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

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Supreme Court of the Gnited

OCTOBER TERM, 1994

NATIONSBANK OF NORTH CAROLINA, N.A. AND

NATIONSBANC SECURITIES, INC.,

Petitioners,

Vv.

VARIABLE ANNUITY LIFE INSURANCE CO.,

BRIEF OF PETITIONERS

NATIONSBANK OF NORTH CAROLINA, N.A. AND

NATIONSBANK SECURITIES, INC.

QUESTIONS PRESENTED

1. Whether the Fifth Circuit misapplied the Chevron

standard when it engaged in a de novo analysis and failed

to defer to the Comptroller’s reasonable construction of

12 U.S.C. §§ 24(7) and 92 and his determination that an-

nuities do not constitute ‘‘insurance” for purposes of 12

U.S.C. § 92.

2. Whether 12 U.S.C. §92, which provides that, “‘in

addition to’’ their other powers, national banks located in

places with 5,000 or fewer inhabitants may act as the

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

impliedly bars national banks in more populous places from

brokering annuities, even though the Comptroller has de-

termined such activity to be part of the ‘‘business of bank-

ing’ or “incidental” thereto under 12 U.S.C. § 24(7).

TABLE OF CONTENTS

TABLE OF AUTIBORITIIS .cccccccccescessssssesaaae

OPTNIORS BELOW q.cccccccssecssensnnesentannsneieeainniainnl

STATEMENT OF THRE CAGED ccccccsccctcccssstessumene

A. The Comptroller’s Approval .............ccc00eeeee

B. The Opinion of the District Court ...............

C. The Opinion of the Court of Appeals .........

D. The Opinion of the Court of Appeals Denying

OO SE

SUMMARY OF ARGUBENT ...ccocccsesssscenssenmannnian

ARGUMENT. ...cccccccccescccssseseoseetonnsonsnnnsanninnnnnnnnnan

I. THE COURT OF APPEALS CONTRAVENED

THE CHEVRON DOCTRINE IN REJECTING

THE COMPTROLLER/S REASONABLE CON-

STRUCTION OF SECTION 24 SEVENTH AND

SC TRUS 9B ..ccescossccsssssnngntenssinanliiaanannnn

Il.

The Chevron Doctrine Requires Deference

to the Comptroller’s Reasonable Con-

struction of the Federal Banking Laws

Which He Is Charged with

AGIRTINE .nccccesvinstctemiiiaen

. The Failure to Grant Deference to the

reg oe Reasonable Construction of

the Federal Banking Laws at Issue Here

Undermines the Critical Role Vested In

the Comptroller by Congress .............0.+

NATIONAL BANKS ARE EMPOWERED BY

THE INCIDENTAL POWERS CLAUSE OF

THE NATIONAL BANK ACT AND BY THE

GLASS-STEAGALL ACT TO SELL FIXED

AND VARIABLE ANNUITIES TO THEIR

CUBTOREIEIES «o..0.cccccsececsseeseseessibaniaieiienininaan

iii

A. The Comptroller’s Conclusion that the In-

cidental Powers Clause Permits the Bro-

kerage of Fixed Annuities Was Supported

by a Functional Approach to the Powers

of National Banks and the Structure and

Features of Annuity Contracts ...............

B. The Comptroller’s Construction of the In-

cidental Powers Clause Was Based upon

a Considered Analysis and a Rational

Finding that Annuities Are Financial In-

C. The Comptroller’s Construction of the In-

cidental Powers Clause and His Analytical

Approach Were Consistent with the De-

cisions of This Court and Significant

Lower Court Decisions ...............cccccceeeeees

D. Since At Least Some Types of Annuities

Are Securities Within the Meaning of the

Glass-Steagall Act, National Banks Also

Possess an Express Banking Power to

I etn scecarecenesencsenccesocccocose

III. SECTION 92 IS NOT A LIMIT ON NATIONAL

BANK POWERS UNDER SECTION 24 SEV-

ENTH AND DOES NOT APPLY TO NON-IN-

SURANCE OR SPECIALIZED INSURANCE-

RELATED PRODUCTS SUCH AS

PEPTPEEED ccncscceccnsescesccvccccnccccocccesceccccscoocccees

A. Section 92 Provides an Additional Grant

of Power to National Banks ..................

B. Annuities Are Not ‘“Insurance’’ Within

the Meaning of Section 92 ............::00

C. Annuities Are a Specialized Insurance-Re-

lated Product that Are Not Subject to

III iiaiaitisaiihicnicneecacedsscnvesestocccccoceces

GPPEMPIEN cccccccccccccsccccccccccccccccccocosccccooccccccosocescees

TABLE OF AUTHORITIES

CASES: Page(s)

American Ins. Ass’n v. Clarke, 865 F.2d 278 (D.C.

es TT inceeceneseciiindndieatiaciiniatbitiati Ohne 29,47

Anderson v. FDIC, 918 F.2d 1139 (4th Cir.

SUIITED snteacebcsinadaundeditiigecediianiiiaidiiictiesimar ei aan 39

Armour & Co. v. Wantock, 323 U.S. 126 (1944) .. 21

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

SP ULED Accshiiinishimniniicitanitinesinisccennaaaamatiitaiiilatilibniadineins 29

Bank v. Lanier, 78 U.S. (11 Wail.) 369 (1871) ..... 30

Block v. Pennsylvania Exch. Bank, 253 N.Y. 227,

De ee OD cniccaiieaestctiteigicasitibiendeiittainatnes 19

Board of Governors v. Investment Co. Inst., 450 U.S.

Oe CII etcericansccnsentcistepscnibiegdeniaaicanninapiddaniatdidenen 18

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

Council, Inc., 467 U.S. 837 (1984) ...............:. passim

Clarke v. Securities Indus. Ass’n, 479 U.S. 388

EUNIIITE: dcdsibeedsstneciiinmnnainbinansenndiintandiieiaabeoadliebnnie 17,18,41

Clement Nat’l Bank v. Vermont, 231 U.S. 120

EI setecedenieitriihemeniddindieiudidimaalatensiinabcindaaaacih aciaaiiattaaiaiaiain 28

Colorado Nat’l Bank v. Bedford, 310 U.S. 41

CEUEEE? seenensciieensnciiadacntiiimiatadtinteiiiaminiuininniminnenitinoe 27

Commonwealth v. Metropolitan Life Ins. Co., 254

os. § FS 5 esa 42

Corporation Comm’n v. Equitable Life Assurance

Soc’y, 73 Ariz. 171, 289 P.2d 360 (1951) ....... 41

Crandon v. United States, 494 U.S. 152 (1990) .... 22

Daniel v. Life Ins. Co., 102 S.W.2d 256 (Tex. Civ.

BERD, TOD ceccecemanenractenentinantainaiaiamatieninitabeahe 42

Estate of Keller v. Commissioner, 312 U.S. 543

GED dicks sncensiniscennsenseicantnnitneniienieninbinieieeemnnne 42

Table of Authorities Continued

Page

First Nat’l Bank v. City of Hartford, 273 U.S.

TEED \siincccsdevsavitnnsiticstinenesuibeiuibiiemimniiintieinenenses 28

First Nat’l Bank v. Taylor, 907 F.2d 775 (8th

CIA cccctahsepubniieisiasninisnihicaibianiniditaniiaiitadinaibabuntin 28

Franklin Nat’l Bank v. New York, 347 U.S. 373

SIND sistiabdaieadndadatinndddeiinddiaiiiiapntgaiidadionnianiniees 26,27

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

Hughey v. United States, 495 U.S. 411 (1990) ...... 45

In re Rhodes’ Estate, 197 Misc. 232, 94 N.Y.S.2d

GE Gale RD cesntonnennstnecssiasintintitnsamennines 42

In re Sothern’s Estate, 257 A.D. 574, 14 N.Y.S.2d

Dh, GEIS dsceabathadibntbenstibhiansicapenisinieniiibianinipntiipencsenne 42

In re Walsh, 19 F. Supp. 567 (D. Minn. 1937) ..... 42

In re Young, 806 F.2d 1303 (5th Cir. 1987) ......... 42

Independent Bankers Ass’n v. Clarke, 917 F.2d 1126

SEA GUE. STII setinisiscunennedapnsiioatngmiannadiondenbinnanttiins 16,23

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

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

BE TIIIIIIET inselessciiarinenntentonncensiianntuiadsudiinontnenensenete passim

Independent Ins. Agents of Am., Inc. v. Ludwig, 997

yp ko fe ee 37

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

Governors, 736 F.2d 468 (8th Cir. 1984) ..... 10,38,46

Investment Co. Inst. v. Camp, 401 U.S. 617

SITE suintesidteupinccionsintensianmnidedeneetienitiinmtncrenes 17

John Hancock Mutual Life Ins. Co. v. Harris Trust

& Sav. Bank, 114 S. Ct. 517 (1998) .............. 44

Kernochan v. United States, 29 F. Supp. 860 (Ct.

Cl. 1939), cert. denied, 309 U.S. 675 (1940) .. 42

K Mart Corp. v. Cartier, Inc., 486 U.S. 281

GPU eccctnsintocseiseescsestnsoceniectesasnensscmmenmngeemenenn 23

Table of Authorities Continued

Page

Legal Tender Case, 110 U.S. 421 (1884) ............... 22,26

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

a 22,26

Merchants’ Bank v. State Bank, 77 U.S. (10 Wall.)

SRI OD SE ce ee 27,28

Muller v. Oregon, 208 U.S. 412 (1908) ..............2... 25

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

563 F.2d 1377 (9th Cir. 1977) ......................... 29

Neuberger v. Commissioner, 311 U.S. 83 (1940) ... 39

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

New York State Banking Dep’t, 83 N.Y.2d 353,

632 N.E.2d 876 (N.Y. 1994) ...........ccccccccscseess passim

Oscar Mayer & Co. v. Evans, 441 U.S. 750

EP scitieetcebihientlescsitaaiadissccipiaiemneitnaandiviinndiiioniaumiees 34

Otto v. Variable Annuity Life Ins. Co., 814 F.2d

Se ee I I seenticsbiicidinndarinciaiitpncnmeitntditedas 35

Pauley v. Bethenergy Mines, Inc., 501 U.S. 680

UTTIITE scliistihansideebininitelicninnniiiiinntesntbipiniitekmndenteens 16,39

Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S.

Ge SIE siacitsitansscntincttidssensinatibobiascsaiindenidinanseiuen 16

People ex rel. Metro Life Ins. Co. v. Knapp, 193

A.D. 413, 184 N.Y.S. 345 (8d Dep’t 1920), aff'd

mem., 231 N.Y. 630, 182 N.E. 916 (1921) ..... 42

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

399 F.2d 1010 (5th Cir. 1968) .............. cece 7

Securities Indus. Ass’n v. Board of Governors, 468

SN I IEE cictcrinsiitttnictdintiiiuindtedindiiadiinmdones 33

Securities Indus. Ass’n v. Board of Governors, 468

IEE sichiigutininnidiainciberniidicadinditinmeness 19

Securities Indus. Ass’n v. Board of Governors, 807

ff es ee 33,34

Securities Indus. Ass’n v. Clarke, 885 F.2d 1034

MRR Ecler artim Re S rR 28

vii

Table of Authorities Continued

Page

SEC v. United Benefit Life Ins. Co., 387 U.S. 202

CIPUIIEE ceidickidiedcuetinnenibendientscpsadipeiintiiiediennatinndbenie passim

SEC v. Variable Annuity Life Insurance Co., 359

es ae GE tine tcencsttecrenenmnetninianiinnenaientisanes passim

Springer v. Government of the Philippine Islands,

PE SEs EE eceinnicaciiaktinisescincenesssnies 38

State ex rel. Equitable Life Assurance Soc’y v. Ham,

54 Wyo. 148, 88 P.2d 484 (1939) ........ 42

United States v. Rodriguez-Rodriguez, 863 F.2d 830

Se SI hcanibiineeidceandsnlabtenineniisoniniazeannioiess 40

United States v. Stauffer Chem. Co., 684 F.2d 1174

es SIE ciittipaciectibiesebennsicdcstinitdandinssiiedemsinniicne 34

Welch v. Helvering, 290 U.S. 111 (1938) .......0000.... 22

STATUTES & RULES:

i scatiinesntnmsnanntenepneninetion 17

Be I si ccincnesicnnstesscetuncsenintinmanents passim

— 5 | CR ea ainaniaelnnis passim

i I inicinsiitcnctncietitencisdanansanameenenooennions 5

Oe IT in sa citi scnneradinmimiaicilennininetnndinns 35

ee Rt INET iiss cicinicrincetioniieitiniaemniuionichiinianuneneees 5

Oe iii catrreiibinidesincnsapsinidneniedines 11

ST insincere enti orinendnininnnnbaniioniies 2

| Enea 8

Be EE titiiiniesenredintninctinpmenndniineninieciasions 8

ee Se chctrneniectrenreenitinintsinntinntecrmesen 8

Act of June 16, 1933, ch. 89, 48 Stat. 184 .......... 7

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

ES TE TEE SRUNET- cencascusetncectnnesecesenenencases 3

Be Ee ceteteeerteiectsinininticaiinnenntcnrnamenenese 47

BD Ges FIED ceseseccccvnccencnniscncccsenentponevanvenesonnces 6

viii

Table of Authorities Continued

Page

BD CSTR. BEB) wcscccccscescecesesceccsssvsssssccsesecscvees 31

oe A RE |: } Renee 33

Fed. BR. Amp. P. BER) ccocceccocccsccccsccccscccscesccsccosssesoes 11

LEGISLATIVE AND ADMINISTRATIVE MATERIALS:

58 Cong. Rec. 11,001 (1916) ..................0.x0.v.cccseeeees 38,46,47

53 Cong. Rec. 11,002 (1916) ..........ccccceeeeeeeeeeeeeeees 38

G2 Fed. Baws, BOGEG CRGGDD ncceccccccesccvessccovessscccvssosee 35

OCC Ltr. No. 271, reprinted in [1983-1984 Transfer

Binder} Fed. Banking L. Rep. (CCH) § 85,435,

at 77,577 (Sept. 21, 19GB) .........ccccoccccccccccrecees 20

OCC Ltr. No. 283, reprinted in [1983-1984 Transfer

Binder] Fed. Banking L. Rep. (CCH) ¢ 85,447,

ft, fF * ) 47

OCC Ltr. No. 331, reprinted in (1985-1987 Transfer

Binder] Fed. Banking L. Rep. (CCH) 4 85,501,

2A; 2) eS. Ren passim

OCC Ltr. No. 338, reprinted in [1985-1987 Transfer

Binder] Fed. Banking L. Rep. (CCH) ¢ 85,508,

Bt 77, TOO Cag B, 19B5) ...cccccccocccescsssscsescoscccoes 47

OCC Ltr. No. 356, reprinted in [1985-1987 Transfer

Binder] Fed. Banking L. Rep. (CCH) 4 85,526,

Bo? 5 Be 20

OCC Ltr. No. 357, reprinted in [1985-1987 Transfer

Binder] Fed. Banking L. Rep. (CCH) 4 85,527,

at 77,819 (Feb. 26, 1986) ............ccscsceceeeeeeeeeees 20

OCC Ltr. No. 365, reprinted in [1985-1987 Transfer

Binder] Fed. Banking L. Rep. (CCH) 4 85,535,

at 77,8382 (Aug. 11, 1986) ........cccccccscseeeerereees 20

OCC Ltr. No. 388, reprinted in [1988-1989 Transfer

Binder] Fed. Banking L. Rep. (CCH) 4 85,612,

at 77,938 (Jume 16, 1987) .........:ccccccsseeeeeeeeees 33

Table of Authorities Continued

Page

OCC Ltr. No. 415, reprinted in [1988-1989 Transfer

Binder] Fed. Banking L. Rep. (CCH) ¢ 85,639,

oe 5 fF | Ee CRE EEn 31

OCC Ltr. No. 429, reprinted in [1988-1989 Transfer

Binder] Fed. Banking L. Rep. (CCH) ¢ 85,653,

OE FES CREE ED, TOGOD cccccccccccccosesccccccccccscees 31

OCC Ltr. No. 494, reprinted in [1989-1990 Transfer

Binder] Fed. Banking L. Rep. (CCH) ¢ 83,083,

Bs fF & & ee 20

OCC Ltr. No. 495 reprinted in [1989-1990 Transfer

Binder] Fed. Banking L. Rep. (CCH) 4 83,084,

OE TEES GRR, TR, TOGO) cccccccsccccscccccccccccescccees 47

OCC Ltr. No. 499, reprinted in [1989-1990 Transfer

Binder] Fed. Banking L. Rep. (CCH) § 83,090

PM Gls BEE dalerircinicvcesecsscevissvessensecsasssccsnsoes 2

SEC Release No. 33-6645, 35 SEC Docket (CCH)

EE MES III wetiveccncsnneienenncedsousceeseccseneve 35

OTHER AUTHORITIES:

1 J. Appleman, Insurance Law and Practices § 84

SRE GEIS AET EES SLSR eco oe Re 41,42

2A N. Singer, Sutherland Stat. Const. § 47.17 (5th

ES ee a 45

2B N. Singer, Sutherland Stat. Const., §§ 51.01,

I TR I iiss sc nccintctecsnntineotacnentcs 30

3A C.J.S. Annuities Sc, at 869 ..................cccccceceees 41

Amv Dunkin, Annuities: Gleaning Hard Facts From

the Hard Sell, Bus. Wk., Apr. 29, 1991 at

SSIES E SS EERE ACSIA SY nee Smo a 24

Black’s Law Dictionary (6th ed. 1990) .................. 42,43

Cass R. Sunstein, Law and Administration After

Chevron, 90 Colum. L. Rev. 2071 (1990) ....... 15,39

Table of Authorities Continued

Edward L. Symons, The “‘Business of Banking’ in

Historical Perspective, 51 Geo. Wash. L. Rev.

FO CD ccnccscnccccesccsessnnsesoccostvennssetsenssnudatnennece

Peter Weaver, Annuities: An Old Product With

Some New Wrinkles, Nation’s Business, June

Se TR: WU cctacccnciindcertidinteniiiminaiiamniidtaitinbinsins

Right of a National Bank To Write Insurance

i Its Officers, 2 Fed. Res. Bull. 73, 74

SEITE , cxnsciiaceiiapnibedinusdnneniintpihiademmaianepsiabanaiannin

The Wall Street Journal, Apr. 29, 1991, at C8 ....

The Wall Street Journal, May 13, 1991, at C13...

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1994

Nos. 93-1612, 93-1613

NATIONSBANK OF NORTH CAROLINA, N.A. AND

NATIONSBANC SECURITIES, INC.,

Petitioners,

Vv.

VARIABLE ANNUITY LIFE INSURANCE CO.,

Respondents.

On Writ Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

BRIEF OF PETITIONERS

NATIONSBANK OF NORTH CAROLINA, N.A. AND

NATIONSBANK SECURITIES, INC.

OPINIONS BELOW

The opinion of the United States Court of Appeals for

the Fifth Circuit (Pet. App. la-17a)' is reported at 998

F.2d 1295. The opinion of the United States Court of

‘On June 27, 1994, this Court granted petitioners’ motion to dispense

with the requirement of a joint appendix, since relevant portions of

the record already were reproduced in the appendix to NationsBank’s

certiorari petition. References to that appendix are designated ‘Pet.

App. —_.—.”” throughout this brief.

Appeals for the Fifth Circuit denying rehearing and re-

hearing en banc, and the. opinion dissenting therefrom (Pet.

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

of the United States District Court for the Southern Dis-

trict of Texas (Pet. App. 29a-34a) is reported at 786 F.

Supp. 639. The approval of the Office of the Comptroller

of the Currency (the “Comptroller’’) (Pet. App. 35a-48a),

dated March 21, 1990, at issue here, is unreported (the

‘“Comptroller’s Approval’’).*

JURISDICTION

The judgment of the court of appeals was entered on

August 26, 1993. Petitions for rehearing and suggestions

for rehearing en banc were denied on January 13, 1994.

Petitions for certiorari were filed on April 13, 1994, and

were granted on June 6, 1994. The jurisdiction of this

Court is invoked under 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

1. 12 U.S.C. § 24 (section 5136 of the Revised Statutes

of 1878) provides, in pertinent part:

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 certifi-

cate, a body corporate, and as such, and in the

name designated in the organization certificate,

it shall have power—

*The Comptroller’s Approval, in turn, references (Pet. App. 35a)

Interpretive Letter No. 499 of the Chief Counsel of the Comptroller,

dated February 12, 1990. See OCC Ltr. No. 499, reprinted in [1989-

1990 Transfer Binder] Fed. Banking L. Rep. (CCH) 83,090 (Feb. 12,

1990) (“‘Chief Counsel’s Letter’’). The Chief Counsel's Letter is attached

as an appendix hereto. References to that appendix are designated “App.

—_—” throughout this brief.

= ee

Seventh. To exercise by its board of directors or

duly authorized officers or agents, subject to law,

all such incidental powers as shall be necessary

to carry on the business of banking; by discount-

ing and negotiating promissory notes, drafts, bills

of exchange, and other evidences of debt; by re-

ceiving deposits, by buying and selling exchange,

coin and bullion; by loaning money on personal

security; and by obtaining, issuing, and circulat-

ing notes according to the provisions of 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 or-

der, and for the account of, customers, and in

no case for its own account... .

2. 12 U.S.C. § 92 (originally enacted as Act of Septem-

ber 7, 1916, ch. 461, 39 Stat. 753, and amended by Act

of October 15, 1982, Pub. L. No. 97-320, 403(b), 96 Stat.

1511) provides, in pertinent part:

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 pop-

ulation of which does not exceed five thousand

inhabitants, as shown by the last preceding de-

cennial census, may, under such rules and reg-

ulations 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 solic-

iting and selling insurance and collecting premi-

ums on policies issued by such company; and may

receive for services so rendered such fees or com-

missions as may be agreed upon between the said

association and the insurance company for which

it may act as agent ....

STATEMENT OF THE CASE

This case presents a question of substantial importance

to national banks—whether they are permitted under fed-

eral banking laws to sell as agent (i.e., broker) fixed and

variable annuity contracts to their customers. The question

has arisen in a challenge to the Comptroller’s approval of

the request of NationsBank of North Carolina, N.A.

(‘“‘NationsBank”’) to have its wholly-owned brokerage op-

erating subsidiary, NationsBanc Securities, Inc. (““NSI’’),’

broker fixed and variable annuity contracts issued by an-

nuity issuers unaffiliated with NationsBank or NSI.

A fixed annuity is a contract in which an issuer agrees,

commencing at a specified time (the “maturity date’), to

make periodic payments to the purchaser or other bene-

ficiary for the life of the purchaser (or another party, such

as the surviving spouse of the purchaser) or for a fixed

term, in return for one or more payments made during a

‘“‘pay-in’’ period. In a pure fixed annuity, the amount of

the periodic payments are specified in the contract or based

upon a set interest rate. In effect, a fixed annuity is a

debt obligation of the issuer. Most modern fixed annuities,

including those at issue here, include a discretionary excess

interest feature whereby the issuer has discretion to pay

additional amounts beyond the contractually-set minimum

payments. See generally Pet. App. 35a-36a & n.1.

* Petitioners have undergone a change of name during the course of

this case. NationsBank was previously NCNB National Bank of North

Carolina and NSI was previously NCNB Securities, Inc. NationsBank

Corporation is the parent company of NationsBank. NationsBank Com-

munity Development Corporation and NationsBank Housing Fund In-

vestment Corporation are partially owned subsidiaries of NationsBank.

;

In a variable annuity, the payments are segregated and

invested in a pooled investment vehicle selected by the

annuity purchaser. The value of a variable annuity contract

at the maturity date is dependent upon the performance

of the investment pool selected by the purchaser, although

there sometimes is a minimum performance return guar-

anteed under the contract. Upon the maturity date, a var-

iable annuity can provide various payment options,

including level, variable, and lump sum payments, or a

combination thereof. Pet. App. 35a-36a; SEC v. Variable

Annuity Life Insurance Co., 359 U.S. 65, 68-72 & n.13

(1959) (“SEC v. VALIC’’).4

Fixed and variable annuities have become popular retail

investment vehicles used by an increasing number of in-

dividuals to pursue their investment and retirement goals.

Annuities, as investment options, compete directly with a

broad range of other retail investment products, such as

taxable and tax-free mutual funds, certificates of deposit

and equity and fixed income securities. Because annuities

possess certain tax-deferral characteristics, they can be an

especially attractive investment alternative for particular

investors. Annuities are widely marketed to the public

based upon their tax-deferred investment attributes and

not on the basis of any risk-insuring characteristics.

Currently, securities brokerage firms, insurance com-

panies and their agents, insurance brokers, and numerous

depository institutions (directly or through subsidiaries and

‘Variable annuity contracts are registered under the Investment

Company Act of 1940, 15 U.S.C. § 80a-1, et seq. (‘Investment Company

Act’’), as a type of investment company, similar in substance.to mutual

funds. These annuity contracts also must be registered as securities

under the Securities Act of 1933, 15 U.S.C. § 77a, et seg. (“‘Securities

Act’). See SEC v. VALIC, 359 U.S. at 67-68. In addition, at least some

fixed annuities also are required to be registered as securities under

the Securities Act. This Court has stated that “the term ‘security’ as

defined in the Securities Act is broad enough to include any ‘annuity’

contract.’’ Ibid. (footnote omitted) (emphasis added).

affiliates), including federally-chartered thrift institutions,

many state-chartered banks and state-chartered thrift in-

stitutions, and credit unions, are authorized to sell fixed

and variable annuities as investment alternatives. For ex-

ample, the New York Court of Appeals has recently af-

firmed the determination of the New York Banking

Department that the brokering of annuities by New York

state-chartered banks is an “incidental power” of the

“business of banking’”’ under New York banking law. New

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

State Banking Dep’t, 83 N.Y.2d 353, 360, 632 N.E.2d 876,

879 (N.Y. 1994). Accordingly, a substantial number of the

depository institutions and other financial services provi-

ders with which national banks directly compete have the

power to sell fixed and variable annuities.

A. The Comptroller’s Approval

In August 1989, NationsBank sought approval from the

Comptroller for NSI to engage in the sale, as agent, of

both fixed and variable annuity contracts solely upon the

order and for the account of customers and without re-

course. NSI proposed to offer annuities issued by a num-

ber of companies unaffiliated with NSI or NationsBank.

The annuities to be offered varied as to whether they

required single or multiple payments, and whether pay-

ments would accumulate solely in a variable account, a

fixed account, or a combination of fixed and variable ac-

counts. All fixed annuities to be offered would have some

form of an excess interest rate feature.

On March 21, 1990, the Comptroller approved

NationsBank’s request. In doing so, the Comptroller relied,

in part, on the “incidental powers’’ of national banks to

* National banks, under applicable Comptroller regulations, may em-

ploy operating subsidiaries to engage in activities permissible for their

national bank parents and “which are a part of or incidental to the

business of banking.” 12 C.F.R. § 5.34(c).

buy and sell a broad range of financial investment instru-

ments for their customers under 12 U.S.C. § 24 Seventh

(hereinafter ‘‘section 24 Seventh’’) of the National Bank

Act. Pet. App. 43a. Based on the traditional role of na-

tional banks as financial intermediaries and the close func-

tional similarity between annuities and other financial

investment instruments which national banks are author-

ized to sell, the Comptroller concluded that fixed and var-

iable annuities could be lawfully sold, as agent, by a

national bank’s operating subsidiary (as well as the na-

tional bank itself). Pet. App. 37a-41la.

The Comptroller also stated that, to the extent that the

annuity contracts were securities for purposes of the Glass-

Steagall Act,® the brokerage of the annuities also would

be authorized by the express securities brokerage power

for national banks set forth in that act. Pet. App. 37a.’

The Comptroller further concluded that 12 U.S.C. § 92

(‘section 92’’), which permits national banks to act as in-

surance agents in towns with 5,000 or fewer inhabitants,

does not limit banking powers under section 24 Seventh.

Consistent with the view of two courts of appeals, the

Comptroller rejected the Fifth Circuit’s interpretive ap-

proach set forth in Saxon v. Georgia Ass’n of Indep. Ins.

Agents, Inc., 399 F.2d 1010 (5th Cir. 1968) (‘‘Sazon’’).

Rather, the Comptroller found that section 92 was merely

a source of additional power, not a limitation on any pow-

ers that national banks otherwise possessed. Pet. App. 42a.

* Act of June 16, 1933, ch. 89, 48 Stat. 184 (codified at 12 U.S.C.

§ 24 Seventh).

"In 1985, the Comptroller's staff had issued interpretive guidance

which confirmed that national banks had the authority to broker var-

iable annuities under section 16 of the Glass-Steagall Act. See OCC

Ltr. No. 331, reprinted in [1985-1987 Transfer Binder] Fed. Banking

L. Rep. (CCH) 85,501, at 77,773 (Apr. 4, 1985) (“OCC Ltr. 331”).

Neither VALIC nor any other annuity issuer ever challenged this pub-

lished position until this case.

Moreover, the Comptroller concluded that even assum-

ing that the interpretive approach in Saxon were valid, it

would not preclude the brokering of annuities because an-

nuities are not “‘insurance’’ within the meaning of section

92 since they “lack the basic insurance characteristic of

indemnification agains‘ isk.”” Pet. App. 47a. As the Comp-

troller observed, ‘{a]ltheugh annuities often share with in-

surance the need for actuarial calculations, they are

primarily a vehicle for investment, not indemnification.”

Pet. App. 45a. Finally, the Comptroller concluded that,

even if annuities were deemed to be “insurance” under

section 92, they were a specialized insurance-related prod-

uct, such as credit-related insurance, and thus are not

prohibited by section 92. Pet. App. 43a.

B. The Opinion of the District Court

In September 1990, respondent the Variable Annuity

Life Insurance Co. (‘“‘VALIC’’) and various insurance in-

dustry trade groups filed suit in the United States District

Court for the Western District of Texas challenging the

Comptroller’s Approval. The district court (Walter S.

Smith, J.) dismissed certain plaintiffs for lack of standing

and, based upon improper venue, ordered a transfer of

the remaining parties to the District Court for the District

of Columbia.® The plaintiffs then filed voluntary dismissals

of the case, and VALIC alone refiled an essentially iden-

tical action in the Southern District of Texas in April

1991.° After limited discovery, the parties filed cross-mo-

tions for summary judgment.

The district court (Kenneth M. Hoyt, J.), adhering to

this Court’s seminal decision in Chevron U.S.A. Inc. v.

Natural Resources Defense Council, Inc., 467 U.S. 837

(1984) (“‘Chevron’’), which it found governed its review of

* The prior district court decision is reported at 761 F. Supp. 1285.

* The district court’s jurisdiction was based on 28 U.S.C. §§ 1331,

1337 and 1361.

the Comptroller’s Approval, rejected VALIC’s challenge

and upheld the Comptroller’s Approval. Pet. App. 34a. The

district court stated that the “‘initial inquiry under Chevron

is whether Congress has directly addressed the specific

question at issue.”” Pet. App. 32a. The district court, on

the record before it, concluded that Congress had not spe-

cifically addressed the issue of whether national banks are

authorized to broker annuity contracts. Ibid.

The district court then proceeded to the second step of

the Chevron analysis: Whether the Comptroller’s interpre-

tation of the National Bank Act was reasonable and, thus,

entitled to deference. Relying upon the plain language of

section 92 and its legislative history, both of which show

that section 92 ‘“‘was proposed to provide an additional

source of revenue for national banks located in small towns

and not to protect the markets from competing insurance

agents,” Pet. App. 33a, the district court concluded that

the Comptroller’s Approval constituted a ‘“‘permissible con-

struction” of section 92, which is ‘‘all that is required in

order to secure this Court’s deference” under Chevron.

Pet. App. 34a.

The district court also found that section 92 “‘is silent

with respect to defining the term ‘insurance.’ Pet. App.

33a. “[T]his silence, coupled with the express delegation

of rulemaking authority to the Comptroller, suggests that

Congress explicitly ‘left a gap for the [Comptroller] to

fill.’’”’ Pet. App. 33a (quoting Chevron, 467 U.S. at 843).

The district court concluded that the Comptroller had not

acted unreasonably in determining “that annuities are pri-

marily financial investment instruments, not insurance,”

given that annuities lack fundamental insurance charac-

teristics. Ibid. The district court further found that the

“Comptroller’s determination that annuities are a special-

ized product and not a ‘broad form’ of insurance to which

Saxon applied, is reasonable.’’ Pet. App. 34a.

C. The Opinion of the Court of Appeals

On appeal, a panel of the U.S. Court of Appeals for the

Fifth Circuit (Goldberg, Jolly, Wiener, JJ.) reversed. Re-

lying chiefly on the maxim of “‘expressio unius est exclusio

alterius,’’ the court of appeals first concluded that section

92 “‘plain{ly]’”’ prohibits national banks from selling insur-

ance products in towns with populations exceeding 5,000.

Pet. App. 3a."° The court of appeals also held that the

district court erroneously deferred to the Comptroller’s

interpretation of section 92. Deference, it held, was ‘“‘not

appropriate” under Chevron where, as in section 92, “‘the

intent of Congress is clear’’ and would be “‘frustrate[d]’’

by deferring to the Comptroller. Pet. App. 9a.

_ With respect to the issue of whether annuities constitute

“‘Insurance,”’ the court of appeals “‘disagreed’’ with the

Comptroller, stating that ‘“‘annuities are an insurance prod-

uct, both historically and functionally.’’ Pet. App. 10a. The

court of appeals’ conclusion was based primarily on the

fact that annuities are regulated, at least in part, under

state “insurance” laws and on a provision of the Internal

Revenue Code of 1986 defining a “‘life insurance company”

as a company “issuing life insurance and annuity con-

tracts.””” Pet. App. lla (quoting 26 U.S.C. § 816(a)).

The court of appeals also refused to defer to the Comp-

troller’s alternative reasoning that, even if Saxon were

In doing so, the court of appeals applied the interpretive approach

used in Sazon. The court of appeals recognized that the Comptroller

disagreed with Sazon and had relied upon two subsequent contrary

court of appeals decisions, Independent Ins. Agents of Am., Inc. v. Board

of Governors, 736 F.2d 468 (8th Cir. 1984) and Independent Bankers

Ass'n v. Heimann, 613 F.2d 1164 (D.C. Cir. 1979), cert. denied, 449

U.S. 823 (1980) (“Heimann”). The court of appeals rejected these two

decisions because, in its view, they “discuss Saxon only in dicta.”’ Pet.

App. 8a.

applicable, the present case was distinguishable on the ba-

sis that section 92 does not apply to “‘specialized’’ insur-

ance-related products like annuities, but only to general

types of insurance. Instead, the court of appeals found

that section 92 applies to “any ... insurance company”

and to ‘general’ forms of insurance. Pet. App. 13a.

Moreover, the court of appeals rejected the Comptrol-

ler’s conclusion that national banks can sell annuities as

an “incidental power’’ under section 24 Seventh. It held

that the sale of annuities cannot be deemed ‘“‘necessary”’

to the “‘business of banking’’ by any “stretch of the imag-

ination,” without citing any authority construing section

24 Seventh to support its holding. Pet. App. 15a. The court

of appeals further held that the “‘specific’’ limits on in-

surance activities in section 92 control over the “‘general”’

grant of power in section 24 Seventh. The court of appeals

totally ignored the express statutory authority of the Glass-

Steagall Act as a separate basis to support the brokering

of at least certain types of annuities by national banks.

D. The Opinion of the Court of Appeals Denying Re-

hearing

After the panel’s ruling, NationsBank and NSI, together

with the Comptroller, submitted petitions for rehearing

and suggestions for rehearing en banc, which were denied

on January 13, 1994. Of the thirteen active judges, six

were disqualified from participating in the case, leaving

only a bare majority of seven judges capable of rendering

a decision." Of the seven remaining judges, a majority of

four judges issued a dissent strongly disagreeing with the

prior disposition by the panel. Pet. App. 20a. They opined

that, in light of the recusal situation, “it is not possible

to discern the views of a substantial majority of the active

judges... . “ Ibid.

" See 28 U.S.C. § 46(c); Fed. R. App. P. 35a).

The dissenting judges stated that the panel “badly

erred” in adopting a view that contravened Chevron. Ibid.

They observed that section 92 ‘‘nowhere defines ‘insur-

ance’’’; accordingly, the panel was obliged to take the sec-

ond step of the Chevron analysis, which it refused to do.

Pet. App. 24a. Under the second step of Chevron, the

dissent concluded that the panel should have “‘le[ft] it to

the Comptroller to arrive at a reasonable definition, insofar

as it relates to the industry within his jurisdiction, namely,

banking.” Ibid. Finding substantial case authority to sup-

port the Comptroller’s Approval, much of which conflicts

with and was not addressed in the panel’s decision, the

dissent concluded that the panel should have deferred to

the Comptroller’s reasonable construction of the applicable

banking laws and found that national banks (and their

operating subsidiaries) have the authority to sell, on an

agency basis, both fixed and variable annuities. Pet. App.

27a-28a.

SUMMARY OF ARGUMENT

In rejecting the Comptroller’s determination that na-

tional banks are empowered by the federal banking laws

to broker fixed and variable annuities, the court of appeals

violated fundamental principles of administrative law that

limit a court’s role in reviewing agency constructions of

statutes. These principles, which are described in Chevron

and its progeny, require courts to defer to reasonable

agency constructions where, as here, Congress has not

spoken to the precise question at issue. The question in

this case, therefore, is whether, under Chevron, the Comp-

troller’s construction of the various statutory provisions

relevant here—the incidental powers clause of section 24

Seventh, section 92, and the Glass-Steagall Act—were rea-

sonable and consistent with the structure and purpose of

the National Bank Act. The answer to this question is an

overwhelming yes.

First, the Comptroller reasonably concluded that na-

tional banks were empowered to broker fixed annuities

based upon the incidental powers clause of section 24 Sev-

enth, which authorizes national banks to engage in “all

such incidental powers as shall be necessary to carry on

the business of banking.” 12 U.S.C. § 24 Seventh. The

Comptroller looked to the longstanding role of banks as

financial intermediaries and determined that the brokering

of fixed annuities was consistent with that function. He

further determined that annuities functionally resembled

other investment products that national banks had long

been empowered to sell and that annuities were, in fact,

treated as investment products in the marketplace. Ac-

cordingly, he concluded that the sale, as agent, of annuities

by national banks is authorized under section 24 Seventh.

The court of appeals erred in holding that the power

to sell annuities can ‘“‘by no stretch of the imagination”’

be deemed ‘“‘necessary.”’ The court of appeals’ unduly nar-

row construction of the word “‘necessary’’ mistakenly treats

“necessary” as synonymous with ‘essential.’ Such a con-

struction is contrary to precedent of this Court and nu-

merous courts of appeals, which instead have adopted a

functional and dynamic mode of analysis in determining

the scope of permissible national bank activities under sec-

tion 24 Seventh.

Second, since at least some types of annuities are se-

curities within the meaning of the Glass-Steagall Act, na-

tional banks also possess an express banking power to

broker annuities. In a prior interpretive letter, the Comp-

troller’s office had confirmed that national banks had the

authority to broker variable annuities. That interpretation

was reasonably premised upon the “functional resem-

blance”’ of variable annuities to mutual funds (which are

Glass-Steagall Act securities) and upon the fact that var-

iable annuities were “securities” under the Securities Act.

For the same reasons, at least some fixed annuities also

are Glass-Steagall securities. Because national banks have

express annuities brokerage authority and because it has

never been contended by the respondent that section 92

is a limitation upon an express banking power, an alter-

native basis for reversal is that at ieast some annuities

are Glass-Steagall securities which national banks have the

express authority to broker.

Finally, the court of appeals erred in interpreting section

92 as an implied limitation on the authority of national

banks to market annuities as general insurance agents. By

its terms, as the Comptroller properly found, section 92

is a supplemental grant of authority providing national

banks in small towns with additional sources of income

from the sale of “insurance”’ that is not incidental to the

business of banking. It does not in any way restrict the

power of national banks to engage in the brokering of

annuities as part of the “business of banking’’ under sec-

tion 24 Seventh. The court of appeals’ reliance on the

expressio unius rule of construction to reach its flawed

interpretation of section 92 is not only at odds with proper

application of the Chevron, but inconsistent with other rules

of construction that require statutory provisions to be con-

strued harmoniously.

Moreover, as the Comptroller also found, annuities are

not “insurance” within the meaning of section 92. In so

finding, the Comptroller analyzed and contrasted the struc-

ture and features of annuities and traditional insurance

products and concluded, on the basis of “the great weight

of authority,” that annuities lack basic insurance charac-

teristics. Further, even if annuities somehow could be

deemed to be “insurance” in the broadest sense of the

word, the Comptroller concluded that they were at most

a specialized insurance-related product that does not fall

within the general prohibition of section 92. Under the

maxim of eyusdem generis, section 92 only extends to the

sale of broad forms of insurance. It does not extend to

more specialized insurance-related products that are func-

tionally equivalent to many investment products, the sale

of which is authorized for national banks and their oper-

ating subsidiaries.

ARGUMENT

I. THE COURT OF APPEALS CONTRAVENED THE CHEV-

RON DOCTRINE IN REJECTING THE COMPTROL-

LER’S REASONABLE CONSTRUCTION OF SECTION 24

SEVENTH AND SECTION 92.

A. The Chevron Doctrine Requires Deference to the

Comptroller’s Reasonable Construction of the

Federal Banking Laws Which He Is Charged with

Administering.

There is no dispute that the Comptroller’s construction

of section 24 Seventh and section 92 is at the heart of

this case. The proper role of a court reviewing an agency’s

construction of a statute which it administers was un-

ambiguously delineated by this Court in Chevron, a decision

which “has established itself as one of the very few de-

fining cases in the last twenty years of American public

law.”’ Cass R. Sunstein, Law and Administration After

Chevron, 90 Colum. L. Rev. 2071, 2075 (1990).

Under Chevron, a court must first consider ‘‘whether

Congress has directly spoken to the precise question at

issue.’’ 467 U.S. at 842. If the intent of Congress is clear,

“that is the end of the matter; for the court, as well as

the agency, must give effect to the unambiguously ex-

pressed intent of Congress.” Jd. at 842-43. If the statute

is “silent or ambiguous,” the question for the court is then

whether the agency’s decision “is based on a permissible

construction of the statute.’’ Jd. at 843. In making that

determination, ‘(t]he court need not conclude that the

agency construction was the only one it permissibly could

have adopted to uphold the construction, or even the read-

ing the court would have reached if the question initially

had arisen in a judicial proceeding.”’ Jd. at 843 n.11. Pro-

vided that the agency’s construction is ‘‘‘rational and con-

sistent with the statute,’ it must be upheld as “‘permis-

sible.”” Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S.

633, 650 (1990) (quoting NLRB v. United Food & Com-

mercial Workers Local 23, 484 U.S. 112, 128 (1987)).

Deference is particularly compelling where, as here, the

regulatory scheme is “complex and highly technical’ and

where the issues in question “require significant expertise,

and entail the exercise of judgment grounded in policy

concerns.’ Pauley v. Bethenergy Mines, Inc., 501 U.S. 680,

697 (1991); see also Chevron, 467 U.S. at 865; Independent

Bankers Ass’n v. Clarke, 917 F.2d 1126, 1129 (8th Cir.

1990) (the “regulatory and competitive [banking] environ-

ment is especially suited to the expert judgment of reg-

ulators’’).

Applying Chevron, in the present case, there can be no

question that Congress “‘has [not] directly spoken”’ to the

issues of whether annuities can be sold under section 24

Seventh or whether annuities are “insurance’’ within the

meaning of section 92. The term ‘“‘insurance’’ is nowhere

defined, and indeed the term ‘‘annuities’’ does not appear,

in either of these sections or their respective legislative

histories. There is, therefore, nothing indicating Congress’

intent—much less the clear Congressional intent required

by Chevron—that annuities cannot be sold by national banks

under the federal banking laws. Congress simply has never

addressed this “precise question.”’

In these circumstances, under Chevron, the court of

appeals wrongly reversed the district court and failed to

defer to the reasonable interpretations of the Comptroller.

As is shown in Sections II and III below, the court of

appeals refused to accord the Comptroller the level of

deference required by this Court’s teachings. In fact, the

court of appeals accorded the Comptroller no deference at

all in this matter. While paying lip-service to Chevron, the

court instead did precisely what Chevron forbids—it in-

}

appropriately engaged in a de novo analysis and ‘“‘substi-

tute[d] its own construction of [sections 24 Seventh and

92] for a reasonable interpretation made by [the Comp-

troller],”” the expert regulator. Chevron, 467 U.S. at 844.

B. The Failure to Grant Deference to the Comptrol-

ler’s Reasonable Construction of the Federal

Banking Laws at Issue Here Undermines the Crit-

ical Role Vested In the Comptroller by Congress.

By failing to grant the Comptroller’s interpretations any

measure of real deference, the court of appeals undermined

the essential role of the Comptroller as the primary reg-

ulator of national banks. The Comptroller is specifically

charged by Congress with the regulation of national banks

and the interpretation and enforcement of the National

Bank Act and the Glass-Steagall Act. See 12 U.S.C. §1,

et seq.; Clarke v. Securities Indus. Ass’n, 479 U.S. 388,

403-04 (1987); Investment Co. Inst. v. Camp, 401 U.S. 617,

626-27 (1971). The Comptroller’s interpretations and rul-

ings govern, in minute detail, many facets of a national

bank’s operations, including the permissible scope of bank-

ing activities. See Heimann, 613 F.2d at 1168 (‘National

banks are perhaps as meticulously regulated as any in-

dustry. Every aspect of their affairs is scrutinized... .’’)

The judicial invalidation of entirely reasonable and appro-

priate Comptroller determinations, such as is the case here,

vitiates the critical regulatory authority Congress intended

the Comptroller to possess. It also creates substantial un-

certainty as to whether the national banks can safely rely

on the Comptroller’s determinations, no matter how rea-

sonably based. These elements are essential ingredients for

an orderly and effective national banking system to exist.

Since the enactment of the National Bank Act over 130

years ago, there have been massive changes in the business

of banking and in the products and services offered to

consumers by providers of retail financial services, such

as banks. With respect to national banks, these changes

have been accommodated primarily by evolving adminis-

trative interpretations based upon statutory language,

which has changed relatively little over the years. Thus,

although the statutory provisions governing national banks’

powers have remained largely static since the enactment

of the National Bank Act, this Court has considered and

upheld administrative determinations by the Comptroller

and other banking agencies permitting new and expanded

activities not explicitly granted by Congress. See, e¢.g.,

Clarke v. Securities Indus. Ass’n, 479 U.S. at 390-91 (the

offering by a national bank’s operating subsidiary of dis-

count brokerage services other than at the bank’s branch

offices); Board of Governors v. Investment Co. Inst., 450

U.S. 46, 49 (1981) (the provision by a bank holding com-

pany or its nonbanking subsidiary of investment advisory

services to a closed-end investment company).

If national banks could not rely upon such regulatory

interpretations they would be unable to respond to the

changing demands and needs of their customers and their

competitive position vis-a-vis other financial services prov-

iders would quickly erode. Such an anomalous result would

be clearly contrary to the intent of Congress and would

eviscerate the regulatory discretion which Congress wanted

the Comptroller to have in a dynamic financial services

marketplace.

II. NATIONAL BANKS ARE EMPOWERED BY THE IN-

CIDENTAL POWERS CLAUSE OF THE NATIONAL

BANK ACT AND BY THE GLASS-STEAGALL ACT TO

SELL FIXED AND VARIABLE ANNUITIES TO THEIR

CUSTOMERS.

A. The Comptroller’s Conclusion that the Incidental

Powers Clause Permits the Brokerage of Fixed

Annuities Was Supported by a Functional Ap-

proach to the Powers of National Banks and the

Structure and Features of Annuity Contracts.

The Comptroller’s Approval found that national banks,

and their operating subsidiaries, have the authority to sell

fixed annuities, as agent, based upon the provision in the

National Bank Act granting “all such incidental powers

as shall be necessary to carry on the business of banking.”’

12 U.S.C. § 24 Seventh. In construing the National Bank

Act’s “incidental powers’’ clause to encompass the bro-

kerage of fixed annuities, the Comptroller found two dif-

ferent bases to support his determination.

First, the Comptroller commenced his analysis by noting

that national banks’ “‘traditional role as financial inter-

mediaries [required that they] have broad powers to buy

and sell financial investment instruments as agent for cus-

tomers.” Pet. App. 38a. The Comptroller observed that

national banks have long engaged in the brokerage of se-

curities for their customers, a power expressly confirmed

by Congress in 1933 in the Glass-Steagall Act. Securities

Indus. Ass’n v. Board of Governors, 468 U.S. 207, 215

(1984); Block v. Pennsylvania Exch. Bank, 253 N.Y. 227,

232, 170 N.E. 900, 901-02 (1930) (securities brokerage by

banks is so widespread that “it may be the subject of

judicial notice’) (Cardozo, CJ). However, the power to bro-

ker financial investment products has not been limited to

traditional securities products, but has been found by the

Comptroller to include a wide variety of financial invest-

ment products, including equity interests in real estate,

various types of options, agricultural and metals futures,

and various types of financial futures.'”

Consistent with the analysis underlying these prece-

dents, the Comptroller concluded that, in the current retail

investments marketplace, fixed annuities “‘are primarily

financial investments.” Pet. App. 38a. Annuities are widely

considered by issuers, agents and consumers to be in-

vestment products comparable to many other investment

products sold by retail financial service providers. The

Comptroller cited numerous supporting authorities, includ-

ing two instructive decisions of this Court,'* that found

that an annuity was predominantly an investment product

and not a traditional insurance product indemnifying

against a risk of loss. Ibid.

Second, using a functional analysis, the Comptroller

found a “close functional resemblance between fixed an-

nuity contracts and other financial investment instruments

that banks may sell as agent.’”’ Pet. App. 39a. Specifically,

the Comptroller found a strong functional similarity be-

tween fixed annuities and variable annuities, debt instru-

ments, and certificates of deposit, each of which is a

product that national banks have the power to sell to their

customers. Pet. App. 39a-41a. ‘‘The financial marketplace

2 OCC Ltr. No. 271, reprinted in [1983-1984 Transfer Binder] Fed.

Banking L. Rep. (CCH) 4 85,435, at 77,577 (Sept. 21, 1983) (equity

interests in real estate); OCC Ltr. No. 356, reprinted in [1985-1987

Transfer Binder] Fed. Banking L. Rep. (CCH) 4 85,526, at 77,818 (Jan.

7, 1986) (agricultural and metals futures used for hedging); OCC Ltr.

No. 357, reprinted in [1985-1987 Transfer Binder] Fed. Banking L.

Rep. (CCH) 4 85,527, at 77,819 (Feb. 26, 1986) (options on financial

instruments and on financial futures); OCC Ltr. No. 365, reprinted in

[1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) { 85,535, at

77,8332 (Aug. 11, 1986) (financial futures); OCC Ltr. No. 494, reprinted

in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) 4 83,083,

at 71,203 (Dec. 20, 1989) (agricultural, oil, and metals futures and

options).

3 SEC v. United Benefit Life Ins. Co., 387 U.S. 202, 207-08 (1967);

Helvering v. Le Gierse, 312 U.S. 531, 542 (1941).

provides many examples of instruments that, like fixed

annuities, pay the investor a fixed stream of income over

time in return for an initial investment.” Pet. App. 41a.

B. The Comptroller’s Construction of the Incidental

Powers Clause Was Based upon a Considered

Analysis and a Rational Finding that Annuities

Are Financial Investment Products.

The court of appeals decision ignored the Comptroller’s

construction of the incidental powers clause, other than

the following lone sentence: ‘Even conceding arguendo

that the power to sell annuities would be incidental to

banking, by no stretch of the imagination can that power

be deemed ‘necessary.”” Pet. App. 15a. The court of

appeals instead relied primarily upon the argument that

the more “specific” provisions of section 92 control over

the more “general grant of power” contained in section

24 Seventh, an argument which, as shown below, is se-

riously flawed. See infra at 37-40.

The cursory treatment that the court of appeals gave

to the Comptroller’s construction of the incidental powers

clause makes it difficult to ascertain the precise basis for

the court of appeals’ conclusion. It appears that the court

construed the word “necessary” to mean that a power

must be ‘‘absolutely essential’ or ‘“‘indispensable’’ to the

business of banking in order for it to be permissible.

This construction is inconsistent with this Court’s inter-

pretation of “necessary” in a variety of other contexts.

Generally, this Court has not construed “necessary” to

mean “‘absolutely necessary”’ or “indispensable,” but rather

to mean ‘appropriate’ or “reasonably conducive to the

end to be accomplished.” See Armour & Co. v. Wantock,

323 U.S. 126, 129-30 (1944) (in interpreting a provision of

the Fair Labor Standards Act of 1938, the Court said that

“the word ‘necessary’ . . . has always been recognized as

a word to be harmonized with its context’’) (citing M’Cul-

loch v. Maryland, 17 U.S. (4 Wheat.) 316, 413, 414 (1819));

Welch v. Helvering, 290 U.S. 111, 113 (1933) (in deter-

mining the meaning of “ordinary and necessary expenses”

in carrying on a business, “‘necessary’”’ construed to mean

“appropriate and helpful’’).

Indeed, this Court has construed the ‘necessary and

proper” clause of Article I, section 8, clause 18 of the

Constitution, as “not limited to such measures as are ab-

solutely and indispensably necessary, without which the

powers granted must fail of execution; but they include all

appropriate means which are conducive or adapted to the

end to be accomplished, and which in the judgment of Con-

gress will most advantageously effect it.” Legal Tender Case,

110 U.S. 421, 440 (1884). See also M’Culloch v. Maryland,

17 U.S. (4 Wheat.) at 413-15 (necessary ‘frequently imports

no more than that one thing is convenient, or useful, or

essential to another.”). See also infra at 26-28.

In any event, the argument with respect to “‘necessity’’

is misdirected, since the legitimate issue is whether the

Comptroller acted permissibly under Chevron. The Comp-

troller can hardly be questioned as to the reasonableness

of his determination that the brokering of annuities is

‘incidental’ to the business of banking. The Comptroller,

first, looked to the role of banks as financial intermediaries

and determined that brokering fixed annuities was con-

sistent with that role. The Comptroller, then, closely ana-

lyzed the modern structure and usage of fixed annuity

contracts and found that they bore a close functional re-

semblance to other investment products that national banks

have long been permitted to sell to their customers. This

is exactly the type of expert regulatory judgment the

Comptroller is authorized and expected to make by Con-

gress.

The analytical approach employed by the Comptroller is

both reasonable and consistent with the overall design and

purpose of the National Bank Act. See, e.g., Crandon v.

United States, 494 U.S. 152, 158 (1990) (in construing stat-

ute, court‘ must look to “design of the statute as a whole

and to its object and policy’); K Mart Corp. v. Cartier,

Inc., 486 U.S. 281, 291 (1988); Independent Bankers Ass’n

v. Clarke, 917 F.2d 1126 (8th Cir. 1990) (Arnold, J.) (up-

holding Comptroller’s functional definition of the term

“State bank’’). In the Independent Bankers case, for ex-

ample, the Eighth Circuit upheld the Comptroller’s con-

clusion that savings and loan institutions fall within the

term ‘‘State banks’’ in the McFadden Act. There, as here,

the Comptroller’s conclusion was based on a “practical”

and “functional” approach to the term “State banks.” Jn-

dependent Bankers, 917 F.2d at 1129. The Comptroller had

found that savings and loan institutions engage in virtually

the same financial activities as commercial banks. Jd. at

1128. The Eighth Circuit noted that “everyone with a

nodding acquaintance with the modern development of the

financial industry’ recognizes that former bright-line dis-

tinctions had “‘blurred.’’ Jbid. Given “‘the realities of bank-

ing in the nineties,’’ the court held that the Comptroller’s

functional approach was “well within the bounds of rea-

son.”’ Id. at 1129.

In the courts below, VALIC’s criticism of the Comp-

troller was not with his analytical approach in construing

the incidental powers clause, but with the Comptroller’s

factual finding that a fixed annuity was functionally an

investment product. In this regard, the Comptroller was

certainly entitled to look beneath the surface qualities of

annuities to their underlying substantive characteristics,

including how they are treated in today’s financial services

marketplace. Cf. SEC v. United Benefit Life Ins. Co., 387

U.S. at 211 (quoting SEC v. Joiner Leasing Corp., 320

U.S. 344, 352-353 (1943)) (The test for what constitutes

an “investment contract” under section 2 of the Securities

Act “is what character the instrument is given in com-

merce by the terms of the offer, the plan of distribution,

and the economic inducements held out to the prospect.”’).

On the basis of that analysis, he certainly could reasonably

conclude that annuities are, in essence, tax-advantaged in-

vestment products that are typically marketed as such in

direct competition with mutual funds, certificates of de-

posit and equity and fixed income securities.

There is a wealth of readily available information from

which the Comptroller could determine the basis on which

annuities are actually marketed to the public and the fea-

tures of annuities that are important to potential investors.

Indeed, newspaper advertisements and business publica-

tions directed at the investing public amply demonstrate

these facts. See, e.g., The Wall Street Journal, Apr. 29,

1991, at C3 (advertisement for Fidelity Investments Bro-

kerage Services) (‘Choose from a wide variety of invest-

ments. From zero coupon bonds to unit investment trusts,

stocks to options, mutual funds, annuities and much more,

Fidelity gives you an unparalleled choice of investments’’);

The Wall Street Journal, May 13, 1991, at C13 (Seligman

advertisement) (‘‘Seligman has joined The Mutual Benefit

Life Insurance Company to provide a tax-deferred variable

annuity investment program for individuals. It also serves

as the underlying investment program in what we believe

is the most intelligent 401(k) plan yet devised ... .’”’); Amy

Dunkin, Annuities: Gleaning Hard Facts From the Hard

Sell, Bus. Wk., Apr. 29, 1991, at 100 (annuities have been

enhanced with “bells and whistles’’ to compete with mutual

funds); Peter Weaver, Annuities: An Old Product With

Some New Wrinkles, Nation’s Business, June 1991, at 71

(annuities have “come up with all sorts of investment and

payout options’’)."

“These examples from the press were among those presented in

NationsBank brief to the court of appeals. NationsBank Brief in the

court of appeals at 46-48. While the Comptroller may not have actually

looked at any of these specific materials, they are representative of

the types of advertisements that are in wide use today. Since VALIC

attacked the reasonableness of the Comptroller’s finding that annuities

While some, but certainly not all, annuities may incor-

porate a mortality-related feature (i.e., payments that end

upon death), the Comptroller nonetheless could reasonably

conclude that annuities are predominantly investment

products rather than an insurance product protecting

against catastrophic losses. Pet. App. 38a. Indeed, VALIC

concedes that not all fixed and variable annuities contain

a mortality-related feature. VALIC Brief in the court of

appeals at 35-36 n.14. Moreover, even with respect to an-

nuities that do have a mortality-related feature, the Comp-

troller clearly had a sufficient basis for finding that the

mortality risk in an annuity contract is essentially an in-

vestment rather than an insurance risk because it acts in

the exact opposite manner from life insurance. One is a

lifetime investment agreement that benefits its purchaser;

the other provides death benefits for the purchaser’s sur-

viving designated beneficiaries. As this Court has previ-

ously observed, ‘‘[aJny risk that the prepayment [premium]

would earn less than the amount paid to respondent as

an annuity was an investment risk similar to the risk as-

sumed by a bank; it was not an insurance risk... .”

Helvering v. Le Gierse, 312 U.S. at 542.

are investment products, publicly available information of this type can

be considered by this Court. The propriety of considering such materials

has been acknowledged since the time of Muller v. Oregon, 208 U.S.

412, 420-21 (1908).

C. The Comptroller’s Construction of the Incidental

Powers Clause and His Analytical Approach Were

Consistent with the Decisions of This Court and

Significant Lower Court Decisions.

The Comptroller’s construction of the incidental powers

clause was consistent with the decisional law which has

interpreted the incidental powers clause dynamically and

functionally, and has never required a banking activity to

be “indispensable” in order for it to be “‘incidental’’ or

‘necessary’ to the business of banking. Cf Legal Tender

Case, supra; M’Culloch v. Maryland, supra.

In Franklin Nat'l Bank v. New York, 347 U.S. 373

(1954), the most recent case decided by this Court directly

involving the incidental powers clause, this Court was re-

quired to consider whether a New York statute could pro-

hibit a national bank from using the word “‘saving”’ or

“savings” in its advertising or in the course of its business.

In invalidating the New York statute, this Court construed

the incidental powers clause as follows:

Modern competition for business finds advertising

one of the most usual and useful of weapons. We

cannot believe that the incidental powers granted

to national banks should be construed so nar-

rowly as to preclude the use of advertising in

any branch of their authorized business. It would

require some affirmative indication to justify an

interpretation that would permit a national bank

to engage in a business but gave no right to let

the public know about it.

Id. at 377-78. The use of the phrase “‘usual and useful”

as well as the nature of the banking “‘activity’’ in ques-

tion—advertising—certainly suggests that this Court en-

dorsed a more flexible standard for determining the validity

of an incidental banking power. This is in marked contrast

to the draconian standard advanced by VALIC that would

require that a banking activity be absolutely indispensable

to the conduct of the business of banking.

The Court’s approval of this more flexible standard of

construction also was reflected in the consideration in

Franklin of the Federal Reserve Act, which the Court

said should not “be construed to freeze individual banks

... to the customs and practices [in use] preceding the

statute.” 347 U.S. at 377. This language strongly suggests

a recognition of the dynamic nature of the banking in-

dustry, and the concomitant need for the nation’s banking

laws to be applied with appropriate flexibility.

In Colorado Nat’l Bank v. Bedford, 310 U.S. 41 (1940),

this Court held that national banks were authorized as an

incidental power to operate a safety-deposit business. This

Court considered it particularly relevant that banks, in-

cluding competing state banks, commonly provided safety

deposit services. This Court did not suggest, however, that

the operation of a safety-deposit service was absolutely

indispensable or necessary to the business of banking.

Nonetheless, the Court determined that provision of this

service was permissible for national banks.

More broadly, in its analyses of cases arising under the

incidental powers clause, this Court has often reasoned by

analogy, just as the Comptroller did when he compared

the brokerage of annuities to the sale of certificates of

deposit and other financial investment instruments. In Col-

orado Nat’l Bank v. Bedford, the Court reasoned that op-

eration of a safety-deposit business was an incidental power

because it was similar to a national bank’s express power

to accept special deposits.’ Likewise, in Merchants’ Bank

v. State Bonk, 77 U.S. (10 Wall.) 604, 648 (1871) (certi-

fication of checks upheld as an incidental power), the Court

recognized the close similarity between certifying checks

's Special deposits “‘are monies and other valuables the identical de-

posits of which are kept, preserved and returned in kind.” 310 U.S.

at 49.

and the express power granted by the National Bank Act

to discount and negotiate bills of exchange. In Clement

Nat'l Bank v. Vermont, 231 U.S. 120, 139-40 (1913) (paying

state taxes on behalf of depositors upheld as an incidental

power), the Court determined that collecting taxes for de-

positors is similar to the express power of national banks

to receive deposits. Finally, in First Nat'l Bank v. City of

Hartford, 273 U.S. 548, 559-60 (1927) (sale of certain mort-

gages and other evidences of debt upheld as an incidental

power), the Court found that these activities were closely

related to the express power to loan money and to discount

and negotiate other evidences of debt.’

The leading court of appeals decisions generally take a

similar analytical approach, and reject a finding of indis-

pensability as a necessary ingredient to determine that a

particular activity is permissible as an incidental banking

power. First Nat'l Bank v. Taylor, 907 F.2d 775, 778 (8th

Cir.) (offering of debt cancellation contracts is incidental

because it is useful to the bank by providing bank cus-

tomers a convenient method of paying off a bank loan in

case of death) (‘The ‘incidental powers’ of national banks

are not limited to activities that are deemed essential to

the exercise of express powers’’), cert. denied, 448 U.S.

972 (1990); Securities Indus. Ass'n v. Clarke, 885 F.2d

‘* This Court also has looked to the importance of an activity to the

economic vitality of national banks and of commerce and business gen-

erally. In Merchants’ Bank v. State Bank, the Court noted that the

practice of certifying checks had ‘‘grown out of the business needs of

the country,” and said that “we could hardly inflict a severer blow

upon the commerce and business of the country than by throwing doubt

on their validity.’’ 77 U.S. at 648. Likewise, in First Nat'l Bank v.

City of Hartford, the Court reasoned that “‘the exercise of this inci-

dental power has become of great importance in the business of national

banks,”’ and cited statistics of the Comptroller as proof. 273 U.S. at

560. National banks’ ability to sell annuities is as critically important

to the retention of their competitive position at this time as their prior

activities were in earlier times.

1034, 1049 (2d Cir. 1989) (sale of mortgage ‘‘passthrough”’

certificates authorized by the National Bank Act because

“convenient and useful’ in connection with bank’s sale of

mortgage loans), cert. denied, 493 U.S. 1070 (1990); Amer-

wan Ins. Ass’n v. Clarke, 865 F.2d 278, 281-82 (D.C. Cir.

1988) (sale of municipal bond insurance by national bank

subsidiary falls within incidental powers because the in-

surance is essentially a credit product); M & M Leasing

Corp. v. Seattle First Nat’i Bank, 563 F.2d 1377, 1382

(9th Cir. 1977) (National Bank Act authorizes personal

property leasing that is incidental to national bank’s ex-

press power to “loan money on personal property’’), cert.

denied, 436 U.S. 956 (1978); Arnold Tours, Inc. v. Camp,

472 F.2d 427, 430, 433-34 (1st Cir. 1972) (operation of full-

scale travel agency not within incidental powers because

not convenient or useful in connection with any express

power) (“[A] sine qua non standard would be an inappro-

priate measure of a national bank’s incidental powers un-

der 12 U.S.C. §24, Seventh .... We do not believe

‘necessary’ was there used to connote that which is in-

dispensable.’’).

The reasonableness of the Comptroller’s construction of

the incidental powers clause also draws significant support

from the recent unanimous decision of the New York Court

of Appeals, affirming the New York State Banking De-

partment’s determination that the sale of annuities is an

incidental banking power of state-chartered banks. New

York State Ass’n of Life Underwriters, supra.” The New

York court rejected the argument that the New York

'* The New York Court of Appeals granted considerable deference to

the Banking Department, because it was “presumed to have the req-

uisite knowledge and understanding of the operational practices’’ of

banks, leading it to apply a standard of review as to whether the

Department’s construction “‘was not unreasonable or irrational.” 83

N.Y.2d at 360, 632 N.E.2d at 879. Certainly, the Comptroller should

be entitled to no less deference here with respect to federal banking

laws which he administers.

equivalent of the federal incidental powers clause should

be narrowly construed.'* Instead, it afforded the provision

a ‘flexible’ meaning, reasoning that the ‘‘business of bank-

ing’ is ‘‘not [a] static’ concept, 83 N.Y.2d at 361, 632

N.E.2d at 880, but rather should reflect the “‘ever-chang-

ing demands of the banking business.” 83 N.Y.2d at 363,

632 N.E.2d at 881. Exactly the same analysis applies in

this case.

By engaging in a comprehensive analysis which included

a functional comparison of the brokerage of annuities to

other well-settled activities authorized for national banks

and a detailed consideration of the realities of the modern

financial marketplace and the treatment of annuities within

that marketplace, the Comptroller acted well within the

bounds of the powers Congress vested in him and existing

case law. The Comptroller’s interpretive approach is fully

consistent with analytical approaches sanctioned by this

Court and by lower courts and, thus, is entitled to the

protection against judicial encroachment accorded by Chev-

ron.

D. Since At Least Some Types of Annuities Are Se-

curities Within the Meaning of the Glass-Steagall

Act, National Banks Also Possess an Express

Banking Power to Broker Them.

The Glass-Steagall Act expressly authorizes national

banks to engage in the business of “purchasing and selling

‘* The “incidental powers’’ clause of the New York Banking Law was

the predecessor of section 24 Seventh as originally enacted in the

National Bank Act of 1863. See Edward L. Symons, The “‘Business of

Banking” in Historical Perspective, 51 Geo. Wash. L. Rev. 676, 689

(1983). Accordingly, the interpretation given to the New York clause

clearly is instructive as to the meaning to be given to the comparable

federal provision. See 2B N. Singer, Sutherland Stat. Const., §§ 51.01,

51.06 (5th ed. 1992). Indeed, soon after the enactment of the National

Bank Act, this Court found it relevant that its interpretation of the

National Bank Act was consistent with that given to state banking law

in states such as New York. See Bank v. Lanier, 78 U.S. (11 Wall.)

369 (1871).

. securities and stock without recourse, solely upon the

order, and for the account of, customers ....”’ 12 U.S.C.

§ 24 Seventh. This authority, as noted previously, is equally

applicable to operating subsidiaries of national banks. 12

C.F.R. § 5.34(d\(2).

Well prior to the Comptroller’s Approval, in interpretive

guidance issued in 1985, the Comptroller’s staff confirmed,

in OCC Ltr. No. 331, that national banks have the au-

thority to broker variable annuities under the Glass-Stea-

gall Act. OCC Ltr. No. 331 was reaffirmed by the

Comptroller’s staff thereafter. See, e.g., OCC Ltr. No. 415,

reprinted in [1988-1989 Transfer Binder] Fed. Banking L.

Rep. (CCH) ¢ 85,639, at 78,000 (Feb. 12, 1988); OCC Ltr.

No. 429, reprinted in [1988-1989 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¢ 85,653, at 78,032 (May 19, 1988).

The Comptroller’s Approval stated as follows: ‘‘To the

extent that the [Annuity] Contracts are Glass-Steagall se-

curities, they would fall within the securities brokerage

authority in 12 U.S.C. § 24(7) as well.”” Pet. App. 37a. The

Chief Counsel’s Letter, which served as the underlying

legal basis for the Comptroller’s Approval, makes clear

that this reference was, at least in part, to OCC Ltr. 331.

App. 3a. The Chief Counsel noted that the earlier in-

terpretive guidance had concluded that variable annuities

were Glass-Steagall Act securities based upon their “‘func-

tional[ ] resembl[ance]’’ to mutual funds shares. Jbid.. The

Chief Counsel’s Letter and the Comptroller’s Approval did

not reach the issue of whether all fixed annuities were

Glass-Steagall securities. In view of the respective findings

in these letters that the brokerage of fixed annuities “‘is

permissible because it is within banks’ power to broker

financial investment instruments” generally, it was un-

necessary to more fully address this issue. Pet. App. 38a;

App. 4a.

Nevertheless, the judgment of the court of appeals ef-

fectively prohibits national banks not located in small towns

from brokering any form of annuities contracts, including

variable annuities. The brokerage of variable annuities was

allowed prior to the Comptroller’s Approval and was ex-

pressly reaffirmed by the Comptroller’s Approval.'®

NationsBank and NSI had maintained before the district

court and the court of appeals that the Glass-Steagall Act

also authorized national banks to broker all types of an-

nuities under such act. The district court had acknowl-

edged the Comptroller’s finding that, to the extent that

the annuities at issue in the case were ‘Glass-Steagall

securities, they would also fall within the securities bro-

kerage authority of national banks.’’ Pet. App. 33a.

The district court was not required to dwell at length

on this issue in light of its ultimate decision upholding

annuities brokerage under the incidental powers clause.

The court of appeals did err, however, in not reaching the

Glass-Steagall Act issue given its disposition of the other

issues in the case. This Court may not be required, of

course, to reach the issue as to whether national banks

have the authority to broker annuities under the Glass-

Steagall Act, if it otherwise determines that the court of

appeals was in error and finds that national banks (and

their operating subsidiaries) have the power to sell an-

nuities. However, the issue is clearly presented by the facts

and record of the case and is subsumed in the questions

presented in the petitions for certiorari granted by this

Court.

Any analysis of the application of the express brokerage

power under the Glass-Steagall Act to annuities should

begin with OCC Ltr. 331. The finding in OCC Ltr. No.

331 that variable annuities are Glass-Steagall Act ‘“‘secu-

rities’”’ had two stated bases. First, the Comptroller’s staff

relied upon the close functional similarity between variable

annuities and mutual funds shares, which are concededly

'’*The Complaint in this case clearly challenged NSI’s authority to

broker all forms of annuity contracts.

securities under the Glass-Steagall Act. The staff had noted

that this Court in SEC v. United Benefit Life Ins. Co., 387

U.S. 202, 211 (1967), and the Federal Reserve Board in

its regulations, 12 C.F.R. § 218.112, had relied upon the

close comparability of variable annuities to mutual funds

as a basis for finding them to be securities in other sta-

tutory contexts.

Second, the Comptroller’s staff relied upon the fact that

variable annuities are securities under the Securities Act.”°

Although the Comptroller has acknowledged that status as

a security under the Securities Act is not necessarily

dispositive of status as a security under the Glass-Steagall

Act, it was reasonable to view the status of an instrument

under the Securities Act as “highly relevant” to whether

it should be found to be a security under the Glass-Steagall

Act.” See Securities Indus. Ass’n v. Board of Governors,

807 F.2d 1052, 1063 (D.C. Cir. 1986), (“W]e must consider

Congress’ understanding of the financial terms it used in

one statute [the Securities Act] highly relevant to discov-

ering the meaning attached to similar but ambiguous terms

in the other [the Glass-Steagall Act].’’), cert. denied, 483

U.S. 1005 (1987).”

Even without reference to OCC Ltr. 331, the conclusion

that at least certain types of annuities are Glass-Steagall

securities is compelling and by itself graphically illustrates

the flawed reasoning of the court of appeals regarding

deference. The Glass-Steagall Act does not explicitly define

the term “securities,” although the statute’s use of the

phrase “securities and stock’’ clearly implies that “‘secu-

rities’’ were intended to include more than simply stock.

* Pet. App. 37a & n.2.

* Congress enacted the Glass-Steagall Act and the Securities Act

within days of one another.

# See also OCC Ltr. No. 388, reprinted in {1988-1989 Transfer Binder]

Fed. Banking L. Rep. (CCH) 4 85,612, at 77,938 (June 16, 1987); Se-

curities Indus. Ass’n v. Board of Governors, 468 U.S. 137, 150-52 (1984).

Moreover, the legislative history of the Glass-Steagall Act

does not reflect any clear definition of the term ‘“‘securi-

ties’’ on the part of its legislative draftsmen. Given the

absence of an express definition by Congress, the term

“securities” is precisely the type of term that regulatory

agencies and courts are permitted to define on the basis

of experience, policy and reason.

The fact that various federal agencies and courts acting

under a variety of federal statutes have concluded that at

least variable and some types of fixed annuities are “‘se-

curities’”’ is persuasive support for a similar meaning under

the Glass-Steagall Act, given the absence of any legislative

history to the contrary. Oscar Mayer & Co. v. Evans, 441

U.S. 750, 755-56 (1979) (construing statutory provisions

with “‘common purpose” and language that is in haec verba

to have same meaning); Securities Industry Ass’n v. Board

of Governors, 807 F.2d at 1063 (meaning of the term “‘un-

derwriter” in the Securities Act is “highly relevant to

discovering the meaning attached to similar but ambiguous

terms” in the Glass-Steagall Act), cert. denied, 483 U.S.

1005 (1987); United States v. Stauffer Chem. Co., 684 F.2d

1174, 1187-89 (6th Cir. 1982) (similar language in Clean

Water Act and Clean Air Act should be given similar

construction), aff'd, 464 U.S. 165 (1984).

At least some fixed annuities also share the status of

variable annuities as “‘securities’’ under the Securities Act.

Section 3 of the Securities Act, entitled “Exempted Se-

curities,’’ provides an exemption from the registration re-

quirements of the Securities Act to any of the following

classes of securities:

Any insurance or endowment policy or annuity

contract or optional annuity contract, issued by

a corporation subject to the supervision of the

insurance commissioner, bank commissioner, or

any agency or officer performing like functions,

of any State or Territory of the United States

or the District of Columbia.

15 U.S.C. § 77c(aX8) (1982) (emphasis added). It would

clearly have been unnecessary for Congress to have ex-

empted annuities from the registration requirements of the

Securities Act if Congress did not consider them to be

securities.

Moreover, the Securities and Exchange Commission

(““SEC’’) also appears to have concluded that at least par-

ticular types of fixed annuities are securities under the

Securities Act. Rule 151, adopted in 1986 by the SEC

under section 3(aX8) of the Securities Act, provides a safe

harbor exemption from registration under the Securities

Act for qualifying fixed annuities. It presumably would

have been unnecessary for the SEC to provide the Rule

151 safe harbor if it had concluded that fixed annuities

were not per se securities for purposes of the Securities

Act. Indeed, in the SEC Release accompanying Rule 151,

the SEC indicated that Rule 151 ‘does not attempt to

identify the outer limits of section 3(aX8) beyond which a

contract, though denominated ‘insurance,’ is a security sub-

ject to federal regulation.’’ SEC Release No. 33-6645, 35

SEC Docket (CCH) 952, 953 (May 29, 1986), 51 Fed. Reg.

20,254, 20,255 (1986) (codified at 17 C.F.R. § 230.151).

This Court also has stated that fixed annuities, at least

in certain circumstances, like variable annuities, are se-

curities under the Securities Act. In SEC v. VALIC, in

which it determined that variable annuities were not ex-

empt from the registration requirements of the Securities

Act, this Court stated that “‘the term ‘security’ as defined

in the Securities Act is broad enough to include any ‘an-

nuity’ contract.’”” SEC v. VALIC, 359 U.S. at 67-68 (foot-

note omitted) (emphasis added); see also SEC v. United

Benefit Life Ins. Co., 387 U.S. at 210 (1967).

In Otto v. Variable Annuity Life Ins. Co., 814 F.2d 1127,

1140-42 (7th Cir. 1986) (opinion on rehearing), cert. denied,

486 U.S. 1026 (1988), the Seventh Circuit directly ad-

dressed the status of fixed annuities under the federal

securities laws. This case concerned a fixed annuity that

created a general obligation of the issuing insurance com-

pany, and provided for a guaranteed minimum interest

rate. The fixed annuity also provided for excess interest

to be credited solely at the discretion of the issuer. Since

the issuer did not limit changes in the excess rate to no

more frequently than once yearly, the fixed annuity did

not qualify for the Rule 151 safe harbor exemption. Con-

sequently, the court held that the fixed annuity that was

the subject of the case had to be registered under the

Securities Act.”

The Glass-Steagall Act thus provides an alternative basis

for upholding the power of national banks to broker an-

nuities. Since securities brokerage is an express banking

power, one which was reaffirmed by Congress after en-

actment of section 92, it is not subject to the position

taken by the court of appeals with respect to the incidental

powers clause that the ‘“‘specific limits’ of section 92

control over the ‘““‘general grant of power’”’ of section 24

Seventh. Pet. App. 16a (quoting American Land Title

Ass'n v. Clarke, 968 F.2d 150, 157 (2d Cir. 1992), cert.

denied, 113 S. Ct. 2959 (1993)). Neither the decision of

the court of appeals,nor any other decision relied upon by

the court below, including Saxon, held that section 92 lim-

ited express, as contrasted with “‘incidental,”’ banking pow-

ers. Therefore, a decision upholding the brokerage of some

or all types of annuities under the Glass-Steagall Act, as

999

* It would be anomalous, as an analytical matter, to conclude that

the annuity considered in Otto, assuming that it had limited discre-

tionary excess interest rate changes to no more than once a year and

therefore came within the Rule 151 exemption from registration safe-

harbor, would not be a security at all for purposes of the Securities

Act.

* Petitioners, of course, reject this position on its merits. See infra

at 37-40.

an express banking power, would pretermit the need for

an extended analysis of the scope of section 92.

III. SECTION 92 IS NOT A LIMIT ON NATIONAL BANK

POWERS UNDER SECTION 24 SEVENTH AND DOES

NOT APPLY TO NON-INSURANCE OR SPECIALIZED

INSURANCE-RELATED PRODUCTS SUCH AS ANNU-

ITIES

A. Section 92 Provides an Additional Grant of

Power to National Banks.

By its terms, section 92 provides an express grant of

supplemental power to national banks and is not, as the

court of appeals held, a per se limitation on such powers.

Section 92 provides that: ‘‘in addition to the powers now

vested by law in national banking associations,”’ national

banks “‘may act as the agent for any fire, life or other

insurance company . . .”” (emphasis added). The use of the

introductory phrase “‘in addition to’’ conclusively demon-

strates that section 92 is a grant of additional powers to

national banks, and is not intended as a limitation on bank

powers under section 24 Seventh, including those author-

ized by the incidental powers clause. See Heimann, 613

F.2d at 1170 n.18 (‘By its own terms,” section 92 ‘“‘does

not address the authority of national banks in larger towns

or cities to act as agents for life insurance companies.”’’).

Nor does this reading of the National Bank Act render

section 92 “‘partially redundant,” as the court of appeals

suggested. Pet. App. 17a. No party has argued that the

power of national banks to engage in insurance-related

activities incidental to the “‘business of banking’’ under

section 24 Seventh authorizes banks to engage in an un-

limited general insurance agency business. It is this ad-

ditional authority—to sell broad forms of insurance

products that are not otherwise authorized for national

banks—that section 92 gave to national banks with offices

in small towns. Independent Ins. Agents of Am., Inc. v.

Ludwig, 997 F.2d 958, 959-61 (D.C. Cir. 1993) (upholding

Comptroller’s interpretation of section 92 under Chevron).

That additional authority does not in any way negate the

possibility that the sale of annuities might also be either

authorized pursuant to an express banking power such as

Glass-Steagall authorized securities brokerage activities or

sufficiently related to the business of banking to come

within the incidental powers of national banks.

Although the clarity of section 92’s language obviates

the need to resort to the statute’s legislative history, that

history confirms that Congress was well aware that section

92 constituted an additional grant of national bank powers.

Senator Owen, section 92’s sponsor, described the provi-

sion as “giving some additional powers to the small banks

to act as agents in insurance matters.’ 53 Cong. Rec.

11,002 (1916); see also 53 Cong. Rec. 11,001 (1916) (Comp-

troller’s letter explaining that the proposal resulted from

consideration of ‘“‘how the powers of these small national

banks might be enlarged”’); Independent Ins. Agents, 736

F.2d at 477 n.6 (‘“‘Congress was concerned only with pro-

viding small-town banks with an additional profit source,

not with prohibiting city banks from selling insurance”’).” |

The Fifth Circuit, ignoring the literal language of section

92 and its legislative history, instead endeavored to divine

a limitation on national bank activities through a misplaced

reliance on the maxim “expressio unius exclusio alterius.”’

That maxim, however, “‘is only an aid in the ascertainment

of the meaning of the law and must yield whenever a

contrary intention on the part of the law-maker is appar-

ent.”” Springer v. Government of the Philippine Islands,

277 U.S. 189, 206 (1928). The maxim “‘can never override

clear and contrary evidences of Congressional intent,”’

* The district court concurred with this view of the import of the

legislative history. Pet. App. 33a (‘‘(TJhe legislative history of § 92

indicates that it was proposed to provide an additional source of revenue

for national banks located in small towns and not to protect the markets

from competing insurance agents.’’).

which is present here. Neuberger v. Commissioner, 311

U.S. 83, 88 (1940).

Moreover, when applying the erpressio unius rule, a

court necessarily reaches its construction by negative im-

plication based on the language of the statute. Chevron

holds, however, that things not “directly spoken to” by

Congress create a delegation of legislative authority to the

administrative agency. Chevron, 467 U.S. at 843-44. When

a court invokes the expressio unius rule, by definition,

Congress has not “directly spoken.’’ Thus, the expressio

unius rule directly conflicts with application of the first

step of the Chevron analysis, and the court of appeals

improperly attempted to apply both simultaneously. See

Sunstein, 90 Colum. L. Rev. at 2109 n.182 (recognizing

that the expressio unius rule “is a questionable one in

light of the dubious reliability of inferring specific intent

from silence’’).

The court of appeals also erroneously held that the ‘‘spe-

cific’’ terms in section 92 control the ‘‘general’’ grant of

power in section 24 Seventh. Pet. App. 15a-16a. This ar-

gument ignores the language and fundamental structure

of the National Bank Act. Assuming section 92 has any

application to annuities at all, see infra at 40-45, section

92 is no more “specific’’ than section 24 Seventh with

respect to insurance activities. Both statutory provisions

provide some authority for national banks to act as agent

for insurance companies and neither expressly limits such

activities.

Indeed, if there is any presumption at all, that pre-

sumption should be that section 92 and section 24 Seventh

do not conflict with or limit one another. Pauley, 501 U.S.

at 706 (agency interpretation harmonizing related statutes

and regulations is “presumptively reasonable’’); Anderson

v. FDIC, 918 F.2d 1139, 1143 (4th Cir. 1990) (courts should

construe statutes harmoniously, especially if they involve

the same subject matter). Since its adoption of section 92

in 1916, Congress has revisited section 24 Seventh and

other provisions of the National Bank Act on many oc-

casions, perhaps most prominently in connection with the

enactment of the Glass-Steagall Act. Yet on none of these

occasions did Congress choose to revisit the scope of the

incidental powers clause. If any tension existed between

section 24 Seventh and section 92, Congress certainly has

had ample opportunities to modify one or the other pro-

vision during the past 78 years. The logical presumption

from this history is that Congress saw no tension because

it intended no limitation on section 24 Seventh by reason

of its enactment in 1916 of section 92. Cf United States

v. Rodriguez-Rodriguez, 863 F.2d 830, 831 (11th Cir. 1989)

(an apparently specific provision may, in context, be con-

strued as a general reference).

In sum, the Comptroller’s construction of section 92

properly harmonizes the interplay between section 92 and

section 24 Seventh: Section 24 Seventh grants powers in-

cidental to the business of banking; section 92 grants ad-

ditional, non-incidental banking powers. The Comptroller’s

interpretation is entirely consistent with the language and

structure of the statute and is not “arbitrary, capricious,

or manifestly contrary to the statute’ under the second

step of Chevron. Chevron, 467 U.S. at 844 (footnote omit-

ted). Accordingly, the Comptroller’s Approval should be

upheld.

B. Annuities Are Not ‘“‘Insurance’’ Within the

Meaning of Section 92.

Even if section 92 were found to be a limit on section

24 Seventh, annuities do not constitute “‘insurance’’ for

section 92 purposes. The Comptroller’s Approval deter-

mined (Pet. App. 41a-47a) that annuities are not “‘insur-

ance’’ within the meaning of section 92. The section itself

neither defines the term “‘insurance’’ nor otherwise ad-

dresses the issue of annuities. Under Chevron, that defi-

nitional interstice in the banking laws is one that is left

for the Comptreller to fill, provided his interpretation is

reasonable. Chevron, 467 U.S. at 843; see also Clarke v.

Securities Indus. Ass’n, 479 U.S. 388, 403-04 (1987). This

approach is especially compelling here, since as tne District

Court noted, section 92 grants the Comptroller the express

poser to issue implementing rules and regulations. Pet.

App. 33a.

The interpretation adopted by the Comptroller in this

case is reasonable by any measure, and is entitled to sub-

stantial deference. The Comptroller first analyzed diction-

ary definitions to determine whether the term “insurance”

included annuities. Not surprisingly, the Comptroller found

that dictionary definitions of the term insurance “invari-

ably’’ describe it as ‘‘a contract for indemnification against

risk of loss.”” Pet. App. 43a-44a. He also considered the

fact that annuities are typically marketed as investment

products, particularly as ‘‘a tax-sheltered means of saving

for retirement.’’ Pet. App. 38a (footnote omitted). The

Comptroller concluded, therefore, that annuity investors

“are not seeking to pool a catastrophic risk,”’ the hallmark

characteristic of ‘‘insurance.’’** [bid.

The Comptroller’s conclusion—a reasonable statutory

construction in and of itself—is reinforced by the extensive

* In fact, as courts and commentators hav. cognized, ‘‘annuity and

insurance are opposites.’ Helvering v. Le Gierse, 312 U.S. 531, 541

(1941); accord 1 J. Appleman, Insurance Law and Practices § 84 (1981)

(the two are “diametrically opposed’’). Insurance involves the payment

of stated amounts over a period of years, in return for which the insurer

agrees to pay a fixed amount in the event of a loss. 3A C.J.S. Annuities

8c, at 869. The insurer bears the risk that a loss will occur before the

amount to be paid in premiums. In the case of an annuity, ‘‘[tJhe

positions are almost exactly reversed.” 1 J. Appleman, Jnsurance Law

and Practices § 84 (1981). The annuitant pays a fixed sum, in return

for which the issuer must make a series of payments to the annuitant,

usually cver a period of years. In other words, “annuities are not

indemnities for death but are investment for life.’’ Corporation Comm'n

v. Equitable Life Assurance Soc’y, 73 Ariz. 171, 175-76, 239 P.2d 360,

362 (1951).

case law recognizing that annuities are investment prod-

ucts and not insurance. Helvering v. Le Gierse, 312 U.S.

531, 541 (1941); In re Young, 806 F.2d 1303, 1306 (5th

Cir. 1987) (‘‘an annuity is essentially a form of invest-

ment’’) (quoting Jn re Howerton, 21 B.R. 621, 623 (Bankr.

N.D. Tex. 1982); Daniel v. Life Ins. Co., 102 S.W.2d 256,

260 (Tex. Civ. App. 1937) (an annuity is “essentially a

form of investment’’); see also 1 J. Appleman, Insurance

Law and Practices § 84, at 295 (1981) (‘[aJnnuity contracts

must ... be recognized as investments rather than as in-

surance).”’

Despite this wealth of authority and reasoning, the court

of appeals simply refused to even consider the reasona-

bleness of the Comptroller’s conclusion that annuities were

not insurance under section 92. Instead, it concluded, with-

out any attempt at meaningful analysis, that its earlier

decision in Saxon decided the novel question presented by

this case and somehow ‘“‘trumped’’ Chevron deference.** As

* As the Comptroller also noted, other courts have distinguished an-

nuities from insurance in holding, for example, that annuities are not

excludable as insurance for certain federal income tax purposes, are

not insurance for purposes of the bankruptcy laws, and are not insur-

ance under state law. E.g., Estate of Keller v. Commissioner, 312 U.S.

543, 544-45 (1941); Kernochan v. United States, 29 F. Supp. 860, 866

(Ct. Cl. 1939), cert. denied, 309 U.S. 675 (1940); In re Walsh, 19 F.

Supp. 567, 571-75 (D. Minn. 1937); In re Sothern’s Estate, 257 A.D.

574, 14 N.Y.S.2d 1, 3-4 (1939); In re Rhodes’ Estate, 197 Misc. 232,

94 N.Y.S.2d 406, 411 (Surr. Ct. 1949); People ex rel. Metro Life Ins.

Co. v. Knapp, 193 A.D. 413, 184 N.Y.S. 345, 347 (8d Dep’t 1920), aff'd

mem., 231 N.Y. 630, 132 N.E. 916 (1921); Commonwealth v. Metro-

politan Life Ins. Co., 254 Pa. 510, 98 A. 1072, 1073 (1916); State ex

rel. Equitable Life Assurance Soc’y v. Ham, 54 Wyo. 148, 88 P.2d 484,

488 (1939). ;

* Indeed, it is telling that even the minimal analysis in which the

court of appeals engaged was flawed. For example, its reference to

Black’s definition of annuities (Pet. App. 10a) is taken not from the

definition of ‘‘annuity,” but from the definition of “annuity insurance”

found under the term “insurance.”’ Black’s Law Dictionary 802-03 (6th

its initial response to the Comptroller’s detailed analysis

of an issue uniquely within his expertise, the court of

appeals tersely stated: ‘“‘We disagree.” Pet. App. 10a.

The court of appeals’ almost exclusive reliance ‘on Saxon

is misplaced. First, Saxon not only precedes Chevron by

sixteen years, but also precedes a number of the decisional

antecedents relied upon by Chevron. The Saxon court had

no need, therefore, to address the level of deference a

reviewing court owes to an administrative construction of

a statute. Indeed, the Saxon court’s entire approach to

the interpretation of section 24 Seventh and section 92

was to treat the matter as one to be determined de novo,

i.e., as if the matter had arisen in the first instance in

litigation between private parties.”

More importantly, the court of appeals’ decision flies in

the face of this Court’s decision in SEC v. VALIC. In SEC

v. VALIC, this Court squarely rejected the proposition,

wrongly urged by VALIC in that case and again wrongly

here, that because annuities are regulated by the states

for certain purposes as insurance, they must be deemed

insurance for all purposes. This Court found:

[H]ow the States may have ruled is not decisive.

For, as we have said, the meaning of “‘insurance”’

ed. 1990). The definition of “straight annuity,’’ applicable here, provides

that this product is “distinguishable from [a] life insurance contract.”’

Id. at 91 (emphasis added).

* Moreover, Saxon merely held that national banks have no power

to act as general insurance agents in towns with a population greater

than 5,000. Saxon, 399 F.2d at 1013. Thus, as the rehearing dissent

observed, this is not a case in which upholding the Comptroller requires

the overruling of judicial precedent. Pet. App. 24a (the “‘better view”

is not to apply or overrule Sazon, but to defer to the Comptroller’s

determination that annuities are financial investment instruments, not

insurance). The Comptroller properly and reasonably distinguished Saxon

on the ground that section 92 does not apply to financial investment

instruments merely because they also are sold by insurance companies

and are regulated, for some purposes, by state insurance authorities.

or ‘‘annuity’’ under these Federal Acts is a fed-

eral question.

359 U.S. at 69. Applying federal law, the Court held that

variable annuities were not insurance under the statute in

question. The court of appeals ignored the analysis applied

in SEC v. VALIC and instead erroneously focused on the

“superficial” similarity between insurance and annuities.*°

The court of appeals’ decision also runs afoul of John

Hancock Mutual Life ins. Co. v. Harris Trust & Sav. Bank,

114 S. Ct. 517 (1993), in which the Court recently reaf-

firmed the vitality of SEC v. VALIC. In doing so, the

Court explicitly emphasized that:

“(T]he assumption of an investment risk cannot

by itself create an insurance provision under the

federal definition. The basic difference between

a contract which to some degree is insured and

a contract of insurance must be recognized.”

Id. at 528 n.13 (quoting SEC v. United Benefit Life Ins.

Co., 387 U.S. 202, 211 (1967)). In John Hancock, the Court

construed ERISA in light of its prior interpretation of the

Securities Act. In construing the National Bank Act, the

court of appeals should have done the same, but inexpl-

icably did not.

* To be sure, the court of appeals did not completely overlook SEC

v. VALIC; however, it somehow ignored its holding. The Court’s ruling,

as shown above, contradicts the court of appeals’ flat declaration in

this case that annuities are ‘functionally and historically” an insurance

product. Pet. App. 10a. Moreover, the court of appeals’ reliance on a

concurring opinion in that case as supporting its conclusion that an-

nuities are “‘insurance”’ is particularly perplexing. Jbid. Justice Brennan,

the author of the concurring opinion, expressly stated that the admin-

istration of the contracts at issue involved a “predominant element of

the business of an investment company’’—a fact that led him to conclude

that the annuities were not “insurance.” 359 U.S. at 81 (emphasis

added).

Finally, the Comptroller’s ruling that annuities are not

“insurance” for federal banking law purposes draws per-

suasive support from the decision of the New York Court

of Appeals in New York State Ass’n of Life Underwriters,

supra. The New York Court of Appeals analyzed many of

the same authorities considered by the Comptroller and

concluded that “the great weight of authority supports the

position that annuities are not insurance.’ 83 N.Y.2d at

363, 632 N.E.2d at 881. Rather, it found that annuities

were comparable to other financial investment instruments

that state-chartered banks commonly sell, including certif-

icates of deposit and various types of securities. 83 N.Y.2d

at 364, 632 N.E.2d at 882.

In short, the court of appeals erred by refusing to apply

the Chevron standard of deference and by substituting its

views de novo in an area in which it, unlike the Comp-

troller, lacked special expertise. Not only did the court of

appeals ignore relevant case law, its decision conflicts with

this Court’s decisions in SEC v. VALIC and John Hancock.

As a result, not surprisingly, its decision is fundamentally

flawed and does not reflect the “hard [economic] realities”

of annuities as a retail investment product.

C. Annuities Are a Specialized Insurance-Related

Product that Are Not Subject to Section 92.

Even assuming arguendo that annuities might constitute

“insurance” in the broadest sense of that term, they are

a specialized form of insurance-related product that do not

come within the purview of section 92. Section 92, by its

terms, applies only to a national bank acting as the “‘agent

for any fire, life, or other insurance company.” Under the

principle of eyusdem generis—a maxim of statutory con-

struction overlooked by the court of appeals—a general

term in a statutory list “‘should be understood in light of

the specific terms that surround it.”” Hughey v. United

States, 495 U.S. 411, 419 (1990); 2A N. Singer, Sutherland

Stat. Const. § 47.17 (5th ed. 1992).

Applying this principle, any limitation imposed by sec-

tion 92 would extend only to the sale of broad forms of

insurance, such as fire and life insurance, which are spe-

cifically enumerated in the provision. It would not encom-

pass more specialized forms of insurance-related products,

such as annuities, which are authorized for national banks

to sell. Indeed, application of eyusdem generis is necessary

to give independent meaning to Congress’ specification of

‘fire’ and ‘‘life’’ insurance in section 92. Under the court

of appeals’ reading of the statute, those terms become

unnecessary, since al] types of insurance are encompassed

in the phrase ‘“‘any . . . insurance company.”

The Comptroller’s narrower reading of section 92 as

excluding specialized insurance-related products is further

supported by the Heimann decision. In that case, the D.C.

Circuit held that credit life insurance is a “limited special

type of coverage’ that “‘in no way’’ involved the ‘‘oper-

ations of a general life insurance business.’’ Hermann, 613

F.2d at 1170. The D.C. Circuit correctly distinguished

Saxon, to which the court of appeals slavishly (and erro-

neously) adhered, as ‘‘not in point” because it involved the

sale of “broad forms of automobile, home, casualty and

liability insurance.”’ [bid.; see also Independent Ins. Agents

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

1984) (‘[t]here is a strong argument that Saxon was

wrongly decided.’’)

Moreover, contrary to the court of appeals’ finding, the

Comptroller’s reading is supported by section 92’s legis-

lative history. The court of appeals references (Pet. App.

16a) documents written by the Comptroller and counsel to

the Federal Reserve Board, prior to section 92’s passage,

purportedly to show a belief by Congress that national

banks lacked authority to act as insurance agents before

section 92 was enacted. See 53 Cong. Rec. 11,001 (1916);

Right of a National Bank To Write Insurance Through Its

Officers, 2 Fed. Res. Bull. 73, 74 (1916). But both docu-

ments refer to insurance in only general terms. 53 Cong.

Rec. 11,001 (1916) (referring to “‘fire, life, etc.”” 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 insur-

ance agency activity that are otherwise closely connected

to banking would not be encompassed within the incidental

powers clause of section 24 Seventh of the Glass-Steagall

Act.

The Comptroller’s Approval and Heimann also are con-

sistent with other explicitly authorized post-Saxon banking

activities. These activities include the sale of credit life

insurance,*! credit disability insurance,** municipal bond in-

surance,“ mortgage life and disability insurance, involun-

tary unemployment insurance, and vendors single interest

insurance (which protects a lender in case of loss or dam-

age to personal property in which the lender has a security

interest).** If the expansive and unsupportable interpre-

tation given Saxon by the court of appeals is upheld, then

the legality of all of the national bank activities relating

to the above-enumerated specialized insurance-related

products similarly would be called into question. Such a

result would be highly disruptive to national banks and

could have serious adverse financial implications for banks

highly dependent on revenues from these financial prod-

ucts.

31 See 12 C.F.R. § 2.6; Heimann, 613 F.2d at 1168.

% See OCC Ltr. No. 283, reprinted in [1983-1984 Transfer Binder]

Fed. Banking L. Rep. (CCH) 4 85,447, at 77,608 (Mar. 16, 1984); OCC

Ltr. No. 495 reprinted in [1989-1990 Transfer Binder] Fed. Banking

L. Rep. (CCH) ¢ 83,084, at 71,204 (Dec. 22, 1989).

% See OCC Ltr. No. 338, reprinted in [1985-1987 Transfer Binder]

Fed. Banking L. Rep. (CCH) q 85,508, at 77,790 (May 2, 1985); Amer-

ican Ins. Ass'n v. Clarke, supra.

* See OCC Ltr. No. 283, reprinted in [1983-1984 Transfer Binder]

Fed. Banking L. Rep. (CCH) 4 85,447, at 77,608 (Mar. 16, 1984).

For these reasons, the Comptroller’s determination that

annuities brokerage was not a general insurance agency

activity was clearly reasonable, consistent with the Na-

tional Bank Act, and should be upheld.

CONCLUSION

The decision of the court of appeals should be reversed.

Respectfully submitted,

RoBERT M. KurRuczA

STEVEN S. ROSENTHAL

Counsel of Record

ROBERT G. BALLEN

LESLIE J. CLOUTIER

MorRRISON & FOERSTER

2000 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 887-1500

Counsel for NationsBank

of North Carolina, N.A. and

NationsBanc Securities, Inc.

Dated: July 29, 1994

PETE E

Creer

“e

—

Comptroller of the Currency

Administrator of National Banks

Washington, D.C. 20219

February 12, 1990

Ss =

*_ * *

Dear

*_ * *,

This responds to your bank’s proposal relating to sale

of annuity contracts, as described in two letters from the

bank’s counsel, *** and subsequent telephone conversa-

tions. You have proposed that your bank (‘‘Bank’’) enter

into an agreement with a marketing company (‘‘Market-

ing’) under which the Bank and its employees would pro-

mote and sell Flexible Payment Variable Annuity

certificates (the “‘Certificates’’) issued by the Integrity Life

Insurance Company (the “Company’’) in exchange for an

assignment of Marketing’s commission from the Company

equal to 4.25% of the premiums generated from such sales.

Bank employees who sold the Certificates would receive

individual commissions of 0.25%, which would come out of

the Bank’s commission. Neither the Bank’s nor the em-

ployees’ percentage interest in premiums would vary with

the volume of the Certificates sold.

You also inquired about the permissibility of a percent-

age leasing arrangement with Marketing under which a

Marketing administrator would coordinate all annuity pro-

grams in the territory from offices located in the Bank.

The Bank would provide office space, supplies, office equip-

ment, and secretarial services, in exchange for rent equal

to 0.25% of the premiums of all annuities sold by the

programs for which the administrator is responsible.

For the reasons given below, we believe that the Bank’s

proposed activities are permissible under the National Bank

Act.

The Certificates

The Certificates combine elements of variable and fixed

annuities. An investor in a variable annuity contract pur-

chases a share in an investment portfolio and then receives

payments that vary according to the performance of the

portfolio. A purchaser of a fixed annuity contract, in con-

trast, receives a fixed or minimum level of payments. Both

types of contracts may have a life term.

The Certificates provide a tax-deferred investment ve-

hicle with a wide range of investment options. A purchaser

of a Certificate may allocate his investment among eight

different ‘‘investment divisions” (the “‘Divisions’’), which

offer a variety of investment policies and risk and growth

characteristics. Subject to certain limitations, an investor

may from time to time make withdrawals against the cur-

rent value of his Certificate (the ‘Certificate Value’’),

transfer funds among the investment divisions, and invest

additional amounts in his Certificate.

Upon a prearranged date selected by the investor, the

investor may choose to receive his Certificate Value as a

lump sum or may choose from several annuity options.

The annuity may be for a fixed term, for life, or for a

minimum fixed term and thereafter for life. Annuity pay-

ments may be fixed in advance or may vary according to

the value of the investor’s Certificate Value.

Seven of the eight Divisions permit investors to pur-

chase interests in a mutual fund (the ‘“‘Trust’’). The Trust

is an open-end, diversified management investment com-

pany registered under the Investment Company Act of

1940 that offers its shares exclusively to separate accounts

of several insurance companies to fund variable annuities.

The Trust maintains seven classes of shares corresponding

to seven of the Investment Divisions. These Investment

Divisions are: the Common Stock Fund, the Aggressive

Stock Fund, the Balanced Funds, the Bond Fund, the High

Yield Fund, the Global Fund, and the Money Market Fund.

The value of an investor’s share in each of these Invest-

ment Divisions depends on the performance of the under-

lying investment portfolio maintained by the Trust.

The eighth investment division, the ‘“‘Guaranteed Inter-

est Division,” differs from the other divisions in that it

offers a fixed level of interest. Funds allocated to the

Guaranteed Interest Division become part of the general

assets of the Company. The Company guarantees principal

and interest on funds allocated to the Guaranteed Invest-

ment Division.

Sale of the Certificates

1. Authority, 12 U.S.C. § 24(7)

The Certificates are called variable annuities, but the

Guaranteed Interest Division option permits an investor

to allocate some or all of his investment to what is, in

effect, a fixed annuity. Although many state banks sell

both types of annuities,! the OCC has only provided an

opinion on the sale by national banks of variable annuities.

See Interpretive Letter No. 331, April 4, 1985, reprinted

in [1985-1987 Transfer Binder] Fed. Banking Law Rep.

(CCH) 4 85,501. That letter stated that variable annuity

contracts are securities, functionally resembling shares in

a mutual fund, and that banks are authorized, pursuant

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

account of customers. To the extent that the Certificates

are Glass-Steagall securities, they would fall within the

securities brokerage authority in 12 U.S.C. ¢ 24(7) as well.

(The Certificates are registered securities under the Se-

' See Annuities Sales by Banks: An Up and Coming Business, ABA

Consumer Banking Digest, Sept./Oct. 1989, at 4-9 (bank annuity sales

for 1990 predicted to be $10 billion); Bank Annuity Sales Expected to

Double in 1989, National Underwriter (Life & Health/Financial Services

Ed.), January 2, 1989, at 3.

curities Act of 1933,? but this is not dispositive of whether

they are securities for purposes of the Glass-Steagall Act.)

However, since we find that brokerage of fixed annuities

~~ is a permissible activity for national banks regardless of

whether fixed annuities are Glass-Steagall securities, it is

unnecessary at this time to determine the status of the

Certificates under the Glass-Steagall Act. Brokerage of

fixed annuities is permissible because it is within banks’

power to broker financial investment instruments.

As part of their traditional role as financial intermedi-

aries, banks have broad powers to buy and sel] financial

investment instruments as agent for customers. The Glass-

Steagall Act explicitly preserved banks’ brokerage power

with respect to securities, but this power antedated the

Glass-Steagall Act* and is not limited to securities. Pur-

suant to this power, national banks may broker a wide

variety of financial investment instruments. See Interpre-

tive Letter No. 494 (December 20, 1989) (agricultural, oil,

and metals futures).

Although annuities have historically been a product of

insurance companies, they are primarily financial invest-

ments. Investors who purchase annuities are not seeking

2 Some fixed annuities are exempt from the registration requirements

of the Securities Act of 1933. See 15 U.S.C. § 77c(aX8) (exempting “‘any

insurance or endowment policy or annuity contract or optiona] annuity

contract, issued by a corporation subject to the supervision of the in-

surance commissioner, bank commissioner, cr any agency or officer

performing like functions, of any State or Territory of the United States

or the District of Columbia.”’) This exemption has been construed to

apply only to fixed annuities. See SEC v. Variable Life Ins. Co., 359

U.S. 65 (1959). To distinguish annuities that qualify for the exemption

from those that do not, the SEC has promulgated a “safe harbor”

definition, Rule 151. See 17 C.F.R. § 230.151(a).

* See Securities Industry Association v. Federal Reserve Board, 468

U.S. 207, 214 (1984) (“‘Banks long have arranged the purchase and sale

of securities as an accommodation to their customers. Congress ex-

pressly endorsed this traditional banking service in 1933.’’).

to pool a catastrophic risk such as death, injury or property

damage, but are instead seeking a guaranteed, long-term

return on their assets. Most commonly, annuities are mar-

keted as a tax-sheltered means of saving for retirement.‘

The element of mortality risk, which is present in some

annuities, derives from the investor’s willingness to price

a contractual arrangement based on the length of his life

in order to increase the return he will receive during his

lifetime. This risk is essentially an investment risk, not an

insurance risk. See Helvering v. Le Gierse, 312 U.S. 531,

542 (1941) (‘Any risk that the prepayment [premium]

would earn less than the amount paid to respondent as

an annuity was an investment risk similar to the risk as-

sumed by a bank; it was not an insurance risk... .”); In

Re Howerton, 21 Bankr. 621, 623 (1982) (‘‘Both life in-

surance and annuity contracts may take various forms but

the heart of the distinction between them is this: life in-

surance is a promise to pay a sum certain on the death

of the insured and an annuity is essentially a form of

investment which pays periodically during the life of the

annuitant or during a term fixed by contract rather than

on the occurrence of a future contingency.’’); Daniel v.

Life Ins. Co. of Virginia, 102 S.W.2d 256, 260 (Tex. Civ.

App. 1937) (“[An annuity] is essentially a form of invest-

ment, and uniformly held to be such, regardless of the

fact that in its usual form payments are contingent upon

continuity of the life of the grantee.’’); 1 J. Appelman,

Insurance Law and Practice, § 84 (1981) (“‘annuity con-

tracts must ... be recognized as investments rather than

as insurance’’). See also SEC v. United Benefit Life Ins.

Co., 387 U.S. 202, 207-208 (1966) (“In fixing the necessary

premium [for a fixed annuity] mortality experience is a

subordinate factor and the planning problem is to decide

what interest and expense rates may be expected. There

* See Helping Consumers Shelter Income, ABA Banking Journal, July

1989, at 16-21 (discussing investment and tax shelter chracteristics of

annuities).

is some shifting of risk from policyholder to insurer, but

no pooling of risks among policyholders. In other words,

the insurer is acting in a role similar to that of a savings

institution ....”). Thus, although annuities often share

with insurance the need for actuarial calculations, they are

primarily a vehicle for investment.

That fixed annuities are financial investments is further

demonstrated by the close functional resemblance between

fixed annuity contracts and other financial investment in-

struments that banks may sell as agent. First, a fixed

annuity is similar to a variable annuity. Both can offer

the investor a stream of payments extending over his life,

and both may involve actuarial calculations. Fixed annui-

ties differ only in that they offer a reduced level of risk,

combining for the risk-averse investor the best aspects of

both certificates of deposit and annuities. The only dis-

tinction between a fixed and a variable annuity—the re-

duced level of investment risk for the customer—provides

no basis for denying to national banks the power to sell

fixed annuities as agent.

Second, fixed annuity contracts resemble debt instru-

ments, in that both involve an obligation to make a stream

of payments overtime.® Annuities differ in form from debts

in that an annuitant only has an interest in the stream

of payments, whereas a creditor has a right to the total

‘Many courts have held that an annuity contract creates a debtor-

creditor relationship. See John Hancock Mut. Life Ins. Co. v. Helvering,

128 F.2d 745, 751 (D.C. Cir. 1942); Hughes v. Sun Life Assurance Co.

of Canada, 159 F.2d 110, 113 (7th Cir. 1946); Chatham v. City Hospital,

25 F.Supp. 614 (S.D. Ga. 1971); Moses v. Manufactures Life Ins. Co.,

298 F.Supp. 321 (E.D. S.C. 1968); Roth v. Kaptowsky, 393 Ill. 484, 66

N.E.2d 664, 669 (1946); Crossman Co. v. Rauch, 263 N.Y. 264, 188

N.E. 748, 751 (1934).

See also Land, Life Insurance Option Settlements: Trusts or Debts,

42 Col. L. Rev. 32, 35-44, 47 (1942) (advocating view that an annuity

contract creates a debtor-creditor relationship, but also discussing a few

cases that hold that an annuity contract creates a trust).

amount owed, though the amount may be payable only in

installments.* But a creditor, like an annuitant, only has

an enforceable interest in the periodic payments due him.

Thus, the practical obligations of an annuity issuer are

essentially the same as those of a debtor.’

Finally, a fixed annuity also functionally resembles a

certificate of deposit. A fixed annuity contract for a fixed

term resembles a certificate of deposit that pays interest

and automatically withdraws principal at a rate calculated

to reduce the balance to zero at the end of the annuity

term. An annuity with a life term resembles a life interest

in a certificate of deposit. The owner of a life interest in

a certificate of deposit has the right to receive income

from the account for life, after which ownership of the

account reverts to the owner of the remainder. See R.

Cunningham, The Law of Property §§ 2.16, 4.11 (1984).

This is precisely the same right that the owner of a life-

term annuity has.*

Thus, neither of the two major features of fixed an-

nuities, the fixed return and the life term, distinguish them

from other financial investment instruments that banks

may buy and sell as agent. The financial marketplace pro-

vides many examples of instruments that, like fixed an-

nuities, pay the investor a fixed stream of income over

* See Matter of Young, 806 F.2d 1303, 1306 (5th Cir. 1987); Com-

monwealth v. Beisel, 338 Pa. 519, 18 A.2d 419 (1940).

* Another feature of some fixed annuities that may call the debt

analogy into question is the life term, but this is really more a matter

of custom and pricing than of legal significance. Nothing prevents a

debtor and creditor from contracting to settle a debt by a series of

payments lasting for life rather than for a term of years. See, ¢.g.,

Note, Reverse Annuity Mortgages and the Due on Sale Clause, 32 Stan.

L. Rev. 143, 145-151 (1979) (discussing reverse annuity mortgages).

* Although banks do not ordinarily use actuarial calculations in setting

interest rates, there are no limitations on how a bank may determine

the interest rate paid on a deposit.

time in return for an initial investment. The life term

feature is present in some variable annuities, and a life

interest in in any instrument with a fixed return is, in

effect, a fixed annuity. Therefore, fixed annuity contracts

are financial investment instruments that national banks

have authority to sell as agent.

2. Insurance, 12 U.S.C. § 92

Although brokerage of fixed annuities is within the busi-

ness of banking under 12 U.S.C. § 24(7), it is also nec-

essary to consider the relationship between 12 U.S.C.

§ 24(7) and 12 U.S.C. § 92, which permits national banks

in towns with 5,000 or fewer people to act as agent for

fire, life or other general insurance companies. Conflicting

judicial interpretations of section 92 have complicated this

relationship. In one case, Saxon v. Georgia Association of

Insurance Agents, 399 F.2d 1010 (5th Cir. 1968), the court

held that a national bank does not have authority to op-

erate a general life and casualty insurance agency, arguing

that the grant of insurance agency powers in section 92

implicitly prohibits national banks not located in small

towns from selling fire, life, or other general insurance.

We disagree with the Saxon court’s interpretive ap-

proach under section 92. The legislative history of section

92 indicates that the Comptroller of the Currency proposed

it in 1916 to provide an additional source of revenue for

national banks located in small towns.’ The United States

Courts of Appeal for the District of Columbia Circuit and

the Eighth Circuit have, in dicta, construed section 92

consistently with the legislative history and have concluded

that section 92 does not affect the powers of national

banks located in towns that have a population larger than

* See 53 Cong. Rec. 11901 (1916) (letter from Comptroller Williams).

5,000.'° This has been the traditional position of the OCC."

However, even under the Saxon court’s interpretation

of section 92, that section should not bar national banks

from brokerage of fixed annuities. As the court observed

in IBAA v. Heimann, Saxon should only apply to products

such as “broad forms of automobile, home, casualty and

liability insurance”, 613 F.2d 1164, 1170 (D.C. Cir. 1979),

and not to more specialized forms of insurance such as

credit life insurance. This limitation on Sazon is implicit

in section 92 itself. Section 92 concerns the power of a

national bank to act as agent for ‘any fire, life, or other

general insurance company.” Under the doctrine of “‘ejus-

dem generis,”’ general words that follow an enumeration

of specific examples are read to apply only to other items

akin to those specifically enumerated. This doctrine con-

fines section 92, and therefore Saxon, to types of insurance

that are similar to fire and life insurance, such as other

general casualty insurance policies. Therefore, section 92,

even as the Saxon court interpreted it, does not affect the

power of a national bank to sell more specialized products

that are incidental to the business of banking, such as title

insurance, credit life and disability insurance, and debt

cancellation contracts.’? Like title insurance, credit life in-

cert. denied 449 U.S. 823 (1980) (Section 92 “‘[b]y its own terms ...

does not address the authority of national banks in larger towns or

cities to act as agents for life insurance companies."’); /ndependent

Insurance Agents of America v. Board of Governors of the Federal

Reserve, 736 F.2d 468, 477, n.6 (8th Cir. 1984) (“There is a strong

argument that Saxon was wrongly decided. The legislative history in-

dicates that Congress was concerned only with providing small-town

banks with an additional profit source, not with prohibiting city banks

from selling insurance.’’).

See Interpretive Letter No. 331, April 4, 1985, reprinted in [1985-

1987 Transfer Binder] Fed. Banking L. Rep. (CCH) 4 85,501.

‘2 See Interpretive Letter No. 368 (July 11, 1986), reprinted in [1985-

87 Transfer Binder] Fed. Banking L. Rep. (CCH) 4 85,538 (national

10a

surance, and debt cancellation contracts, fixed annuity con-

tracts are a specialized product, unrelated to the general

life and casualty policies that section 92 concerns, that

banks have authority to sell as agent.

Indeed, it is doubtful that the word “insurance” in sec-

tion 92 can be construed to include annuities. Since the

term is not defined in section 92, it should be given its

common meaning.” Dictionary definitions of “insurance”

invariably describe it as a contract for indemnification

against risk of loss. For example, Black’s Law Dictionary

(1979) defines “‘insurance’’ as follows:

A contract whereby, for a stipulated consideration,

one party undertakes to compensate the other for loss

on a specified subject by specified perils.... A con-

tract whereby one undertakes to indemnify another

against loss, damage, or liability arising from an un-

known or contingent event and is applicable only to

some contingency or act to occur in future. An agree-

ment by which one party for a consideration promises

to pay money or its equivalent or to do an act valuable

to other party upon destruction, loss, or injury of

something in which another party has an interest.

See also Webster’s Third International Dictio ry (1971)

(“coverage by contract whereby for a stipul:.ted consid-

eration one party undertakes to indemnify or guarantee

another against loss by a specified contingency or peril’);

Random House Dictionary (1973) (“coverage by contract

bank may act as agent in the sale of title insurance incidental to

authority to make loans secured by real property), Interpretive Letter

No. 377 (February 6, 1987), reprinted in [Current] Fed. Banking L.

Rep. (CCH) 4 85,601 (operating subsidiary of national bank may un-

derwrite title insurance for its mortgage loan customers); 12 C.F.R.

§ 7.7495 (national banks may enter into debt cancellation contracts); 12

C.F.R. § 2.6 (national banks may also issue credit life insurance or sell

credit life insurance as agent).

‘* See 2A Sutherland, Statutory Construction § 47.28 (4th ed. 1984).

lla

in which one party agrees to indemnify or reimburse an-

other for any loss that occurs under the terms of the

contract’’); Oxford English Dictionary (Compact ed. 1971)

(“a contract by which the one party (usually a company

or corporation) undertakes, in consideration of a payment

(called a premium) proportioned to the nature of the risk

contemplated, to secure the other against pecuniary loss,

by payment of a sum of money in the event of destruction

of or damage to property (as by disaster at sea, fire, or

other accident), or the death or disablement of a person’’);

Helvering v. Le Gierse, 312 U.S. 531, 542 (1941) (“His-

torically and commonly, insurance involves risk-shifting and

risk-distributing.”). Most authorities hold that annuities are

not insurance, because they do not incorporate the element

of indemnification against risk.'* Courts considering the

status of annuities as “insurance” have held that annuities

are not insurance for purposes of federal tax law", several

state tax laws,’* bankruptcy law,'’ and other laws.'* Al-

“ See generally 1 J. Appleman, Insurance Law and Practice, § 84

(1981) (“annuity contracts must . . . be recognized as investments rather

than as insurance’’).

‘8 See Helvering v. Le Gierse, 312 U.S. 531, 542 (1941); Keller v.

Commissioner of Internal Revenue, 312 U.S. 543 (1941) (Under federal

tax law which excludes “amounts receivable as insurance” from de-

cedent’s gross estate for tax purposes, annuities are not treated as

insurance.).

‘6 See Kernochan v. U.S., 29 F.Supp. 860 (Ct. Cl. 1939); Jn re Soth-

ern’s Estate, 257 A.D. 574, 14 N.Y.S.2d 1 (1939); In re Rhodes’ Estate,

197 Misc. 232, 94 N.Y.S.2d 406 (N.Y. Surr. Ct. 1949) (Annuity contracts

are not within New York tax law exemption, applicable to insurance

payable to a designated beneficiary, from estate taxes.); People v. Knapp,

193 A.D. 413, 184 N.Y.S. 345 (1920); Commonwealth v. Metropolitan

Life Ins. Co., 254 Pa. 510, 98 A. 1072 (1916); Daniel v. Life Ins. Co.

of Virginia, 102 S.W.2d 256, 260 (Tex. Civ. App. 1937); State v. Ham,

54 Wyo. 148, 88 P.2d 484 (1939) (Consideration paid for annuity con-

12a

though annuities often share with insurance the need for

actuarial calculations, they are primarily a vehicle for in-

vestment, not indemnification.

A few authorities have characterized annuities as “‘in-

surance.” Most significantly, the cases construing the scope

of section 3(aX8) of the Securities Act of 1933, 15 U.S.C.

§ 77c(aX8), (exempting annuity and insurance contracts

from the registration requirements of the Securities Act

of 1933)'* occasionally speak of fixed annuities as being

“insurance” rather than “‘securities.’’”? The exemption ex-

pressly covers both annuity contracts and insurance con-

tracts, but the cases discuss the issue in terms of the

distinction between “insurance” and “‘securities.’’*! The

tracts is not subject to tax law which taxes all ‘“‘premiums’’ paid for

insurance, because annuities are not insurance.)

” See In re Walsh, 19 F.Supp. 567 (D. Minn. 1937) (Annuity policy

owned by bankrupt was not within insurance exemption to Minnesota

bankruptcy law and therefore trustee in bankruptcy was entitled to the

cash surrender value of the policies.); Jn Re Howerton, 21 Bankr. 621,

623 (1982).

* See Carroll v. Equitable Life Assurance Co., 9 F.Supp. 223 (W.D.

Mo. 1934) (Defendant, a mutual insurance company forbidden by law

to issue insurance contracts except by a “‘mutual plan’, was nonetheless

authorized to sell annuity contracts without a mutual plan because

annuity contracts are investments rather than insurance.); Succession

of Rabouin, 201 La. 227, 9 So.2d 529 (1942) (Insurance is not considered

part of the decedent’s estate for purposes of the law of ‘forced heir-

ship”, but annuities are part of the estate because they are not in-

surance.).

'* Section 3(aX8) is quoted supra, n. 2.

» See SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959);

SEC v. United Benefit Life Ins. Co., 387 U.S. 202 (1966); Otto v.

Variable Life Ins. Co., 814 F.2d 1127 (1986).

See e.g., SEC v. Variable Life Ins. Co., 359 U.S. 65, 75 (1959)

(Opinion of Brennan, J.) (“‘The point [of the exemption] must have been

that there then was a form of ‘investment’ known as insurance (in-

cluding ‘annuity contracts’) which did not present very squarely the

sort of problems that the Securities Act and the Investment Company

13a

cases disregard state cases defining insurance on the

grounds that the extent to which annuity contracts are

insurance under a federal statute is a federal question.”

The principal issue in these cases is the degree of invest-

ment risk that an annuity may incorporate without be-

coming a security subject to the Securities Act registration

requirements. Those annuities that are exempt are labelled

“insurance” and those that are not are labelled ‘‘securi-

ties.”

These cases should not be read as holding that fixed

annuity contracts are insurance for purposes of federal

banking law. First, the holdings in these cases only address

the applicability or inapplicability of the annuity exemption

in § 77c(aX8) to a particular instrument. The courts’ char-

acterization of the annuities in question as “‘insurance’”’ is,

therefore, dicta. Second, the analysis used to distinguish

“insurance” annuities from “‘security” annuities only makes

sense in the context of the federal securities laws. The

standard that has emerged in this area focuses almost

entirely on investment purpose and investment risk, so

that an annuity may qualify for the “insurance” exemption

even if it is totally lacking in mortality risk.** This standard

is clearly narrowly tailored to the specific purposes of the

Securities Act of 1933 and is therefore not useful in con-

struing the term “‘insurance’’ generally.

Even under the Saxon court’s reading of section 92,

therefore, section 92 does not affect the power of a na-

Act were devised to deal with, and which were, in many details, subject

to a form of state regulation of a sort which made the federal regulation

even less relevant.’’); SEC v. United Benefit Life Ins. Co., 387 U.S.

202, 210-211 (same); Otto v. Variable Annuity Life Ins. Co., 814 F.2d

1127, 1141.

2 See SEC v. Variable Annuity Life Ins. Co., 359 U.S. at 68-69.

* See SEC Rule 151, 17 C.F.R. § 230.151; SEC Securities Act Release

No. 6645 (May 29, 1986), reprinted in (1986-87 Transfer Binder] Fed.

Sec. L. Rep. (CCH) 4 84,004.

l4a

tional bank to sell annuities as agent. Under the Saxon

court’s interpretation, section 92 only limits a national

bank’s power to sell general life and casualty insurance.

This limitation does not apply to annuities because they

are, like credit life insurance, a specialized product that

banks have authority to sell as agent, and because, in any

case, they are not insurance for purposes of section 92

since they lack the basic insurance characteristic of in-

demnification against risk.

3. Supervisory Issues

Sale of fixed annuities as agent is a logical complement

to other financial services offered by the Bank, such as

financial planning, investment counseling, and discount

brokerage services. State banks are already offering this

product to customers. This activity will provide a valuable

additional source of income and activity will provide a

valuable additional source of income and will help the Bank

to compete effectively with other providers of financial

services. Since the Bank will act only as agent, the Bank

will not have a principal stake in annuity contracts and

therefore will incur no interest rate or actuarial risks.

Customers will benefit from the increased range of prod-

ucts made available to them by the Bank. Brochures, forms,

and the prospectus describing the Certificates clearly and

conspicuously state that the Certificates are a product of

the insurance company issuer. The risk that customers may

confuse the Certificates with federally insured deposit ac-

counts is, therefore, minimal. As an additional safeguard

against such confusion, however, the Bank should ex-

pressly disclose in its own advertising and promotional

materials, and the Bank’s employees should disclose when

describing the Certificates to customers, that the Certifi-

cates are not products of the Bank and are not FDIC

insured. Moreover, the Bank should obtain from the cus-

tomer before a sale is made a signed statement that the

customer understands that (1) the annuity product is an

15a

obligation of the issuing insurance company and not of the

Bank, (2) the Bank is acting only as agent for the insur-

ance company, and (3) the obligation is not FDIC insured.

Finally, the Bank should determine whether any state

laws govern this activity, and to the extent that they do,

should comply fully with them.

Incentive Program

The proposed incentive program is legally permissible.

Twelve C.F.R. § 7.5000 provides that ‘(a) national bank

may adopt any reasonable bonus or profit sharing plan

designed to insure adequate remuneration of bank officers

and employees.’’ However, incentive pay programs must

be undertaken with care. At the same time that such pro-

grams further legitimate interests of the Bank, they have

the potential for creating unintended incentives for em-

ployees to engage in improper activities, such as illegal

product tie-ins and unsound lending. See Interpretive Let-

ter No. 86, from John G. Heimann, Comptroller of the

Currency (April 3, 1979), reprinted in [1978-79 Transfer

Binder] Fed. Banking L. Rep. (CCH) 4 85,161 (providing

discussion of concerns with one such program and some

guidelines for addressing). Thus, in the design and imple-

mentation of such programs, banks must evaluate the po-

tential for such unintended effects created by their

proposed program’s specific provisions and take special

care to ensure that there are adequate policies and pro-

cedures to counter such potentialities. In this case, for

instance, the Bank should have controls in place to ensure,

at a minimum, that product tying is avoided and that all

required disclosures are made by employees in the sale of

the annuity product. |

Percentage Lease

The OCC has conditioned banks’ authority to lease on

a percentage basis on their observance of the safeguards

l6a

enumerated in Interpretive Letter No. 274 (December 2,

1983), reprinted in [1983-1984 Transfer Binder] Fed. Bank-

ing L. Rep. (CCH) 4 85,438 (attached). If the requirements

stated in that letter are met, then the percentage leasing

arrangement will be permissible. For the foregoing rea-

sons, I conclude that the activities proposed for the Bank

are permissible under the National Bank Act. The Bank

will be expected to comply with the requirements set forth

above relating to disclosures in the Bank’s promotional

materials and employee representations and the receipt of

a signed customer statement, and to the design and im-

plementation of its incentive pay program and percentage

lease arrangement.

Very truly yours,

/s/ Paul Allan Scott

Paul Allan Scott

Chief Counsel

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.