer needs. See NYSALU, 1994 N.Y.

LEXIS 324 at *13. The approach of the New York Court of

Appeals — which looks to whether an activity is consistent

with the economic functions of, and is of a nature historically

or customarily performed by, commercial banks — is far

more in keeping with Congress’ intent in creating a national

banking system.

The Fifth Circuit’s departure from this approach and

result will likely generate substantial confusion and

uncertainty as to the nature and extent of the “business of

banking” in the United States. Given the exceptional

importance of this issue to the commercial banking industry

and its customers, the Court should grant certiorari and hold

that the OCC reasonably determined that annuities are

financial investment instruments and that the brokerage of

these instruments is included among the traditional powers of

national banks under Section 24 (Seventh) of the NBA.

* See Arnold Tours, Inc. v. Camp, 472 F.2d 427, 431 (Ist

Cir. 1972); Phillip R. Trimble, The Implied Power of National

Banks to Issue Letters of Credit and Accept Bills, 58 Yale L.J.

713, 719 (1949).

13

Iil.

THE COURTS OF APPEALS ARE DIVIDED

OVER WHETHER NATIONAL BANKS LOCATED

OUTSIDE OF SMALL TOWNS MAY SELL

“INSURANCE” PRODUCTS THAT ARE

INCIDENTAL TO THEIR BANKING BUSINESS.

Because the Fifth Circuit erroneously concluded that

annuities are a form of “insurance” (NBNC Pet. App. at

10a), the court was required to decide whether the sale of

annuities is covered by Section 92. In rejecting the OCC’s

determination that Section 92 does not prohibit national banks

from brokering annuities, the Fifth Circuit intensified the

existing conflict among the courts of appeals over whether

Section 92 bars national banks in communities with

populations exceeding 5,000 from acting as sales agents for

all “insurance” products, even when the OCC determines that

such sales are incidental to the business of banking.

The court below (NBNC Pet. App. at 10a, 13a-17a) and

the Second Circuit in American Land Title Association v.

Clarke, 968 F.2d 150 (2d Cir. 1992), cert. denied, 113 S.

Ct. 2959 (1993), have held that Section 92 impliedly bars

national banks from selling annuities and title insurance,

respectively, notwithstanding the OCC’s determination that

the sale of those products is incidental to the business of

banking. Both courts applied the erroneous construction of

Section 92 first adopted by the Fifth Circuit in Saxon v.

Georgia Association of Independent Insurance Agents, 399

F.2d 1010 (Sth Cir. 1968), sixteen years before this court’s

decision in Chevron. By contrast, the D.C. Circuit has

rejected this erroneous construction of Section 92 and upheld

the OCC’s determination that national banks may sell credit

life insurance as incidental to the business of banking. See

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

1169-70 (D.C. Cir. 1979), cert. denied, 449 U.S. 823

(1980); see also Independent Ins. Agents v. Federal Reserve

14

Bd., 736 F.2d 468, 477 n.6 (8th Cir. 1984) (upholding

Federal Reserve’s approval of bank holding company’s

application to engage in credit-related property and casualty

insurance, and noting “strong argument” that Saxon had

“wrongly decided” that Section 92 bars banks from selling

insurance).

Section 92 provides that “/ijn addition to the powers

now vested by law in national banking associations,” national

banks in small towns may “act as the agent for any fire, life,

or other insurance company” in selling insurance policies.

(Emphasis added). As the Petitions demonstrate (see OCC

Pet. at 14-15; NBNC Pet. at 24-25), the language and

legislative history of Section 92 support the OCC’s (and the

D.C. Circuit’s) view that Section 92 is a supplemental grant

of authority providing additional sources of income for

national banks located in small towns from the sale of

insurance that is not incidental to the business of banking.

Section 92 does not restrict the power of national banks to

conduct “the business of banking.”* The court below erred

in refusing to enforce the OCC’s interpretation.

Instead, the Fifth Circuit relied upon the maxim of

construction expressio unius est exclusio alterius to conclude

that Section 24 (Seventh) does not apply here. (See NBNC

Pet. App. at 15a-16a). However, Section 92 does not

address—and, thus, the maxim cannot be invoked to restrict—

the powers Section 24 (Seventh) grants to national banks to

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

1170 n.18 (“[b]y 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”); Independent Ins. Agents v. Federal

Reserve Bd., 736 F.2d 477 n.6 (“[t}he legislative history indicates

that Congress was concerned only with providing small-town banks

with an additional profit source, not with prohibiting city banks

from selling insurance”).

15

engage in insurance-related activities that are incidental to the

business of banking. (See NBNC Pet. at 25-26).

The ability of national banks to engage in a wide range

of banking activities should not depend upon the fortuity of

a bank’s location or the venue in which the bank’s activities

are challenged. Accordingly, this Court should now resolve

the important conflict among the courts of appeals over

whether Section 92 bars national banks in communities of

more than 5,000 persons from selling insurance-related

products that are incidental to the business of banking.

Although this conflict has previously existed, it is posed for

the first time in the context of a judicial decision that could

require scores of banks to discontinue existing services

involving billions of dollars in revenues. This is a

straightforward question of statutory construction requiring

determination by this Court to forestall further conflict and

uncertainty affecting an important sector of the nation’s

financial system.

IV.

THE FIFTH CIRCUIT’S FAILURE TO FOLLOW

CHEVRON THREATENS THE OCC’S EXPERT

ADMINISTRATION OF THE NBA AND THE

DEVELOPMENT OF BANKING GENERALLY.

This Court should grant certiorari for the additional

reason that the Fifth Circuit’s rejection of the OCC’s

determination that national banks may sell annuities, in clear

contravention of Chevron, has disrupted the regulatory

predictability and stability essential to the banking business.

The OCC is the federal agency charged with the regulation

of national banks and the administration of the NBA. Law

and business necessity compel national banks to rely on the

OCC’s interpretation of the permissible scope of their

banking activities.

16

More generally, banks are subject to a comprehensive

scheme of regulation that pervades every aspect of their

operations and procedures. Many parts of this scheme are

specifically left to implementing regulations of the banking

agencies. Other aspects of this scheme, particularly those

enacted many years ago, require interpretation and,

frequently, reinterpretation to account for changing financial,

economic and technological developments.

Since the enactment of the NBA in 1864, there have

been enormous changes in the banking and financial services

industries, and a growing homogenization in the products

offered to consumers. For example, consumers now have a

wider range of choices among the money market instruments

offered by banks, brokerage firms and mutual funds. If banks

could not rely upon OCC regulations and interpretations in

response to the evolving demands of the marketplace, they

would be unable to meet the changing demands and needs of

their customers, and inevitably their competitive position

wouid deteriorate.

If allowed to stand, the decision below would pave the

way for other courts to substitute their construction of the

NBA for the reasoned interpretations of the OCC, even

where the regulator’s interpretation is supported by the

statute’s language and legislative history. Such an approach

inevitably would result in piecemeal and inconsistent

application of the federal banking laws and would hinder the

development of a coherent body of law for the national

banking community.

17

CONCLUSION

The petitions for a writ of certiorari should be granted.

Respectfully submitted,

JOHN L. WARDEN,

125 Broad Street,

New York, New York 10004.

(212) 558-4000

Counsel for The New York

Clearing House Association,

Amicus Curiae

H. RODGIN COHEN

MICHAEL M. WISEMAN

THEODORE EDELMAN

ROBERT J. GIUFFRA, JR.

SULLIVAN & CROMWELL

Of Counsel

NORMAN R. NELSON

General Counsel

The New York Clearing

House Association

Of Counsel May 13, 1994